Wetouch(WETH) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended June 30, 2023 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of Wetouch Technology Inc. and its subsidiaries for the period ended June 30, 2023, prepared in accordance with U.S. GAAP Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity as of June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheet Highlights | Metric | June 30, 2023 (US$) | December 31, 2022 (US$) | Change (US$) | | :--- | :--- | :--- | :--- | | Cash | $92,214,861 | $51,250,505 | +$40,964,356 | | Accounts receivable, net | $13,963,453 | $9,057,741 | +$4,905,712 | | Total Current Assets | $107,404,114 | $62,182,142 | +$45,221,972 | | Total Assets | $117,789,704 | $73,105,752 | +$44,683,952 | | Total Current Liabilities | $8,163,038 | $4,014,608 | +$4,148,430 | | Total Liabilities | $8,375,212 | $4,271,565 | +$4,103,647 | | Total Stockholders' Equity | $109,414,492 | $68,834,187 | +$40,580,305 | Condensed Consolidated Statements of Income and Comprehensive Income This statement details the company's revenues, expenses, and net income for the three and six months ended June 30, 2023 and 2022 Income Statement Highlights (Three-Month Period Ended June 30) | Metric | 2023 (US$) | 2022 (US$) | Change (US$) | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $12,774,432 | $11,752,934 | +$1,021,498 | +8.7% | | Gross Profit | $6,253,417 | $5,050,999 | +$1,202,418 | +23.8% | | Net Income | $4,672,983 | $2,930,705 | +$1,742,278 | +59.4% | | Basic EPS | $0.02 | $0.09 | -$0.07 | -77.8% | | Diluted EPS | $0.02 | $0.09 | -$0.07 | -77.8% | Income Statement Highlights (Six-Month Period Ended June 30) | Metric | 2023 (US$) | 2022 (US$) | Change (US$) | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $26,207,893 | $23,747,481 | +$2,460,412 | +10.4% | | Gross Profit | $12,292,217 | $9,361,754 | +$2,930,463 | +31.3% | | Net Income | $7,466,232 | $5,493,218 | +$1,973,014 | +35.9% | | Basic EPS | $0.04 | $0.17 | -$0.13 | -76.5% | | Diluted EPS | $0.04 | $0.17 | -$0.13 | -76.5% | Condensed Consolidated Statements of Changes in Shareholders' Equity This statement outlines the changes in the company's shareholders' equity for the six months ended June 30, 2023 and 2022 - Total stockholders' equity increased from $68,834,187 as of December 31, 2022, to $109,414,492 as of June 30, 2023, primarily driven by a $40,000,000 private placement stock issuance[18][22][23] - 160,000,000 shares of common stock were issued in a private placement on January 19, 2023, generating $40,000,000 in proceeds[22][88] - Foreign currency translation adjustment resulted in a loss of $(6,885,927) for the six months ended June 30, 2023[23] Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Cash Flow Highlights (Six-Month Period Ended June 30) | Cash Flow Activity | 2023 (US$) | 2022 (US$) | Change (US$) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $6,758,708 | $1,498,745 | +$5,259,963 | | Net cash provided by investing activities | $0 | $0 | $0 | | Net cash provided by financing activities | $40,047,145 | $0 | +$40,047,145 | | Effect of changes of foreign exchange rates on cash | $(5,841,498) | $(2,516,649) | $(3,324,849) | | Net increase in cash | $40,964,356 | $(1,017,904) | +$41,982,260 | | Cash, end of period | $92,214,861 | $45,145,800 | +$47,069,061 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements - Wetouch Technology Inc. is primarily engaged in the research, development, manufacture, and distribution of touchscreen displays, mainly for computer components, to customers in PRC and overseas[31][115] - The company's corporate structure includes BVI Wetouch, HK Wetouch, and Sichuan Vtouch, with Sichuan Wetouch being acquired by an independent third party on March 30, 2023[31][37][38][115] Accounts Receivable, Net | Metric | June 30, 2023 (US$) | December 31, 2022 (US$) | | :--- | :--- | :--- | | Accounts receivable, net | $13,963,453 | $9,057,741 | - Prepayments for land use rights and security deposits for a new facility are expected to be reclassified to intangible assets and refunded, respectively, by the end of 2023[47] - Sichuan Wetouch received RMB115.2 million ($15.9 million) in compensation for government-directed relocation and demolition of assets[49] - The effective income tax rates for the six-month periods ended June 30, 2023 and 2022 were 28.4% and 28.2%, respectively[59][152] - Accrued expenses and other current liabilities increased significantly due to a $1.2 million accrued underwriting fee related to a private placement[60][148] - The company issued seven convertible promissory notes in 2021, with principal amounts totaling $1,420,750 as of June 30, 2023, and also issued warrants to purchase 1,800,000 shares of common stock[64][70][74] - A private placement on January 19, 2023, resulted in the sale of 160,000,000 common shares for $40,000,000[88] Geographical Revenue Breakdown (Six-Month Period Ended June 30) | Region | 2023 (US$) | 2022 (US$) | Change % | | :--- | :--- | :--- | :--- | | Sales in PRC | $18,395,711 | $16,262,309 | +13.1% | | Sales in Overseas | $7,812,182 | $7,485,172 | +4.4% | | Total Revenue | $26,207,893 | $23,747,481 | +10.4% | - A reverse stock split with a ratio of 1-for-20 was authorized by the Board on February 17, 2023, and fixed on July 16, 2023, to be retroactively restated upon implementation[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results for the three and six months ended June 30, 2023, compared to the same periods in 2022 Forward-Looking Statements This section cautions that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to known and unknown risks and uncertainties that may cause actual results to differ materially[8][9][112] Basis of Presentation This section clarifies that the financial discussion is based on unaudited statements prepared under U.S. GAAP - The discussion and analysis are based on unaudited financial statements prepared in accordance with United States generally accepted accounting principles (U.S. GAAP)[113] Overview This section provides a general description of Wetouch Technology Inc.'s business, products, and target industries - Wetouch Technology Inc. is engaged in the research, development, manufacturing, sales, and servicing of medium to large sized projected capacitive touchscreens, with products ranging from 7.0 to 42 inches[115] - The company's product portfolio includes Glass-Glass (GG), Glass-Film-Film (GFF), Plastic-Glass (PG), and Glass-Film (GF) touch panel structures, used across various industries like financial terminals, automotive, POS, gaming, and medical[115] Effects of COVID-19 This section discusses the impact of the COVID-19 pandemic on the company's operations and future uncertainties - The company's PRC subsidiary has resumed normal operations after temporary shutdowns and restrictive policies related to the COVID-19 pandemic[119] - The extent of future impact from COVID-19 remains uncertain, depending on the pandemic's duration, severity, and macroeconomic factors[119] Highlights for the three-month period ended June 30, 2023 This section summarizes key financial and operational performance metrics for the second quarter of 2023 Q2 2023 Financial Highlights | Metric | Q2 2023 (US$) | Q2 2022 (US$) | Change % | | :--- | :--- | :--- | :--- | | Revenues | $12.8 million | $11.8 million | +8.5% | | Gross profit | $6.3 million | $5.1 million | +23.5% | | Gross profit margin | 49.0% | 43.0% | +6.0 pp | | Net income | $4.7 million | $2.9 million | +62.1% | | Total volume shipped | 590,140 units | 566,875 units | +4.1% | Results of Operations - Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 This section analyzes the company's financial performance for the second quarter of 2023 compared to the same period in 2022 Revenues This subsection details the drivers of revenue changes, including sales volume, average selling price, and foreign exchange impacts - Revenues increased by 8.5% to $12.8 million, driven by a 4.1% increase in sales volume and a 10.4% increase in average selling price, partially offset by a 6.1% negative impact from RMB depreciation[121] - Domestic market revenue grew by 12.3% due to a 9.3% increase in sales volume and an 8.8% increase in average RMB selling price, primarily from higher-end products like POS and industrial control computer touchscreens[123][124] - The company shifted its production mix towards higher-end products such as POS, medical, multi-functional printer, and automotive touchscreens, recognizing greater growth potential and stronger demand[128] Revenue Breakdown by End Application (Three Months Ended June 30) | Product Category | 2023 Amount (US$) | 2023 % | 2022 Amount (US$) | 2022 % | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | | Automotive Touchscreens | $3,210,054 | 25.1% | $2,904,951 | 24.7% | +10.5% | | Industrial Control Computer Touchscreens | $2,422,606 | 19.0% | $2,344,118 | 20.0% | +3.3% | | POS Touchscreens | $2,278,814 | 17.8% | $2,017,900 | 17.2% | +12.9% | | Medical Touchscreens | $1,888,053 | 14.8% | $1,576,755 | 14.4% | +19.7% | | Gaming Touchscreens | $1,733,135 | 13.6% | $1,803,630 | 15.3% | -3.9% | | Multi-Functional Printer Touchscreens | $1,241,770 | 9.7% | $1,105,671 | 9.4% | +12.3% | Gross Profit and Gross Profit Margin This subsection explains the changes in gross profit and margin, attributing them to revenue growth and product mix shifts - Gross profit increased by 23.5% to $6.3 million, and gross profit margin rose to 49.0% from 43.0% in the prior year, primarily due to increased revenues and a shift towards higher-end products[129] General and Administrative Expenses This subsection analyzes the decrease in general and administrative expenses for the quarter - General and administrative expenses decreased by 87.2% to $56,907, mainly due to lower salary, wages, and miscellaneous expenses[130] Research and Development Expenses This subsection details the slight decrease in research and development expenses for the quarter - Research and development expenses decreased by 6.1% to $20,384, primarily due to reduced material consumption[132] Operating Income This subsection explains the significant increase in operating income, driven by higher gross margin and reduced expenses - Operating income increased by 48.8% to $6.1 million, driven by higher gross margin and lower selling and administrative expenses[133] Gain on changes in fair value of Common Stock Purchase Warrants This subsection reports the gain recognized from changes in the fair value of common stock purchase warrants - The company recognized a gain of $0.1 million on changes in the fair value of common stock purchase warrants for the three months ended June 30, 2023[134] Income Taxes This subsection details the effective income tax rate for the three-month period - The effective income tax rate for the three-month period ended June 30, 2023, was 25.0%, down from 28.3% in the prior year[135] Net Income This subsection highlights the substantial increase in net income for the second quarter of 2023 - Net income increased by 62.1% to $4.7 million for the second quarter of 2023, compared to $2.9 million in the same period of 2022[136] Results of Operations - Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 This section analyzes the company's financial performance for the first half of 2023 compared to the same period in 2022 Revenues This subsection details the drivers of revenue changes, including sales volume, average selling price, and foreign exchange impacts for the six-month period - Revenues increased by 10.5% to $26.2 million, primarily due to a 28.1% increase in average RMB selling price, partially offset by a 7.9% decrease in sales volume and a 6.9% negative impact from RMB depreciation[138] - Domestic market revenue increased by 13.6% due to a 13.9% increase in sales volume and a 6.2% increase in average RMB selling price, driven by higher-end products[140][141] - Overseas market revenue increased by 4.0% to $7.8 million, mainly due to a 5.6% increase in average selling price, despite a 35.1% decrease in sales volume due to reduced demand for gaming and automotive touchscreens[143] - The company continued to shift its production mix towards higher-end products like POS, medical, and automotive touchscreens, driven by growth potential and consumer demand for quality[146] Revenue Breakdown by End Application (Six Months Ended June 30) | Product Category | 2023 Amount (US$) | 2023 % | 2022 Amount (US$) | 2022 % | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | | Automotive Touchscreens | $6,444,890 | 24.6% | $5,917,676 | 24.9% | +8.9% | | Industrial Control Computer Touchscreens | $5,094,856 | 19.4% | $4,642,261 | 19.6% | +5.7% | | POS Touchscreens | $4,345,588 | 16.6% | $3,566,699 | 15.0% | +21.8% | | Medical Touchscreens | $3,982,295 | 15.2% | $3,048,846 | 12.8% | +30.6% | | Gaming Touchscreens | $3,644,432 | 13.9% | $3,974,250 | 16.8% | -8.3% | | Multi-Functional Printer Touchscreens | $2,695,832 | 10.3% | $2,593,846 | 10.9% | +3.9% | Gross Profit and Gross Profit Margin This subsection explains the changes in gross profit and margin, attributing them to increased sales of high-end products - Gross profit increased by 30.9% to $12.3 million, and gross profit margin improved to 46.9% from 39.4% in the prior year, mainly due to increased sales of high-end products[147] General and Administrative Expenses This subsection analyzes the increase in general and administrative expenses, primarily due to an underwriting fee - General and administrative expenses increased by 112.5% to $1.7 million, primarily due to a $1.2 million accrued underwriting fee related to a private placement[148] Research and Development Expenses This subsection details the slight decrease in research and development expenses for the six-month period - Research and development expenses decreased by 7.4% to $41,269[149] Operating Income This subsection explains the increase in operating income, driven by higher gross profit and lower selling expenses - Operating income increased by 38.7% to $10.4 million, driven by higher gross profit and lower selling expenses, partially offset by increased general and administrative expenses[150] Gain (loss) on changes in fair value of Common Stock Purchase Warrants This subsection reports the gain recognized from changes in the fair value of common stock purchase warrants for the six-month period - The company recorded a gain of $44,784 on changes in the fair value of common stock purchase warrants for the six months ended June 30, 2023, a decrease from $0.2 million in the prior year[151] Income Taxes This subsection details the effective income tax rate and the policy on reinvested earnings for the six-month period - The effective income tax rate for the six-month period ended June 30, 2023, was 28.4%, slightly up from 28.2% in the prior year[152] - The company has a policy of indefinitely reinvesting earnings from its PRC subsidiary, Sichuan Vtouch, in PRC, thus not providing for deferred income tax liabilities related to PRC withholding income tax[153] Net Income This subsection highlights the significant increase in net income for the first half of 2023 - Net income increased by 36.4% to $7.5 million for the six-month period ended June 30, 2023, compared to $5.5 million in the same period of 2022[154] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations and funding sources Overview of Liquidity This subsection provides an overview of the company's current liquidity position and expected funding sources - The company expects to meet its operational and capital expenditure needs for the next 12 months using cash, cash equivalents, operating cash flows, and bank borrowings[155] - As of June 30, 2023, current assets were $107.4 million (including $92.2 million in cash) and current liabilities were $8.1 million[157] Operating Activities This subsection details the cash generated from the company's primary business operations - Net cash provided by operating activities was $6.8 million for the six months ended June 30, 2023, a significant increase from $1.5 million in the prior year[158][159] - This increase was primarily due to higher net income, a decrease in accounts receivable due to faster collection, and changes in other operating assets and liabilities[159] Investing Activities This subsection reports on cash flows related to the acquisition and disposal of long-term assets - There were no investing activities for the six-month periods ended June 30, 2023 and 2022[161] Financing Activities This subsection details cash flows from debt and equity transactions, including a private placement - Net cash provided by financing activities was $40.0 million for the six months ended June 30, 2023, entirely from proceeds of a private placement stock issuance[162] Days Sales Outstanding (DSO) and Accounts Receivable Aging This subsection analyzes the efficiency of accounts receivable collection and the aging of outstanding balances - Days Sales Outstanding (DSO) decreased to 79 days for the six-month period ended June 30, 2023, from 81 days for the year ended December 31, 2022[163] Accounts Receivable Aging | Aging Category | June 30, 2023 (US$) | December 31, 2022 (US$) | | :--- | :--- | :--- | | Current | $8,031,102 | $1,252,152 | | 1-3 months past due | $4,600,385 | $4,998,596 | | 4-6 months past due | $1,331,966 | $2,806,973 | | 7-12 months past due | $0 | $20 | | > 1 year past due | $0 | $0 | | Total accounts receivable | $13,963,453 | $9,057,741 | Future Outlook This subsection presents management's expectations regarding future liquidity and capital resources - Management believes current cash, cash equivalents, operating cash flows, and financing activities will provide sufficient liquidity for the next 12 months[164] Off Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements for the company - The company has no off-balance sheet arrangements[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for the company as it is a smaller reporting company - Not applicable for smaller reporting companies[166] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, and concluded they were not effective due to material weaknesses in internal control over financial reporting Disclosure Controls and Procedures This section details the evaluation of disclosure controls and procedures, identifying material weaknesses - Disclosure controls and procedures were not effective as of June 30, 2023[168] - Material weaknesses include limited segregation of duties due to a limited number of employees and the lack of a formal audit committee with a financial expert[168][169] Changes in Internal Control Over Financial Reporting This section reports on any material changes in internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the period[170] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings and exhibits Item 1. Legal Proceedings The company is not aware of any material, active, pending, or threatened legal proceedings against it or its subsidiaries as of June 30, 2023 - No material, active, pending, or threatened legal proceedings against the company or its subsidiaries as of June 30, 2023[173] Item 1A. Risk Factors This item is not required for smaller reporting companies - Not required for smaller reporting companies[174] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[175] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None to report[176] Item 4. Mine Safety Disclosure This item is not applicable to the company - Not applicable[177] Item 5. Other Information No other information to report for the period - None to report[178] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents Exhibits Filed | Exhibit No. | Description | | :--- | :--- | | 31.1 | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 31.2 | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32.1 | Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 32.2 | Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | Inline XBRL Instance Document | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | SIGNATURES This section contains the required signatures of the registrant's Principal Executive Officer and Principal Financial Officer, certifying the report SIGNATURES This section contains the required signatures of the registrant's Principal Executive Officer and Principal Financial Officer, certifying the report - The report was signed by Zongyi Lian, President and Chief Executive Officer, and Yuhua Huang, Chief Financial Officer, on August 16, 2023[183]