Business context and reporting period
Wetouch Technology Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The filing does not provide separate fourth-quarter results. The company manufactures and sells 7- to 42-inch projected capacitive touchscreens, primarily from operations in China, for automotive, industrial HMI, gaming, POS, medical and other applications. Its October 2020 reverse merger was accounted for as a recapitalization; BVI Wetouch is treated as the accounting acquirer, and no goodwill was recorded.
Financial results and liquidity
Audited consolidated financial statements are prepared under U.S. GAAP. Figures below are in U.S. dollars; amounts are rounded where indicated.
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $31.35 million | $40.00 million |
| Gross profit / margin | $15.61 million / 49.8% | $19.74 million / 49.3% |
| Operating income | $11.88 million | $17.00 million |
| Income before tax | $10.48 million | $16.44 million |
| Net income | $8.93 million | $13.72 million |
| Basic and diluted EPS | $0.31 | $0.49 |
| Net cash from operating activities | $12.96 million | $10.16 million |
| Cash and cash equivalents at year-end | $23.96 million | $14.28 million |
- Revenue declined 21.6% based on audited statement totals; management also describes the decline as 21.8%, reflecting rounded figures. Shipped units fell 26.9%, partly offset by a higher average selling price.
- Operating expenses rose to $3.73 million from $2.74 million, including $1.06 million of share-based compensation for legal services. Operating income fell 30.1%; net income fell 34.9%.
- Gross margin improved slightly, to 49.8% from 49.3%. The filing attributes this partly to product mix and lower material costs alongside reduced sales.
- Cash provided by operations was $12.96 million; investing cash flow was nil; financing used $4.70 million, principally related-party advance repayments and bank-loan repayment. The company reported no short-term bank loans at year-end.
- At December 31, 2020, current assets were $36.60 million and current liabilities $2.28 million; total liabilities were $2.71 million. Cash was $23.96 million, compared with $0.89 million of accounts payable and $0.53 million due to related parties. The filing reports no material long-term debt.
- Receivables were $11.93 million net, and days sales outstanding increased to 161 from 135. The filing attributes slower collection to pandemic disruption; it says overdue receivables were collected by year-end, though the aging table still shows past-due balances at December 31.
Material changes and management commentary
- COVID-19 caused a temporary shutdown of the Sichuan facility from early February to early March 2020, disrupted logistics and collections, and negatively affected production and sales. Management says the duration and financial effects of future pandemic impacts remain uncertain.
- Management cites the loss of a major customer and pandemic-related disruption as drivers of lower revenue. Automotive touchscreen revenue fell 35.4%; medical touchscreen revenue grew 39.1%, and POS revenue grew 3.9%. Medical products rose to 9.7% of revenue from 5.5%.
- The five largest customers represented approximately 73.3% of revenue in 2020; the top ten represented 98.5%. Three suppliers accounted for 37.5% of raw-material purchases, and the company has no long-term supply agreements.
- Interest expense increased to $1.73 million from $0.02 million. The company repaid a related-party loan of approximately $4.3 million, including interest, in November 2020. A separate $1.7 million loan-default penalty was paid in September 2020; no such penalty was recorded in 2020 versus $0.87 million in 2019.
- After year-end, local government relocation requirements led to withdrawal of the company’s land-use right and demolition of its existing site. In March 2021, the company received RMB115.2 million (approximately $17.7 million) in compensation. A leaseback permits operations at the site through December 31, 2021 at monthly rent of RMB300,000. Management estimates approximately RMB170 million ($26.2 million) for a replacement parcel, production facilities and offices, and expects completion before year-end 2021, but gives no assurance on timing or sufficiency of funds. Additional financing may be needed.
- Management believes cash, operating cash flow and borrowings can meet operating and working-capital needs for at least 12 months, while separately warning that relocation and expansion may require additional financing. The company does not expect to pay dividends in the foreseeable future.
Risks, contingencies and controls
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020, citing inadequate segregation of duties, lack of formal procedures, no functioning audit committee or independent directors, and insufficient risk assessment. Remediation plans include seeking independent directors and improving policies and processes. The auditor did not attest to internal controls.
- The independent auditor issued an unqualified opinion on the financial statements and identified guarantee-related legal proceedings as a critical audit matter. The filing says the company and relevant affiliates were released from specified guarantees and that related proceedings were settled; verify the status and completeness of those releases.
- The filing states PRC-resident shareholders had not completed or applied for certain SAFE Circular 37 foreign-exchange registrations as of the report date, creating potential fines and restrictions on capital flows, dividends or funding.
- Other material risks include customer concentration, relocation execution and financing, COVID-19 and supply-chain disruption, foreign-exchange and China regulatory risks, preferential tax qualification, related-party influence, limited OTC trading liquidity, and lack of business liability or disruption insurance.
Important facts for investors to verify
- Reconcile management’s stated 21.8% revenue decline with the 21.6% decline calculated from audited revenue totals.
- Assess the relocation plan: receipt and permitted use of the RMB115.2 million compensation, leaseback continuity, replacement-site costs and schedule, and the potential financing shortfall.
- Review receivables aging, DSO, subsequent collections and customer exposure, given the increase in DSO and high revenue concentration.
- Confirm remediation progress for the disclosed material weaknesses and whether governance, segregation of duties and financial-reporting controls have improved.
- Confirm completion of required SAFE registrations and continuing eligibility for the 15% PRC preferential income-tax rate.
- Evaluate related-party balances, past guarantees and loan repayments, as well as the potential dilution from outstanding warrants and shares registered for resale.