Wetouch Technology Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited and presented in U.S. dollars. Wetouch develops, manufactures and sells medium- to large-format projected-capacitive touchscreens, primarily through its PRC operations. The filing describes demand across automotive, industrial, POS, medical, gaming and other applications.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $12.77 million | $11.75 million | $26.21 million | $23.75 million |
| Gross profit / margin | $6.25 million / 49.0% | $5.05 million / 43.0% | $12.29 million / 46.9% | $9.36 million / 39.4% |
| Operating income | $6.09 million | $4.05 million | $10.40 million | $7.48 million |
| Net income | $4.67 million | $2.93 million | $7.47 million | $5.49 million |
| Basic and diluted EPS | $0.02 | $0.09 | $0.04 | $0.17 |
- Cash flow: Six-month operating cash flow was $6.76 million, versus $1.50 million in 2022. Investing cash flow was nil. Financing cash flow was $40.05 million, principally $40 million of private-placement proceeds. Cash rose to $92.21 million from $51.25 million at year-end, after a $5.84 million adverse foreign-exchange effect.
- Liquidity: Current assets were $107.40 million and current liabilities $8.16 million at June 30, including $13.96 million in receivables and $0.17 million in inventory. Management said available cash, operating cash flow and financing sources should cover needs for at least 12 months.
- Debt and obligations: Convertible notes had a $1.25 million carrying amount; a third-party loan was $0.47 million. Convertible-note principal totaled about $1.42 million, with remaining lenders’ maturities extended for six months in amendments made between late December 2022 and January 2023. The company also reported a $0.21 million warrant liability. A $0.7 million balance remained on a facility-decoration commitment, payable by year-end 2023.
Changes, drivers and material items
- Q2 revenue increased 8.5% year over year; management attributed the increase to 4.1% higher shipment volume and a 10.4% increase in average selling price, partly offset by a 6.1% adverse currency effect. Six-month revenue rose 10.5%, despite a 7.9% decline in total units sold, on higher selling prices and product mix; currency translation also weighed on reported revenue.
- Management linked improved gross margin to stronger sales of higher-priced products, including POS and medical touchscreens. Q2 gross margin expanded by 6.0 percentage points; the six-month margin expanded by 7.5 points. The filing also cites higher material costs, including chip costs.
- Q2 operating expenses fell to $0.16 million from $1.00 million, including lower selling and general and administrative expenses. For the six months, operating expenses were nearly flat at $1.90 million: lower selling expenses were offset by higher G&A, which included a $1.2 million accrued underwriting fee related to the private placement. The fee is described as payable only upon completion of an underwritten offering.
- The January 2023 private placement raised $40 million by issuing 160 million shares at $0.25 each. Shares outstanding increased from 33.60 million at December 31, 2022 to 193.90 million at June 30, 2023. Net income increased, but reported EPS declined substantially year over year as the weighted-average share count rose sharply.
- Foreign-currency translation losses were $6.20 million in Q2 and $6.89 million for the first half, reducing Q2 comprehensive income to a $1.53 million loss and first-half comprehensive income to $0.58 million. The balance sheet’s accumulated other comprehensive loss reached $9.86 million.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expects liquidity to meet operating, capital expenditure and other requirements for at least 12 months, but notes it may seek additional equity, debt or credit if cash needs increase; financing may not be available on acceptable terms.
- Management says the PRC subsidiary’s $92.2 million cash is planned to be indefinitely reinvested in China. Remittances and currency conversion are subject to PRC restrictions, and RMB depreciation has adversely affected reported results.
- Customer concentration is high: the top ten customers accounted for 99.9% of Q2 revenue and 99.6% of first-half revenue. Three customers represented 64.4% of accounts receivable at June 30. The company also identifies exposure to customer credit and PRC bank-deposit risks.
- Management concluded disclosure controls and procedures were not effective at June 30, 2023, citing material weaknesses, limited personnel that prevent segregation of duties, and the absence of a formal audit committee with a financial expert. No material control changes were reported during the quarter.
- The board authorized a reverse stock split of between 1-for-5 and 1-for-80; on July 16, 2023, the chairman set the ratio at 1-for-20. The filing says share counts will be restated once implemented; implementation status is not clear in the provided text. The filing reports no pending material legal proceedings.
Key facts for investors to verify
- Confirm reverse-split implementation, adjusted share counts, and the filing’s difference between 193,904,965 shares outstanding at June 30 and 194,304,965 reported as of August 15.
- Reconcile the Q2 2022 shipment-volume comparison: the highlights cite 556,875 units, while the detailed table cites 566,875; the reported 4.1% growth is consistent with the latter.
- Assess the terms, due dates and conversion or repayment rights of the remaining convertible notes, and the circumstances triggering the $1.2 million underwriting-fee payment.
- Track collections and customer exposure given receivables of $13.96 million, concentration among a small group of customers, and no recorded doubtful-account allowance.
- Evaluate the remediation of the disclosed material weaknesses, the restricted availability of PRC cash, and the effects of currency movements on earnings and equity.