Wetouch Technology Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated statements are presented under U.S. GAAP. Wetouch manufactures and sells medium-to-large projected capacitive touchscreens through operating subsidiaries in China.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $11.75 million | $15.23 million | $23.75 million | $25.95 million |
| Gross profit | $5.05 million | $7.90 million | $9.36 million | $13.04 million |
| Gross margin | 43.0% | 51.9% | 39.4% | 50.3% |
| Operating income | $4.05 million | $6.94 million | $7.48 million | $8.31 million |
| Net income | $2.93 million | $5.07 million | $5.49 million | $13.43 million |
| Basic and diluted EPS | $0.09 | $0.20 | $0.17 | $0.42 |
| Operating cash flow | Not separately reported | Not separately reported | $1.50 million | $11.15 million |
Q2 revenue fell about 23% year over year; the six-month decrease was 8.5%. Six-month unit shipments increased 9.8% to 1.33 million, while management reported a 16.8% decline in average selling price. Profitability weakened: six-month gross profit fell 27.7% and net income fell about 59%. The prior-year comparison included a $7.63 million asset-disposal gain and $3.15 million of share-based compensation; neither was recorded in the first half of 2022.
Balance sheet, debt and liquidity
- At June 30, cash was $45.15 million, accounts receivable $15.29 million, current assets $62.18 million and current liabilities $6.12 million. Total assets were $73.43 million and shareholders’ equity $66.40 million.
- Cash declined $1.02 million from year-end 2021. Operating cash flow was $1.50 million, compared with $11.15 million a year earlier; the filing attributes the decline partly to lower earnings and a $7.73 million use of cash from accounts receivable growth. Investing and financing cash flows were nil in first-half 2022.
- Convertible notes had a $2.25 million aggregate original principal, 8% interest and 2022 maturities from October through December. The balance sheet reports a $1.99 million carrying amount. Notes include conversion, repayment and prepayment provisions; default interest is 16%. The filing reports principal repayments during the period, but disclosures do not fully reconcile the repayment amounts to the listed outstanding principal.
- Management expects cash, operating cash flow and borrowings to fund operations and commitments for at least 12 months. However, $45.1 million of subsidiary cash is planned to be indefinitely reinvested in China; transferring funds may be subject to restrictions and tax.
Business changes, outlook and risks
- Management cited COVID-related disruption and China’s strict pandemic controls, weaker demand, lower shipment volume in Q2, discounting to enter new markets, and RMB depreciation as factors affecting results. Q2 shipment volume fell 20.3%; management also cited chip-material costs rising 45% year over year in the quarter, partly offset by lower labor costs.
- Sales were highly concentrated: the top ten customers represented 99.9% of Q2 revenue and 99.4% of first-half revenue. The filing also reports material customer concentration in receivables and supplier concentration in raw-material purchases.
- The company is relocating operations following a government-directed order affecting Sichuan Wetouch; Sichuan Vtouch took over the operating business. A facility-decoration contract had RMB 5.0 million (about $0.8 million) remaining to be paid by year-end 2022. The land-use-right certificate and construction license were expected by the end of 2022.
- No numerical revenue or earnings guidance was provided. Management said it was promoting products and pursuing new customers and regions, and shifting product mix toward higher-end applications. Actual COVID-19 effects remained uncertain.
- Foreign-currency translation reduced first-half comprehensive income by $3.40 million. Revenue and expenses are primarily denominated in RMB, which is not freely convertible. The company also identified customer credit, interest-rate, and PRC bank-deposit risks.
- Management concluded disclosure controls were not effective at June 30, 2022 because of material weaknesses, including limited employee segregation of duties and the absence of a formal audit committee with a financial expert. No material control changes were reported during the quarter.
- No legal proceedings were reported as of June 30, 2022; the filing reports no off-balance-sheet arrangements.
Investor verification points
- Reconcile MD&A figures with the financial statements: the filing gives differing Q2 revenue-decline figures, and the MD&A cash-flow summary lists ending cash as $11.1 million despite the balance sheet and cash-flow statement reporting $45.1 million.
- Confirm the notes’ remaining principal, repayment history, maturity schedule, and potential dilution from note conversions and warrants.
- Assess collectability and aging of receivables, which rose to $15.29 million; the filing reports 88 days sales outstanding and no allowance for doubtful accounts.
- Evaluate the accessibility of PRC-held cash, progress and cost of the relocation/new facility, and the company’s remediation of disclosed internal-control weaknesses.
- Monitor customer and supplier concentration, pandemic-related demand, input costs, selling prices, and RMB exchange-rate effects.