WETOUCH TECHNOLOGY INC. 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 QuarterlyReport. 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 withUnited 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 ofNevada onAugust 31, 1992 . OnOctober 9, 2020 , we entered into a share exchange agreement (the "Share Exchange Agreement") with BVI Wetouch, and all the shareholders of BVIWetouch (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 onOctober 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 ofHong Kong ("HK Wetouch"), an affiliate ofGuangde Cai , our Chairman and Director, was incorporated onDecember 3, 2020 under the laws ofHong Kong . HKWetouch was established to own all the outstanding shares ofSichuan Vtouch Technology Co., Ltd. , which was incorporated onDecember 30, 2020 ("Sichuan Vtouch") inChengdu ,Sichuan , under the laws ofThe People's Republic of China ("PRC"). OnMarch 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 ofHK$10,000 pursuant to instruments of transfer in accordance withHong 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 KongWetouch , 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 ofSichaun Vtouch Technology Co., Ltd. , a company incorporated under the laws
of PRC. OnMarch 16, 2021 , Sichuan Wetouch entered into an Agreement of Compensation on Demolition ("Compensation Agreement") withSichuan 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 onTianfu 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 onMarch 16, 2021 . The Leaseback Agreement entitles us to lease back the Properties commencing fromApril 1, 2021 untilDecember 31, 2021 , at a monthly rent ofRMB300,000 (approximately$46,154 ), which period has been extended toOctober 31, 2022 . OnMarch 18, 2021 , Sichuan Wetouch received a total amount ofRMB115.2 million (approximately$17.7 million ) as the total amount of compensation fromSichuan Renshou, includingRMB100.2 million ($15.4 million ) based upon the appraised value of the Properties plus an extra 15% relocation bonus ofRMB15.0 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 approximatelyRMB170.0 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 toDecember 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 thanDecember 31, 2021 and was compensated forRMB115.2 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. OnMarch 2, 2021 , HK Wetouch acquired all shares of Hong Kong Wetouch. OnJune 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 ofMarch 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
? Revenues were
first quarter of 2021
? Gross profit was
first quarter of 2021
? Gross profit margin was 35.9%, compared to 47.7% in the first quarter of 2021
? Net income was
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, Three-Month Period Ended
except percentage) 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
Revenues
We generated revenue of$12.0 million for the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 . The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic inJanuary 2020 continued to exacerbate the touch screen business environment. For the first quarter endedMarch 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% inSouthwest China , and partially offset by decreases of 33.9% inSouth China , for the first quarter endedMarch 31, 2022 as compared to that of the same period last year. (ii) Overseas market For the three-month period endedMarch 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 inChina , 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 endedMarch 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
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 endedMarch 31, 2022 , compared to$3.1 million in the same period in 2021. OnJanuary 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 endedMarch 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 endedMarch 31, 2021 , partially offset by the decrease of$0.7 million in gross profit, and the increase of$0.3 million in selling and administrative expenses for the three-month period endedMarch 31, 2022 .
Gain on changes in fair value of Common Stock Purchase Warrants
Three-Month Period Ended
March 31 , Change(in millions, except percentage) 2022 2021 Amount % Gain on changes in fair value of Common Stock Purchase Warrants$ 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 endedMarch 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 endedMarch 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 thanDecember 31, 2021 and received compensation accordingly.OnMarch 18, 2021 , pursuant to the agreement with the local government and an appraisal report issued by a mutual agreed appraiser, Sichuan Wetouch received compensation ofRMB115.2 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 endedMarch 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 endedMarch 31, 2022 and 2021 were 28.1% and 13.9%, respectively. The effective income tax rate for the three-month period endedMarch 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 endedMarch 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
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 ofMarch 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 ofMarch 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 2021Net 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 endedMarch 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 endedMarch 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 endedMarch 31, 2022 , due to Sichuan Wetouch settling customer receivables for the three-month period endedMarch 31, 2021 , (iii) the decrease of$3.1 million of share-based compensation for the three-month period endedMarch 31, 2021 , partially offset by (iv) the decrease of$7.6 million gain on asset disposal for the three-month period endedMarch 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 endedMarch 31, 2021 . Investing Activities There were$17.8 million proceeds from asset disposal for Sichuan Wetouch for the three-month period endedMarch 31, 2021 . See Note 5 in the interim financial information. Financing Activities
There were nil financing activities for the three-month period ended
As of
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 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.
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