Wetouch Technology Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited statements are prepared under U.S. GAAP. Wetouch manufactures and sells medium-to-large projected capacitive touchscreens, primarily through operations in China, for automotive, industrial, POS, gaming, medical and other applications.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $11.12 million | $11.62 million | $37.33 million | $35.37 million |
| Gross profit | $4.78 million | $5.06 million | $17.07 million | $14.42 million |
| Gross margin | 42.9% | 43.6% | 45.7% | 40.8% |
| Operating income | $4.29 million | $4.74 million | $14.68 million | $12.22 million |
| Net income | $2.86 million | $3.29 million | $10.33 million | $8.78 million |
| Net cash from operations | Not separately presented for the quarter | $9.01 million | $4.77 million |
- Quarterly revenue declined 4.3% and net income declined; management attributes the sales decrease mainly to RMB depreciation and 2.6% fewer units shipped, partly offset by higher RMB selling prices. Shipments were 557,503 units.
- Nine-month revenue rose 5.4%, while net income increased 17.0%. Higher unit volume, higher average RMB prices and a stronger product mix supported results; currency translation partly offset revenue growth.
- Quarterly gross margin narrowed 0.7 percentage points, which management linked to lower revenue and higher labor and material costs. Nine-month margin improved 4.9 points, primarily with sales growth in higher-end products.
- At September 30, cash was $93.94 million, accounts receivable $13.93 million and current assets $109.12 million. Current liabilities were $7.33 million; total liabilities were $7.72 million and equity was $111.72 million.
- Cash increased from $51.25 million at year-end 2022. Nine-month cash flow included $9.01 million from operations and $39.95 million from financing, principally the $40 million private placement; investing cash flow was nil. Foreign exchange reduced cash by $6.27 million.
- Convertible notes had a $1.23 million carrying value ($1.40 million principal) and generally bear 8% interest; the balance-sheet also reports a $385,791 third-party loan. The notes were amended to extend maturities, and certain amendments require repayment at 105% of the outstanding balance after an uplisting.
Material changes and unusual items
- On January 19, 2023, Wetouch issued 8 million shares for $40 million, substantially increasing shares outstanding. The company also effected a 1-for-20 reverse stock split in September 2023. It reported 9,732,948 shares outstanding at September 30 and November 13, 2023.
- Q3 domestic revenue fell 8.6%, while overseas revenue rose 5.7%. For the nine months, domestic and overseas revenue increased 5.3% and 5.5%, respectively. Medical touchscreen revenue increased 16.3% year over year for the nine-month period.
- Nine-month G&A expense rose to $1.93 million from $0.90 million, mainly reflecting $1.2 million in accrued underwriting fees. Selling expense declined to $0.40 million from $1.23 million, while research and development expense remained small.
- Foreign-currency translation loss was $7.56 million for the nine months, contributing to accumulated other comprehensive loss of approximately $10.54 million at quarter-end.
- The company reports no pending material legal proceedings; previously identified litigation matters were settled. A facility decoration contract had approximately $0.7 million remaining to be paid by year-end 2023.
Outlook, risks and controls
- Management expects cash, operating cash flows and available financing to cover working capital, capital expenditures and other needs for at least the next 12 months. It gives no specific revenue or earnings guidance. Management says the $93.9 million of PRC subsidiary cash is intended to be indefinitely reinvested in China.
- Key exposures include RMB/U.S. dollar movements, customer concentration, receivable collection, raw-material and labor costs, and the PRC operating and regulatory environment. The top ten customers represented 99.8% of Q3 revenue and 99.6% of nine-month revenue; two customers represented 40.8% of quarter-end receivables.
- Accounts receivable rose to $13.93 million from $9.06 million. At September 30, $7.46 million was 1–6 months past due; the company reported no doubtful-account allowance.
- Management concluded disclosure controls and procedures were not effective at September 30, 2023, citing material weaknesses in internal control over financial reporting, including limited employee numbers that prevent segregation of duties. No material control changes were reported during the quarter.
- The filing cautions that forward-looking statements are subject to risks and uncertainties, including economic, competitive, market and regulatory changes. COVID-related restrictions had been relaxed and PRC operations had resumed normally, but future impacts remain uncertain.
Investor verification priorities
- Verify customer concentration, receivable aging and subsequent collections, particularly given the lack of a reported allowance for doubtful accounts.
- Confirm the terms, maturity dates and repayment implications of the convertible notes, including the 105% repayment provision tied to an uplisting.
- Assess availability and transferability of PRC-held cash, foreign-exchange exposure and the practical implications of the indefinite-reinvestment assertion.
- Review progress and remaining costs for the new facility, including the stated land-use certificate and construction-related timing assumptions.
- Track remediation of the disclosed internal-control material weaknesses and review future filings for control improvements.
- Reconcile two MD&A presentation points: it describes 2022 operating cash flow as “used,” although the cash-flow statement reports $4.77 million provided; it also calls DSO of 83 days a decrease from 81 days, which the figures do not show.