Wetouch Technology Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited, consolidated U.S. GAAP financial statements. Wetouch manufactures and sells medium- and large-format projected capacitive touchscreens through subsidiaries in China and serves customers in China and overseas.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $11.99 million | $10.71 million | +12.0% |
| Gross profit / margin | $4.31 million / 35.9% | $5.14 million / 47.7% | Profit down 16%; margin down 11.8 percentage points |
| Operating income | $3.43 million | $1.39 million | +147% |
| Net income | $2.56 million | $8.36 million | Down 69% |
| Basic and diluted EPS | $0.08 | $0.25 | Down |
| Net cash from operating activities | $(1.44) million | $13.77 million | Declined |
| Cash and cash equivalents | $44.82 million | $46.16 million at Dec. 31, 2021 | Down $1.34 million |
At March 31, 2022, current assets were $61.43 million and current liabilities were $5.11 million. Current liabilities included $2.04 million of convertible notes payable. Total liabilities were $6.08 million; shareholders’ equity was $67.25 million. The filing reports no financing cash flows in the quarter.
Material changes and operating drivers
- Revenue rose with 12.0% growth in units shipped (559,958 versus 499,796), a reported 0.9% increase in average selling price, and a 2.1% favorable foreign-exchange impact. Domestic revenue increased 13.9%; overseas revenue increased 8.6%.
- Gross profit fell despite higher sales. Management attributed the margin decline mainly to material costs, including chip costs up approximately 45%, and labor costs up 30.8%.
- Operating income increased largely because Q1 2021 included $3.15 million of share-based compensation, versus none in Q1 2022. Selling expense rose to $485,000 from $88,000; general and administrative expense declined to $372,000 from $495,000.
- Net income was substantially lower primarily because Q1 2021 included a $7.61 million asset-disposal gain and $691,713 of government-grant income; neither was recorded in Q1 2022. Q1 2022 included a $160,443 gain from remeasuring warrant liabilities.
- Operating cash flow turned negative, principally reflecting a $6.35 million cash use from accounts receivable. Receivables increased to $14.61 million from $7.99 million at year-end. Management reported DSO of 85 days, versus 88 days at December 31, 2021.
- Revenue mix shifted toward POS, medical and multifunction-printer touchscreens; automotive touchscreen revenue decreased 14.4%, while POS revenue increased 68.7%.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management believes cash, operating cash flows and financing sources will meet working-capital, capital-expenditure and other liquidity needs for at least the next 12 months, but says additional financing could be needed if conditions change.
- The company is relocating manufacturing following a government-directed order. Sichuan Wetouch’s operations were taken over by Sichuan Vtouch, and the company continued leasing the former properties through October 31, 2022. New-facility construction and related spending remain important execution and funding considerations.
- A facility-decoration contract totals RMB20.0 million (approximately $3.1 million); RMB15.0 million had been prepaid and recorded in construction in progress, with RMB5.0 million (approximately $0.8 million) remaining due by July 30, 2022. The company also reported a prepaid land-use right of approximately $615,000, pending government certification.
- Seven convertible notes have $2.25 million aggregate principal, bear 8% interest and mature from October through December 2022. They include conversion and price-reset provisions; default interest is 16%, and early repayment may carry a 10% penalty. The associated warrants cover 1.8 million shares, creating potential dilution. The company repaid $25,000 to one lender on May 3, 2022 under a subsequent amendment.
- Customer concentration is high: the top ten customers represented 99.4% of Q1 2022 revenue, and six customers represented 80.7% of quarter-end receivables. Four suppliers individually exceeding 10% accounted together for 47.4% of raw-material purchases.
- Management cited continuing COVID-19 uncertainty, higher material and labor costs, RMB exchange-rate exposure and restrictions on currency conversion. No legal proceedings were reported as of March 31, 2022; the filing states there were no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the higher receivables balance converts to cash, and the collectability and aging of those balances.
- Whether gross margins recover as input and labor costs evolve and the higher-end product mix develops.
- Progress, cost, funding and timing of the relocation and new-facility construction, including remaining contractual payments.
- Repayment, conversion or amendment of the notes maturing in late 2022, including potential dilution and registration obligations.
- Customer and supplier concentration, and the continuing effects of COVID-19 and RMB movements on operations and reported results.
- Share count: 31,811,523 shares were outstanding at March 31, 2022; 32,039,035 were reported outstanding as of May 13, 2022.