Wetouch Technology : Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

About this update from Wetouch Technology Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under Item 1A. Risk Factors" and elsewhere in this Annual Report. See "Special Note Regarding Forward-Looking Statements." Overview The Company is a Nevada holding company with no material operations of its own. We conduct substantially all of our operations through our subsidiary in mainland China, which we control through BVI Wetouch. See "Item 1. Business - Corporate History and Structure" for more details. Because our operations are primarily in China, we are subject to complex and evolving PRC laws and regulations. These include restrictions on capital flows, dividend payments, currency conversion, cybersecurity and data privacy, and governmental discretion over overseas securities offerings. These risks could materially affect our ability to transfer funds, conduct offerings, or continue operations in their current form. See "Item 1A. Risk Factors-Risks Related to Doing Business in China." As of March 31, 2025, the Company has contributed RMB 348.0 million (US$47.7 million) to its PRC subsidiary through intermediate holding companies, which were accounted for as long-term investments. These funds have been used by our PRC subsidiary in its operations. To date, no dividends or other distributions have been made by our PRC subsidiary to the Company. We may rely on future distributions from our PRC subsidiary to fund our holding company obligations, subject to PRC law and restrictions. For more details, see " Item 1A. Risk Factors-Risks Related to Doing Business in China-As a holding company, we conduct our operations primarily through our PRC subsidiary and face risks and uncertainties associated with this structure. " Under current PRC law, dividend payments by our PRC subsidiary are limited to accumulated profits determined in accordance with PRC accounting standards and are subject to statutory reserve requirements. Dividends to the Company are also subject to withholding tax, generally 10%, but reduced to 5% if treaty conditions are met. There is no assurance that the reduced rate will apply. For more details, see " Item 1A. Risk Factors-Risks Related to Doing Business in China-Uncertainties with respect to the PRC legal system, including the enforcement of laws and changes in laws and regulations, could adversely affect us and limit the legal protections available ." We currently do not have cash management policies dictating how funds are transferred between the Company and its subsidiaries. Most of our cash is maintained in Renminbi in mainland China and may be subject to PRC restrictions on outbound transfers. For details, see " Item 1A. Risk Factors - Risks Related to Doing Business in China - Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment. " Through our wholly owned subsidiaries, BVI Wetouch, HK Wetouch, and Sichuan Vtouch, we are engaged in the research, development, manufacturing, sales and servicing of medium- to large-sized projected capacitive touchscreens. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in the financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries. Our product portfolio comprises medium- to large-sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. We generate revenues through sales of our various touchscreen products. For the years ended December 31, 2024 and 2023, we recognized approximately $42.3 million and $39.7 million, respectively, in total revenues. We sell our touchscreen products both domestically in China and internationally, covering major areas in Mainland China, including but not limited to the eastern, southern, northern and southwest regions of Mainland China, Taiwan, South Korea, and Germany. We believe that we have established a strong and diversified client base. For the years ended December 31, 2024 and 2023, our domestic sales accounted for approximately 64.7% and 69.6%, respectively, of our revenues, and our international sales accounted for approximately 35.3% and 30.3%, respectively, of our revenues. Since our incorporation, we have effected two reverse stock splits of our common stock, including a 1-for-70 reverse split in 2020 and a 1-for-20 reverse split in 2023, and all share and per share information in this Annual Report has been retroactively adjusted to reflect these actions. For more details, see " Item 1. Business - Corporate History and Structure - Reverse Stock Splits. " Highlights for the Year Ended December 31, 2024 ● Revenues were $42.3 million, an increase of 6.5% from $39.7 million for the year ended December 31, 2023. ● Gross profit was $13.6 million, a decrease of 20.9% from $17.2 million for the year ended December 31, 2023. ● Gross profit margin was 32.2%, as compared to 43.3% for the year ended December 31, 2023. ● Net income was $6.0 million, a decrease of 27.7% from $8.3 million for the year ended December 31, 2023. ● Total volume of touchscreens shipped was 2,060,870 units, an increase of 4.8% from 1,967,316 units of touchscreens for the year ended December 31, 2023. Results of Operations The following table sets forth, for the periods indicated, statements of income data: For the Years Ended December 31, Change (in US Dollar millions, except percentage) 2024 2023 % Revenues $ 42.3 $ 39.7 6.5 % Cost of revenues (28.7 ) (22.5 ) 27.6 % Gross profit 13.6 17.2 (20.9 )% Total operating expenses (4.3 ) (4.5 ) (4.4 )% Operating income 9.3 12.7 (26.8 )% Total other expense, net (0.6 ) (0.3 ) 100.0 % Income before income taxes 8.7 12.4 (29.8 )% Income tax expense (2.7 ) (4.1 ) (34.1 )% Net income $ 6.0 $ 8.3 (27.7 )% For the Years Ended December 31, 2024 and 2023 Revenues Revenues were $42.3 million for the year ended December 31, 2024, representing an increase of $2.6 million, or 6.5%, compared with $39.7 million for the same period in 2023. This was mainly due to the increase of 4.8% in sales volume, and an increase of 3.2% in the average selling price of our products in RMB, and 1.6% negative impact from exchange rate due to depreciation of RMB against US dollars, as compared with those of the same period in 2023. For the Years Ended December 31, 2024 2023 Change Change Amount % Amount % Amount % (in US Dollar except percentage) Revenue from sales to customers in the PRC $ 27,340,555 64.7 % $ 27,668,985 69.7 % $ (328,430 ) (1.2 )% Revenue from sales to customers overseas 14,939,818 35.3 % 12,036,954 30.3 % 2,902,864 24.1 % Total Revenues $ 42,280,373 100 % $ 39,705,939 100 % $ 2,574,434 6.5 % For the Years Ended December 31, 2024 2023 Change Change Unit % Unit % Unit % (in Unit, except percentage) Units sold to customers in the PRC 1,309,240 63.5 % 1,330,013 67.6 % (20,773 ) (1.6 )% Units sold to customers overseas 751,630 36.5 % 637,303 32.4 % 114,327 17.9 % Total Units Sold 2,060,870 100 % 1,967,316 100 % 93,554 4.8 % PRC Domestic Market For the year ended December 31, 2024, revenue from the PRC domestic market decreased by $0.3 million or 1.2%, as a combined result of (i) the decrease of 1.6% in sales volume, primarily attributable to weakened market demand, consistent with the overall macroeconomic conditions in China in 2024, and (ii) 1.6% negative impact from exchange rate due to depreciation of RMB against US dollars, partially offset by (iii) an increase of 2.0% in the average sales price of our products in RMB, and as compared with those of the same period in 2023. The increase of 2.0% in sales price of our products in RMB was mainly due to the marketing initiatives to enhance sales of new models of higher-end products such as medical touchscreens, automotive touchscreen, and multi-functional printer touchscreens during the year ended December 31, 2024. During the year ended December 31, 2024, the Company undertook proactive marketing initiatives for new models and sought to obtain new customers in order to reduce the impact the weakening macroeconomic conditions in China. Our sales increased by 6.0% in Southwest China, partially offset by a decrease of 2.4% in East China, and 0.8% in South China during the year ended December 31, 2024, Overseas Market For the year ended December 31, 2024, revenue from overseas markets was $14.9 million as compared to $12.1 million of the same period of 2023, representing an increase of $2.8 million, or 24.1%, primarily due to i) an increase of 17.9% in sales volume, particularly driven by higher demand for the automotive touchscreens, gaming touchscreens, and industrial control touchscreens, (ii) 6.8% increase in average RMB selling price of the products, particularly in the product of industrial control touchscreens and automotive touchscreens, as the Company had greater pricing power due to the higher demand for the products during the year ended December 31, 2024, partially offset by (iii) the 1.6% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period in 2023. The following table summarizes the breakdown of revenues by categories in US dollars: Revenues For the Years Ended December 31, 2024 2023 Change Change Amount % Amount % Amount Margin% (in US Dollars, except percentage) Product categories by end applications Automotive Touchscreens $ 11,513,813 27.2 % $ 9,780,713 24.6 % $ 1,733,100 17.7 % Industrial Control Computer Touchscreens 8,212,232 19.4 % 7,884,224 19.9 % 328,008 4.2 % Gaming Touchscreens 6,462,723 15.3 % 5,619,228 14.1 % 843,495 15.0 % Medical Touchscreens 6,282,892 14.9 % 5,799,489 14.6 % 483,402 8.3 % POS Touchscreens 6,255,175 14.8 % 6,613,501 16.7 % (358,325 ) (5.4 )% Multi-Functional Printer Touchscreens 3,559,538 8.4 % 4,008,784 10.1 % (455,246 ) (11.4 )% Total Revenues $ 42,280,373 100.0 % $ 39,705,939 100.0 % $ 2,574,434 6.5 % * Others include applications in self-service kiosks, ticket vending machines and financial terminals. The Company continued to shift production mix from traditional lower-end products to high-end touchscreens used in automotive touchscreens, gaming touchscreens, medical touchscreens, and industrial control computer touchscreens, primarily due to (i) greater growth potential of computer screen models in China and overseas, and (ii) stronger demand for higher-end touchscreens made with better materials and better quality. Gross Profit and Gross Profit Margin Years Ended December 31, Change (in millions, except percentage) 2024 2023 Amount % Gross Profit $ 13.6 $ 17.2 $ (3.6 ) (20.9 )% Gross Profit Margin 32.2 % 43.3 % (11.1 )% Gross profit was $13.6 million during the year ended December 31, 2024, compared to $17.2 million in the same period of 2023. Our gross profit margin decreased to 32.2% during the year ended December 31, 2024 as compared to 43.3% for the same period of 2023, primarily due to i) an increase of 29.9% in cost of goods sold, and ii) sales discount to certain long-term customers at year-end. During the year ended December 31, 2024, we had an increase of 31.8% in costs of raw materials, among which the chip cost accounted for 43%, and the increase of 24.3% of labor costs due to additional hiring of technicians. Chip costs increased starting in the first quarter of 2024 and stabilized by the third quarter of 2024. Selling Expenses Years Ended December 31, Change (in millions, except percentage) 2024 2023 Amount % Selling Expenses $ 0.8 $ 0.6 $ 0.2 33.3 % as a percentage of revenues 1.9 % 1.5 % 0.4 % Selling expenses were $0.8 million for the year ended December 31, 2024, compared to $0.6 million in the same period in 2023, representing an increase of $0.2 million, or 133.3%, primarily due to an increase in traveling and transportation expenses of our selling and marketing team to visit customers and attend exhibitions in order to promote the increase of sales during the year ended December 31, 2024. General and Administrative Expenses Years Ended December 31, Change (in millions, except percentage) 2024 2023 Amount % General and Administrative Expenses $ 3.5 $ 3.8 $ (0.3 ) (7.9 )% as a percentage of revenues 8.3 % 9.6 % (1.3 )% General and administrative expenses were $3.5 million for the year ended December 31, 2024, compared to $3.8 million in the same period in 2023, representing a decrease of $0.3 million, or 7.9%. The decrease was primarily due to i) accrued placement agent fees of $1.2 million related to the private placement consent agreement with representatives of the private placement that took place on January 19, 2023, partially offset by only ii) increase of amortized consulting fees of $0.6 million (see NOTE 4- PREPAID EXPENSES AND OTHER CURRENT ASSETS of the accompanying financial statements), and $0.1 million of miscellaneous expenses including $44,862 allowance for credit losses of advance to vendors and $54,873 provision for obsolete inventory. Research and Development Expenses Years Ended December 31, Change (in US dollars, except percentage) 2024 2023 Amount % Research and development expenses $ - $ 84,551 $ (84,551 ) (100.0 )% as a percentage of revenues 0.0 % 0.2 % (0.2 )% Research and development ("R&D") expenses were nil and $84,551 for the years ended December 31, 2024 and 2023, respectively. The Company did not incur any research and development expenses during the year ended December 31, 2024. Operating Income Total operating income was $9.3 million for the year ended December 31, 2024 as compared to $12.7 million for the same period in 2023, a decrease of $3.4 million or 26.8%. The decrease was primarily due to lower gross profit, higher selling expenses, partially offset by lower general & administration expenses, andlower research and development expenses. Gain (loss) on Changes in Fair Value of Common Stock Purchase Warrants Years Ended December 31, Change (in US dollars, except percentage) 2024 2023 Amount % Gain (loss) on changes in fair value of common stock purchase warrants $ 378,371 $ (121,413 ) $ 499,784 (411.6 )% as a percentage of revenues 0.9 % (0.3 )% 1.2 % In connection with the issuance of convertible promissory notes in October, November and December, 2021, the Company also issued seven (7) three-year warrant (the " Note Warrants") to purchase an aggregate of 1,800,000 shares of the Company's common stock (the "Warrant Shares") (see NOTE 10 - CONVERTIBLE PROMISSORY NOTES PAYABLE). Gain on changes in fair value of common stock purchase warrants was $378,371 for the year ended December 31, 2024, as compared to a loss of $121,413 in the same period of 2023. Income Taxes Years Ended December 31, Change (in millions, except percentage) 2024 2023 Amount % Income before Income Taxes $ 8.7 $ 12.4 $ (3.7 ) (29.8 )% Income Tax Expense (2.7 ) (4.1 ) (1.4 ) (34.1 )% Effective income tax rate 30.6 % 33.1 % (2.5 )% The effective income tax rate for the years ended December 31, 2024 and 2023 was 30.6% and 33.1%, respectively. Our PRC subsidiary had $103.7 million of cash as of December 31, 2024, which is planned to be indefinitely reinvested in our business operations in the PRC. Distributions from our PRC subsidiary to our stockholders would be subject to the U.S. federal income tax at 21%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities related to PRC withholding income tax on undistributed earnings of our PRC subsidiary. Net Income As a result of the above factors, we had a net income of $6.0 million in the year ended December 31, 2024 compared to a net income of $8.3 million in the same period of 2023. Liquidity and Capital Resources Historically, our primary uses of cash have been to finance working capital needs. We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings. We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all. As of December 31, 2024, we had current assets of $114.1 million, consisting of $103.7 million in cash, $7.5 million in accounts receivable, $0.1 million in inventories, and $2.8 million in prepaid expenses and other current assets. Our current liabilities as of December 31, 2024 were $3.0 million, which comprised of $1.3 million in accounts payable, $0.1 million due to related parties, $1.0 million in accrued expenses and other current liabilities and $0.6 million in operating lease liabilities, current portion. We also had $0.5 million in operating lease liabilities, non- current as of December 31, 2024. The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the years ended December 31 , 2024 and 2023: Years Ended December 31, (in US Dollar millions) 2024 2023 Net cash provided by operating activities $ 1.1 $ 12.7 Net cash used in investing activities (0.3 ) (2.3 ) Net cash provided by financing activities 7.6 40.0 Effect of foreign currency exchange rate changes on cash and cash equivalents (2.7 ) (3.6 ) Net increase in cash and cash equivalents 5.7 46.8 Cash and cash equivalents at the beginning of period 98.0 51.2 Cash and cash equivalents at the end of period $ 103.7 $ 98.0 Operating Activities Net cash provided by operating activities was $1.1 million for the year ended December 31, 2024, as compared to $12.7 million provided by operating activities for the same period in 2023, representing a decrease of $11.6 million, or 91.3%. The positive cash flow for the year ended December 31, 2024 was primarily due to i) $6.0 million net income during the year ended December 31, 2024, ii) the increase of $0.6 million in accounts payable and $0.1 million in amounts due to a related party, partially offset by iii) the increase of $0.4 million gain on changes in fair value of common stock purchase warrants liability, $0.2 million in accounts receivable and $1.8 million in prepaid expenses and other current assets (mainly in prepaid $0.9 million of consulting service fees and $1.0 million in market research fees) , and iv) the decrease of $3.3 million in accrued expenses and other current liabilities. The positive cash flow for the year ended December 31, 2023 was primarily due to i) $8.3 million net income during the year ended December 31, 2023; ii) the decrease of $1.2 million in accounts receivable, $0.2 in inventory and $0.3 million in prepaid expenses and other current assets, iii) the increase of $3.1 million in accrued expenses and other current liabilities, and partially offset by iv) the decrease of $0.7 million in accounts payable. Investing Activities Net cash used in investing activities for the year ended December 31, 2024 was $0.3 million for the purchase of property, plant and equipment and construction in progress. Net cash used in investing activities for the year ended December 31, 2023 was $2.3 million for the purchase of property, plant and equipment. Financing Activities Net cash provided by financing activities for the year ended December 31, 2024 was $7.6 million, including $9.0 million in net proceeds from the 2024 Uplisting Offering, partially offset by $1.4 million repayment of convertible promissory notes. Net cash provided by financing activities was $40.0 million for the year ended December 31, 2023, consisting of $40.0 million proceeds from a private placement, partially offset by the repayment of $55,000 in convertible promissory note payable. Our Days Sales Outstanding ("DSO") decreased to 64 days for the year ended December 31, 2024 from 75 days for the year ended December 31, 2023 due to our faster collection of accounts receivables. The majority of the Company's revenues and expenses were denominated primarily in RMB, the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. Inflation has not had a material impact on the Company's business. COMMITMENTS AND CONTINGENCIES Capital Expenditure Commitment As of December 31, 2024, the Company had commitment of RMB5.0 million (equivalent to $0.7 million) for construction in progress. Off-Balance Sheet Arrangements We had no off- balance sheet arrangements as of December 31, 2024. Critical Accounting Policies An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this registration statement. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. Revenue recognition The Company adopted Accounting Standards Codification ("ASC") 606 using the modified retrospective approach. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. Therefore, no adjustments to opening retained earnings were necessary. ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers . The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that would result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams. In accordance with ASC 606, the Company recognizes revenue when it transfers its goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its products primarily to its customers in PRC and overseas, as the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods, because it has control of the goods and the ability to direct their use to obtain substantially all the benefits. All of the Company's contracts have one single performance obligation as the promise is to transfer the individual goods to customers, and there is no separately identifiable other promises in the contracts. The Company's revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company's products are sold with no right of return and the Company does not provide other credits or sales incentive to customers. The Company's sales are net of value added tax ("VAT") and business tax and surcharges collected on behalf of tax authorities in respect of product sales. Contract Assets and Liabilities Payment terms are established based on the Company's pre-established credit requirements after an evaluation of customers' credit quality. Contract assets are recognized as related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs. As of December 31, 2024 and 2023, other than accounts receivable and advances from customers, the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers' purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred. The Company generally warrants that its products will substantially conform to the agreed-upon specifications for three years from the date of shipment. The Company's liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns, after sales services and technical support under warranty have historically been immaterial. As such, the Company does not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation. Disaggregation of Revenues The Company disaggregates its revenue from contracts by geography, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company's disaggregation of revenues for the years ended December 31, 2024 and 2023 is disclosed in Note 16 to the financial statements. Use of estimates In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP"), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available at the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, inventory valuations, useful lives of property, plant and equipment, intangible assets, operating leases, the recoverability of long-lived assets, provisions necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those estimates. Inventories Inventory consists of raw materials, work-in-process and finished goods and is stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. For work-in-process and manufactured inventories, cost consists of raw materials, direct labor and an allocated portion of the Company's production overhead. The Company writes down excess and obsolete inventory to its estimated net realizable value based upon assumptions about future demand and market conditions. For finished goods and work-in-process, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs to completion and disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable value. Net realizable value for raw materials is based on replacement cost. Provisions for inventory write-downs are included in the cost of revenues in the consolidated statements of operations. Inventories are carried at this lower cost basis until sold or scrapped. $54,873 and nil inventory write-off was recorded for the years ended December 31, 2024 and 2023, respectively. Convertible Promissory Notes The Company accounts for its convertible promissory notes in according with guidance of ASU 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815. The Company analyzes the convertible notes for the existence of a beneficial conversion feature. The Company considered the three characteristics of a derivative instrument listed in ASC 815-10-15-83: (i) having one or more underlyings and one or more notional amounts or payment provisions or both; (ii) requiring no initial net investment; and (iii) permitting net settlement. Since the Company's notes have a fixed interest rate, specified notional principal and settlement date, with no other events affecting settlement, and because the Company received net proceeds after issuance costs and discount (recorded as net proceeds or net settled investment), management assessed that the Notes do not meet the definition of derivative instruments and that any embedded feature would not be bifurcated. The discounts on the convertible notes, were amortized to interest expense, using the effective interest method, over the terms of the related convertible notes. On February 23, 2024, immediately upon the closing of the 2024 Public Offering, the Company made a full payment on the remaining five outstanding promissory notes. (see details in NOTE 10 - CONVERTIBLE PROMISSORY NOTES PAYABLE-a) Convertible promissory notes). There were no convertible promissory notes as of December 31, 2024. Common stock purchase warrants The Company also analyzed the warrants in accordance with ASC 815, to determine whether the warrants meet the definition of a derivative and, if so, whether the warrants meet the scope exception of ASC 815-40, which provides hat contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders' equity shall not be considered derivative instruments for purposes of ASC 815-40. The Company concluded that the Note Warrants (as defined in NOTE 10 - CONVERTIBLE PROMISSORY NOTES PAYABLE - ii) Warrants) issued in October, November and December 2021 financings should be treated as a derivative liability because the Warrants are entitled to a price adjustment provision that allows the exercise price to be adjusted if the Company issues or sells any additional shares of common stock at a price per share more or less than the then-applicable exercise price or without consideration, which is typically referred to as a "down-round protection" or "anti-dilution" provision. According to ASC 815-40, the "down-round protection" provision is not considered an input to the fair value of a fixed-for-fixed option on equity shares which causes the Warrants to fail to qualify as indexed to the Company's own stock and therefore fail to meet the scope exceptions of ASC 815. Therefore, the Company accounted for the Warrants as derivative liabilities under ASC 815. Pursuant to ASC 815, derivatives are measured at fair value and remeasured at fair value with changes in fair value recorded in earnings for each reporting period. The Company used a Black-Scholes pricing model to estimate the fair values of common stock purchase warrants at the balance sheet dates. The Note Warrant (see details in NOTE 10 - CONVERTIBLE PROMISSORY NOTES PAYABLE-b) Note Warrant) was issued in 2021 and was valid for three years and expired during the year ended December 31, 2024. As of December 31, 2024 and 2023, the Company recorded nil and $378,371 of common stock purchase warrant liability, respectively, and a $378,371 gain and a $121,413 loss on changes in the fair value of common stock purchase warrant liability for the year ended December 31, 2024 and 2023, respectively. Income taxes The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. An uncertain tax position is recognized only if it is "more likely than not" that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to beg realized upon examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes were incurred during the years ended December 31, 2024 and 2023. The Company believes that there were no uncertain tax positions as of December 31, 2024 and 2023. The Company's operating subsidiaries in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal years ended December 31, 2024 and 2023. As of December 31, 2024 and 2023, all of the Company's tax returns for its PRC Subsidiaries remain open for statutory examination by PRC tax authorities. Property, plant and equipment, net Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is provided using the straight-line method over their expected useful lives, as follows: Useful life Buildings 20 years Machinery and equipment 10 years Vehicles 4 years Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized . The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of income and other comprehensive income (loss) as other income or expenses. Construction in progress, funded by the Company's working capital, represents manufacturing facilities and office buildings under construction. It is stated at cost and transferred to property, plant and equipment when it is substantially ready for its intended use. No depreciation is recorded for construction in progress. Management estimates that construction in progress for our new facilities will be completed by the end of the fourth quarter of 2025, at which time it will be transferred to property, plant and equipment and depreciation will begin. Fair value measurement Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact as well as assumptions that market participants would use when pricing the asset or liability. Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows: Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. Accounting guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach, and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company measures fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. Impairment of long-lived Assets Long-lived assets, such as property, plant and equipment, and land use rights, are reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount that the carrying value exceeds the estimated fair value of the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated. No impairment of long-lived assets was recognized for the years ended December 31, 2024 and 2023. Lease The Company adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") for all periods presented. The Company elected the short-term lease exemption for all contracts with lease terms of 12 months or less. Under the guidance of ASU 2016-02, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The Company's lease terms include options to renew or terminate the lease when it is reasonably certain that it will exercise the option. The Company determines if a contract contains a lease based on whether it has the right to obtain substantially all of the economic benefits from the use of an identified asset that the Company does not own and whether it has the right to direct the use of an identified asset in exchange for consideration. Right of use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets are recognized as the amount of the lease liability, adjusted for lease incentives received. Lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate ("IBR"), because the interest rate implicit in most of the Company's leases is not readily determinable. The IBR is a hypothetical rate based on the Company's understanding of what its credit rating would be and the resulting interest it would pay to borrow an amount equal to the lease payments in a similar economic environment over the lease term on a collateralized basis. Lease payments may be fixed or variable, however, only fixed payments or in-substance fixed payments are included in the Company's lease liability calculation. Variable lease payments are recognized in operating expenses in the period in which the obligation for those payments is incurred. The lease right-of-use assets are initially measured at the carrying amount of the lease liability and adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use-asset. Lease expense for minimum lease payments exclusive of value-added tax is recognized on a straight-line basis over the lease term The new standard provides a number of optional practical expedients at transition. The Company elected certain practical expedients that must be elected as a package, which permit the Company to not reassess, under the new standard, prior conclusions about (1) lease identification, (2) lease classification and (3) initial direct costs. Additionally, the Company elected a short-term lease exception policy, which allows entities to not apply Topic 842 to short-term leases (i.e. leases with terms of 12 months or less) and a hindsight policy, which allows an entity to include current considerations for existing leases when determining initial lease terms. The Company has also elected to account for lease and non-lease components as a single component for all leases and elected to utilize an IBR (incremental borrowing rate) that equals the risk free rate plus premium for all leases when calculating the lease liability. Comprehensive income Comprehensive income (loss) consists of two components, net income and other comprehensive income (loss). The foreign currency translation gain or loss resulting from translating the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss) in the consolidated statements of income and comprehensive income. Recently issued accounting guidance The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Management periodically reviews new accounting standards issued. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying U.S. GAAP on contract modifications and hedge accounting to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. These optional expedients and exceptions provided in ASU No. 2020-04 are effective for the Company as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"), which deferred the application dates of Topic 848 to December 31, 2024. The Company currently does not have any financial instrument that reference to LIBOR and does not anticipate the adoption will have a material impact to the Company's combined and consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is evaluating this ASU and expects to add additional disclosures to our combined and consolidated financial statements, once adopted.

View stock analysis, news, and events for Wetouch Technology Inc.