Wetouch Technology Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion should be read in conjunction with the Company’s consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from those expressed, implied or anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission. For more information regarding the risks and uncertainties of our business, See “Risk Factors”, “Cautionary Note Regarding Forward Looking Statement.” Overview The Company is a Nevada holding company with no material operations of its own. We conduct substantially all of our operations through our subsidiary in mainland China, which we control through BVI Wetouch. See “Item 1. Business – Corporate History and Structure” for more details. Because our operations are primarily in China, we are subject to complex and evolving PRC laws and regulations. These include restrictions on capital flows, dividend payments, currency conversion, cybersecurity and data privacy, and governmental discretion over overseas securities offerings. These risks could materially affect our ability to transfer funds, conduct offerings, or continue operations in their current form. See “Item 1A. Risk Factors—Risks Related to Doing Business in China.” As of March 31, 2026, the Company has contributed RMB 348.0 million (US $50.4 million ) to its PRC subsidiary through intermediate holding companies, which were accounted for as long-term investments. These funds have been used by our PRC subsidiary in its operations. To date, no dividends or other distributions have been made by our PRC subsidiary to the Company. We may rely on future distributions from our PRC subsidiary to fund our holding company obligations, subject to PRC law and restrictions. For more details, see “ Item 1A. Risk Factors—Risks Related to Doing Business in China—As a holding company, we conduct our operations primarily through our PRC subsidiary and face risks and uncertainties associated with this structure. ” Under current PRC law, dividend payments by our PRC subsidiary are limited to accumulated profits determined in accordance with PRC accounting standards and are subject to statutory reserve requirements. Dividends to the Company are also subject to withholding tax, generally 10%, but reduced to 5% if treaty conditions are met. There is no assurance that the reduced rate will apply. For more details, see “ Item 1A. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system, including the enforcement of laws and changes in laws and regulations, could adversely affect us and limit the legal protections available .” We currently do not have cash management policies dictating how funds are transferred between the Company and its subsidiaries. Most of our cash is maintained in Renminbi in mainland China and may be subject to PRC restrictions on outbound transfers. For details, see “ Item 1A. Risk Factors - Risks Related to Doing Business in China - Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment. ” Through our wholly owned subsidiaries, BVI Wetouch, HK Wetouch, and Sichuan Vtouch, we are engaged in the research, development, manufacturing, sales and servicing of medium- to large-sized projected capacitive touchscreens. We are specialized in large-format touchscreens, which are developed and designed for a wide variety of markets and used in the financial terminals, automotive, POS, gaming, lottery, medical, HMI, and other specialized industries. Our product portfolio comprises medium- to large-sized projected capacitive touchscreens ranging from 7.0 inch to 42 inch screens. 2 We generate revenues through sales of our various touchscreen products. We sell our touchscreen products both domestically in China and internationally, covering major areas in Mainland China, including but not limited to the eastern, southern, northern and southwest regions of Mainland China, Taiwan, South Korea, and Germany. We believe that we have established a strong client base, although our revenues remain concentrated among a limited number of major customers, as described in Note 13 to the condensed consolidated financial statements. For the three months ended March 31, 2026 and 2025, our domestic sales accounted for approximately 67.5% and 67.4%, respectively, of our revenues, and our international sales accounted for approximately 32.5% and 32.6%, respectively, of our revenues. Since our incorporation, we have effected two reverse stock splits of our common stock, including a 1-for-70 reverse split in 2020 and a 1-for-20 reverse split in 2023, and all share and per share information in this Quarterly Report has been retroactively adjusted to reflect these actions. For more details, see “ Item 1. Business - Corporate History and Structure - Reverse Stock Splits ” of the 2025 Form 10-K. Construction of our new facility We have been actively engaged in the construction of our new production facilities and office buildings in Chengdu Medicine City (Technology Park), Wenjiang District, Chengdu, Sichuan Province, People’s Republic of China since the summer of 2023. The Company has planned to increase the scope of facility construction by adding a touch machine construction area. Due to the delayed supply of construction materials, the project has been progressed slowly than expected. As of the date of this Quarterly report, the Company estimated the construction to be completed by the first half of 2027 and commence production by the end of 2027. The total capital requirements for the new facility construction totaled approximately $36.7 million (RMB253 million) and $13.7 million (RMB 94.6 million) have been recorded in the construction in progress as of March 31, 2026. The Company primarily fund the project with our existing cash on hand and cash flows generated from operations, and we may seek additional financing if needed to support the timely completion of the project. Highlights for the three-month period ended March 31, 2026 include: ● Revenues were $16.3 million, an increase of 6.5% compared to $15.3 million in the first quarter of 2025 ● Gross profit was $5.8 million, an increase of 1.8% compared to $5.7 million in the first quarter of 2025 ● Gross profit margin was 35.7%, compared to 36.9% in the first quarter of 2025 ● Net income was $3.9 million, an increase of 50.0% compared to $2.6 million in the first quarter of 2025 ● Total volume shipped was 763,325 units, an increase of 0.1% compared to 762,545 units in the first quarter of 2025 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 March 31, Change 2026 2025 % Revenues $ 16.3 $ 15.3 6.5 % Cost of revenues (10.5 ) (9.6 ) 9.4 % Gross profit 5.8 5.7 1.8 % Total operating expenses (0.7 ) (1.6 ) (56.3 )% Operating income 5.1 4.1 24.4 % Income before income taxes 5.1 4.1 24.4 % Income tax expense (1.2 ) (1.5 ) (20.0 )% Net income $ 3.9 $ 2.6 50.0 % 3 Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025 Revenues We generated revenue of $16.3 million for the three months ended March 31, 2026, an increase of $1.0 million, or 6.5%, compared to $15.3 million in the same period of last year. This was due to an increase of 0.1% in sales volume, an increase of 1.5% in the average selling price of our products , and 4.8% positive impact from exchange rate due to appreciation of RMB against US dollars, compared with that of the same period of last year. For the Three-Month Ended March 31, 2026 2025 Change Change Amount % Amount % Amount % (in US Dollar millions except percentage) Revenue from sales to customers in Mainland China $ 11.0 67.5 % $ 10.3 67.4 % $ 0.7 6.8 % Revenue from sales to customers overseas 5.3 32.5 % 5.0 32.6 % 0.3 6.0 % Total Revenue $ 16.3 100 % $ 15.3 100 % $ 1.0 6.5 % For the Three-Month Ended March 31, 2026 2025 Change Change Unit % Unit % Unit % (in UNIT, except percentage) Units sold to customers in Mainland China 503,300 65.9 % 508,650 66.7 % (5,350 ) (1.1 )% Units sold to customers overseas 260,025 34.1 % 253,895 33.3 % 6,130 2.4 % Total Units Sold 763,325 100 % 762,545 100 % 780 0.1 % (i) PRC Domestic Market For the three months ended March 31, 2026, revenue from the PRC domestic market increased by $0.7 million, or 6.8%, as a combined result of: (i) an increase of 2.7% in the average RMB selling price of our products, and 4.8% positive impact from exchange rate due to appreciation of RMB against US dollars, partially offset by (iii) a decrease of 1.1% in sales volume due to higher pricing offset by the lower demand in broader types of touchscreens exclusive of the medial touchscreens, compared with that of the same period of last year. As for the RMB selling price, the increase of 2.7% was mainly due to the higher demand of higher selling priced products of touchscreen machines in the PRC domestic market, average RMB selling price of 10.8% in medical touchscreens and 1.0% in automotive computer touchscreens during the three-month period ended March 31, 2026. Due to our proactive efforts to market new models and efforts to obtain new customers and penetrate into new regions, our sales increased by 9.1% in Southwest China, partially offset by a decrease of 1.8% in South China and 1.8% in East China during the three months ended March 31, 2026. 4 (ii) Overseas Market For the three-month period ended March 31, 2026, revenues from the overseas market were $5.3 million as compared to $5.0 million of the same period of 2025, representing an increase by $0.3 million, or 6.0%, primarily due to (i) 2.4% increase in sales volume because of higher demand on automotive computer touchscreens and gaming touchscreens, (ii) 4.8% positive impact from exchange rate due to appreciation of RMB against US dollars, partially offset by (iii) a decrease of 1.0% in average selling price in RMB (mainly in medical touchscreens and gaming touchscreens), compared to the same period of last year. The following table summarizes the breakdown of revenues by categories in US dollars: Revenues For the Three-Month Ended March 31, 2026 2025 Change Change Amount % Amount % Amount Margin% (in US Dollars, except percentage) Product categories by end applications Automotive Touchscreens $ 4,330,102 26.5 % $ 3,960,497 25.9 % $ 369,605 9.3 % Industrial Control Computer Touchscreens 3,307,179 20.3 % 3,235,073 21.2 % 72,106 2.2 % POS Touchscreens 2,488,365 15.3 % 2,411,031 15.8 % 77,334 3.2 % Gaming Touchscreens 2,333,822 14.3 % 2,320,592 15.1 % 13,230 0.6 % Medical Touchscreens 2,393,767 14.7 % 1,949,658 12.8 % 444,109 22.8 % Multi-Functional Printer Touchscreens 1,458,934 8.9 % 1,412,727 9.2 % 46,207 3.3 % Total Revenue $ 16,312,169 100.0 % $ 15,289,578 100.0 % $ 1,022,591 6.5 % * 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 products such as medical touchscreens, automotive touchscreens, POS touchscreens, industrial control computer touchscreens, and multi-functional printer touchscreens, primarily due to (i) greater growth potential of computer screen models in China and overseas market, and (ii) the stronger demand on higher-end touch screens made with better materials and better quality. Gross Profit and Gross Profit Margin Three-Month Period Ended March 31, Change (in millions, except percentage) 2026 2025 Amount % Gross Profit $ 5.8 $ 5.7 $ 0.1 1.8 % Gross Profit Margin 35.7 % 36.9 % (1.2 )% Gross profit was $5.8 million in the first quarter ended March 31, 2026, compared to $5.7 million in the same period of 2025. Our gross profit margin decreased to 35.7% for the first quarter ended March 31, 2026, as compared to 36.9% for the same period of 2025, primarily due to an increase of 8.7% in cost of goods sold, consisting of an increase of 10.5% in labor costs due to additional hiring of technicians, and an increase of 2.7% in costs of materials, and partially offset by the increase of revenue by 6.5%, particularly high-end products as stated above during the three months ended March 31, 2026. 5 Selling Expenses Three-Month Period Ended March 31, Change (in millions, except percentage) 2026 2025 Amount % Selling Expenses $ 0.2 $ 0.1 $ 0.1 100.0 % as a percentage of revenues 1.2 % 0.6 % 0.6 % Selling expenses were $0.2 million for the three-month period ended March 31, 2026, compared to $0.1 million in the same period in 2025, representing an increase of $0.1 million. The increase was primarily due to the traveling expenses visiting clients during the three months ended March 31, 2026. General and Administrative Expenses Three-Month Period Ended March 31, Change (in millions, except percentage) 2026 2025 Amount % General and Administrative Expenses $ 0.6 $ 1.6 $ (1.0 ) (62.5 )% as a percentage of revenues 3.7 % 10.5 % (6.8 )% General and administrative expenses were $0.6 million for the three-month period ended March 31, 2026, compared to $1.6 million in the same period in 2025, representing a decrease of $1.0 million, or 62.5%. The decrease was primarily due to the absence in the first quarter of 2026 of approximately $0.5 million of amortization expense related to prepaid three-year consulting service fees that was recorded during the first quarter of 2025, partially offset by an increase of approximately $0.4 million in professional fees during the first quarter of 2026. Operating Income Total operating income was $5.1 million for the three-month period ended March 31, 2026 as compared to $4.1 million of the same period of last year, primarily due to higher revenues and gross profit, and lower general and administrative expenses, partially offset by the higher selling expenses for the three-month period ended March 31, 2026. Income Taxes Three-Month Period Ended March 31, Change (in millions, except percentage) 2026 2025 Amount % Income before Income Taxes $ 5.1 $ 4.1 $ 1.0 24.4 % Income Tax (Expense) (1.2 ) (1.5 ) 0.3 (20.0 )% Effective income tax rate 24.3 % 36.5 % (12.2 )% The effective income tax rates for the three-month period ended March 31, 2026 and 2025 were 24.3% and 36.5%, respectively. Net Income As a result of the above factors, we had a net income of $3.9 million in the first quarter of 2026 compared to a net income of $2.6 million in the same quarter of 2025. 6 Liquidity and Capital Resources Historically, our primary uses of cash have been to finance working capital needs. We expect to be able to meet our needs to fund operations, capital expenditures, and other commitments over the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings. However, we may require additional cash resources due to changes in business conditions or other future developments. If these sources prove insufficient to meet our cash requirements, we may seek to raise additional funds through the sale of equity or debt securities or by obtaining a credit facility. Any issuance of additional equity or equity-linked securities could dilute the ownership interests of existing shareholders, while the incurrence of additional indebtedness would increase our debt service obligations and could subject us to operating and financial covenants that may restrict our business activities. There can be no assurance that financing will be available in the necessary amounts, on terms acceptable to us, or at all. As of March 31, 2026, we had current assets of $132.7 million, consisting of $120.5 million in cash and cash equivalent, $11.1 million in accounts receivable, $29,060 in inventories, and $1.1 million in prepaid expenses and other current assets. Our current liabilities as of March 31, 2026 were $4.1 million, which is comprised of $0.9 million in accounts payable, $0.3 million in amounts due to a related party, $1.2 million income tax payable, $1.3 million in accrued expenses and other current liabilities. and $0.4 million in operating lease liabilities, current portion. The following is a summary of our cash flows provided by operating, investing, and financing activities for the three-month periods ended March 31, 2026 and 2025: Three-Month Period Ended March 31, (in US Dollar millions) 2026 2025 Net cash provided by provided by operating activities $ 0.5 $ 2.0 Net cash used in investing activities (0.0 ) (0.0 ) Net cash provided by financing activities 0.0 0.0 Effect of foreign currency exchange rate changes on cash and cash equivalents 1.6 0.6 Net increase in cash and cash equivalents 2. 1 2.6 Cash and cash equivalents at the beginning of period 118.4 103.8 Cash and cash equivalents at the end of period $ 120.5 $ 106.4 Operating Activities Net cash provided by operating activities was $0.5 million for the three months ended March 31, 2026 as compared to net cash provided by operating activities of $2.0 million for the same period of the last year. The positive cash flow for the three months ended March 31, 2026 was primarily due to i) $3.9 million net income, ii) the increase of $1.2 million in income tax payable, and partially o ffset by iii) the increase of $4.4 million in accounts receivable and iv) the decrease of $0.1 million in accounts payable. The positive cash flow for the three months ended March 31, 2025 was primarily due to i) $2.5 million net income, ii) the decrease of $0.6 million in prepaid expenses and current assets, iii) the increase of in $0.3 million accounts payable, $0.3 million due to a related party, $1.3 million in tax payable and $0.6 million in accrued expenses and current liabilities, partially offset by iv) the increase of $3.5 million in accounts receivable. 7 Investing Activities There were no cash flows from investing activities for the three-month period ended March 31, 2026 and 2025. Financing Activities There were no cash flows from financing activities for the three-month period ended March 31, 2026 and 2025. As of March 31, 2026, our cash and cash equivalents were $120.5 million, as compared to $118.4 million on December 31, 2025. Days Sales Outstanding (“DSO”) has decreased to 48 days for the three-month period ended March 31, 2026 from 56 days for the year ended December 31, 2025. The majority of the Company’s revenues and expenses were denominated 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. Holding Company Structure There have been no changes to the Company’s holding company structure during the three months ended March 31, 2026. For more details, refer to the Company’s holding company structure disclosures set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Holding Company Structure” of the 2025 Form 10-K. Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries Please see “ITEM 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations- Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries” of the 2025 Form 10-K for more details. Capital Expenditure Commitment As of March 31, 2026, the Company had commitment of RMB7.3 million (equivalent to $1.06 million) for construction in progress. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of March 31, 2026. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2025 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the 2025 Form 10-K. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable for smaller reporting companies.