Wetouch Technology Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. The unaudited statements are prepared under U.S. GAAP. Wetouch designs, manufactures and sells medium- to large-format projected-capacitive touchscreens, primarily through operations in China.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.62 million | $11.17 million | $35.37 million | $37.11 million |
| Gross profit / margin | $5.06 million / 43.6% | $4.80 million / 42.9% | $14.42 million / 40.8% | $17.84 million / 48.2% |
| Operating income | $4.74 million | $4.34 million | $12.22 million | $12.65 million |
| Net income | $3.29 million | $3.28 million | $8.78 million | $16.70 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $4.77 million | $13.02 million |
Q3 basic and diluted earnings per share were each $0.10, compared with $0.10 in Q3 2021. Nine-month basic and diluted EPS were each $0.27, versus $0.53.
- At September 30, cash was $45.55 million; current assets were $61.41 million and current liabilities $5.42 million. Accounts receivable was $14.28 million, up from $7.99 million at December 31, 2021.
- Convertible notes payable, net, were $1.94 million; the company also reported a $1.09 million warrant liability. No bank borrowings were reported.
- Cash declined $0.61 million during the first nine months, including a $5.38 million adverse foreign-exchange effect. Investing and financing cash flows were each reported as nil for 2022.
- Property, plant and equipment, net, was $10.59 million, mostly construction in progress. The company reported a remaining $0.7 million facility-decoration commitment due by year-end 2022.
Changes and management commentary
- Q3 revenue rose 3.6% year over year as units shipped increased 7.7% and average RMB selling prices rose; RMB depreciation reduced reported U.S.-dollar revenue. Gross margin improved 0.7 percentage points, with management citing a richer product mix, partly offset by higher material costs.
- Nine-month revenue fell 4.6%, including a 12.8% decline in overseas revenue and a 2.5% decrease in total units sold. Gross profit fell 19.1% and margin contracted 7.4 percentage points; management cited higher material and overhead costs.
- Nine-month net income decreased 47.3%. The 2021 comparison included a $7.6 million asset-disposal gain and $3.1 million share-based compensation expense that did not recur in 2022; 2022 also had lower gross profit and a higher effective tax rate.
- Management said COVID-19 restrictions and related lockdowns continued to weigh on operations, particularly in Southern China and overseas sales. The company has promoted newer POS, medical and other higher-end products and sought new customers and regions.
- Management expects cash, operating cash flows and financing sources to meet operating and capital needs for at least 12 months, but says additional financing may be needed if conditions change. It reports that $45.5 million of PRC subsidiary cash is intended to remain invested in China.
Risks, contingencies and unusual items
- Customer concentration is substantial: the top ten customers represented 99.1% of Q3 revenue and 99.2% of nine-month revenue. The filing says five customers represented significant shares of receivables, but lists only four percentages; the disclosure is unclear.
- Receivables more than doubled from year-end; $7.59 million was 1–3 months past due and $1.40 million was 4–6 months past due. Management reported no doubtful-account allowance.
- Seven convertible notes had $2.25 million aggregate original principal, 8% interest and maturities from October 27 to December 2, 2022. The filing reports $115,000 of principal repayments through September 30 and a $1.94 million carrying balance. Default interest is 16% if obligations are not met at maturity; lenders may require repayment upon certain cash proceeds. The filing text does not clearly establish the post-quarter repayment status of these maturities.
- Currency risk is material: much of the business is denominated in RMB, which is not freely convertible, and nine-month accumulated other comprehensive income reflects a $7.60 million foreign-currency translation loss.
- The PRC subsidiary’s government-directed relocation and facility buildout remain relevant. A $0.7 million decoration-contract balance was due by year-end 2022. No legal proceedings were reported as of September 30, 2022.
- Management concluded disclosure controls and procedures were not effective at September 30, citing material weaknesses, limited staff that prevents segregation of duties, and lack of a formal audit committee with a financial expert.
Important facts for investors to verify
- Whether all convertible notes due October–December 2022 were repaid, converted, extended or otherwise resolved, and whether any default interest or penalties arose.
- Collections on the sharply higher receivables balance, particularly past-due amounts, and the absence of a doubtful-account allowance.
- Availability and practical transferability of the company’s PRC cash, alongside progress on construction, land-use documentation and relocation.
- Whether the company remediated the disclosed internal-control weaknesses and improved board-level financial oversight.
- How customer concentration, COVID-related disruption, RMB depreciation and higher input costs affect future revenue and margins. The filing provides no formal earnings or revenue guidance.