Wetouch Technology Inc.: Form 10-Q for the period ended Sep 30, 2023
Filed with the SEC on Nov 14, 2023 and accepted by EDGAR at Nov 14, 2023, 16:00 ET.
Management's discussion and analysis
As filed, 33,965 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Forward-Looking Statements
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Annual Report filed with the SEC on April 14, 2023, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
Overview
We were originally incorporated under the laws of the state of Nevada 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 1,569,820 issued and outstanding shares of common stock. As a result of the Reverse Merger, BVI Wetouch is now our wholly-owned subsidiary.
On July 16, 2023, the Company’s board of directors approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. On July 16, 2023, the Company filed a certificate of change (with an effective date of July 16, 2023) with the Nevada Secretary of State pursuant to Nevada Revised Statutes 78.209 to effectuate a 1-for-20 reverse stock split of its outstanding common stock. On September 11, 2023, the Company received notice from FINRA/OTC Corporate Actions the reverse split would take effect at the open of business on September 12, 2023, and the reverse stock that split took effect on that date. All share information included in this Quarterly Report has been reflected as if the reverse stock split occurred as of the earliest period presented.
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, 2022.
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.
Commencing in the spring of 2021, China began to experience an increase in COVID-19 cases, and to some extent, local governments and the national government began to take more restrictive measures to stem the spread of the virus, particularly from October 2021 to December 2021 and various periods in 2022. Since December 2022, many of the restrictive policies previously adopted by the PRC government to control the spread of COVID-19 have been revoked or replaced with more flexible measures. Although there were occasional increases in COVID-19 cases in China after the government abandoned its restrictive policies, as of the date of this Quarterly Report, our PRC subsidiary has resumed normal operations. There are still uncertainties of future impact of the COVID-19 pandemic, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; and the macroeconomic impact of government measures to contain the spread of COVID-19 and related government stimulus measures.
Highlights for the three-month period ended September 30, 2023 include:
- Revenues were $11.1 million, a decrease of 4.3% from $11.6 million in the third quarter of 2022
- Gross profit was $4.8 million, a decrease of 5.9% from $5.1 million in the third quarter of 2022
- Gross profit margin was 42.9%, compared to 43.6% in the third quarter of 2022
- Net income was $2.9 million, compared to $3.3 million in the third quarter of 2022
- Total volume shipped was 557,503 units, a decrease of 2.6% from 572,241 units in the third quarter of 2022
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 |
|---|---|---|---|---|
| 2023 | 2022% | 2023 | 2022% | |
| Revenues | $11.1 | $11.6 (4.3)% | $37.3 | $35.4 5.4% |
| Cost of revenues | (6.3) | (6.6) (4.5)% | (20.2) | (20.9) (3.3)% |
| Gross profit | 4.8 | 5.1 (5.9)% | 17.1 | 14.4 21.3% |
| Total operating expenses | (0.5) | (0.3) 66.7% | (2.4) | (2.2) 9.1% |
| Operating income | 4.3 | 4.7 (8.5)% | 14.7 | 12.2 20.5% |
| Loss on changes of fair values of Common Stock Purchase Warrant | (0.2) | (0.2) 0.0% | (0.1) | 0.0 N/A |
| Income before income taxes | 4.0 | 4.5 (11.1)% | 14.4 | 12.2 18.0% |
| Income tax expense | (1.1) | (1.2) (8.3)% | (4.1) | (3.4) 20.6% |
| Net income | $2.9 | $3.3 (12.1)% | $10.3 | $8.8 17.0% |
6
Results of Operations - Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Revenues
We generated revenue of $11.1 million for the three months ended September 30, 2023, a decrease of $0.5 million, or 4.3%, compared to $11.6 million in the same period of last year. This was mainly due to 5.7% negative impact from exchange rate due to depreciation of RMB against US dollars, a decrease of 2.6% in sales volume and partially offset by an increase of 3.8% in the average RMB selling price of our products, compared with those of the same period of last year.
| For the Three-Month Ended September 30, 2023 Amount% (in US Dollar millions except percentage) | 2022 Amount% | Change Amount% | Change | |||
|---|---|---|---|---|---|---|
| Revenue from sales to customers in PRC | $7.4 | 66.7% | $8.1 | 69.8% | $(0.7) | (8.6)% |
| Revenue from sales to customers overseas | 3.7 | 33.3% | 3.5 | 30.2% | 0.2 | 5.7% |
| Total Revenues | $11.1 | 100% | $11.6 | 100% | $(0.5) | (4.3)% |
| For the Three-Month Ended September 30, 2023 Unit% (in UNIT, except percentage) | 2022 Unit% | Change Unit% | Change | |||
|---|---|---|---|---|---|---|
| Units sold to customers in PRC | 365,623 | 65.6% | 390,542 | 68.2% | (24,919) | (6.4)% |
| Units sold to customers overseas | 191,880 | 34.4% | 181,699 | 31.8% | 10,181 | 5.6% |
| Total Units Sold | 557,503 | 100% | 572,241 | 100% | (14,738) | (2.6)% |
(i) Domestic market
For the three months ended September 30, 2023, revenue from domestic market decreased by $0.7 million or 8.6% as a combined result of 5.7% negative impact from exchange rate due to depreciation of RMB against US dollars, a decrease of 6.4% in sales volume due to the fluctuation of product demand for products such as POS touchscreens and industrial control touchscreens with increase of raw material costs and higher selling price, and partially offset by an increase of 2.3% in the average RMB selling price of our products. For example, our POS touchscreens had an increase of 16% of selling price due to the pricing control capability of the Company, compared with those of the same period of last year.
As for the RMB selling price, the increase of 2.3% was mainly due to the increased sales of new models of higher-end products such as POS touchscreens, and industrial control computer touchscreens with higher selling prices in the domestic market during the three-month period ended September 30, 2023.
The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. Despite our proactive efforts to market new models such as POS touchscreens, medical touchscreens, and industrial control computer touchscreens, and efforts to obtain new customers and penetrate into new regions, our sales decreased by 6.0% in South China, 5.5% in Southwest China, and 2.2% in East China and during the three-month period ended September 30, 2023.
(ii) Overseas market
For the three-month period ended September 30, 2023, revenues from overseas market increased by 5.7% or $0.2 million as compared to the same period of 2022, mainly due to the increase of 5.6% in sales volume and the increase of 7.7% in average selling price in RMB in gaming touchscreens and automotive touchscreens during the three-month period ended September 30, 2023.
The following table summarizes the breakdown of revenues by categories in US dollars:
| Product categories by end applications | Revenues For the Three-Month Ended September 30, 2023 Amount% (in US Dollars, except percentage) | 2022 Amount% | Change Amount | Change Margin% | ||
|---|---|---|---|---|---|---|
| Automotive Touchscreens | $2,945,460 | 26.5% | $2,841,960 | 24.5% | $103,500 | 3.6% |
| Industrial Control Computer Touchscreens | 2,297,924 | 20.7% | 2,609,467 | 22.5% | (311,543) | (11.9)% |
| POS Touchscreens | 1,738,935 | 15.6% | 1,989,250 | 17.1% | (250,315) | (12.6)% |
| Gaming Touchscreens | 1,742,589 | 15.7% | 1,578,004 | 13.5% | 164,585 | 10.4% |
| Medical Touchscreens | 1,398,203 | 12.6% | 1,579,007 | 13.6% | (180,804) | (11.5)% |
| Multi-Functional Printer Touchscreens | 1,000,494 | 9.0% | 1,024,278 | 8.8% | (23,784) | (2.3)% |
| Others* | - | 0.0% | 1,052 | 0.0% | (1,052) | (100.0)% |
| Total Revenues | $11,123,605 | 100.0% | $11,623,018 | 100.0% | $(499,413) | (4.3)% |
*Others include applications in self-service kiosks, ticket vending machines and financial terminals.
The Company continued to shift production mix from traditional lower-end products to high-end touchscreens used in control computer industries, gaming touchscreens, and automotive touchscreens, 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
(in millions, except percentage)
| Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Gross Profit | $4.8 | $5.1 | $(0.3) | (5.9)% |
| Gross Profit Margin | 42.9% | 43.6% | (0.7)% |
Gross profit was $4.8 million in the third quarter ended September 30, 2023, compared to $5.1 million in the same period of 2022. Our gross profit margin decreased to 42.9% for the third quarter ended September 30, 2023 as compared to 43.6% for the same period of 2022, primarily due to the decrease of 4.3% in sales revenues and increase of 3.8% in cost of goods sold, including the increase of 7.7% in labor cost and increase of 4.0% in the raw materials such as chip cost by 3.8%, despite the Company shifting our products to higher gross profit margin products such as automotive touchscreens and gaming touchscreens and POS touchscreens.
Selling Expenses
(in millions, except percentage)
| Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Selling Expenses | $0.3 | $0.2 | $0.1 | 50.0% |
| as a percentage of revenues | 2.7% | 1.7% | 1.0% |
Selling expenses were $0.3 million for the three-month period ended September 30, 2023, compared to $0.2 million in the same period in 2022, primarily due to the more marketing expenses incurred during the three-month period ended September 301, 2023 in order to market new models and penetrate into new regions.
General and Administrative Expenses
(in millions, except percentage)
| Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| General and Administrative Expenses | $0.2 | $0.1 | $0.1 | 100.0% |
| as a percentage of revenues | 1.8% | 0.8% | 1.0% |
General and administrative (G&A) expenses were $0.2 million for the quarter ended September 30, 2023, compared to $0.1 million in the same period in 2022, primarily due to $0.1 million in professional fees and traveling expenses during the third quarter of 2023.
Research and Development Expenses
| (in US dollars, except percentage) | Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | |
|---|---|---|---|---|
| Research and Development Expenses | $20,580 | $20,737 | $(157) | (0.8)% |
| as a percentage of revenues | 0.0% | 0.0% | 0.0% |
Research and development (R&D) expenses were $20,580 for the quarter ended September 30, 2023, compared to $20,737 in the same period in 2022, representing a decrease of $157 of material consumption.
Operating Income
Total operating income was $4.3 million for the third quarter ended September 30, 2023, compared to $4.7 million for the same period of last year, due to lower gross profit, and higher operating expenses.
Loss on changes in fair value of Common Stock Purchase Warrants
| (in US$ millions, except percentage) | Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | |
|---|---|---|---|---|
| Loss on changes in fair value of Common Stock Purchase Warrants | $(0.2) | $(0.2) | $(0.0) | 0.0% |
| as a percentage of revenues | 1.8% | 1.7% | 0.1% |
Loss on changes in fair value of common stock purchase warrants stayed the same as $0.2 million for the three-month period ended September 30, 2023 and 2022, respectively. (See Note 9 (b)).
Income Taxes
(in millions, except percentage)
| Three-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Income before Income Taxes | $4.0 | $4.5 | $(0.5) | (11.1)% |
| Income Tax (Expense) | (1.1) | (1.2) | 0.1 | (8.3)% |
| Effective income tax rate | 28.7% | 27.3% | 1.4% |
The effective income tax rates for the three-month periods ended September 30, 2023 and 2022 were 28.7% and 27.3%, respectively.
Net Income
As a result of the above factors, our net income was $2.9 for the three-month period ended September 30, 2023, as compared to $3.3 million in the same period of 2022.
Results of Operations - Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Revenues
We generated revenue of $37.3 million for the nine-month period ended September 30, 2023, an increase of $1.9 million, or 5.4%, compared to $35.4 million in the same period of last year. This was primarily due to an increase of 4.9% in sales volume, and an increase of 6.8% in the average RMB selling price of our products, and partially offset by 6.2% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.
| For the Nine-Month Ended September 30, 2023 Amount% (in US Dollar millions except percentage) | 2022 Amount% | Change Amount% | Change | |||
|---|---|---|---|---|---|---|
| Revenue from sales to customers in PRC | $25.8 | 69.2% | $24.5 | 69.2% | $1.3 | 5.3% |
| Revenue from sales to customers overseas | 11.5 | 30.8% | 10.9 | 30.8% | 0.6 | 5.5% |
| Total Revenues | $37.3 | 100% | $35.4 | 100% | $1.9 | 5.4% |
| For the Nine-Month Ended September 30, 2023 Unit% (in UNIT, except percentage) | 2022 Unit% | Change Unit% | Change | |||
|---|---|---|---|---|---|---|
| Units sold to customers in PRC | 1,207,931 | 66.5% | 1,129,764 | 66.5% | 78,167 | 6.9% |
| Units sold to customers overseas | 574,988 | 33.5% | 569,144 | 33.5% | 5,844 | 1.0% |
| Total Units Sold | 1,782,919 | 100% | 1,698,908 | 100% | 84,011 | 4.9% |
(i) Domestic market
For the nine-month period ended September 30, 2023, revenue from domestic market increased by $1.3 million or 5.3%. This was primarily due to an increase of 6.9% in sales volume due to market demand for gaming touchscreen, and medical touchscreens, and an increase of 4.8% in the average RMB selling price of our products, and partially offset by 6.2% negative impact from exchange rate due to depreciation of RMB against US dollars, compared with those of the same period of last year.
As for the RMB selling price, the increase of 4.8% was mainly due to the increased sales of new models of higher-end products such as medical touchscreens, automotive touchscreens, POS touchscreens, industrial control computer touchscreens and gaming touch screens with higher selling prices in the domestic market during the three-month period ended September 30, 2023.
The weakening in macroeconomic conditions since the outbreak of COVID-19 pandemic in January 2020 continued to exacerbate the touch screen business environment. Due to our proactive efforts to market new models such as medical touchscreens, industrial control computer touchscreens, and POS touchscreens and efforts to obtain new customers and penetrate into new regions, we had sales increases of 20.5% in Southwest China, 10.4% in South China, and 8.3% in East China during the nine-month period ended September 30, 2023.
(ii) Overseas market
For the nine-month period ended September 30, 2023, revenues from overseas market were $11.5 million as compared to $10.9 million of the same period of 2022, an increase of $0.6 million or 5.5% mainly due to the increase of 11.2% in average selling price, and increase of 1.0% in sales volume as a result of demand increasing from overseas market such as gaming touchscreens and automotive touchscreens for the nine-month period ended September 30, 2023.
The following table summarizes the breakdown of revenues by categories in US dollars:
| Product categories by end applications | Revenues For the Nine-Month Ended September 30, 2023 Amount% (in US Dollars, except percentage) | 2022 Amount% | Change Amount | Change Margin% | ||
|---|---|---|---|---|---|---|
| Automotive Touchscreens | $9,390,350 | 25.2% | $8,759,635 | 24.8% | $630,715 | 7.2% |
| Industrial Control Computer Touchscreens | 7,392,780 | 19.8% | 7,251,728 | 20.5% | 141,052 | 1.9% |
| POS Touchscreens | 6,084,523 | 16.3% | 5,963,500 | 16.9% | 121,023 | 2.0% |
| Gaming Touchscreens | 5,387,021 | 14.4% | 5,144,703 | 14.5% | 242,318 | 4.7% |
| Medical Touchscreens | 5,380,498 | 14.4% | 4,627,854 | 13.1% | 752,644 | 16.3% |
| Multi-Functional Printer Touchscreens | 3,696,326 | 9.9% | 3,618,124 | 10.2% | 78,202 | 2.2% |
| Others* | - | 0.0% | 4,955 | 0.0% | (4,955) | (100.0)% |
| Total Revenues | $37,331,498 | 100.0% | $35,370,499 | 100.0% | $(1,960,999) | 5.4% |
*Others include applications in self-service kiosks, ticket vending machines and financial terminals.
The Company continued to shift production mix from traditional lower-end products such as touchscreens used in automotive to high-end products such as touchscreens used in medical touchscreen, automotive touchscreens, POS touchscreens, and multi-functional printer touchscreens, 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
(in millions, except percentage)
| Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Gross Profit | $17.1 | $14.4 | $2.7 | 18.8% |
| Gross Profit Margin | 45.7% | 40.8% | 4.9% |
Gross profit was $17.1 million during the nine-month period ended September 30, 2023, compared to $14.4 million in the same period of 2022. Our gross profit margin increased to 45.7% for the nine-month period ended September 30, 2023 as compared to 40.8% for the same period of 2022, primarily due to the increase of sales by 5.4%, particularly high-end products such as medical touchscreens, automotive touchscreens, and gaming touchscreens for the nine-month period ended September 30, 2023, partially offset by the increase in cost of goods sold by 2.4% including increase of cost of materials such as chip cost by 2.6% and labor cost by 8.2%, for the nine-month period ended September 30, 2023.
Selling Expenses
(in millions, except percentage)
| Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Selling Expenses | $0.4 | $1.2 | $(0.8) | (66.7)% |
| as a percentage of revenues | 3.6% | 3.4% | 0.2% |
Selling expenses were $0.4 million for the nine-month period ended September 30, 2023 compared to $1.2 million in the same period in 2022, representing a decrease of 66.7%, or $0.8 million, primarily due to the marketing expenses of $1.0 million during the nine-month months ended September 31, 2022 as the Company increased marketing expenses of $1.0 million to promote Company’s products, coping with the extreme local and national government lockdown for restrictive measures for COVID-19. China started to revoke the restrictive policies previously adopted by the PRC government in late December 2022 by replacing with more flexible measures.
General and Administrative Expenses
(in millions, except percentage)
| Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| General and Administrative Expenses | $1.9 | $0.9 | $1.0 | 111.1% |
| as a percentage of revenues | 5.1% | 2.5% | 2.6% |
General and administrative (G&A) expenses were $1.9 million for the nine-month period ended September 30, 2023, compared to $0.9 million in the same period in 2022, representing an increase of 111.1%, or $1.0 million. The increase was primarily due to the increase of accrued $1.2 million underwriting fees in connection with a private placement, partially offset by the decrease of $0.2 million in salary and wages and other miscellaneous expenses. On March 18, 2023, the Company entered into a consent agreement with representatives related to the private placement on the fees of US$1.2 million, payable only on the completion of an underwritten offering (see Note 8).
Research and Development Expenses
| (in US dollars, except percentage) | Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | |
|---|---|---|---|---|
| Research and Development Expenses | $61,849 | $65,307 | $(3,458) | (5.3)% |
| as a percentage of revenues | 0.0% | 0.0% | 0.0% |
Research and development (R&D) expenses were $61,849 for the nine-month period ended September 30, 2023 compared to $65,307 in the same period in 2022.
Operating Income
Total operating income was $14.7 million for the nine-month period ended September 30, 2023 as compared to $12.2 million of the same period of last year due to higher gross profit and lower selling expenses, partially offset by higher G&A expenses.
Gain (loss) on changes in fair value of Common Stock Purchase Warrants
(in millions, except percentage)
| Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Gain (loss) on changes in fair value of Common Stock Purchase Warrants | $(0.2) | $0.0 | $(0.2) | N/A |
| as a percentage of revenues | 1.8% | 0.0% | 1.8% |
Loss on changes in fair value of common stock purchase warrants was $0.2 million for the nine-month period ended September 30, 2023, as compared to a gain of $35,542 in the same period of 2022 (See Note 9 (b)).
Income Taxes
(in millions, except percentage)
| Nine-Month Period Ended September 30, 2023 | 2022 | Change Amount% | ||
|---|---|---|---|---|
| Income before Income Taxes | $14.4 | $12.2 | $2.2 | 18.0% |
| Income Tax (Expense) | (4.1) | (3.4) | (0.7) | 20.6% |
| Effective income tax rate | 28.5% | 27.9% | 0.6% |
The effective income tax rates for the nine-month periods ended September 30, 2023 and 2022 were 28.5% and 27.9%, respectively. The effective income tax rate for the nine-month period ended September 30, 2023 increase was primarily due to more taxable income for the nine-month periods ended September 30, 2023.
Our PRC subsidiary Sichuan Vtouch had $93.9 million of cash and cash equivalents of September 30, 2023, 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 $10.3 million in the nine-month period ended September 30, 2023 compared to a net income of $8.8 million in the same period of 2022.
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, 2023, we had current assets of $109.1 million, consisting of $93.9 million in cash, $13.9 million in accounts receivable, $0.2 million in inventories, and $1.0 million in prepaid expenses other current assets. Our current liabilities as of September 30, 2023, were $7.3 million, which is comprised of $1.5 million in accounts payable, $3.1 million in accrued expenses, $1.1 million in income tax payable, and other current liabilities and $1.2 million convertible promissory notes payable.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities for the nine-month period ended September 30, 2023 and 2022:
| (in US Dollar millions) | Nine-Month Period Ended September 30, 2023 | 2022 |
|---|---|---|
| Net cash provided by operating activities | $9.0 | $4.8 |
| Net cash provided by investing activities | - | - |
| Net cash used in financing activities | 39.9 | - |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (6.2) | (5.4) |
| Net increase (decrease) in cash and cash equivalents | 42.7 | (0.6) |
| Cash and cash equivalents at the beginning of period | 51.2 | 46.1 |
| Cash and cash equivalents at the end of period | $93.9 | $45.5 |
Operating Activities
Net cash provided by operating activities was $9.0 million for the nine-month period ended September 30, 2023, as compared to $4.8 million used in operating activities for the same period of the last year, primarily due to (i) the increase of $1.5 million net income for the nine-month period ended September 30, 2023 as compared to the same period of 2022, (ii) the increase of $0.2 million loss on changes of FV of common stock purchase warrants for the nine-month period ended September 30, 2023; (iii) the decrease of $1.8 million of accounts receivable for the nine-month period ended September 30, 2023 due to faster collection of receivables, (iv) the decrease of $0.4 million in inventories, (v) the increase of $1.8 million of accrued expenses and other current liabilities for the nine-month period ended September 30, 2023, partially offset by (vi) the decrease in $0.5 million in account payable, and (vii) the increase of $0.8 million in prepaid expenses and other current assets for the nine-month period ended September 30, 2023.
Investing Activities
There were nil investing activities for nine-month period ended September 30, 2023 and 2022.
Financing Activities
Net cash provided by financing activities for the nine-month period ended September 30, 2023 was $40.0 million, due to the $40.0 million proceeds from stock issuance in a private placement, partially offset by the repayment of $55,000 convertible promissory note payable.
There were nil financing activities for the September 30, 2022.
As of September 30, 2023, our cash and cash equivalents were $93.9 million, as compared to $51.2 million at December 31, 2022.
Days Sales Outstanding (“DSO”) has decreased to 83 days for the nine-month period ended September 30, 2023 from 81 days for the year ended December 31, 2022.
The following table provides an analysis of the aging of accounts receivable as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |
|---|---|---|
| -Current | $6,473,561 | $1,252,152 |
| -1-3 months past due | 5,527,382 | 4,998,596 |
| -4-6 months past due | 1,930,839 | 2,806,973 |
| 7-12 months past due | - | 20 |
| -greater than 1 year past due | - | - |
| Total accounts receivable | $13,931,782 | $9,057,741 |
The majority of the Company’s revenues and expenses were denominated primarily in Renminbi (“RMB”), the currency of the People’s Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. Inflation has not had a material impact on the Company’s business.
Based on past performance and current expectations, we believe our cash and cash equivalents provided by operating activities and financing activities will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for at least the next 12 months.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Controls and procedures
As filed, 2,463 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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, 2023 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. 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.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-07-01 to 2023-09-30 | $11.1m | us-gaap:Revenues |
| Revenue | 9 months2023-01-01 to 2023-09-30 | $37.3m | us-gaap:Revenues |
| Cost of revenue | 3 months2023-07-01 to 2023-09-30 | $6.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months2023-01-01 to 2023-09-30 | $20.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months2023-07-01 to 2023-09-30 | $4.8m | us-gaap:GrossProfit |
| Gross profit | 9 months2023-01-01 to 2023-09-30 | $17.1m | us-gaap:GrossProfit |
| Research and development | 3 months2023-07-01 to 2023-09-30 | $20.6k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2023-01-01 to 2023-09-30 | $61.8k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months2023-07-01 to 2023-09-30 | $4.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-01-01 to 2023-09-30 | $14.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-07-01 to 2023-09-30 | $139.9k | us-gaap:InterestExpense |
| Interest expense | 9 months2023-01-01 to 2023-09-30 | $211.4k | us-gaap:InterestExpense |
| Income tax | 3 months2023-07-01 to 2023-09-30 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-01-01 to 2023-09-30 | $4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-07-01 to 2023-09-30 | $2.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-01-01 to 2023-09-30 | $10.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-07-01 to 2023-09-30 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2023-01-01 to 2023-09-30 | $1.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-07-01 to 2023-09-30 | $0.29 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2023-01-01 to 2023-09-30 | $1.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-07-01 to 2023-09-30 | 9,794,357 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2023-01-01 to 2023-09-30 | 9,224,423 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-01-01 to 2023-09-30 | $9.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | At period end2023-09-30 | $93.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-09-30 | $109.1m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-09-30 | $119.4m | us-gaap:Assets |
| Current liabilities | At period end2023-09-30 | $7.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-09-30 | $7.7m | us-gaap:Liabilities |
| Shareholders' equity | At period end2023-09-30 | $111.7m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001493152-23-041024. Last ingested by Listed: Oct 24, 2026, 15:15 ET. Listed shows no prices and gives no investment advice.