Wetouch Technology Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The unaudited consolidated statements are prepared under U.S. GAAP. Wetouch develops, manufactures, and sells medium- to large-format touchscreens, principally through operations in China, with overseas sales including Taiwan and South Korea.
Financial performance
- Revenue: $13.43 million, up 11.7% from $11.99 million in Q1 2022. Shipment volume increased 13.5% to 635,276 units; management attributed growth to volume and higher average selling prices, partly offset by RMB depreciation.
- Gross profit and margin: $6.04 million versus $4.31 million; gross margin rose to 45.0% from 35.9%. Management cited increased sales of higher-end products, partly offset by higher material costs.
- Operating income: $4.30 million, up from $3.43 million. Operating expenses increased to $1.74 million from $0.88 million, largely because of a $1.2 million accrued underwriting fee. The fee is payable only upon completion of an underwriting offering.
- Net income: $2.79 million versus $2.56 million. Income tax expense was $1.41 million, and the effective tax rate increased to 33.5% from 28.1%. A $97,602 warrant fair-value loss compared with a $160,443 gain in Q1 2022.
- Cash flow: Operating activities provided $2.72 million, compared with $1.44 million used in Q1 2022. Investing cash flow was nil. Financing provided $40.05 million, mainly from the January private placement. Cash increased to $93.26 million from $51.25 million at year-end.
- Liquidity and debt: Current assets were $107.66 million and current liabilities $7.33 million. Total liabilities were $7.69 million, including $1.25 million of convertible notes payable and a $0.47 million third-party loan. The notes’ stated principal totaled $1.42 million; their maturities had been extended by six months. Cash included the private-placement proceeds.
- Balance sheet: Total assets were $118.63 million, including $13.09 million in net accounts receivable, up from $9.06 million at year-end. Property, plant and equipment was $10.97 million, mostly construction in progress.
Material changes and notable developments
- On January 19, 2023, Wetouch issued 160 million shares at $0.25 per share for $40 million gross proceeds. Shares outstanding rose from 33.60 million at December 31, 2022 to 193.60 million at March 31, 2023. The filing reports 193,604,965 shares outstanding as of May 22, 2023.
- Revenue growth was led by China, where sales rose 13.4%; overseas sales rose 7.9%. Medical touchscreen revenue increased 42.3%, and industrial-control touchscreen revenue increased 16.3%, while multifunctional-printer touchscreen revenue declined 2.3%.
- Top ten customers generated 99.6% of revenue, and five customers represented substantial individual portions of period-end receivables. Five suppliers accounted for about 75% of raw-material purchases in Q1 2023.
- Management reported a DSO of 74 days, down from 81 days at December 31, 2022. Receivables nevertheless increased during the quarter.
- The company had a $0.7 million remaining payment under a facility-decoration contract, expected by the end of 2023. A separate land-use prepayment is expected to be reclassified when the land-use certificate is obtained, estimated by Q4 2023.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management believes cash, operating cash flows, and financing resources should meet working-capital, capital-expenditure, and other liquidity needs for at least 12 months, while noting that additional financing may be needed if conditions change.
- Management cited prior COVID-related shutdowns and continuing uncertainty about the pandemic’s effects. It also identified foreign-currency exposure: most revenue and expenses are denominated in RMB, which is not freely convertible.
- Other key risks include customer and supplier concentration, receivable collection, interest-rate exposure, and risks described in the company’s 2022 Form 10-K. Management cautioned that forward-looking statements are uncertain.
- The filing states there were no material pending legal proceedings; previously described matters had been settled, with certain related court fees paid in March 2023.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2023, citing material weaknesses, limited staffing that prevents segregation of duties, and the lack of a formal audit committee with a financial expert. No material changes in internal control were reported during the quarter.
Important facts for investors to verify
- Review the placement terms, use of proceeds, and dilution from the 160 million newly issued shares, along with the potential effects of convertible notes and warrants.
- Assess the high customer and supplier concentration and the collectability and aging of accounts receivable.
- Confirm the company’s post-restructuring corporate structure and reporting scope: the notes state that an independent third party acquired all shares of Sichuan Wetouch on March 30, 2023, while other disclosures describe operations through Sichuan Vtouch and subsidiaries.
- Reconcile the stockholders’ equity statement’s accumulated other comprehensive income presentation: it shows positive $3.66 million at March 31, while the balance sheet shows negative $3.66 million and the reported currency translation adjustment is a loss.
- Track the conditional $1.2 million underwriting fee, the remaining facility commitment, and the effectiveness of remediation for the disclosed control weaknesses.