Wetouch Technology Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. The company manufactures and sells medium- to large-format projected-capacitive touchscreens, principally for automotive, industrial HMI, POS, gaming, and medical applications. Financial statements are audited under U.S. GAAP.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $37.92 million | $40.79 million | Down 7.1% |
| Gross profit / margin | $14.05 million / 37.0% | $18.43 million / 45.3% | Profit down 23.9%; margin down 8.3 percentage points |
| Operating income | $11.41 million | $12.62 million | Down 9.5% |
| Net income | $8.73 million | $17.39 million | Down 50.0% |
| Basic and diluted EPS | $0.27 | $0.55 | Down |
| Operating cash flow | $8.59 million | $14.05 million | Down |
| Cash at year-end | $51.25 million | $46.16 million | Up $5.09 million |
Gross margin pressure reflected higher material costs, particularly chips (up 13.2%), and lower sales; lower labor and overhead costs partly offset the increase. Operating expenses were $2.64 million, versus $5.81 million, including no share-based compensation in 2022 compared with $3.15 million in 2021. FY2021 also included a $7.65 million gain on asset disposal and $0.70 million in government grants; neither recurred in 2022. FY2022 included a $0.87 million noncash gain from remeasurement of warrant liabilities and a $0.10 million loss on conversion of notes.
At December 31, 2022, current assets were $62.18 million, including $9.06 million of receivables and $0.42 million of inventory. Current liabilities were $4.01 million; total liabilities were $4.27 million. Current obligations included $1.28 million of convertible notes and a $0.39 million third-party loan. Operating cash flow was positive, but lower year over year. Investing cash flow was nil; financing cash flow was negative $0.65 million. The company reported a $5.24 million foreign-currency translation loss in other comprehensive income.
Material changes and business developments
- Sales volume was nearly flat at 1.92 million units, down 0.3%, while average selling prices and RMB depreciation reduced U.S.-dollar revenue. Domestic revenue declined 2.8%; overseas revenue fell 15.4%, to $11.48 million. Overseas sales represented 30.3% of revenue.
- Automotive touchscreen revenue declined 19.9% to $9.29 million. POS revenue rose 4.2% to $6.56 million; industrial control touchscreens were essentially flat at $7.99 million. Management said it was shifting toward higher-end products.
- Customer and receivable concentration is significant: six customers each exceeded 10% of FY2022 revenue, and the top 10 collectively represented 98.7%. Three customers accounted for 69.0% of year-end receivables. Receivables increased to $9.06 million from $7.99 million, although reported DSO improved to 81 days from 88.
- The company received RMB115.2 million of government compensation in 2021 for relinquishing its former site and facilities. It continued leasing the former premises, with the lease extended through October 31, 2023 at RMB400,000 per month. The filing states the new Chengdu facility was approximately 80% complete, while also describing significant construction and funding needs.
- After year-end, on January 19, 2023, the company sold 160 million shares for $40 million gross proceeds, received $40 million net proceeds, and stated it would use funds for working capital, general corporate purposes, and debt repayment. Shares outstanding were 33.60 million at year-end and 193.60 million on April 14, 2023. The board also authorized a 1-for-5 to 1-for-80 reverse split; the exact ratio and timing were not specified in the filing.
Outlook, risks, contingencies, and unusual items
- Outlook and funding: Management expected cash, operating cash flow, and borrowings to cover the next 12 months, but estimated approximately RMB170 million ($26.2 million) was needed for land acquisition and new facilities and warned additional financing might be required. No quantified revenue or earnings guidance was provided. The company had a remaining RMB5 million ($0.7 million) facility-decoration commitment due by the end of 2023.
- Operations and COVID-19: Management cited 2022 shutdowns, restrictions, supply-chain and shipment delays, and weaker overseas orders. The duration and financial effect of further disruption could not be estimated.
- Customer, supplier, and collection exposure: Heavy dependence on a small number of customers, significant past-due receivables, and no long-term supplier agreements expose results and liquidity to customer or supplier disruption. The filing reports no allowance for doubtful accounts despite receivables being $9.06 million, including approximately $7.81 million past due.
- Relocation and execution risk: Timely completion and equipping of the new manufacturing site are important to continuity. Management’s construction timetable and the adequacy of its cost estimate are not assured.
- China-related and currency risks: Operations and cash are concentrated in China. The filing notes foreign-exchange controls, uncertainty over cross-border fund transfers, potential regulatory requirements for overseas offerings, and that PRC-resident beneficial owners had not completed or applied for certain SAFE registrations as of the filing date.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022, citing inadequate segregation of duties, insufficient formal policies and procedures, and inadequate risk assessment. Remediation was ongoing; the auditor did not attest to internal controls. The auditor gave an unqualified opinion on the financial statements and identified legal proceedings involving guarantee obligations as a critical audit matter.
- Legal matters and tax: The filing says the described legal actions were settled and parties discharged by the filing date; several related payments or court fees were made in March 2023. Sichuan Vtouch’s application for a 15% preferential tax rate was pending; the standard PRC rate cited is 25%. The company does not expect to pay dividends in the foreseeable future.
- Other market risks: The company’s stock traded on OTCQB, with limited trading and penny-stock restrictions noted. The filing also describes potential dilution, volatility, uninsured business risks, and possible U.S. trading restrictions if auditor-inspection access again becomes an issue; it states the auditor is U.S.-based and PCAOB-inspected.
Important facts for investors to verify
- Reconcile the large post-year-end share issuance, its net proceeds and use, and the resulting dilution; confirm the reverse-split ratio and implementation status.
- Check construction progress, total remaining project costs, leaseback arrangements, and whether the new facility can be completed and operational on schedule.
- Review receivable aging, subsequent collections, customer concentration, and the basis for recording no doubtful-account allowance.
- Track gross-margin trends, materials costs, product mix, and whether the sales shift toward higher-end products is improving profitability.
- Confirm remediation of material weaknesses and improved financial-reporting controls, as well as completion of relevant SAFE registrations and any applicable PRC overseas-listing filings.
- Verify the status of convertible notes, warrant liabilities, tax-rate qualification, and any remaining legal or guarantee-related obligations.