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Operating Lease

6 Months Ended

Jun. 30, 2025

NOTE 6 — OPERATING LEASE

In March 2021, pursuant to the local PRC government guidelines on local environmental issues and the national plan, the Company was under the government directed relocation order to relocate from a parcel of state-owned land where we maintained our executive offices, research and development facilities and factories. The Company received a total amount of RMB115.2 million (approximately $17.7 million) from the local government (see ITEM 2. PROPERTIES AND FACILITIES) to start the construction of the new facility in a neighboring Chengdu Wenjiang District.

On March 16, 2021, in order to minimize interruption of the Company’s business, Sichuan Vtouch entered into a leasing agreement with Sichuan Renshou Shigao Tianfu Investment Co., Ltd. (later renamed as Meishan Huantian Industrial Co., Ltd.), a limited liability company owned by the local government, to lease the property, and all buildings, facilities and equipment thereon (the “Demised Properties) of Sichuan Wetouch, commencing from April 1, 2021 until December 31, 2021 at a monthly rent of RMB300,000 ($41,100), which period was extended to October 31, 2022. The lease was renewed on October 30, 2022, October 30, 2023 and August 9, 2024, respectively, with a monthly rent of RMB 400,000 ($55,837), the term of which has been extended to October 31, 2025 for the use of the Demised Properties.

The Company’s new facility started in August 2021 yet was delayed and suspended due to the outbreak of Covid-19 and government-ordered shutdowns in China. The Company has rescheduled and extended the completion by end of December 31, 2025 with the production at the new facilities will commencing in the second quarter of 2026. For the three and six months ended June 30, 2025, management makes estimates and assumptions to use the leasing property till the end of October 2026, and applies ASU 2016-02 “Leases (Topic 842) as practical expedients during the three and six months ended June 30, 2025.

Both operating lease expense and short-term lease expense are recognized in cost of revenues and general and administrative expenses.

The components of lease expense for the three and six months ended June 30, 2025 and 2024 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2025		2024		2025		2024
	(Unaudited)				(Unaudited)
Lease expense
Operating lease expense	$	156,869	$	-	$	308,244	$	-
Short-term lease expense		-		146,643		-		294,372
Total lease expense	$	156,869	$	146,643	$	308,244	$	294,372

The balances for the operating leases where the Company is the lessee are presented as follows:

	June 30, 2025		December 31, 2024
	(Unaudited)
Operating lease right-of-use assets	$	813,516	$	1,055,208
Lease liabilities – current		609,059		571,539
Lease liabilities – non-current		204,458		482,606
Total operating lease liabilities	$	813,517	$	1,054,145

The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2025:

	Operating lease
	(Unaudited)
2025 lease payment (from July 1, 2025 to December 31, 2025)	$	307,364
2026 lease payment		506,153
Less: imputed interest		-
Present value of lease liabilities	$	813,517

Lease term and discount rate:

	For the Six Months Ended June 30,
	2025			2024
	(Unaudited)
Weighted-average remaining lease term (years)
Operating lease		1.4			-

Weighted-average discount rate
Operating lease		1.09	%		-

Supplemental cash flow information related to leases where the Company was the lessee for the six months ended June 30,2025 was as follows:

	For the Six Months Ended June 30,
	2025		2024
	(Unaudited)
Cash payments for operating lease	$	303,592	$	-
Lease liabilities arising from obtaining right-of-use assets		49,775		-