Wetouch Technology Inc. Debt Disclosure

NOTE 9 – CONVERTIBLE PROMISSORY NOTES PAYABLE

 

a) Convertible promissory notes

 

In October, November, and December 2021, the Company, issued seven (7) convertible promissory notes (the “Notes”) of an aggregate principal amount of US$2,250,000, due in one year with issuance price discounted 90.0%.   The Notes bore interest at a rate of 8.0% per annum, payable in one year and matured on October 27, November 5, November 16, November 29 and December 2 of 2022. Net proceeds after debt issuance costs and debt discounts were approximately US$1,793,000. Debt issuance costs in the amount of US$162,000 are recorded as deferred charges and included in the other current assets on the consolidated balance sheet. The debt discount and debt issuance costs are amortized into interest expense using the effective interest method over the terms of the Notes.

 

The details of the Notes are as follows:

 

Unless the Notes are converted, the principal amounts of the Notes, and accrued interest at the rate of 8% per annum, are payable on the one-year anniversary of the issuance of the Notes (the “Maturity Date”). If the Company fails to satisfy its loan obligation by the Maturity Date, the default interest rate will be 16%.

 

 

The Lenders have the right to convert any or all of the principal and accrued interest on the Notes into shares of common stock of the Company on the earlier of (i) 180 calendar days after the issuance date of the Notes or (ii) the closing of a listing for trading of the common stock of the Company on a national securities exchange offering resulting in gross proceeds to the Company of $15,000,000 or more (an “Uplist Offering”). If the Company closes an Uplist Offering on or before the 180^th calendar date after the issuance date of the Notes, the conversion price shall be 70% of the per share offering price in the Uplist Offering; otherwise, the conversion price is $15.0 per share.

 

Subject to customary exceptions, if the Company issues shares or any securities convertible into shares of common stock at an effective price per share lower than the conversion price of the Notes, the conversion rate of the Notes shall be reduced to such lower price.

 

Until the Notes are either paid or converted in their entirety, the Company agreed with the Lenders not to sell any securities convertible into shares of common stock of the Company (i) at a conversion price that is based on the trading price of the stock or (ii) with a conversion price that is subject to being reset at a future date or upon an event directly or indirectly related to the business of the Company or the market for the common stock. The Company also agreed to not issue securities at a future determined price.

 

The Lenders have the right to require the Company to repay the Notes if the Company receives cash proceeds, including proceeds from customers and the issuance of equity (including in the Uplist Offering). If the Company prepays the Notes prior to the Maturity Date, the Company shall pay a 10% prepayment penalty.

 

The following table summarizes the outstanding promissory notes as of December 31, 2023 and December 31, 2022:

 SUMMARY OF OUTSTANDING PROMISSORY NOTES

 

						December 31, 2023								December 31, 2022
		Interest rate				Principal Amount				Carrying Amount				Principal Amount				Carrying Amount
Convertible Note - Talos Victory (Note 9 (b))			8	%		$	-			$	-			$	-				-
Convertible Note - Mast Hill (Note 9 (b))			8	%			740,000				700,448				740,000				635,535
Convertible Note - First Fire (Note 9 (b))			8	%			156,250				151,457				181,250				156,594
Convertible Note - LGH Note 9 (b))			8	%			202,500				204,929				207,500				188,987
Convertible Note - Fourth Man (Note 9 (b))			8	%			152,000				142,397				157,000				128,703
Convertible Note - Jeffery Street Note 9 (b))			8	%			165,000				150,641				170,000				142,554
Convertible Note - Blue Lake Note 9 (b))Total			8	%			-				-				-				-
Total						$	1,400,750			$	1,349,872			$	1,455,750			$	1,252,373
Amortization of Discounts for the Year Ended December 31, 2023											(110,746	)
Convertible Promissory Notes payable as of December 31, 2023										$	1,239,126

 

From December 28, 2022 to April 6, 2023, the lenders of five outstanding Notes and the Company entered into an amendment to the Notes (“Amendment to Promissory Note”) extending the term of the Notes for an additional 6 months.

 

 

From August 29 to September 9, 2023, the lenders of the outstanding Notes and the Company entered into an amendment to the Notes (“Amendment to Promissory Note”) that the Company’s ordinary shares on the Nasdaq Capital Market (the “Uplist”), the Company shall within three (3) business days after the Uplist, pay to the Holders amounts equal to 105% of the total outstanding balance of the Convertible Debenture.

 

During the year ended December 31, 2023, principal and default charges totaling $1,200,000 were converted into 25,000 shares of common stock of the Company.

 

During the year ended December 31, 2022, principal, accrued and unpaid interest and default charges totaling $1,038,426 were converted into 69,228 shares of common stock of the Company. Two notes were fully converted

 

For the year ended December 31, 2023 and 2022, the Company recognized interest expenses of the Notes in the amount of US$252,325 and US$224,885, respectively.

 

*The  Company prepaid $10,000 legal deposit for each Note till the repayment of the Notes.

 

As of the date of the Report, the Company has repaid remaining Principal and interests accrued.

 

b) Warrants

 

Accounting for Warrants

 

In connection with the issuance of the Notes, the Company also issued to the lenders seven (7) three-year warrants (the “Note Warrants”) to purchase an aggregate of 90,000 shares of the Company’s common stock (the “Warrant Shares”).

 

The Note Warrants issued to the lenders granted the holders the rights to purchase up to 10,000 shares   of common stock of the Company at an exercise price of $25 per share. However, if the Company closes an Uplist Offering on or before the 180^th calendar date after the issuance date of the Note Warrants, then the exercise price shall be 125% of the offering price of a share in the Uplist Offering. If the adjusted exercise price as a result of the Uplist Offering is less than $25per share, then the number of shares for which the Warrants are exercisable shall be increased such that the total exercise price, after taking into account the decrease in the per share exercise price, shall be equal to the total exercise price prior to such adjustment.

 

The lenders have the right to exercise the Note Warrants on a cashless basis if the highest traded price of a share of common stock of the Company during the 150 trading days prior to exercise of the Note Warrants exceeds the exercise price, unless there is an effective registration statement of the Company which covers the resale of the Lenders. 

 

If the Company issues shares or any securities convertible into shares at an effective price per share lower than the exercise price of the Note Warrants, the exercise price of the Note Warrants shall be reduced to such lower price, subject to customary exceptions.

 

The lenders may not convert the Notes or exercise the Note Warrants if such conversion or exercise will result in each of the lenders, together with any affiliates, beneficially owning in excess of 4.9% of the Company’s outstanding shares of common stock immediately after giving effect to such exercise unless such lender notifies the Company at least 61 days prior to such exercise.

 

During the year ended December 31, 2022, three lenders exercised the Note Warrants cashlessly for 14,233 shares of common stock.

 

 

During the year ended December 31, 2023, two lenders exercised the Note Warrants cashlessly for 22,338 shares of common stock.

 

The fair values of these warrants as of December 31, 2023 were calculated using the Black-Scholes option-pricing model with the following assumptions:

SCHEDULE OF FAIR VALUE OF WARRANTS

 

																		December 31, 2023
		Volatility (%)				Expected dividends yield (%)				Weighted average expected life (year)				Risk-free interest rate (%) (per annum)				Common stock purchase warrants liability as of December 31, 2022(US$)				Changes of fair value of common stock purchase warrants liability (+ (loss)/(- (gain)(US$)				Common stock purchase warrants liability as of December 31, 2023 (US$)
Convertible Note - Talos Victory (Note 9 (a))			545.7	%			0.0	%			0.8				5.03	%			14,803				28,310				43,113
Convertible Note - Mast Hill (Note 9 (a))			545.7	%			0.0	%			-				5.03	%			101,293				(101,293	)			-
Convertible Note - First Fire (Note 9 (a))			545.7	%			0.0	%			0.9				5.03	%			33,919				64,456				98,375
Convertible Note - LGH Note 9 (a))			545.7	%			0.0	%			0.9				5.03	%			34,028				64,489				98,517
Convertible Note - Fourth Man (Note 9 (ab))			545.7	%			0.0	%			0.9				5.03	%			14,398				27,241				41,639
Convertible Note - Jeffery Street Note 9 (a))			545.7	%			0.0	%			0.9				5.03	%			34,134				(7,870	)			26,264
Convertible Note - Blue Lake Note 9 (a))			545.7	%			0.0	%			0.9				5.03	%			24,382				46,080				70,463
Total															Total				256,957				121,413				378,371

 

(c) Registration Rights Agreements

 

Pursuant to the terms of the Registration Rights Agreements between the Company and lenders of the Notes, the Company agreed to file a registration statement with the Securities and Exchange Commission to register the shares of common stock underlying the Notes and the shares issuable upon exercise of the Note Warrants within sixty days from the date of each Registration Rights Agreement. The Company also granted the lenders piggyback registration rights on such securities pursuant to the Purchase Agreements .