Wetouch Technology Inc. (WETH) - Q2 2024 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2024. Wetouch Technology Inc. is a Nevada corporation engaged in the research, development, manufacturing, and distribution of medium to large-sized projected capacitive touchscreens. Products are primarily used in financial terminals, automotive, Point of Sales (POS), gaming, lottery, medical, and Human-Machine Interface (HMI) applications. The company operates primarily through its subsidiary, Sichuan Vtouch, in China. As of August 15, 2024, there were 11,931,534 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2024 (3 Months) | Q2 2023 (3 Months) | YTD 2024 (6 Months) | YTD 2023 (6 Months) |
|---|---|---|---|---|
| Revenue | $12.23 million | $12.77 million | $27.11 million | $26.21 million |
| Gross Profit | $4.86 million | $6.25 million | $8.20 million | $12.29 million |
| Gross Margin | 39.7% | 49.0% | 30.2% | 46.9% |
| Net Income | $2.70 million | $4.67 million | $3.26 million | $7.47 million |
| Diluted EPS | $0.23 | $0.48 | $0.29 | $0.84 |
| Cash and Equivalents | $98.37 million (as of June 30, 2024) | |||
| Total Assets | $125.91 million (as of June 30, 2024) | |||
| Total Liabilities | $3.45 million (as of June 30, 2024) |
Liquidity: The company reported a net cash outflow from operating activities of $5.34 million for the six months ended June 30, 2024, compared to an inflow of $6.76 million in the prior year period. Financing activities provided $7.85 million, primarily from a public offering.
Material Changes vs. Prior Period
- Revenue Decline (Q2): Revenue decreased 4.7% year-over-year in Q2 2024 due to a 0.8% drop in sales volume, a 1.1% decrease in average selling price, and a 3.3% negative impact from RMB depreciation.
- Margin Compression: Gross margin fell significantly from 49.0% in Q2 2023 to 39.7% in Q2 2024. This was driven by a 43.3% increase in raw material costs, specifically a 44.4% increase in chip costs.
- Expense Increases: Operating expenses surged 450% in Q2 2024 compared to Q2 2023. General and Administrative (G&A) expenses increased 1,310% due to $0.5 million in consulting fees and $0.2 million in professional fees. Selling expenses rose 256% due to travel and logistics.
- Interest Expense: Interest expense for the six months ended June 30, 2024, was $1.17 million, primarily due to default interest charges of $1.15 million upon the repayment of convertible promissory notes. This compares to $71,507 in the same period in 2023.
- Geographic Shift: While domestic (PRC) revenue declined 13.2% in Q2, overseas revenue increased 16.2%, driven by growth in gaming and automotive touchscreen sales.
Guidance, Outlook, Risks, and Unusual Items
- Capital Raise & Debt Repayment: In February 2024, the company closed a public offering of 2.16 million shares at $5.00 per share, raising gross proceeds of $10.8 million. Proceeds were used to fully repay $2.59 million in outstanding convertible promissory notes (including principal and default charges).
- Stock Repurchase Program: On July 2, 2024, the Board authorized a program to repurchase up to $15 million of common stock at prices between $1.50 and $4.00 per share.
- Regulatory Risk (CSRC): The company failed to timely complete filing procedures with the China Securities Regulatory Commission (CSRC) regarding its overseas listing. While no penalty notice has been received, the company faces potential fines ranging from RMB 1 million to RMB 10 million ($140k - $1.4M) and warnings.
- Auditor Dismissal: The company dismissed its former auditor, BF Borgers, following an SEC order barring them from practice due to fraud. The company has engaged Enrome LLP and plans to redo the 2023 annual audit. This creates risks of delays in future financings and SEC filings.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, citing material weaknesses including inadequate segregation of duties and lack of formal policies.
- Legal Proceedings: Several legal cases involving former subsidiaries and related parties have been settled or are in enforcement stages. One case regarding construction materials (Chengdu Hongxin) remains with an estimated liability that management states cannot be currently estimated.
- Construction: The company is constructing new facilities in Chengdu, with completion expected by Q1 2025 and production commencing in Q3 2025.
Investor Verification Checklist
- CSRC Filing Status: Verify if the company has successfully completed the required filings with the China Securities Regulatory Commission to avoid fines or trading restrictions.
- Audit Progress: Confirm the timeline and status of the re-audit of the 2023 financial statements by the new auditor, Enrome LLP.
- Internal Control Remediation: Review the specific steps taken to address the material weaknesses in internal controls over financial reporting.
- Raw Material Costs: Monitor trends in chip and raw material costs to assess if gross margins can recover from the current compression.
- Stock Repurchase Execution: Track the actual volume and price of shares repurchased under the new $15 million program.
- Legal Liabilities: Monitor the resolution of the outstanding legal case with Chengdu Hongxin Shunda Trading Co., Ltd. regarding construction materials.