Our Management's Discussion and Analysis contains forward-looking statements
relating to future events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may",
"should", "intends", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, levels of activity or performance to be materially
different from any future results, levels of activity or performance expressed
or implied by these forward-looking statements.



Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity or performance. You should not place undue reliance on these
statements, which speak only as of the date of this Annual Report. These
cautionary statements should be considered with any written or oral
forward-looking statements that we may issue in the future. You should read this
Annual Report on Form 10-K with the understanding that our actual future results
may be materially different from what we expect. All forward-looking statements
speak only as of the date on which they are made. We undertake no obligation to
update such statements to reflect events that occur or circumstances that exist
after the date on which they are made, except as required by applicable law.



Management's discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The following discussion and analysis of
financial condition and results of operations of the Company is based upon, and
should be read in conjunction with, the audited consolidated financial
statements and related notes elsewhere in this Annual Report on Form 10-K.




Overview



We were originally incorporated under the laws of the state of Nevada in August
1992. On October 9, 2020, we entered into a share exchange agreement (the "Share
Exchange Agreement") with Wetouch Holding Group Limited, a British Virgin
Islands ("BVI") company incorporated on August 14, 2020 under the laws of the
British Virgin Islands ("BVI Wetouch"), and all the shareholders of BVI Wetouch
(each a "Shareholder" and collectively the "Shareholders"), to acquire all the
issued and outstanding capital stock of BVI Wetouch in exchange for the issuance
to the Shareholders an aggregate of 28 million shares of our common stock (the
"Reverse Merger"). The Reverse Merger closed on October 9, 2020. Immediately
after the closing of the Reverse Merger, we had a total of 31,396,394 issued and
outstanding shares of common stock. As a result of the Reverse Merger, BVI
Wetouch is now our wholly-owned subsidiary.



Through our wholly-owned subsidiaries, BVI Wetouch, HK Wetouch, Sichuan Vtouch
and Sichuan Wetouch, we are engaged in the research, development, manufacturing,
sales and servicing of medium to large sized projected capacitive touchscreens,
which constitutes our source of revenues. We are specialized in large-format
touchscreens, which are developed and designed for a wide variety of markets and
used in by 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. In terms of the structures of touch panels, we offer (i) Glass-Glass
("GG"), primarily used in GPS/car entertainment panels in mid-size and luxury
cars, industrial HMI, financial and banking terminals, POS and lottery machines;
(ii) Glass-Film-Film ("GFF"), mostly used in high-end GPS and entertainment
panels, industrial HMI, financial and banking terminals, lottery and gaming
industry; (iii) Plastic-Glass ("PG"), typically adopted by touchscreens in
GPS/entertainment panels motor vehicle GPS, smart home, robots and charging
stations; and (iv) Glass-Film ("GF"), mostly used in industrial HMI. The
following discussion and analysis pertain financial condition and results of
operations of our subsidiaries Hong Kong Wetouch, Sichuan Wetouch and Sichuan
Vtouch for the years ended December 30, 2022 and 2021, respectively.



49






Effects of COVID-19



The COVID-19 pandemic and resulting global disruptions have affected our
businesses, as well as those of our customers and suppliers significantly. The
spread of COVID-19 has caused significant disruption to society as a whole,
including the workplace. The resulting impact on the global supply chain has
disrupted most aspects of national and international commerce, with
government-mandated social distancing measures imposing stay-at-home and
work-from-home orders in almost every country. The effects of social distancing
have shut down significant parts of the local, regional, national, and
international economies, for limited or extended periods of time, with the
exception of government designated essential services.



Commencing in the spring of 2021, China began to experience an increase of
COVID-19 cases, and to some extent, local and national governments began to take
more restrictive measures to stem the spread of the virus, particularly from
October to December 2021. The Company has several shutdowns during the year
ended December 31, 2022.



To serve our customers while also providing for the safety of our employees and
service providers, we have modified numerous aspects of our logistics,
transportation, supply chain, purchasing, and after-sale processes. The Company
has taken proactive measures to promote products to new customers and entering
more regions during the year ended December 31, 2022. The extent of the impact
of COVID-19 on the Company's results of operations and financial condition will
depend on the virus' future developments, including the duration and spread of
the outbreak and the impact on the Company's customers, which are still
uncertain and cannot be reasonably estimated at this point of time.



Results of Operations


Highlights for the year ended December 31, 2022 include:

? Revenues were $37.9 million, a decrease of 7.1% from $40.8 million for the year ended December 31, 2021

? Gross profit was $14.0 million, an decrease of 23.9% from $18.4 million for the year ended December 31, 2021

? Gross profit margin was 37.0%, as compared to 45.3% for the year ended December 31, 2021

? Net income was $8.7 million, a decrease of 50.0% from $17.4 million for the year ended December 31, 2021

? Total volume shipped was 1,916,976 units, a decrease of 0.3% from 1,922,353 units for the year ended December 31, 2021





The following table sets forth, for the periods indicated, statements of income
data:



(in US Dollar millions,
except percentage)                         For the Years Ended December 31,             Change
                                             2022                     2021                 %
Revenues                               $           37.9         $           40.8              (7.1 )%
Cost of revenues                                  (23.9 )                  (22.4 )             6.7 %
Gross profit                                       14.0                     18.4             (23.9 )%
Total operating expenses                           (2.6 )                   (5.8 )           (55.2 )%
Operating income                                   11.4                     12.6              (9.5 )%
Gain on asset disposal                              0.0                      7.6               0.0 %

Loss on conversion of notes payable                (0.1 )                      -               N/A
Gain (loss) on changes of fair
values of Common Stock Purchase
Warrant                                             0.9                      0.8              12.5 %
Income before income taxes                         12.1                     21.8             (44.5 )%
Income tax benefit (expense)                       (3.4 )                   (4.4 )           (22.7 )%
Net income                             $            8.7         $           17.4             (50.0 )%




50





For the Years Ended December 31, 2022 and 2021





Revenues



Revenues were $37.9 million in the year ended December 31, 2022, a decrease of
$2.9 million, or 7.1%, compared with $40.8 million in the same period of last
year. This was mainly due to the decrease of 0.3% in sales volume, and a
decrease of 2.7% in the average selling price of our products in RMB, and 4.4%
negative impact from exchange rate due to depreciation of RMB against US
dollars, as compared with those of the same period of last year.



                                                   For the Years Ended December 31,
                                   2022                          2021                   Change         Change
                            Amount           %            Amount           %            Amount           %
                                                   (in US Dollar except percentage)
Revenue from sales to
customers in PRC         $ 26,440,376         69.7 %   $ 27,213,684         66.7 %   $   (773,307 )       (2.8 )%
Revenue from sales to
customers overseas         11,482,736         30.3 %     13,571,790         33.3 %     (2,089,054 )      (15.4 )%
Total Revenues           $ 37,923,112          100 %   $ 40,785,474          100 %   $ (2,862,361 )       (7.1 )%




51






                                                 For the Years Ended December 31,
                                   2022                         2021                Change        Change
                            Unit            %            Unit            %           Unit            %
                                                   (in UNIT, except percentage)
Units sold to
customers in PRC           1,295,097         67.6 %     1,244,438         64.7 %      50,659           4.1 %
Units sold to
customers overseas           621,879         32.4 %       677,915         35.3 %     (56,036 )        (8.3 )%
Total Units Sold           1,916,976          100 %     1,922,353          100 %      (5,377 )        (0.3 )%




(i) Domestic market



For the year ended December 31, 2022, revenue from domestic market decreased by
$0.8 million or 2.8%, as a combined result of (i) a decrease of 2.6% in the
average selling price of our products in RMB, and (ii) 4.4% negative impact from
exchange rate due to depreciation of RMB against US dollars, and offset by (iii)
an increase of 4.1% in sales volume, as compared with those of last year.



As for the RMB selling price, the decrease of 2.6% was mainly due to the marketing initiatives to enhance sales of new models of higher-end products such as touch screens used in POS touchscreens, medical touchscreens and gaming touchscreens in marketing regions such as East China during the year ended December 31, 2022.





The weakening in macroeconomic conditions since the outbreak of COVID-19
pandemic continued to exacerbate the touch screen business environment. Since
April 2022, the Chinese government has imposed strict zero tolerance virus
policies and the Company's business has been negatively impacted and has
continued to generate lower revenues during the year ended December 31, 2022.
Although the Company has taken proactive efforts to market new models such as
POS touchscreens and obtain new customers and penetrate into new regions with a
sales increase of 0.8% in Eastern China, the Company had hard suffering of a
decrease of 1.6% in Southwest China, and of 0.5% in Southern China due to the
government lockdown in this region during the year ended December 31, 2022.




(ii) Overseas market



For the year ended December 31, 2022, revenue from overseas market was $11.5
million as compared to and $13.6 million of the same period of 2021, a decrease
of $2.1 million or 15.4%, mainly due to a decrease of 8.3% in sales volume
primarily due to 1) the slack overseas orders; 2) negative effects of COVID 19
impact, such as more strict customs inspection in China leading to delayed
product shipment during the second half of 2022, and a decrease of 7.8% in
average selling price of our products due to the decreased higher pricing
medical touchscreens during the year ended December 31, 2022, compared with
those of the same period of last year.



52






The following table summarizes the breakdown of revenues by categories in US
dollars:



                                                                        Revenues
                                                            For the Years Ended December 31,
                                             2022                         2021                        Change
                                      Amount           %           Amount           %           Amount           %
                                                           (in US Dollars, except percentage)
Product categories by end
applications
Automotive Touchscreens            $  9,293,357        24.5 %   $ 11,597,467        28.4 %   $ (2,304,110 )     (19.9 )%
Industrial Control Computer
Touchscreens                          7,991,356        21.1 %      7,988,346        19.6 %          3,010         0.0 %
POS Touchscreens                      6,556,348        17.3 %      6,291,534        15.4 %        264,814         4.2 %
Gaming Touchscreens                   5,199,118        13.7 %      5,831,529        14.3 %       (632,411 )     (10.8 )%

Medical Touchscreens                  5,050,067        13.3 %      5,205,304        12.8 %       (155,237 )      (3.0 )%
Multi-Functional Printer
Touchscreens                          3,822,054        10.1 %      3,748,868         9.2 %         73,186         2.0 %
Others*                                  10,812         0.0 %        122,426         0.3 %       (111,614 )     (19.9 )%
Total Revenues                     $ 37,923,112       100.0 %   $ 40,785,474       100.0 %   $ (2,862,362 )      (7.1 )%



*Others include applications in financial terminals, ticket vending machines, and self-service kiosks.





The Company continued to shift production mix from traditional lower-end
products such as touchscreens used in automotive to high-end products such as
touchscreens used in POS touchscreens and multi-functional printer touchscreens,
primarily due to (i) greater growth potential of computer screen models in
China, and (ii) the stronger demand and better quality demand from consumers'
recognition of higher-end touchscreens made with better raw materials.



Gross Profit and Gross Profit Margin





                                      Years Ended
                                     December 31,               Change
(in millions, except percentage)    2022       2021       Amount         %
Gross Profit                       $ 14.0     $ 18.4     $   (4.4 )     (23.9 )%
Gross Profit Margin                  37.0 %     45.3 %                   (8.3 )%




Gross profit was $14.0 million during the year ended December 31, 2022, as
compared to $18.4 million in the same period of 2021, representing a decrease of
$4.4 million, or 23.9%. Our gross margin was 37.0% during the year ended
December 31, 2022, as compared to 45.3% for the year ended December 2021,
primarily due to the decrease of sales by 7.1%, and the increase of 13.2% in
cost of materials such as the chip cost, partially offset by the decrease of
labor cost by 2.2%, depreciation and other overhead cost such as rent and
electricity by 9.0% due to the reduced production volume for the year ended
December 31, 2022.



Selling Expenses



                                      Years Ended
                                     December 31,              Change
(in millions, except percentage)    2022       2021      Amount         %
Selling Expenses                   $   1.3     $ 0.6     $   0.7       116.7 %
as a percentage of revenues            3.5 %     1.5 %                   2.0 %




Selling expenses were $1.3 million during the year ended December 31, 2022, as
compared to $0.6 million for the year ended December 31, 2021, primarily due to
the increase of marketing expenses of $0.7 million as the Company took
promotional efforts to market new models such as POS touchscreens and obtain new
customers and penetrate into new regions in order to reduce the negative impact
of COVID 19.



53





General and Administrative Expenses





                                         Years Ended
                                        December 31,              Change
(in millions, except percentage)       2022       2021      Amount         %
General and Administrative Expenses   $   1.3     $ 1.9     $  (0.6 )     (31.6 )%
as a percentage of revenues               3.4 %     4.7 %                  (1.3 )%




General and administrative (G&A) expenses was $1.3 million for the year ended
December 31, 2022, as compared to $1.9 million for the year ended December 31,
2022, representing a decrease of 31.6%, or $0.6 million. The decrease was
primarily due to i) $0.4 million loss of VAT input credits due to Sichuan
Wetouch ceasing operation and relocation to comply with local PRC government
guidelines on local environmental issues and the national overall plan, ii) $0.1
million accelerated amortization expense due to Sichuan Wetouch ceasing
operation and relocation to comply with local PRC government guidelines on local
environmental issues and the national overall plan during the year ended
December 31, 2021 (See Note 5), iii) the decrease of $0.4 million miscellaneous
fees, and partially offset by iv) an increase of $0.3 million professional fees
during the year ended December 31, 2022.



Research and Development Expenses





                                          Years Ended
                                         December 31,                Change

(in US dollars, except percentage) 2022 2021 Amount

%

Research and Development Expenses $ 85,251 $ 89,477 $ (4,226 )

  (4.7 )%
as a percentage of revenues               0.0 %        0.0 %                   0.0 %




Research and development (R&D) expenses were $85,251 in the year ended December
31, 2022 compared to $89,477 in the same period in 2021, representing a decrease
of $4,226, or 0.0, mainly due to the decrease of salary and welfare expenses of
R&D personnel.



Share-based Compensation



                                      Years Ended
                                     December 31,              Change
(in millions, except percentage)    2022       2021      Amount        %
Share-based compensation           $   0.0     $ 3.1     $  (3.1 )     (0.0 )%
as a percentage of revenues            0.0 %     7.6 %                 (7.6 )%



Share-based compensation were nil and $3.1 million for the years ended December 31, 2022 and 2021, respectively.





On January 1, 2021, the Board of Directors of the Company authorized the
issuance of an aggregate of 310,830 shares and 631,080 warrants to a consultant
for advisory services that had been rendered. The Company recognized relevant
share-based compensation expense of $1,041,281 for the vested shares and
$2,107,825 for the warrants during the year ended December 31, 2021.



Operating Income



Total operating income was $11.4 million for the year ended December 31, 2022
compared to $12.6 million for the year ended December 31, 2021, representing a
decrease of $1.2 million or 9.5% due to lower gross profit and higher selling
expenses, partially offset by the lower G&A expenses and share-based
compensation expenses.



54






Gain on Asset Disposal



                                      Years Ended
                                     December 31,              Change
(in millions, except percentage)    2022       2021      Amount         %
Gain on asset disposal             $  0.0     $  7.6     $  (7.6 )      (0.0 )%
as a percentage of revenues           0.0 %     20.5 %                 (20.5 )%




Gain on asset disposal was nil for the year ended December 31, 2022 compared to
$7.6 million for the year ended December 31, 2021. Pursuant to local PRC
government guidelines on local environmental issues and the national overall
plan, Sichuan Wetouch was under the government directed relocation order to
relocate no later than December 31, 2021 and received compensation accordingly.
On March 18, 2021, pursuant to the agreement with the local government and an
appraisal report issued by a mutual agreed appraiser, Sichuan Wetouch received a
compensation of RMB115.2 million ($17.9 million) ("Compensation Funds") for the
withdrawal of the right to use of state-owned land and the demolition of all
buildings, facilities, equipment and all other appurtenances on the land. During
the year ended December 31, 2021, the Company recorded a gain of $7,625,279

for
the asset disposal.


Loss on conversion of notes payable





                                         Years Ended
                                        December 31,              Change
(in millions, except percentage)       2022       2021       Amount        %
Loss on conversion of notes payable   $   0.1     $ 0.0     $    0.1
N/A
as a percentage of revenues               0.3 %     0.0 %                  0.3 %




Loss on conversion of notes payable were $0.1 million for the year ended
December 31, 2022, as lenders of convertible promissory note payable converted
certain principal, accrued and unpaid interest and default charges totaling
$1,038,426 into 1,384,564 shares of common stock of the Company, including two
notes fully converted. As a result, the Company recorded a loss on the
conversion of notes payable of $0.1 million accordingly (see Note (9 (a)).

Gain on changes in fair value of Common Stock Purchase Warrants





                                          Years Ended
                                          December 31,                      Change

(in millions, except percentage)      2022            2021          Amount 

%


Gain on changes in fair value of
Common Stock Purchase Warrants     $       0.9     $      0.8     $       0.1           12.5 %
as a percentage of revenues                2.4 %          2.0 %                          0.4 %




Gain on changes in fair value of common stock purchase warrants was $0.9 million
and $0.8 million for the years ended December 31, 2022 and 2021, respectively
(See Note 9 (b)).



Income Taxes



                                      Years Ended
                                     December 31,              Change
(in millions, except percentage)    2022       2021      Amount         %
Income before Income Taxes         $ 12.1     $ 21.8     $  (9.7 )     (44.5 )%
Income Tax Benefit (Expense)         (3.4 )     (4.4 )       1.0       (22.7 )%
Effective income tax rate            27.7 %     20.2 %                  (7.5 )%




55





The effective income tax rates for the years ended December 31, 2022 and 2021 were 27.1% and 20.2%, respectively. The effective income tax rate increased during the year ended December 31, 2022 primarily due to Sichuan Wetouch's preferential income tax rate for the same period of 2021.





Our PRC subsidiaries had $51.2 million of cash and cash equivalents at December
31, 2022, which are planned to be indefinitely reinvested in PRC. The
distributions from our PRC subsidiary are 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 subsidiaries.



Net Income



As a result of the above factors, we had a net income of $8.7 million the year
ended December 31, 2022 compared to net income of $17.4 million for the year
ended December 31, 2021.


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, 2022, we had current assets of $62.2 million, consisting of
$51.3 million in cash, $9.1 million in accounts receivable, $0.4 million in
inventories, and $1.5 million in prepaid expenses other current assets. Our
current liabilities as of December 31, 2022, were $4.0 million, which is
comprised of $1.4 million in accounts payable, $0.9 million in accrued expenses
and other current liabilities, $0.4 million loan from a third party, and $1.3
million convertible promissory notes payable.



The following table sets forth a summary of our cash flows for the periods
indicated.



                                                              Years Ended
                                                             December 31,
(in US Dollar millions)                                 2022               2021

Net cash provided by operating activities $ 8.6 $

14.0


Net cash provided by investing activities                       -          

6.2


Net cash provided by (used) in financing
activities                                                   (0.7 )        

1.9


Effect of foreign currency exchange rate changes
on cash and cash equivalents                                 (2.8 )        

0.1


Net increase (decrease) in cash and cash
equivalents                                                   5.1          

22.2


Cash and cash equivalents at the beginning of
period                                                       46.2          

24.0

Cash and cash equivalents at the end of period $ 51.3 $


    46.2




56






Operating Activities



Net cash provided by operating activities was $8.6 million for the year ended
December 31, 2022, as compared to $14.0 million provided by operating activities
for for the year ended December 31, 2021, primarily due to (i) the decrease of
$8.7 million net income for the year ended December 31, 2022 as compared to the
same period of 2021, (ii) the decrease of $3.1 million of share-based
compensation during the year ended December 31, 2022 , (iii) ) the increase of
$6.5 million account receivable due to slower collection from the impact of the
COVID-19 pandemic and Sichuan Wetouch settling customer receivables during the
year ended December 31, 2021; partially offset by (iv) the increase of $0.8
million of account payable due to the longer payment period (v) $7.6 million
gain on asset disposal for the year ended December 31, 2021, (vi) the decrease
of $3.1 million prepaid expenses including amortization of $1.0 million prepaid
marketing expenses during the year ended December 31, 2022; (vii) 0.5 million of
deferred income due to Sichuan Wetouch write-off government grant in the
operating ceasing process for the year ended December 31, 2021.



Investing Activities


There was nil investing activities for the year ended December 31, 2022.





There were $17.8 million in proceeds from asset disposal for Sichuan Wetouch,
and $0.2 million in purchase of property, plant and equipment for year ended
December 31, 2021. See Note 5 in the interim financial information.



Financing Activities



Net cash used in the financing activities was $0.7 million for the year ended
December 31, 2022, including $1.4 million of repayment of convertible promissory
note payable (see Note 9 (a)), partially offset by 0.4 million loan from a

third
party.



Net cash provided by the financing activities was $1.8 million for the year
ended December 31, 2021 as a result of proceeds of $2.0 million from issuance of
seven convertible promissory notes, partially offset by the payment of issue
cost of $0.2 million related to notes financing (see Note 11).



As of December 31, 2022, our cash and cash equivalents were $51.3 million, as compared to $46.2 million at December 31, 2021.

Days Sales Outstanding ("DSO") has decreased at 81 days for the year ended December 31, 2022 compared to 88 days for the year ended December 31, 2021.

The following table provides an analysis of the aging of accounts receivable as of December 31, 2022 and December 31, 2021:





                                 December 31, 2022       December 31 2021
-Current                        $         1,252,152     $        1,403,187
-1-3 months past due                      4,998,596              2,827,048
-4-6 months past due                      2,806,973              3,742,732
7-12 months past due                             20                 18,070

-greater than 1 year past due                     -                      -

Total accounts receivable       $         9,057,741     $        7,991,037




57






The majority of the Company's revenues and expenses were denominated primarily
in Renminbi ("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.

Our industry typical payment term is 180 days. Accounts receivables are written off against the allowances only after exhaustive collection efforts.

Based on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing activities will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.

COMMITMENTS AND CONTINGENCIES





Legal Proceedings



From time to time, the Company is a party to various legal actions arising in
the ordinary course of business. The Company accrues costs associated with these
matters when they become probable and the amount can be reasonably estimated.
Legal costs incurred in connection with loss contingencies are expensed as
incurred.



As of December 31, 2022, the Company had several legal claims or litigations. As
of the date of this Annual Report, all actions have been settled and Sichuan
Wetouch, Hong Kong Wetouch and Mr. Guangde Cai were unconditionally and fully
discharged and released therefrom. For a discussion of the Company's legal
proceedings, see Note 13 to the Financial Statements in Item 8.



Capital expenditure commitment





On December 20, 2021, the Company entered into a contract with Shenzhen
Municipal Haoyutuo Decoration & Cleaning Engineering Company Limited to purchase
a facility decoration contract of RMB20.0 million (equivalent to US$3.1
million). As of December 31, 2022, the Company has prepaid RMB15.0 million
(equivalent to US$2.2 million) and recorded as construction in progress (see
Note 5) and had a remaining balance of RMB5.0 million (equivalent to US$0.7
million) to be paid by the end of 2023.



Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements as of December 31, 2022.





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.



58






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 to ASC 606, the Company recognizes revenue when it transfers its
goods and 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, which the Company has control of the goods and has the ability to direct
the use of goods 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 on the Company's pre-established credit
requirements based upon an evaluation of customers' credit quality. Contract
assets are recognized for in 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 when an order is placed and when shipment or delivery occurs. As of
December 31, 2022 and 2021, 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.



59






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, 2022 and 2021 are
disclosed in Note 14 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 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
as of 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, the recoverability of
long-lived assets, provision 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 a
weighted average. 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 predicable
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. $74,100 and nil inventory write-off was recorded for the years ended
December 31, 2022 and 2021, respectively.



Convertible Promissory Notes



The Company accounts for its convertible promissory notes according to 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.



We analyze 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 fixed interest rate, specified notional principal
and settlement date, which no other events would affect specified settlement,
and the Company received net proceeds after issuance costs and discount, which
the Company recorded as the net proceeds or net settled investment, the
management assessed that the Notes did not do not meet the definition of a
derivative instruments and an embedded feature would not be bifurcated. The
discounts on the convertible notes, are amortized to interest expense, using the
effective interest method, over the terms of the related convertible notes.




60





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 is that 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 to be derivative
instruments for purposes of ASC 815-40.



The Company concluded that the Warrants issued in November and December 2021
financing should be treated as a derivative liability because the Warrants are
entitled to a price adjustment provision to allow the exercise price to be
increased or reduced in the event 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 to be an
input to the fair value of a fixed-for-fixed option on equity shares which leads
the Warrants to fail to be qualified as indexed to the Company's own stock and
then to 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 re-measured at fair value
with changes in fair value recorded in earnings at 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. As of December 31,
2022 and 2021, the Company recorded $256,957 and $1,128,635 common stock
purchase warrants liability, respectively, and $871,677 and $759,471 gain on
change of fair value of common stock purchase liability warrants for the year
ended December 31, 2022 and 2021, 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 including 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
of being realized on 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 have been incurred during the years ended December 31, 2022 and 2021. The
Company does not believe there was any uncertain tax provision at December

31,
2022 and 2021.



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, 2022 and 2021. As of December 31, 2022, all of the
Company's tax returns of its PRC Subsidiaries remain open for statutory
examination by PRC tax authorities.



61





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
Office and electric equipment   3 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 in other income or expenses.



Impairment of long-lived Assets


Long-lived assets, such as property, plant and equipment, 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 by 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 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 any of the
years presented.



Share-Based Compensation



The Company awards share options and other equity-based instruments to its
employees, directors and third party service providers (collectively
"share-based payments"). Compensation cost related to such awards is measured
based on the fair value of the instrument on the grant date. The Company
recognizes the compensation cost over the period the employee is required to
provide service in exchange for the award, which generally is the vesting
period. The amount of cost recognized is adjusted to reflect the expected
forfeiture prior to vesting. When no future services are required to be
performed by the employee in exchange for an award of equity instruments, and if
such award does not contain a performance or market condition, the cost of the
award is expensed on the grant date. The Company recognizes compensation cost
for an award with only service conditions that has a graded vesting schedule on
a straight-line basis over the requisite service period for the entire award,
provided that the cumulative amount of compensation cost recognized at any date
at least equals the portion of the grant-date value of such award that is vested
at that date.



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 translation of 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

that
are issued.



62






In August 2020, the FASB issued ASU No. 2020-06 ("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." ASU 2020-06
will simplify the accounting for convertible instruments by reducing the number
of accounting models for convertible debt instruments and convertible preferred
stock. Limiting the accounting models results in fewer embedded conversion
features being separately recognized from the host contract as compared with
current U.S. GAAP. Convertible instruments that continue to be subject to
separation models are (1) those with embedded conversion features that are not
clearly and closely related to the host contract, that meet the definition of a
derivative, and that do not qualify for a scope exception from derivative
accounting, and (2) convertible debt instruments issued with substantial
premiums for which the premiums are recorded as additional paid-in capital. ASU
2020-06 also amends the guidance for the derivatives scope exception for
contracts in an entity's own equity to reduce form-over-substance-based
accounting conclusions. For public business entities, the amendments in ASU
2020-06 are effective for public entities which meet the definition of a smaller
reporting company are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2023, including interim periods
within those fiscal years. Early application of the guidance will be permitted
for all entities for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. The Company adopted ASU 2020-06
effective January 1, 2021.



In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326), which introduces new guidance for the accounting for credit losses
on instruments within its scope. The new guidance introduces an approach based
on expected losses to estimate credit losses on certain types of financial
instruments. It also modifies the impairment model for available-for-sale (AFS)
debt securities and provides for a simplified accounting model for purchased
financial assets with credit deterioration since their origination. The
pronouncement will be effective for public business entities that are SEC filers
in fiscal years beginning after December 15, 2022, including interim periods
within those fiscal years. Early application of the guidance will be permitted
for all entities for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The Company adopted ASU 2016-13
utilizing the modified retrospective transition method. The adoption of ASU
2016-13 did not have a material impact on the Company's condensed consolidated
financial statements.



In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes". The amendment simplifies the
accounting for income taxes by eliminating some exceptions to the general
approach in ASC 740, Income Taxes. It also clarifies certain aspects of the
existing guidance to promote more consistent application, among other things.
The guidance is effective for interim and annual reporting periods beginning
within 2021 with early adoption permitted.



In October 2021, the FASB issued ASU No. 2021-08, which will require companies
to apply the definition of a performance obligation under ASC Topic 606 to
recognize and measure contract assets and contract liabilities (i.e., deferred
revenue) relating to contracts with customers that are acquired in a business
combination. Under current U.S. GAAP, an acquirer generally recognizes assets
acquired and liabilities assumed in a business combination, including contract
assets and contract liabilities arising from revenue contracts with customers,
at fair value on the acquisition date. ASU No. 2021-08 will result in the
acquirer recording acquired contract assets and liabilities on the same basis
that would have been recorded by the acquiree before the acquisition under ASC
Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after
December 15, 2022, with early adoption permitted. The Company is currently
evaluating the impact of this ASU on its financial statements and the effects
will be based upon the contract assets and liabilities acquired in the future.



From time to time, the FASB or other standards setting bodies issue new
accounting pronouncements. Updates to the FASB ASCs are communicated through
issuance of ASUs. Unless otherwise discussed, the Company believes that the
recently issued guidance, whether adopted or to be adopted in the future, is not
expected to have a material impact on its consolidated financial statements

upon
adoption.



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