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 March 24, 2021 , 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. Recent Developments
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 , an indirectly wholly-owned operating subsidiary of the Company, 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. 4
In order to minimize the interruption of our business, Sichuan Vtouch, our newly acquired wholly owned subsidiary, 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$46,367 ). OnMarch 18, 2021 , Sichuan Wetouch received a total amount ofRMB115.2 million (approximately$17.9 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 Form 10-Q, we estimate that our capital needs for this acquisition and construction will be approximatelyRMB170.0 million (approximately$26.4 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 ($17.9 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. The Company plans to dissolve Sichuan Wetouch and its business and operations are being assumed by Sichuan Vtouch.
On
On
On
Convertible Note and Warrant OnNovember 3, 2021 , we entered into a Securities Purchase Agreement (the "Purchase Agreement") withTalos Victory Fund, LLC , aDelaware limited liability company (the "Lender"), dated as ofOctober 27, 2021 , pursuant to which the Company issued the Lender a convertible promissory note in the principal amount of$250,000 (the "Note") and a three-year warrant (the "Warrant") to purchase an aggregate of 200,000 shares of the Company's common stock (the "Warrant Shares"). The terms and provisions of the Note and Warrant are described in the Current Report on Form 8-K filed by the Company with theSecurities and Exchange Commission (the "SEC") onNovember 5, 2021 . The Company received$225,000 gross proceeds from the issuance of the Note as a result of the original discount rate on the Note. Unless the Note is converted, the principal amount of the Note, and accrued interest at the rate of 8% per annum, are payable on the one-year anniversary of the issuance of the Note (the "Maturity Date"). The Lender has the right to convert any or all of the principal and accrued interest on the Note into shares of common stock of the Company on the earlier of (i) 180 calendar days afterOctober 27, 2021 or (ii) the closing of a listing for trading of the common stock of the Company on a national securities exchange offering resulting in gross proceeds to the Company of$15,000,000 or more (an "Uplist Offering"). If the Company closes an Uplist Offering on or before the 180th calendar date afterOctober 27, 2021 , the conversion price shall be 70% of the per share offering price in the Uplist Offering; otherwise, the conversion price is$0.75 per share. The Warrant issued to the Lender granted the Lender the right to purchase up to 200,000 shares of common stock of the Company at an exercise price of$1.25 per share. However, if the Company closes an Uplist Offering on or before the 180th calendar date afterOctober 27, 2021 , then the exercise price shall be 125% of the offering price of a share in the Uplist Offering. If the adjusted exercise price as a result of the Uplist Offering is less than$1.25 per share, then the number of shares that the Warrant is issuable shall be increased such that the exercise price, after taking into account the decrease in the exercise price, shall be equal to the exercise price prior to such adjustment. The Lender has the right to exercise the Warrant 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 Warrant exceeds$1.75 , unless there is an effective registration statement of the Company which covers the resale. If the Company issues shares or any securities convertible into shares at an effective price per share lower than the exercise price of the Warrant, the exercise price of the Warrant shall be reduced to such lower price, subject to customary exceptions. Pursuant to the terms of the Registration Rights Agreement datedOctober 27, 2021 executed between the Company and the Lender, the Company agreed to file a registration statement with theSEC to register the shares of common stock underlying the Note and the shares issuable upon exercise of the Warrant no later thanDecember 26, 2021 . The Company also granted the Lender piggyback registration rights on said shares pursuant to the Purchase Agreement. 5 Registration Statement OnSeptember 13, 2021 , the Company filed a registration statement (No. 333-259499) with theSEC to offer and sell shares of common stock in an underwritten offering throughCraft Capital Management LLC andR.F. Lafferty & Co., Inc. The Company also filed an application to have its shares of common stock listed on the Nasdaq Capital Market. Overview We were originally incorporated under the laws of the state ofNevada inAugust 1992 . OnOctober 9, 2020 , we entered into a share exchange agreement (the "Share Exchange Agreement") with BVI Wetouch and all the shareholders of BVI Wetouch, to acquire all the issued and outstanding capital stock of BVI Wetouch in exchange for the issuance to such 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. We are engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens, which constitutes our source of revenues through BVI Wetouch, which owns Hong Kong Wetouch, HKWetouch , Sichuan Wetouch and Sichuan Vtouch. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in by the financial terminals, automotive, point of sale (POS), gaming, lottery, medical, human machine interface (HMI), and other specialized industries. Our product portfolio comprises medium to large sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. In terms of the structures of touch panels, we offer (i) Glass-Glass ("GG"), primarily used in GPS/car entertainment panels in mid-size and luxury cars, industrial HMI, financial and banking terminals, POS and lottery machines; (ii) Glass-Film-Film ("GFF"), mostly used in high-end GPS and entertainment panels, industrial HMI, financial and banking terminals, lottery and gaming industry; (iii) Plastic-Glass ("PG"), typically adopted by touchscreens in GPS/entertainment panels motor vehicle GPS, smart home, robots and charging stations; and (iv) Glass-Film ("GF"), mostly used in industrial HMI. The following discussion and analysis pertain financial condition and results of operations of our subsidiaries Hong Kong Wetouch, HK Wetouch, Sichuan Wetouch and Sichuan Vtouch for the quarter endedSeptember 30, 2021 . 6 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. Beginning in Q1 2020, we made numerous process updates across our operations worldwide, and adapted our fulfillment network, to implement employee and customer safety measures, such as enhanced cleaning and physical distancing, personal protective gear, disinfectant spraying, and temperature checks. We will continue to prioritize employee and customer safety and comply with evolving state and local standards as well as to implement standards or processes that we determine to be in the best interests of our employees, customers, and communities. Due to the COVID-19 pandemic, our subsidiary Sichuan Wetouch was temporarily shut down from earlyFebruary 2020 to earlyMarch 2020 in accordance with the requirement of the local governments. Our business was negatively impacted and generated lower revenue and net income in 2020. The Company has taken proactive measures to promote products to new customers and entering more regions during the nine-month period endedSeptember 30, 2021 . 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
third quarter of 2020
? Gross profit was
third quarter of 2020
? Gross profit margin was 42.9%, compared to 52.0% in the third quarter of 2020
? Net income was
2020
? Total volume shipped was 531,210 units, a decrease of 12.5% from 607,261
units in the third quarter of 2020
Results of Operations
The following table sets forth, for the periods indicated, statements of income
data:
Three-Month Nine-Month
(in US Dollar millions, Period Ended Period Ended
except percentage) September 30, Change September 30, Change
2021 2020 % 2021 2020 %
Revenues $ 11.2 $ 11.9 (5.9 )% $ 37.1 $ 20.7 79.2 %
Cost of revenues (6.4 ) (5.7 ) 12.3 % (19.3 ) (10.2 ) 89.2 %
Gross profit 4.8 6.2 (22.6 )% 17.8 10.5 69.5 %
Total operating expenses (0.5 ) (1.0 ) (50.0 )% (5.2 ) (1.6 ) 225.0 %
Operating income 4.3 5.2 (17.3 )% 12.6 8.9 41.6 %
Income before income taxes 4.4 5.2 (15.4 )% 21.0 9.1 130.8 %
Income tax expense (1.1 ) (0.5 ) 120.0 % (4.3 ) (1.1 ) 290.9 %
Net income $ 3.3 $ 4.7 (29.8 )% $ 16.7 $ 8.0 108.8 %
7
Results of Operations - Three Months Ended
Revenues
We generated revenue of$11.2 million for the three months endedSeptember 30, 2021 , a decrease of 0.7 million, or 5.9%, compared to$11.9 million in the same period of last year. This was due to a decrease of 12.5% in sales volume due to insufficient raw materials to meet order capacity and of 7.2% in the average selling price of our products, and 0.3% 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 September 30,
2021 2020 Change Change
Amount % Amount % Amount %
(in US Dollar millions except percentage)
Revenue from sales to customers
in PRC $ 7.7 68.8 % $ 8.4 70.6 % $ (0.7 ) (8.3 )%
Revenue from sales to customers
overseas 3.5 31.2 % 3.5 29.4 % 0.0 0.0 %
Total Revenues $ 11.2 100 % $ 11.9 100 % $ (0.7 ) (5.9 )%
For the Three-Month Ended September 30,
2021 2020 Change Change
Unit % Unit % Unit %
(in UNIT, except percentage)Units sold to customers in PRC 356,600 67.1 % 412,445 67.9 % (55,845 ) (13.5 )% Units sold to customers overseas 174,610 32.9 % 194,816
32.1 % (20,206 ) (10.4 )% Total Units Sold 531,210 100 % 607,261 100 % (76,051 ) (12.5 )% (i) Domestic market For the three months endedSeptember 30, 2021 , revenue from the domestic market decreased by$0.7 million or 8.3% as a combined result of: (i) a decrease of 13.5% in sales volume and (ii) an increase of 7.2% in the average RMB selling price of our products, and 0.3% 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 7.2% was mainly due to the increased sales of new models of higher-end products such as touch screens used in gaming machines with higher selling price in the domestic market during the three-month period endedSeptember 30, 2021 . The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic inJanuary 2020 continued to exacerbate the touch screen business environment. For the three months period endedSeptember 30, 2020 , 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 penetrate into new customers and new regions, we had sales decreases of 44.2% inSouth China and 9.2% in East China, partially offset by increases of 3.3% inNorth China and 0.9% inSouthwest China , for the third quarter endedSeptember 30, 2021 as compared to that of last year. 8 (ii) Overseas market For the three-month period endedSeptember 30, 2021 , revenues from the overseas market remained stable at$3.5 million as compared to the same period of 2020, with a decrease of 10.4% in sales volume and an increase of 10.7% in average selling price. The following table summarizes the breakdown of revenues by categories in US dollars: Revenues For the
Three-Month Ended
2021 2020 Change Change
Amount % Amount % Amount Margin%
(in US Dollars, except percentage)
Product categories by end
applications
Automotive Touchscreens $ 2,819,828 25.3 % $ 3,924,169 33.0 % $ (1,104,341 ) (28.1 )%
Industrial Control Computer
Touchscreens 2,237,229 20.0 % 2,277,645 19.1 % (40,416 ) (1.8 )%
POS Touchscreens 1,935,984 17.3 % 1,794,947 15.1 % 141,037 7.9 %
Gaming Touchscreens 1,576,455 14.1 % 1,500,392 12.6 % 76,063 5.1 %
Medical Touchscreens 1,556,448 13.9 % 1,424,617 12.0 % 131,831 9.3 %
Multi-Functional Printer
Touchscreens 1,023,167 9.2 % 967,504 8.1 % 55,663 5.8 %
Others* 16,869 0.2 % 14,846 0.1 % 2,023 13.6 %
Total Revenues $ 11,165,980 100.0 % $ 11,904,120 100.0 % $ (738,140 ) (5.9 )%
*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 self-service kiosks, medical touchscreens, ticket vending machine and financial terminals, primarily due to (i) greater growth potential of computer screen models inChina and (ii) the stronger demand and better quality demand from consumers' recognition of higher-end touch screens made with better raw materials.
Gross Profit and Gross Profit Margin
Three-Month Period Ended
September 30, Change
(in millions, except percentage) 2021 2020 Amount %
Gross Profit $ 4.8 $ 6.2 $ 1.4 (22.6 )%
Gross Profit Margin 42.9 % 52.0 % (9.1 )%
Gross profit was $4.8 million in the third quarter ended September 30, 2021 ,
compared to $6.2 million in the same period of 2020. Our gross profit margin
decreased to 42.9% for the third quarter ended September 30, 2021 as compared to
52.0% for the same period of 2020, primarily due to decrease in sales volume,
partially offset by our product shift to higher gross profit margin products
such as POS touchscreens, gaming touchscreens, industrial control computer
touchscreens and medical touchscreens.
9
General and Administrative Expenses
Three-Month Period Ended
September 30 , Change(in millions, except percentage) 2021 2020 Amount % General and Administrative Expenses$ 0.3 $ 1.0 $ (0.7 ) (70.0 )% as a percentage of revenues 2.7 % 8.4 % (5.7 )%
General and administrative (G&A) expenses were$0.3 million for the quarter endedSeptember 30, 2021 , compared to$1.0 million in the same period in 2020, representing a decrease of 70.0%, or$0.7 million . The decrease was primarily due to the decrease of$0.4 million loss of VAT input credits due toSichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environment issues and the national overall plan (see Note 5 to our Condensed Consolidated Financial Statements (unaudited)), and a decrease of$0.3 million of salary & benefits due to optimal management.
Research and Development Expenses
Three-Month Period Ended
September 30, Change
(in US dollars, except percentage) 2021 2020 Amount %
Research and Development Expenses $ 22,267 $ 21,532 $ 735 3.4 % as a percentage of revenues 0.0 % 0.0 % 0.0 %
Research and development (R&D) expenses were
Operating Income Total operating income was$4.3 million for the third quarter endedSeptember 30, 2021 as compared to$5.2 million for the same period of last year, due to lower gross profit, offset by lower operating expenses. Income Taxes Three-Month Period EndedSeptember 30 , Change
(in millions, except percentage) 2021 2020 Amount
%
Income before Income Taxes $ 4.4 $ 5.2 $ (0.8 ) (15.4 )%
Income Tax (Expense) (1.1 ) (0.5 ) (0.6 ) 120.0 %
Effective income tax rate 25.0 % 10.2 % 12.2 %
The effective income tax rates for the three-month periods endedSeptember 30, 2021 and 2020 were 25.0% and 10.2%, respectively. The increase of the effective income tax rate was partially due to the increase of$0.6 million income tax clearance for Sichuan Wetouch for the year ended 2020. Net Income
As a result of the above factors, we had a net income of
10
Results of Operations - Nine Months Ended
Revenues We generated revenue of$37.1 million for the nine-month period endedSeptember 30, 2021 , an increase of$16.4 million , or 79.2%, compared to$20.7 million in the same period of last year. This was due to an increase of 62.0% in sales volume and of 10.5% in the average selling price of our products, compared with those of the same period of last year. For the Nine-Month Ended September 30, 2021 2020 Change Change Amount % Amount % Amount % (in US Dollar millions except percentage) Revenue from sales to customers in PRC$ 24.6 66.3 %$ 13.9 67.1 %$ 10.7 77.0 % Revenue from sales to customers overseas 12.5 33.7 % 6.8 32.9 % 5.7 83.8 % Total Revenues$ 37.1 100 %$ 20.7 100 %$ 16.4 79.2 % For the Nine-Month Ended September 30, 2021 2020 Change Change Unit % Unit % Unit % (in UNIT, except percentage)
Units sold to customers in PRC 1,109,985 63.7 % 710,719
66.1 % 399,266 56.2 %
Units sold to customers overseas 632,569 36.3 % 365,802
33.9 % 266,767 72.9 %
Total Units Sold 1,742,554 100 % 1,075,521 100 % 667,033 62.0 %
(i) Domestic market
For the nine-month period ended September 30, 2021 , revenue from the domestic
market increased by $10.7 million or 77.0% as a combined result of: (i) an
increase of 56.2% in sales volume and (ii) an increase of 10.5% in the average
RMB selling price of our products, compared with those of the same period of
last year.
As for the RMB selling price, the increase of 10.5% was mainly due to the
increased sales of new models of higher-end products such as touch screens used
in gaming machines with higher selling price in the domestic market during the
nine-month period ended September 30, 2021 .
The weakening in macroeconomic conditions since the outbreak of COVID-19
pandemic in January 2020 continued to exacerbate touch screen business
environment. The Company's business was negatively impacted and has continued to
generate lower revenues during the nine months ended September 30, 2020 . The
Company has taken proactive efforts to market new models such as POS
touchscreens and penetrate into new customers and into new regions. We had our
sales increases of 72.2% in East China, 71.3% in Southwest China , 55.8% in North
China , and 35.1% in South China .
(ii) Overseas market
For the nine-month period ended September 30, 2021 , revenues from the overseas
market was $12.5 million as compared to $6.8 million of the same period of 2020,
increased by $5.7 million or 83.8% mainly due to an increase of 72.9% in sales
volume and an increase of 6.7% in the average selling price of our products.
11
The following table summarizes the breakdown of revenues by categories in US
dollars:
Revenues
For the Nine-Month Ended September 30,
2021 2020 Change Change
Amount % Amount % Amount Margin%
(in US Dollars, except percentage)
Product categories by end
applications
Automotive Touchscreens $ 10,574,802 28.5 % $ 6,510,640 31.5 % $ 4,064,162 62.4 %
Industrial Control Computer
Touchscreens 7,060,893 19.0 % 4,383,103 21.2 % 2,677,790 61.1 %
Gaming Touchscreens 5,469,102 14.8 % 2,993,899 14.5 % 2,475,203 82.7 %
POS Touchscreens 5,580,657 15.0 % 2,442,123 11.8 % 3,138,534 128.5 %
Medical Touchscreens 4,960,325 13.4 % 2,274,261 11.0 % 2,686,064 118.1 %
Multi-Functional Printer
Touchscreens 3,356,615 9.0 % 2,031,850 9.8 % 1,324,765 65.2 %
Others* 111,776 0.3 % 33,396 0.2 % 78,380 234.7 %
Total Revenues $ 37,114,170 100.0 % $ 20,669,272 100.0 % $ 16,444,898 79.2 %
*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 self-service kiosks, medical touchscreens, ticket vending machine and financial terminals., primarily due to (i) greater growth potential of computer screen models inChina and (ii) the stronger demand and better quality demand from consumers' recognition of higher-end touch screens made by better raw materials.
Gross Profit and Gross Profit Margin
Nine-Month Period Ended
September 30, Change
(in millions, except percentage) 2021 2020 Amount %
Gross Profit $ 17.8 $ 10.5 $ 7.3 69.5 %
Gross Profit Margin 48.2 % 50.7 % (2.5 )%
Gross profit was$17.8 million during the nine-month period endedSeptember 30, 2021 , compared to$10.5 million in the same period of 2020. Our gross profit margin decreased to 48.2% for the nine-month period endedSeptember 30, 2021 as compared to 50.7% for the same period of 2020, primarily due to the increasing raw materials and higher cost of goods sold, despite of our product mix shift to higher gross profit margin products such as POS touchscreens, gaming touchscreens, and industrial control computer touchscreens.
General and Administrative Expenses
Nine-Month Period Ended
September 30 , Change(in millions, except percentage) 2021 2020 Amount % General and Administrative Expenses$ 1.6 $ 1.5 $ 0.1 6.7 % as a percentage of revenues 4.3 % 7.5 % (3.2 )% 12 General and administrative (G&A) expenses were$1.6 million for the nine-month period endedSeptember 30, 2021 , compared to$1.5 million in the same period in 2020, representing an increase of 6.7%, or$0.1 million . The increase was primarily due to (i) the increase of$0.4 million loss of VAT input credits due to Sichuan Wetouch ceasing operation and relocation to comply with local PRC government guidelines on local environment issues and the national overall plan (see Note 5 of our Condensed Consolidated Financial Statements (unaudited)) and (ii) the increase 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 (see Note 5 of our Condensed Consolidated Financial Statements (unaudited)), and (iii) partially offset by the increase of$0.3 million in miscellaneous expenses.
Research and Development Expenses
Nine-Month Period Ended
September 30, Change
(in US dollars, except percentage) 2021 2020 Amount %
Research and Development Expenses $ 67,035 $ 54,831 $ 12,204 22.2 %
as a percentage of revenues 0.0 % 0.0 % 0.0 %
Research and development (R&D) expenses were
Share-based Compensation
Nine-Month Period Ended
September 30, Change
(in millions, except percentage) 2021 2020 Amount %
Share-based compensation $ 3.1 $ 0.0 $ 3.1 0.0 %
as a percentage of revenues 8.4 % 0.0 % 8.4 %
Share-based compensation was $3.1 million for the nine-month period ended
September 30, 2021 compared to nil in the same period in 2020. 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 Ascendant Global Advisors,
Inc. 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 $12.6 million for the nine-month period ended
September 30 , 202 as compared to $8.9 million of the same period of last year
due to higher gross profit offset by the higher G&A expenses and share-based
compensation expenses.
Gain on Asset Disposal
Nine-Month Period Ended
September 30, Change
(in millions, except percentage) 2021 2020 Amount %
Gain on asset disposal $ 7.6 $ 0.0 $ 7.6 0.0 %
as a percentage of revenues 20.5 % 0.0 % 20.5 %
13
Gain on asset disposal was $7.6 million for the nine-month period ended
September 30, 2021 compared to nil in the same period in 2020. 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 RMB115.2 million ($17.9 million ) ("Compensation Funds") for the
withdrawal of the right to use state-owned land and the demolition of all
buildings, facilities, equipment and all other appurtenances on the land. During
the nine-month period ended September 30, 2021 , the Company recorded a gain of
$7,625,279 for the asset disposal.
Income Taxes
Nine-Month Period Ended
September 30, Change(in millions, except percentage) 2021 2020 Amount
%
Income before Income Taxes $ 21.0 $ 9.1 $ 11.9 130.8 %
Income Tax (Expense) (4.3 ) (1.1 ) (3.2 ) 290.9 %
Effective income tax rate 20.6 % 12.2 % 8.4 %
The effective income tax rates for the nine-month periods ended September 30,
2021 and 2020 were 20.6% and 12.2%, respectively. The effective income tax rate
for the nine-month period ended September 30, 2021 differs from the PRC
statutory income tax rate of 25% primarily due to Sichuan Wetouch's preferential
income tax rate.
Our PRC subsidiary Sichuan Vtouch had $54,1 million of cash and cash equivalents
as of September 30, 2021 , which are planned to be indefinitely reinvested in
PRC. The distributions from our PRC subsidiary are subject to the U.S. federal
income tax at 21%, less any applicable foreign tax credits. Due to our policy of
indefinitely reinvesting our earnings in our PRC business, we have not provided
for deferred income tax liabilities related to PRC withholding income tax on
undistributed earnings of our PRC subsidiaries.
Net Income
As a result of the above factors, we had a net income of
Liquidity and Capital Resources
Historically, our primary uses of cash have been to finance working capital needs. We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings.
We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all. As ofSeptember 30, 2021 , we had current assets of$66.9 million , consisting of$54.1 million in cash,$11.3 million in accounts receivable,$0.5 million in inventories, and$1.0 million in prepaid expenses other current assets. Our current liabilities as ofSeptember 30, 2021 , were$2.2 million , which is comprised of$1.1 million in income tax payable,$0.8 in accounts payable, and$0.3 million in accrued expenses and other current liabilities. 14 The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the nine- month period endedSeptember 30, 2021 and 2020: Nine-Month Period Ended September 30, (in US Dollar millions) 2021 2020
Net cash provided by operating activities $ 13.0 $
4.9
Net cash provided by investing activities 17.6 - Net cash used in financing activities - (0.4 ) Effect of foreign currency exchange rate changes on cash and cash equivalents (0.5 )
0.5
Net increase in cash and cash equivalents 30.1
5.0
Cash and cash equivalents at the beginning of period 24.0
14.3
Cash and cash equivalents at the end of period $ 54.1 $
19.3
Operating Activities
Net cash provided by operating activities was $13.0 million for the nine-month
period ended September 30, 2021 , as compared to $4.9 million provided by
operating activities for the same period of the last year, primarily due to (i)
the increase of $8.7 million net income for the period ended September 30, 2021
as compared to the same period of 2020, (ii) the increase of $3.1 million of
share-based compensation, (iii) the increase of $1.5 million income tax payable
due to income tax clearance for Sichuan Wetouch during the nine-month period
ended September 30, 2021 , and (iv) the increase of $2.8 million account
receivable due to the faster collection of customer accounts, partially offset
by (v) the decrease of $7.6 million gain on asset disposal for the September 30,
2021 and (vi) the increase of 0.5 million of deferred income due to Sichuan
Wetouch write-off government grant in the operating ceasing process for the
September 30, 2021 , as compared to the same period of 2020.
Investing Activities
There were $17.8 million in proceeds from asset disposal for Sichuan Wetouch,
and $0.2 million for the purchase of property, plant and equipment for the
nine-month period ended September 30, 2021 . See Note 5 in the interim financial
information.
Financing Activities
There was
As of
Days Sales Outstanding ("DSO") has decreased to 65 days for the nine-month
period ended September 30, 2021 from 161 days for the year ended December 31,
2020 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
September 30, 2021 December 31, 2020
-Current $ 4,323,500 $ 3,531,963
-1-3 months past due 6,990,504 8,136,340
-4-6 months past due 29,110 123,581
7-12 months past due - 160,844
-greater than 1 year past due - 49,726
Total accounts receivable $ 11,343,114 $ 12,002,454
The majority of the Company's revenues and expenses were denominated primarily
in Renminbi ("RMB"), the currency of the People's Republic of China . There is no
assurance that exchange rates between the RMB and the U.S. Dollar will remain
stable. Inflation has not had a material impact on the Company's business.
Our industry typical payment term is 180 days. Accounts receivable are written
off against the allowances only after exhaustive collection efforts. There was a
stalled collection activities during February and March 2020 , during which most
businesses except essential services were operated.
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.
15
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