Wetouch Technology Inc 10-Q for FY2021 Q3
Wetouch Technology Inc. (WETH)
About this 10-Q
Wetouch Technology Inc filed this 10-Q on November 10, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.17M
- down 6.2% from $11.9M a year earlier
- Net income
- $3.28M
- down 30.7% from net income of $4.73M a year earlier
- Diluted EPS
- $0.10
- down 41.2% from $0.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the Quarterly Period Ended
or
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 | ||
| 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 November 10, 2021, the registrant had shares of common stock issued and outstanding.
WETOUCH TECHNOLOGY INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2021
TABLE OF CONTENTS
| PAGE | ||
| PART I - FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 |
| Item 4. | Controls and Procedures | 16 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 16 |
| Item 1A. | Risk Factors | 16 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 |
| Item 3. | Defaults Upon Senior Securities | 16 |
| Item 4. | Mine Safety Disclosure | 17 |
| Item 5. | Other Information | 17 |
| Item 6. | Exhibits | 17 |
| SIGNATURES | 18 | |
| 2 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 (UNAUDITED)
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 3 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
As of September 30, 2021 | As of December 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Due from related parties | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | - | |||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Amount due to related parties | - | |||||||
| Income tax payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred grants | - | |||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Deferred grants-non current | - | |||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| COMMITMENTS AND CONTINGENCIES | - | |||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized, and issued and outstanding as of September 30, 2021 and December 31, 2020, 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)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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 | - | - | ( | ) | - | |||||||||||
| OPERATING EXPENSES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME FROM OPERATIONS | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Government grant | - | |||||||||||||||
| Gain on asset disposal | - | - | - | |||||||||||||
| TOTAL OTHER INCOME | ||||||||||||||||
| 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*(*) | ||||||||||||||||
| * |
| F-2 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Shares | Amount | capital | reserve | Earnings | loss | equity | ||||||||||||||||||||||
Common stock at Par value $0.001 | Additional paid-in | Statutory | Retained | Accumulated other comprehensive | Total stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | reserve | Earnings | loss | equity | ||||||||||||||||||||||
| Balance at July 1, 2020*(*) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||
| Share-based compensation, shares | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| * |
Common stock at Par value $0.001 | Additional paid-in | Statutory | Retained | Accumulated other comprehensive | Total stockholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | reserve | Earnings | loss | equity | ||||||||||||||||||||||
| Balance at July 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| F-3 |
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 | loss | equity | ||||||||||||||||||||||
| Balance at January 1, 2020*(*) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| * |
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 January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Share-based compensation | - | - | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
WETOUCH HOLDING GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 2021 | 2020 | |||||||
For the nine-months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to cash provided by operating activities | ||||||||
| Bad debts reversal | ( | ) | - | |||||
| Depreciation and amortization | ||||||||
| Share-based compensation | - | |||||||
| Loss of input VAT credits | - | |||||||
| Gain on asset disposal | ( | ) | - | |||||
| 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 operating activities | ||||||||
| Cash flows from investing activities | ||||||||
| Purchase of property, plant and equipment | ( | ) | - | |||||
| Proceeds from assets disposal | - | |||||||
| Net cash provided by investing activities | - | |||||||
| Cash flows from financing activities | ||||||||
| Repayment of bank borrowings | - | ( | ) | |||||
| 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 disclosure of cash flow information | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-5 |
WETOUCH TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — BUSINESS DESCRIPTION
Business
Wetouch
Technology Inc. (“Wetouch”, or the “Company”, or “we”), is a holding company that is
incorporated in Nevada, United States. Through a reverse merger and a series of transactions, Wetouch acquired
For accounting purpose, the acquisition was accounted for as a reverse acquisition with Wetouch (the legal acquirer) identified as the accounting acquiree and Sichuan Wetouch (the legal acquiree) identified as the accounting acquirer. Sichuan Wetouch is a limited liability company established under the laws of the People’s Republic of China (“PRC”).
Wetouch, through its subsidiaries, is primarily engaged in the business of research development, manufacture, and distribution of touchscreen displays to customers both in PRC and overseas through its subsidiaries. The touchscreen products, which are manufactured by the Company, are primarily for use in the computer components.
The Company’s operations are primarily conducted through its subsidiaries in the PRC. The Company’s other subsidiaries in British Virgin Islands (“BVI”), and Hong Kong, do not have significant operations.
Restructuring
Wetouch Holding Group Limited (“BVI Wetouch”)), is the sole stockholder of Hong Kong Wetouch Electronics Technology Limited (“Hong Kong Wetouch”) and Hong Kong Wetouch Technology Limited (“HK Wetouch”).
Pursuant to local PRC government guidelines on local environmental 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 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 order to take over the operating business of Sichuan Wetouch, with HK Wetouch as its sole shareholder.
On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. 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.
On June 18, 2021, Hong Kong Wetouch started its dissolution process pursuant to the minutes of its special shareholder meeting.
| F-6 |
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, 2020 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, 2020, 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 September 30, 2021, the results of operations and cash flows for the nine-month periods ended September 30, 2021 and 2020 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 the Company’s 2020 audited consolidated financial statements. During the three-month and nine-month periods ended September 30, 2021, there were no significant changes made to Wetouch significant accounting policies.
| F-7 |
NOTE-3- ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
SCHEDULE OF ACCOUNT RECEIVABLE
| September 30, 2021 | December 31 2020 | |||||||
| 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 consist of the following:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| September 30, 2021 | December 31, 2020 | |||||||
| Advance to customers | $ | $ | ||||||
| VAT input credits | - | |||||||
| Others receivable (i) | ||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
| (i) |
NOTE 5 — PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
SCHEDULE OF PROPERTY PLANT AND EQUIPMENT
| September 30, 2021 | December 31, 2020 | |||||||
| Buildings | $ | $ | ||||||
| Machinery, equipment and furniture | ||||||||
| Construction in progress | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
expense was US$
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 nine-month period ended September
30, 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
NOTE 6 – INTANGIBLE ASSETS, NET
Intangible assets, net mainly consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
| September 30, 2021 | December 31, 2020 | |||||||
| Land use rights | $ | $ | ||||||
| Patents | ||||||||
| Subtotal | ||||||||
| Less: accumulated amortization for patents | ( | ) | ||||||
| Accumulated amortization for land use right | ( | ) | ||||||
| Subtotal | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||
Amortization
expense was nil and $
| F-8 |
NOTE 7 – RELATED PARTY TRANSACTIONS
The related party transactions are summarized as follows:
SCHEDULE OF RELATED PARTY TRANSACTIONS
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| Revenues resulting from related parties: | ||||||||||||||||
| Sales to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | $ | $ | $ | $ | ||||||||||||
| Sales to Meishan Vtouch Electronics Technology Co., Ltd. (Meishan Wetouch) | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| Cost of goods sold resulting from related parties: | ||||||||||||||||
| Sales to Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | $ | $ | $ | $ | ||||||||||||
| Sales to Meishan Vtouch Electronics Technology Co., Ltd. (Meishan Wetouch) | ||||||||||||||||
| Total cost of goods sold | $ | $ | $ | $ | ||||||||||||
The
Company sells capacitive touchscreens to Chengdu Wetouch and Meishan Wetouch from time to time. There are 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 from related parties are as follows:
Amounts due from related parties | Relationship | September 30, 2021 | December 31, 2020 | Note | ||||||||
| Vision Touch Technology AG | $ | $ | Operating expense paid on behalf of the related party/Company | |||||||||
Amounts due to related parties are as follows:
| Relationship | September 30, 2021 | December 31, 2020 | Note | |||||||||
| Chengdu Wetouch Technology Co., Ltd (“Chengdu Wetouch”) | $ | - | $ | Operating expense paid on behalf of the Company | ||||||||
| Meishan Vtouch Electronics Technology Co., Ltd. | Operating expense paid on behalf of the Company | |||||||||||
| Chengdu Vtouch Intelligence Science & Technology Co., Ltd. | Operating expenses paid on behalf of the Company | |||||||||||
| Mr. Guangde Cai | Payable to employee | |||||||||||
| Total | $ | $ | ||||||||||
NOTE 8 - 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, subsidiary 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
| F-9 |
PRC
Pursuant
to an approval from the local tax authority in October 2017, Sichuan Wetouch became a qualified enterprise located in the western region
of the PRC, entitled it to a preferential income tax rate of
Sichuan
Vtouch is entitled to
The
effective income tax rates for the nine-month periods ended September 30, 2021 and 2020 were
The estimated effective income tax rate for the year ended December 31, 2021 would be similar to actual effective tax rate of the nine-month periods ended September 30, 2021.
NOTE 9- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| September 30, 2021 | December 31, 2020 | |||||||
| Advance from customers | $ | $ | ||||||
| Accrued payroll and employee benefits | ||||||||
| Other tax payable (i) | - | |||||||
| Others (ii) | ||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||
| (i) |
| (ii) |
NOTE 10- DEFERRED GRANTS
On
January 14, 2013 and January 27, 2014, Sichuan Wetouch received RMB
Since the funding is related to the construction of long-term assets, the amounts were recognized as government grant, which is included in deferred grants on the consolidated balance sheets, and to be recognized as other income in the consolidated statements of comprehensive income (loss) over the periods and in the proportions in which depreciation expense on the long-term assets is recognized.
During the nine-month period ended September 30, 2021, the Company recognized the remaining balance of deferred grant as income due to the government directed relocation order disclosed in Note 4.
| F-10 |
As
of September 30, 2021, the Company had
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
The Company awards common stock and stock options to employees, consultants, and directors as compensation for their services, and accounts for its stock option awards to employees, consultants, and directors pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.
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 %.
For the three-month periods and nine-month periods ended September 30, 2021, the Company recognized relevant share-based compensation expense of nil and $ for the vested shares, and nil and $ for the warrants, respectively.
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.
The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
SCHEDULE OF CURRENCY EXCHANGE RATE
| September
30, 2021 | December
31, | |||||||
| Year-end spot rate | US$ | US$ | ||||||
| Average rate | US$ | US$ |
And
average rate for September 30, 2021 is US$=RMB
| F-11 |
Concentrations
- The Company sells its products primarily through direct customers in the PRC and to some extent, the overseas customers in
European countries and East Asia such as South Korea and Taiwan (Refer to Note 12). Sales to customers individually exceeded
For
the three-month periods ended September 30, 2021 and 2020, five customers accounted for
For
the nine-month periods ended September 30, 2021 and 2020, five customers accounted for
And
the Company’s top ten customers aggregately accounted for
As
of September 30, 2021 and December 31, 2020, seven customers accounted for
The
Company purchases its raw materials through various suppliers. Raw material purchases from these suppliers which individually exceeded
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of June 30, 2021, there were no legal proceedings.
Capital expenditure commitment
The Company does not have any capital commitments as of September 30, 2021.
NOTE 14 — REVENUES
SCHEDULE OF GEOGRAPHICAL REVENUE INFORMATION
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||
| Sales in PRC | $ | $ | $ | $ | ||||||||||||
| Sales in Overseas | ||||||||||||||||
| —Republic of China (ROC, or Taiwan) | ||||||||||||||||
| -South Korea | ||||||||||||||||
| -Others | ||||||||||||||||
| Sub-total | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
Due to the COVID-19 pandemic, the Company’s subsidiary Sichuan Wetouch was temporarily shut down from early February 2020 to early March 2020 in accordance with the requirement of the local governments. The Company’s business was negatively impacted and generated lower revenue and net income during the period from February to April 2020. Our business was gradually recovered to its normal level during the three -months and nine months period ended September 30, 2021, due to our proactive efforts to in marketing new models such as POS touchscreens and penetrate into new customers into new regions.
NOTE 15 — SUBSEQUENT EVENT
Convertible Note and Warrant
On November 3, 2021,
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Talos Victory Fund, LLC, a Delaware
limited liability company (the “Lender”), dated as of October 27, 2021, pursuant to which the Company issued the Lender a
convertible promissory note in the principal amount of $
Registration Statement
On September 13, 2021, the Company filed a registration statement (No. 333-259499) with the SEC to offer and sell shares of common stock in an underwritten offering through Craft Capital Management LLC and R.F. Lafferty & Co., Inc. The Company also filed an application to have its shares of common stock listed on the Nasdaq Capital Market.
| F-12 |
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 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 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.
Recent Developments
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, an indirectly wholly-owned operating subsidiary of the Company, 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.
| 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 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 $46,367).
On March 18, 2021, Sichuan Wetouch received a total amount of RMB115.2 million (approximately $17.9 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 Form 10-Q, we estimate that our capital needs for this acquisition and construction will be approximately RMB170.0 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 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 ($17.9 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 March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch. On June 18, 2021, Hong Kong Wetouch started its dissolution process.
On March 2, 2021, HK Wetouch acquired all shares of Hong Kong Wetouch.
On June 18, 2021, Hong Kong Wetouch started its dissolution process.
Convertible Note and Warrant
On November 3, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Talos Victory Fund, LLC, a Delaware limited liability company (the “Lender”), dated as of October 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 the Securities and Exchange Commission (the “SEC”) on November 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 after October 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 after October 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 after October 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 dated October 27, 2021 executed between the Company and the Lender, the Company agreed to file a registration statement with the SEC to register the shares of common stock underlying the Note and the shares issuable upon exercise of the Warrant no later than December 26, 2021. The Company also granted the Lender piggyback registration rights on said shares pursuant to the Purchase Agreement.
| 5 |
Registration Statement
On September 13, 2021, the Company filed a registration statement (No. 333-259499) with the SEC to offer and sell shares of common stock in an underwritten offering through Craft Capital Management LLC and R.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 of Nevada in August 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, 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 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.
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, HK Wetouch, 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 ended September 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 early February 2020 to early March 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 ended September 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 September 30, 2021 include:
| ● Revenues were $11.2 million, a decrease of 5.9% from $11.9 million in the third quarter of 2020 | |
| ● Gross profit was $4.8 million, a decrease of 22.6% from $6.2 million in the third quarter of 2020 | |
| ● Gross profit margin was 42.9%, compared to 52.0% in the third quarter of 2020 | |
| ● Net income was $3.3 million, compared to $4.7 million in the third quarter of 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:
| (in US Dollar millions, except percentage) | Three-Month Period Ended September 30, | Change | Nine-Month Period Ended 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 | % | ||||||||||||
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Results of Operations - Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Revenues
We generated revenue of $11.2 million for the three months ended September 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 ended September 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 ended September 30, 2021.
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 three months period ended September 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% in South China and 9.2% in East China, partially offset by increases of 3.3% in North China and 0.9% in Southwest China, for the third quarter ended September 30, 2021 as compared to that of last year.
| 8 |
(ii) Overseas market
For the three-month period ended September 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 September 30, | ||||||||||||||||||||||||
| 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 in China 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 ended September 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 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 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 $22,267 for the quarter ended September 30, 2021 compared to $21,532 in the same period in 2020, representing an increase of $735 of material consumption.
Operating Income
Total operating income was $4.3 million for the third quarter ended September 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 Ended September 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 ended September 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 $3.3 million in the third quarter of 2021 compared to a net income of $4.7 million in the same quarter of 2020.
| 10 |
Results of Operations - Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Revenues
We generated revenue of $37.1 million for the nine-month period ended September 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.
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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 in China 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 ended September 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 ended September 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 | )% | ||||||||||
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General and administrative (G&A) expenses were $1.6 million for the nine-month period ended September 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 $67,035 for the nine-month period ended September 30, 2021 compared to $54,831 in the same period in 2020, representing an increase of $12,204 mainly due to the increase of salary expenses.
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 | % | ||||||||||
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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 $16.7 million in the nine-month period ended September 30, 2021 compared to a net income of $8.0 million in the same period of 2020.
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 of September 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 of September 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.
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The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the nine- month period ended September 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 $0.4 million in payment of bank borrowings for the nine-month period ended September 30, 2020.
As of September 30, 2021, our cash and cash equivalents were $54.1 million, as compared to $24.0 million at December 31, 2020.
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 and December 31, 2020:
| 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable because we are a smaller reporting company.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021 due to the material weaknesses in internal control over financial reporting described below. Because of our limited operations, we have a limited number of employees which prohibits a segregation of duties. In addition, we lack a formal audit committee with a financial expert. As we grow and expand our operations we will engage additional employees and experts as needed. However, there can be no assurance that our operations will expand.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
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Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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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: November 10, 2021 | By: | /s/ Zongyi Lian |
| Name: | Zongyi Lian | |
| Title: | President and Chief Executive Officer (Principal Executive Officer) | |
| Date: November 10, 2021 | By: | /s/ Yuhua Huang |
| Name: | Yuhua Huang | |
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | |
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