Wetouch Technology Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. This is an annual report, not a standalone fourth-quarter report. The company manufactures and sells medium- to large-format projected capacitive touchscreens, principally through PRC subsidiaries.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $40.8 million | $31.3 million | +30.0% |
| Gross profit / margin | $18.4 million / 45.3% | $15.6 million / 49.8% | Gross profit +17.9%; margin declined |
| Operating income | $12.6 million | $11.9 million | +5.9% |
| Net income | $17.4 million | $8.9 million | +95.5% |
| Operating cash flow | $14.1 million | $13.0 million | +$1.1 million |
| Cash and cash equivalents, year-end | $46.2 million | $24.0 million | +$22.2 million |
| Accounts receivable, net, year-end | $8.0 million | $11.9 million | Down approximately $3.9 million |
| Current liabilities, year-end | $3.2 million | $2.3 million | Included $2.0 million carrying value of convertible notes |
Revenue increased on a 16.1% rise in units sold, higher average selling prices, and a favorable currency translation effect. Domestic sales were $27.2 million (66.7% of revenue); overseas sales were $13.6 million (33.3%). Gross margin fell as material costs and overhead increased faster than sales. The filing reports a 45.3% gross margin; the exact statement figures imply approximately 45.2%.
Net income included a $7.6 million gain on asset disposal following government-directed relocation, a $0.8 million gain from changes in warrant fair value, and $0.7 million of government grants. These items materially contributed to the year-over-year earnings increase. Share-based compensation was $3.1 million, versus $1.1 million in 2020.
Cash, debt, and liquidity
- Operating activities generated $14.1 million. Investing activities generated $6.2 million net, including $17.9 million of disposal proceeds and $11.7 million of property and equipment purchases. Financing activities generated $1.9 million net, primarily from convertible-note proceeds.
- Year-end current assets were $56.8 million against current liabilities of $3.2 million. Management stated that cash, operating cash flows, and financing sources were expected to meet operating and other needs for at least 12 months.
- The company issued seven convertible notes with $2.25 million aggregate principal, 8% annual interest, and one-year maturities in late 2022. Notes were issued at a discount; the balance sheet reports $2.03 million payable. Conversion terms include potential price resets, and associated warrants include anti-dilution provisions. Warrants were recorded as a $1.13 million liability.
- Management says $46.2 million of PRC subsidiary cash is intended to be indefinitely reinvested in China. Foreign-exchange controls and restrictions on transfers from PRC subsidiaries may limit access to that cash outside China.
Material changes and operating developments
- The government required relocation of the former Sichuan Wetouch site. The company received RMB115.2 million (reported as approximately $17.8–$18.1 million in different filing passages) in compensation and recorded the disposal gain. It leased back the old property, with the lease extended through October 31, 2022.
- The company purchased a land-use right for a planned new facility and reported construction in progress of $11.8 million at year-end. It disclosed estimated facility acquisition and construction needs of RMB170 million (approximately $26.2 million), while noting that additional financing might be required. The filing’s stated construction timing is not consistent across passages.
- Medical touchscreen revenue rose 70.4% and POS touchscreen revenue rose 52.1%; automotive remained the largest application category at 28.4% of revenue. Product mix shifted toward higher-end applications, although overall gross margin declined.
- Days sales outstanding fell from 161 to 88 days. Year-end receivables were $8.0 million, including $3.7 million 4–6 months past due.
Outlook, risks, and other notable items
- No numerical revenue or earnings guidance is provided. Management describes plans to expand capacity, develop technology and products, and broaden sales; it cautions that relocation and construction may require more time or funding than estimated.
- Customer concentration is substantial: the filing states the top five customers represented approximately 79.6% of 2021 revenue, while its customer-level percentages elsewhere sum to 76.6%. The top ten customers reportedly generated 97.5% of revenue. These figures should be reconciled.
- COVID-19, supply-chain and raw-material availability, competition, customer collections, PRC regulatory and foreign-exchange uncertainty, and the relocation are identified risks. The company reports no business liability or disruption insurance.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2021. Disclosed weaknesses include inadequate segregation of duties, insufficient formal procedures, and deficient risk-assessment procedures. The auditor did not provide an internal-control attestation.
- The financial statements received an unqualified audit opinion. The auditor identified legal proceedings concerning guarantee obligations as a critical audit matter. The filing states there were no pending material legal proceedings; prior guarantee-related matters are described as settled or released.
- The company reported no expected cash dividends in the foreseeable future. Its common stock traded on OTCQB, and the filing described trading as minimal.
Most important facts for investors to verify
- Reconcile the top-five customer concentration figures and determine current exposure to major customers and receivables.
- Confirm the relocation, facility construction, land-use-right certification, remaining capital needs, lease expiration, and funding plan.
- Review the convertible notes’ discount, maturity and repayment terms, conversion-price resets, warrant dilution, and registration obligations.
- Assess earnings excluding the relocation-related disposal gain, warrant fair-value gain, and government grants; confirm the gross-margin figures.
- Track remediation of material internal-control weaknesses and verify cash accessibility, PRC tax status, and applicable cross-border transfer restrictions.