UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the Quarterly Period Ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| (Do not check if a smaller reporting company) | Emerging growth company | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
As of May 13, 2022, the registrant had shares of common stock issued and outstanding
WETOUCH TECHNOLOGY INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2022
TABLE OF CONTENTS
| PAGE | ||
| PART I - FINANCIAL INFORMATION | 4 | |
| Item 1. | Financial Statements | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 5 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 |
| Item 4. | Controls and Procedures | 13 |
| PART II - OTHER INFORMATION | 12 | |
| Item 1. | Legal Proceedings | 12 |
| Item 1A. | Risk Factors | 12 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
| Item 3. | Defaults Upon Senior Securities | 12 |
| Item 4. | Mine Safety Disclosure | 12 |
| Item 5. | Other Information | 12 |
| Item 6. | Exhibits | 12 |
| SIGNATURES | 13 | |
| 2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include, among others, those statements including the words “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans” and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions.
A description of these and other risks and uncertainties that could affect our business appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 which we filed with the Securities and Exchange Commission (“SEC”) on April 15, 2022 (the “Annual Report”). The risks and uncertainties described under “Risk Factors” are not exhaustive.
Given these uncertainties, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC, and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report, as updated in subsequent filings we have made with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 (UNAUDITED)
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 4 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of March 31, 2022 | As of December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Due to related parties | ||||||||
| Income tax payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Convertible promissory notes payable | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Common stock purchase warrants liability | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized, and issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | $ | $ | ||||||
| Additional paid in capital | ||||||||
| Statutory reserve | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Revenue from customers | $ | $ | ||||||
| Revenues from related parties | - | |||||||
| Total Revenues | ||||||||
| COST OF REVENUES | ||||||||
| Cost of revenues from customers | ( | ) | ( | ) | ||||
| Cost of revenues related parties | - | - | ||||||
| Total Cost of revenues | ( | ) | ( | ) | ||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| Selling expenses | ( | ) | ( | ) | ||||
| General and administrative expenses | ( | ) | ( | ) | ||||
| Research and development expenses | ( | ) | ( | ) | ||||
| Share-based compensation | - | ( | ) | |||||
| Total operating expenses | ( | ) | ( | ) | ||||
| INCOME FROM OPERATIONS | ||||||||
| OTHER INCOME (EXPENSES) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Government grant | - | |||||||
| Gain on asset disposal | - | |||||||
| Gain on changes in fair value of common stock purchase warrants liability | - | |||||||
| TOTAL OTHER NET | ||||||||
| INCOME BEFORE INCOME TAX EXPENSE | ||||||||
| INCOME TAX EXPENSE | ( | ) | ( | ) | ||||
| NET INCOME | $ | $ | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||
| Foreign currency translation adjustment | ( | |||||||
| COMPREHENSIVE INCOME | $ | $ | ||||||
| EARNINGS PER COMMON SHARE | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
WETOUCH TECHNOLODY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Common stock at Par value $0.001 | Additional paid-in | Statutory | Retained | Accumulated other comprehensive | Total stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | reserve | Earnings | Income (loss) | equity | ||||||||||||||||||||||
| Balance at December 31 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Common stock at Par value $0.001 | Additional paid-in | Statutory | Retained | Accumulated other comprehensive | Total stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | reserve | Earnings | income | equity | ||||||||||||||||||||||
| Balance at December 31 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
WETOUCH TECHNOLODY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three-months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to cash provided by operating activities | ||||||||
| Bad debts reversal | - | ( | ) | |||||
| Depreciation and amortization | ||||||||
| Asset disposal gain | - | ( | ) | |||||
| Share-based compensation | - | |||||||
| Amortization of discounts and issuance cost of the notes | - | |||||||
| Gain on changes in fair value of common stock purchase warrants liability | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Amounts due from related parties | - | |||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ||||||||
| Amounts due to related parties | ( | ) | ||||||
| Income tax payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Deferred grants | - | ( | ) | |||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Proceeds from assets disposal | - | |||||||
| Net cash provided by investing activities | - | |||||||
| Cash flows from financing activities | ||||||||
| Net cash used in financing activities | - | - | ||||||
| Effect of changes of foreign exchange rates on cash | ( | ) | ||||||
| Net increase in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Income tax paid | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 — BUSINESS DESCRIPTION
Business
Wetouch Technology Inc. (“Wetouch”, or the “Company”), formerly known as Gulf West Investment Properties, Inc., was originally incorporated in August 1992, under the laws of the state of Nevada.
On October 9, 2020, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Wetouch Holding Group Limited (“BVI Wetouch”) and all the shareholders of BVI Wetouch (each, a “BVI Shareholder” and collectively the “BVI Shareholders”), to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to the BVI Shareholders an aggregate of shares of our common stock (the “Reverse Merger”). In the Reverse Merger, each ordinary share of BVI Wetouch was exchanged for shares of common stock of Wetouch. Immediately after the closing of the Reverse Merger on October 9, 2020, we had a total of issued and outstanding shares of common stock. As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.
Wetouch Holding Group Limited (“BVI Wetouch”), is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Sichuan Wetouch Technology Co. Ltd. (“Sichuan Wetouch”), a limited liability company organized under the laws of the People’s Republic of China (“China” or “PRC”). Sichuan Wetouch is primarily engaged in the business of research development, manufacture, distribution of touchscreen displays to customers both in PRC and overseas. The touchscreen products, which are manufactured by the Company, are primarily for use in the computer components.
The Reverse Merger was accounted for as a recapitalization effected by a share exchange, wherein BVI Wetouch is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of BVI Wetouch have been brought forward at their book value and no goodwill has been recognized. The number of shares, par value amount, and additional paid-in capital in the prior years are retrospectively adjusted according.
Corporate History of BVI Wetouch
Wetouch Holding Group Limited (“BVI Wetouch”) was incorporated under the laws of British Virgin Islands on August 14, 2020. It became the holding company of Hong Kong Wetouch Electronics Technology Limited (“Hong Kong Wetouch”) on September 11, 2020.
Hong Kong Wetouch Technology Limited (“HK Wetouch”), was incorporated as a holding company under the laws of Hong Kong Special Administrative Region (“SAR”) on December 3, 2020. On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Vtouch. Due to the fact that Hong Kong Wetouch and HK Wetouch are both under the same sole stockholder, the acquisition is accounted for under common control.
In June 2021, Hong Kong Wetouch completed its dissolution process pursuant to the minutes of its special shareholder meeting.
Sichuan Wetouch Technology Co. Ltd. (“Sichuan Wetouch”) was formed on May 6, 2011 in the People’s Republic of China (“PRC”) and became Wholly Foreign-Owned Enterprise in PRC on February 23, 2017. On July 19, 2016, Sichuan Wetouch was 100% held by HK Wetouch.
On December 30, 2020, Sichuan Vtouch Technology Co., Ltd. (“Sichuan Vtouch”) was incorporated in Chengdu, Sichuan, under the laws of the People’s Republic of China.
In March 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, and started its dissolution process which is estimated to be completed by the second quarter of 2022. Sichuan Vtouch took over the operating business of Sichuan Wetouch.
As a result of the above restructuring, HK Wetouch became the sole shareholder of Sichuan Vtouch.
| F-5 |
Note 2 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the United States Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of December 31, 2021 was derived from the audited consolidated financial statements of Wetouch. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2021, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended.
In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2022, the results of operations and cash flows for the three-month periods ended March 31, 2022 and 2021 have been made. However, the results of operations included in such financial statements may not necessary be indicative of annual results.
Use of Estimates
The preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
On an ongoing basis, management evaluates the Company’s estimates, including those related to the bad debt allowance, fair values of financial instruments, intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Significant Accounting Policies
For a detailed discussion about Wetouch’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in Wetouch’s consolidated financial statements included in Company’s 2021 audited consolidated financial statements. During the three-month periods ended March 31, 2022, there were no significant changes made to Wetouch significant accounting policies.
| F-6 |
NOTE-3- ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
| March 31, 2022 | December 31 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | $ | ||||||
The Company’s accounts receivable primarily includes balance due from customers when the Company’s products are sold and delivered to customers.
NOTE-4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Advance to suppliers | $ | $ | ||||||
| VAT input credits | - | |||||||
| Issue cost related to convertible promissory notes | ||||||||
| Deferred marketing expenses | ||||||||
| Prepayment for land use right/ (i) | ||||||||
| Security deposit (ii) | ||||||||
| Others receivable (iii) | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
| (i) |
| (ii) |
| (i) |
NOTE 5— PROPERTY, PLANT AND EQUIPMENT, NET
| March 31, 2022 | December 31, 2021 | |||||||
| Buildings | $ | $ | ||||||
| Machinery, equipment and furniture | ||||||||
| Construction in progress | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
expense was $
Pursuant
to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch is 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 RMB million ($ 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 $
On
March 16, 2021, in order to minimize interruption of our business, Sichuan Vtouch entered into a leasing agreement with Sichuan Renshou
Shigao Tianfu Investment Co., Ltd., a limited company owned by the local government, to lease the property, and all buildings, facilities
and equipment thereon (“Demised Properties) of Sichuan Wetouch, commencing from April 1, 2021 until December 31, 2021 at a monthly
rent of RMB
| F-7 |
NOTE 6 – RELATED PARTY TRANSACTIONS
The related party transactions are summarized as follows:
Three-Month Period Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues resulting from related parties: | ||||||||
| Sales to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | $ | $ | ||||||
| Sales to Meishan Vtouch Electronics Technology Co., Ltd. (Meishan Wetouch) | - | |||||||
| $ | $ | |||||||
During
the three-month period ended March 31, 2021, the Company sold capacitive touchscreens to Chengdu Wetouch and Meishan Wetouch from time
to time. There were no written agreements between the Company and Meishan Wetouch. Mr. Guangde Cai, Chairman and director of the Company
and our indirect majority shareholder, owns
Amounts due to related parties are as follows:
| Relationship | March 31, 2022 | December 31, 2021 | Note | |||||||||
| Mr. Zongyi Lian | $ | $ | Payable to employee | |||||||||
| Mr. Guangde Cai | Payable to employee | |||||||||||
| Total | $ | $ | ||||||||||
| F-8 |
NOTE 7 — INCOME TAXES
Wetouch
Wetouch
Technology Inc. is subject to a tax rate of
BVI Wetouch
Under the current laws of the British Virgin Islands, BVI Wetouch, subsidiaries of Wetouch, is not subject to tax on its income or capital gains. In addition, no British Virgin Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.
Hong Kong
HK
Wetouch is incorporated in Hong Kong and is subject to profit taxes in Hong Kong at a progressive rate of
PRC
Sichuan
Wetouch and Sichuan Vtouch files income tax returns in the PRC. Effective from January 1, 2008, the PRC statutory income tax rate is
Under
PRC CIT Law, domestic enterprises and Foreign Investment Enterprises (“FIEs”) are usually subject to a unified 25% enterprise
income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis by local government
as preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs
are entitled to an income tax rate of
Sichuan
Vtouch is entitled to
The
effective income tax rates for the three-month periods ended March 31, 2022 and 2021 were
The estimated effective income tax rate for the year ended December 31, 2022 would be similar to actual effective tax rate of the three-month periods ended March 31, 2022.
| F-9 |
NOTE 8— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Advance from customers | $ | $ | ||||||
| Accrued payroll and employee benefits | ||||||||
| Accrued interest expenses | ||||||||
| Other tax payables (i) | - | |||||||
| Others (ii) | ||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||
| (i) |
| (ii) |
NOTE 9 – CONVERTIBLE PROMISSORY NOTES PAYABLE
a) Convertible promissory notes
In
October, November, and December 2021, the Company, issued seven (7) convertible promissory notes
of US$
The details of convertible notes are as follows:
Unless
the Notes are converted, the principal amounts of the Notes, and accrued interest at the rate of
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 $
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.
| F-10 |
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.
For the three-month period ended March 31, 2022, the Company recognized interest expenses of the Notes in the amount of US$56,172.
The following is the summary of outstanding promissory notes as of March 31, 2022:
| Interest rate | Principal Amount | Net Proceeds | Warrants Shares | Maturity Date | ||||||||||||||
| Convertible Note- Talos Victory (Note 9 (b)) | | % | $ | $ | ||||||||||||||
| Convertible Note-Mast Hill (Note 9 (b)) | % | |||||||||||||||||
| Convertible Note-First Fire (Note 9 (b)) | % | |||||||||||||||||
| Convertible Note-LGH Note 9 (b)) | % | |||||||||||||||||
| Convertible Note -Fourth Man (Note 9 (b)) | % | |||||||||||||||||
| Convertible Note-Jeffery Street Note 9 (b)) | % | |||||||||||||||||
| Convertible Note -Blue Lake Note 9 (b)) | % | |||||||||||||||||
| Total | ||||||||||||||||||
| Debt Discounts | ( | ) | ||||||||||||||||
| Amortization of discounts for the year ended December 31, 2021 | ||||||||||||||||||
| Convertible promissory notes payable as of December 31, 2021 | ||||||||||||||||||
| Amortization of discounts for the three-month period ended March 31, 202 | ||||||||||||||||||
| Convertible promissory notes payable as of March 31,2022 | $ | |||||||||||||||||
*The
Company prepaid $
| F-11 |
b) Warrants
Accounting for Warrants
In
connection with the issuance of a convertible promissory notes (see Note 11 (a) in October,
November and December, 2021, the Company also issued seven (7) three-year warrant (the “
Warrant”) to purchase an aggregate of
The
Warrants issued to the Lenders granted each of the Lenders the right to purchase up to
The Lenders have the right to exercise the 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 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 Warrants, the exercise price of the Warrants shall be reduced to such lower price, subject to customary exceptions.
The
Lenders may not convert the Notes or exercise the Warrants if such conversion or exercise will result in each of the Lenders, together
with any affiliates, beneficially owning in excess of
The fair values of these warrants as of March 31, 2022 were calculated using the Black-Scholes option-pricing model with the following assumptions:
| March 31, 2022 | ||||||||||||||||||||||||||||
| Volatility (%) | Expected dividends yield (%) | Weighted average expected life (year) | Risk-free interest rate (%) (per annum) | Common stock purchase warrants liability as of December 31, 2021(US$) | Changes of fair value of common stock purchase warrants liability (- (gains)/+ losses(US$) | Common stock purchase warrants liability as of March 31, 2022 (US$) | ||||||||||||||||||||||
| Convertible Note- Talos Victory (Note 9 (a)) | % | $ | % | $ | % | ( | ) | |||||||||||||||||||||
| Convertible Note-Mast Hill (Note 9 (a)) | % | % | % | ( | ) | |||||||||||||||||||||||
| Convertible Note-First Fire (Note 9 (a)) | % | % | % | ( | ) | |||||||||||||||||||||||
| Convertible Note-LGH Note 9 (a)) | % | % | % | ( | ) | |||||||||||||||||||||||
| Convertible Note -Fourth Man (Note 9 (ab)) | % | % | % | ( | ) | |||||||||||||||||||||||
| Convertible Note-Jeffery Street Note 9 (a))3,054 | % | % | % | ( | ) | |||||||||||||||||||||||
| Convertible Note -Blue Lake Note 9 (a)) | % | % | % | ( | ) | |||||||||||||||||||||||
| Total | Total | ( | ) | |||||||||||||||||||||||||
(c) Registration Rights Agreements
Pursuant to the terms of the Registration Rights Agreement dated as of contract date of each convertible promissory note, 2021, executed between the Company and Lender, the Registration Rights Agreement dated as of each contract date, executed between the Company and Lenders, 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 Warrants within sixty days from the date of each Registration Rights Agreement. The Company also granted the Lenders piggyback registration rights on such shares pursuant to the Purchase Agreements.
| F-12 |
NOTE 10— SHAREHOLDERS’ EQUITY
Ordinary Shares
The Company’s authorized number of ordinary shares was shares with par value of $.
On December 22,2020, the Company issued shares of common stock to The Crone Law Group, P.C. or its designees for legal services (see Note 11).
On January 1, 2021, the Company issued an aggregate of shares to a third party service provider for consulting services that had been rendered.
As of March 31, 2022, the Company had issued and outstanding shares.
The Company applied ASC 718 and related interpretations in accounting for measuring the cost of share-based compensation over the period during which the consultants are required to provide services in exchange for the issued shares. The fair value of above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses.
On December 22, 2020, the Board of Directors of the Company authorized the issuance of an aggregate of shares and warrants to The Crone Law Group, P.C. or its designees for legal services that had been rendered. The -year warrants are exercisable at one cent per share.
The shares of were vested on December 22, 2020 and warrants were exercised. The fair value of above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of the Black-Scholes model includes the following assumptions: expected life of years, expected dividend rate of %, volatility of % and an average interest rate of %.
On January 1, 2021, the Board of Directors of the Company authorized the issuance of an aggregate of shares and warrants to a third party service provider for consulting services that had been rendered. The -year warrants are exercisable at one cent per share.
The shares of common stock and warrants were vested on January 1, 2021 and no warrants were exercised. The fair value of above award was estimated at the grant date using Black-Scholes model for pricing the share compensation expenses. The fair value of the Black-Scholes model includes the following assumptions: expected life of years, expected dividend rate of %, volatility of % and an average interest rate of %.
As
of March 31, 2022, the Company had
For the three-month periods ended March 31, 2022 and 2021, the Company recognized relevant share-based compensation expense of and $ for the vested shares, and and $ for the warrants, respectively.
| F-13 |
NOTE 12- RISKS AND UNCERTAINTIES
Credit Risk – The carrying amount of accounts receivable included in the balance sheet represents the Company’s exposure to credit risk in relation to its financial assets. No other financial asset carries a significant exposure to credit risk. The Company performs ongoing credit evaluations of each customer’s financial condition. The Company maintains allowances for doubtful accounts and such allowances in the aggregate have not exceeded management’s estimates.
The
Company has its cash in bank deposits primarily at state owned banks located in the PRC. Historically, deposits in PRC banks have been
secured due to the state policy of protecting depositors’ interests. The PRC promulgated a Bankruptcy Law in August 2006, effective
June 1, 2007, which contains provisions for the implementation of measures for the bankruptcy of PRC banks. The bank deposits with financial
institutions in the PRC are insured by the government authority for up to RMB
Interest Rate Risk – The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment of existing debts and viability of securing future debt instruments within the PRC.
Currency Risk - A majority of the Company’s revenue and expense transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
Concentrations - The Company sells its products primarily through direct customers in the PRC and to some extent, the overseas customers in European countries and East Asia such as South Korea and Taiwan.
For
the three-month periods ended March 31, 2022 and 2021, six customers accounted for
And
the Company’s top ten customers aggregately accounted for
As
of March 31, 2022, six customers accounted for
The
Company purchases its raw materials through various suppliers. Raw material purchases from these suppliers which individually exceeded
| F-14 |
NOTE 13 — 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 March 31, 2022, there were no legal proceedings.
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 RMB
NOTE 14 — REVENUES
The Company’s geographical revenue information is set forth below:
| For the Three-Month Periods Ended, March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales in PRC | $ | $ | ||||||
| Sales in Overseas | ||||||||
| —Republic of China (ROC, or Taiwan) | ||||||||
| -South Korea | ||||||||
| -Others | ||||||||
| Sub-total | ||||||||
| Total revenues | $ | $ | ||||||
NOTE 15 — SUBSEQUENT EVENT
As
of October 27, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
Talos Victory Fund, LLC (the “Lender”). The transactions contemplated by the Securities Purchase Agreement pursuant to which
the Company issued to the Lender a convertible promissory note in the principal amount of $
On
April 27, 2022, the Company entered into an amendment to the Note (“Amendment to Promissory Note”) issued to the Lender and,
on May 3, 2022, an amendment to the Registration Rights Agreement by and between the Company and the Lender dated as of October 27, 2021
(“Amendment to Registration Rights Agreement”), extending the number of days the Company shall have in order to cause the
registration statement covering the resale of the Common Stock to become effective. For each 30-day extension, the Company agreed to
repay the Lender $
| F-15 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Annual Report filed with the SEC on April 15, 2022, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
Overview
We were originally incorporated under the laws of the state of Nevada on August 31, 1992. On October 9, 2020, we entered into a share exchange agreement (the “Share Exchange Agreement”) with 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.
Hong Kong Wetouch Technology Limited, a limited company organized under the laws of Hong Kong (“HK Wetouch”), an affiliate of Guangde Cai, our Chairman and Director, was incorporated on December 3, 2020 under the laws of Hong Kong. HK Wetouch was established to own all the outstanding shares of Sichuan Vtouch Technology Co., Ltd., which was incorporated on December 30, 2020 (“Sichuan Vtouch”) in Chengdu, Sichuan, under the laws of The People’s Republic of China (“PRC”).
On March 12, 2021, Wetouch Holding Group Limited (“BVI Wetouch”), the Company’s wholly owned subsidiary, acquired all the outstanding shares of HK Wetouch from the sole shareholder of HK Wetouch, Guangde Cai, in consideration of the payment of HK$10,000 pursuant to instruments of transfer in accordance with Hong Kong law. As a result of the acquisition, HK Wetouch became a wholly-owned subsidiary of BVI Wetouch. BVI Wetouch owns (i) all the outstanding shares of Hong Kong Wetouch, which, in turn, owns all the outstanding shares of Sichuan Wetouch and (ii) all of the outstanding shares of HK Wetouch, which owns all the shares of Sichaun Vtouch Technology Co., Ltd., a company incorporated under the laws of PRC.
On March 16, 2021, Sichuan Wetouch entered into an Agreement of Compensation on Demolition (“Compensation Agreement”) with Sichuan Renshou Shigao Tianfu Investment Co., Ltd, a limited company owned by the local government (Sichuan Renshou”), for the withdrawal of our right to use of state-owned land and the demolition of all buildings, facilities and equipment on such land where we maintain our executive offices, research and development facilities and factories at No.29, Third Main Avenue, Shigao Town, Renshou County, Meishan City, Sichuan, China (the “Property”). The Property, all buildings, facilities, equipment and all other appurtenances on the Property are collectively referred to as “Properties”. The Compensation Agreement was executed and delivered as a result of guidelines (the “Guidelines”) published by the local government of with respect to local environmental issues and a national overall plan on Tianfu New District, Meishan City, Sichuan, PRC. In accordance with the Guidelines, a project named “Chaisang River Ecological Wetland Park” is under construction in the areas where the manufacturing facilities and properties of the Company are located. As a result, Sichuan Wetouch must relocate. In consideration for such relocation, the owner of the buildings on the state-owned land will be compensated.
In order to minimize the interruption of our business, Sichuan Vtouch entered into a Leaseback Agreement with Sichuan Renshou on March 16, 2021. The Leaseback Agreement entitles us to lease back the Properties commencing from April 1, 2021 until December 31, 2021, at a monthly rent of RMB300,000 (approximately $46,154), which period has been extended to October 31, 2022.
On March 18, 2021, Sichuan Wetouch received a total amount of RMB115.2 million (approximately $17.7 million) as the total amount of compensation from Sichuan Renshou, including RMB100.2 million ($15.4 million) based upon the appraised value of the Properties plus an extra 15% relocation bonus of RMB15.0 million ($2.3 million).
We are actively searching for an appropriate parcel in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu for the construction of our new production facilities and office buildings. As of the date of this prospectus, we estimate that our capital needs for this acquisition and construction will be approximately RMB170.0 million (approximately $26.2 million), but there is no assurance that the estimated amount is sufficient to achieve our goals. We may need additional financing for our business development. In addition, we expect that this acquisition and construction will be completed prior to December 31, 2021, but there is no assurance and we may need extended time to achieve our business plan. Pursuant to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch was under the government directed relocation order to relocate no later than December 31, 2021 and was compensated for RMB115.2 million ($17.8 million) from the local government 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.
On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. On June 18, 2021, Hong Kong Wetouch submitted its application for dissolution, which requires approximately one year for governmental approval. During such period, Hong Kong Wetouch is no longer engaged in any operations. In addition, as of March 31, 2021, Sichuan Wetouch’s business and operations have been assumed by Sichuan Vtouch.
Through our wholly-owned subsidiaries, we are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens. We specialize 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. 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.
| 5 |
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. 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 three-month period ended March 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.
Highlights for the three-month period ended March 31, 2022 include:
| ● | Revenues were $12.0 million, an increase of 12.1% from $10.7 million in the first quarter of 2021 | |
| ● | Gross profit was $4.3 million, a decrease of 15.7% from $5.1 million in the first quarter of 2021 | |
| ● | Gross profit margin was 35.9%, compared to 47.7% in the first quarter of 2021 | |
| ● | Net income was $2.5 million, compared to $8.4 million in the first quarter of 2021 | |
| ● | Total volume shipped was 559,958 units, an increase of 12.0% from 499,796 units in the first quarter of 2021 |
Results of Operations
The following table sets forth, for the periods indicated, statements of income data:
| (in US Dollar millions,
except percentage) | Three-Month Period Ended March 31, | Change | ||||||||||
| 2022 | 2021 | % | ||||||||||
| Revenues | $ | 12.0 | $ | 10.7 | 12.1 | % | ||||||
| Cost of revenues | (7.7 | ) | (5.6 | ) | 37.5 | % | ||||||
| Gross profit | 4.3 | 5.1 | (15.7 | )% | ||||||||
| Total operating expenses | (0.9 | ) | (3.7 | ) | (75.7 | )% | ||||||
| Operating income | 3.4 | 1.4 | 142.9 | % | ||||||||
| Total Other income | 0.1 | 8.3 | (98.8 | )% | ||||||||
| Income before income taxes | 3.5 | 9.7 | (63.9 | )% | ||||||||
| Income tax expense | (1.0 | ) | (1.3 | ) | (23.1 | )% | ||||||
| Net income | $ | 2.5 | $ | 8.4 | (70.2 | )% | ||||||
| 6 |
Results of Operations - Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenues
We generated revenue of $12.0 million for the three months ended March 31, 2022, an increase of $1.3 million, or 12.1%, compared to $10.7 million in the same period of last year. This was due to an increase of 12.0% in sales volume, an increase of 0.9% in the average selling price of our products, and 2.1% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with those of the same period of last year.
| For the Three-Month Ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| (in US Dollar millions except percentage) | ||||||||||||||||||||||||
| Revenue from sales to customers in PRC | $ | 8.2 | 68.3 | % | $ | 7.2 | 67.3 | % | $ | 1.0 | 13.9 | % | ||||||||||||
| Revenue from sales to customers overseas | 3.8 | 31.7 | % | 3.5 | 32.7 | % | 0.3 | 8.6 | % | |||||||||||||||
| Total Revenues | $ | 12.0 | 100 | % | $ | 10.7 | 100 | % | $ | 1.3 | 12.1 | % | ||||||||||||
| For the Three-Month Ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||||||||||
| Unit | % | Unit | % | Unit | % | |||||||||||||||||||
| (in UNIT, except percentage) | ||||||||||||||||||||||||
| Units sold to customers in PRC | 356,687 | 63.7 | % | 317,413 | 63.5 | % | 39,274 | 12.3 | % | |||||||||||||||
| Units sold to customers overseas | 203,271 | 36.3 | % | 182,383 | 36.5 | % | 20,888 | 11.5 | % | |||||||||||||||
| Total Units Sold | 559,958 | 100 | % | 499,796 | 100 | % | 60,162 | 12.0 | % | |||||||||||||||
(i) Domestic market
For the three months ended March 31, 2022, revenue from domestic market increased by $1.0 million or 13.9% as a combined result of: (i) an increase of 12.3% in sales volume, and (ii) an increase of 4.2% in the average RMB selling price of our products, and 2.1% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with those of the same period of last year.
As for the RMB selling price, the increase of 4.2% was mainly due to the increased sales of new models of higher-end products of such as POS touchscreens, medical touchscreens and multi-functional printer touchscreens used in applications with higher selling price in domestic market during the three-month period ended March 31, 2022.
The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. For the first quarter ended March 31, 2022, the Company’s business was negatively impacted and has continued to generate lower revenues. Due to our proactive efforts to market new models such as POS touchscreens and medical touchscreens, and penetration into new customers and new regions,we had sales increases of 46.6% in East China, 8.4% in Southwest China, and partially offset by decreases of 33.9% in South China, for the first quarter ended March 31, 2022 as compared to that of the same period last year.
(ii) Overseas market
For the three-month period ended March 31, 2022, revenues from overseas market were $3.8 million as compared to $3.5 million of the same period of 2021, increasing by $0.3 million or 8.6% mainly due to an increase of 11.5% in sales volume, partially offset by a decrease of 3.5% in average selling price.
| 7 |
The following table summarizes the breakdown of revenues by categories in US dollars:
Revenues For the Three-Month Ended March 31 | ||||||||||||||||||||||||
| 2022 | 2021 | Change | Change | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | Margin% | |||||||||||||||||||
| (in US Dollars, except percentage) | ||||||||||||||||||||||||
| Product categories by end applications | ||||||||||||||||||||||||
| Automotive Touchscreens | $ | 3,012,725 | 25.1 | % | $ | 3,519,642 | 32.9 | % | $ | (506,917 | ) | (14.4 | )% | |||||||||||
| Industrial Control Computer Touchscreens | 2,298,142 | 19.2 | % | 2,235,175 | 20.9 | % | 62,967 | 2.8 | % | |||||||||||||||
| POS Touchscreens | 1,956,350 | 16.3 | % | 1,159,805 | 10.8 | % | 796,545 | 68.7 | % | |||||||||||||||
| Gaming Touchscreens | 1,763,069 | 14.7 | % | 1,574,315 | 14.7 | % | 188,754 | 12.0 | % | |||||||||||||||
| Medical Touchscreens | 1,472,091 | 12.3 | % | 1,216,583 | 11.4 | % | 255,508 | 21.0 | % | |||||||||||||||
| Multi-Functional Printer Touchscreens | 1,488,175 | 12.4 | % | 917,031 | 8.6 | % | 571,144 | 62.3 | % | |||||||||||||||
| Others* | 3,995 | 0.0 | % | 90,753 | 0.7 | % | (86,758 | ) | (95.6 | )% | ||||||||||||||
| Total Revenues | $ | 11,994,547 | 100.0 | % | $ | 10,713,304 | 100.0 | % | $ | 1,281,243 | 12.0 | % | ||||||||||||
*Others include applications in self-service kiosks, ticket vending machine and financial terminals.
The Company continued to shift production mix from traditional lower-end products such as touchscreens used in automotive and industrial control computer industries to high-end products such as touchscreens used in POS touchscreens, multi-functional printer touchscreens, and medical touchscreens, primarily due to (i) greater growth potential of computer screen models in China, and (ii) the stronger demand and better quality needs from consumers’ recognition of higher-end touch screens made in higher quality with better performance.
Gross Profit and Gross Profit Margin
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in millions, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| Gross Profit | $ | 4.3 | $ | 5.1 | $ | (0.8 | ) | (15.7 | )% | |||||||
| Gross Profit Margin | 35.9 | % | 47.7 | % | (11.8 | )% | ||||||||||
Gross profit was $4.3 million in the first quarter ended March 31, 2022, compared to $5.1 million in the same period of 2021. Our gross profit margin decreased to 35.9% for the first quarter ended March 31, 2022, as compared to 47.7% for the same period of 2021, primarily due to the increase in sales of $1.3 million, partially offset by the increase of cost of materials such as chip cost by approximately 45.0%, and the increase of labor cost by 30.8% for the three-month period ended March 31, 2022.
General and Administrative Expenses
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in millions, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| General and Administrative Expenses | $ | 0.4 | $ | 0.5 | $ | (0.1 | ) | (20.0 | % | |||||||
| as a percentage of revenues | 3.3 | % | 4.7 | % | (1.4 | )% | ||||||||||
General and administrative (G&A) expenses were $0.4 million for the three-month period ended March 31, 2022, compared to $0.5 million in the same period in 2021, representing a decrease of 20.0% or $0.1 million. The decrease was primarily due to the decrease of $0.1 million accelerated amortization expense due to Sichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environment issues and the national overall plan.
| 8 |
Research and Development Expenses
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in US dollars, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| Research and Development Expenses | $ | 22,857 | $ | 22,180 | $ | 677 | 3.1 | % | ||||||||
| as a percentage of revenues | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||
Research and development (R&D) expenses were $22,857 for three-month ended March 31, 2022 compared to $22,180 in the same period in 2021, representing an increase of $677 in material consumption.
Share-based Compensation
Three-Month Period Ended March 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 | % | 29.0 | % | (29.0 | )% | ||||||||||
Share-based compensation was nil for the three-month period ended March 31, 2022, compared to $3.1 million in the same period in 2021. 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 an external 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.
Operating Income
Total operating income was $3.4 million for the three-month period ended March 31, 2022 as compared to $1.4 million of the same period of last year, primarily due to the decrease of $3.1 million share-based compensation expenses for the three-month period ended March 31, 2021, partially offset by the decrease of $0.7 million in gross profit, and the increase of $0.3 million in selling and administrative expenses for the three-month period ended March 31, 2022.
Gain on changes in fair value of Common Stock Purchase Warrants
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in millions, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| Gain on changes in fair value of Common Stock Purchase Warrants | $ | 0.2 | $ | 0.0 | $ | 0.2 | 0.0 | % | ||||||||
| as a percentage of revenues | 1.7 | % | 0.0 | % | 1.7 | % | ||||||||||
Gain on changes in fair value of common stock purchase warrants was $160,443 for the three-month period ended March 31, 2022, as compared to nil in 2021 (See Note 9 (b)).
| 9 |
Gain on Asset Disposal
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in millions, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| Gain on asset disposal | $ | - | $ | 7.6 | $ | (7.6 | ) | (0.0 | )% | |||||||
| as a percentage of revenues | 0.0 | % | 71.0 | % | (71.0 | )% | ||||||||||
Gain on asset disposal was nil for the three-month period ended March 31, 2022 as compared to $7.6 million in the same period in 2021. Pursuant to local PRC government guidelines on local environment issues and the national overall plan, Sichuan Wetouch was under 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 compensation of RMB115.2 million ($18.2 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 three-month period ended March 31, 2021, the Company recorded a gain of $7,611,646 for the asset disposal.
Income Taxes
Three-Month Period Ended March 31, | Change | |||||||||||||||
| (in millions, except percentage) | 2022 | 2021 | Amount | % | ||||||||||||
| Income before Income Taxes | $ | 3.5 | $ | 9.7 | $ | (6.2 | ) | (63.9 | )% | |||||||
| Income Tax (Expense) | (1.0 | ) | (1.3 | ) | 0.3 | (23.1 | )% | |||||||||
| Effective income tax rate | 28.1 | % | 13.9 | % | 14.2 | % | ||||||||||
The effective income tax rates for the three-month periods ended March 31, 2022 and 2021 were 28.1% and 13.9%, respectively. The effective income tax rate for the three-month period ended March 31, 2022 and 2021 differs from the PRC statutory income tax rate of 25% primarily due to non deductible expenses of $160,443 resulting from gain of changes in fair value of Common Stock Purchase Warrants for the three-month periods ended March 31, 2022, and Sichuan Wetouch’s preferential income tax rate for the same period of the last year, respectively.
Net Income
As a result of the above factors, we had a net income of $2.5 million in the first quarter of 2022 compared to a net income of $8.4 million in the same quarter of 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.
| 10 |
As of March 31, 2022, we had current assets of $61.4 million, consisting of $44.8 million in cash, $14.6 million in accounts receivable, $0.3 million in inventories, and $1.7 million in prepaid expenses other current assets. Our current liabilities as of March 31, 2022, were $5.1 million, which is comprised of $1.0 million in income tax payable, $1.3 in accounts payable, $0.8 million in accrued expenses and other current liabilities and $2.0 million convertible promissory notes payable.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the three-month period ended March 31, 2022 and 2021:
Three-Month Period Ended March 31, | ||||||||
| (in US Dollar millions) | 2022 | 2021 | ||||||
| Net cash provided by (used in) operating activities | $ | (1.4 | ) | $ | 13.7 | |||
| Net cash provided by investing activities | - | 17.8 | ||||||
| Net cash used in financing activities | - | - | ||||||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | 0.0 | (1.0 | ) | |||||
| Net increase in cash and cash equivalents | (1.4 | ) | 30.5 | |||||
| Cash and cash equivalents at the beginning of period | 46.2 | 24.0 | ||||||
| Cash and cash equivalents at the end of period | $ | 44.8 | $ | 54.5 | ||||
Operating Activities
Net cash used in operating activities was $1.4 million for the three-month period ended March 31, 2022, as compared to $13.7 million provided by operating activities for the same period of the last year, primarily due to (i) the decrease of $5.8 million net income for the three-month period ended March 31, 2022 as compared to the same period of 2021, (ii) the increase of $14.6 million of accounts receivable for the three-month period ended March 31, 2022, due to Sichuan Wetouch settling customer receivables for the three-month period ended March 31, 2021, (iii) the decrease of $3.1 million of share-based compensation for the three-month period ended March 31, 2021, partially offset by (iv) the decrease of $7.6 million gain on asset disposal for the three-month period ended March 31, 2021, and (v) the decrease of 0.6 million of deferred income due to Sichuan Wetouch write-off government grant in the operating ceasing process for the three-month period ended March 31, 2021.
Investing Activities
There were $17.8 million proceeds from asset disposal for Sichuan Wetouch for the three-month period ended March 31, 2021. See Note 5 in the interim financial information.
Financing Activities
There were nil financing activities for the three-month period ended March 31, 2022 and 2021.
As of March 31, 2022, our cash and cash equivalents were $44.8 million, as compared to $46.2 million at December 31, 2021.
Days Sales Outstanding (“DSO”) has decreased to 85 days for the three-month period ended March 31, 2022 from 88 days for the year ended December 31, 2021 as a result of Sichuan Wetouch settling all accounts receivable collection from customers.
The following table provides an analysis of the aging of accounts receivable as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||
| -Current | $ | 9,210,001 | $ | 1,403,187 | ||||
| -1-3 months past due | 3,746,280 | 2,827,048 | ||||||
| -4-6 months past due | 1,654,904 | 3,742,732 | ||||||
| 7-12 months past due | - | 18,070 | ||||||
| -greater than 1 year past due | - | - | ||||||
| Total accounts receivable | $ | 14,611,185 | $ | 7,991,037 | ||||
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.
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.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
| 11 |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
ITEM 1A. RISK FACTORS.
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(1) Incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed with the Commission on May 3, 2022
| 12 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WETOUCH TECHNOLOGY INC. | ||
| Date: May 16, 2022 | By: | /s/ Zongyi Lian |
| Name: | Zongyi Lian | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |
| Date: May 16, 2022 | By: | /s/ Yuhua Huang |
| Name: | Yuhua Huang | |
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | |
| 13 |