Wetouch Technology Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated financial statements; amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Wetouch develops, manufactures and sells medium- to large-format capacitive touchscreens for automotive, industrial, POS, gaming, medical and other applications. Operations are primarily in China. The filing describes a government-directed relocation of its Sichuan manufacturing site: the company received compensation and continued operating from the existing properties under a leaseback while planning to transfer operations to Sichuan Vtouch.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $11.17 million | $11.90 million | $37.11 million | $20.67 million |
| Gross profit / margin | $4.80 million / 42.9% | $6.19 million / 52.0% | $17.84 million / 48.2% | $10.49 million / 50.7% |
| Operating income | $4.34 million | $5.18 million | $12.65 million | $8.85 million |
| Net income | $3.28 million | $4.73 million | $16.70 million | $7.98 million |
| Operating cash flow | Not separately presented for the quarter | $13.02 million | $4.90 million |
For the nine-month period, other income included a $7.63 million gain on asset disposal and $0.69 million in government grants. Operating expenses included $3.15 million of share-based compensation, primarily for shares and warrants issued to an advisory service provider. Q3 basic and diluted EPS were reported as $0.10; nine-month basic and diluted EPS were $0.53.
At September 30, 2021, cash was $54.07 million, current assets were $66.94 million and current liabilities were $2.26 million. Total liabilities were $2.26 million; the balance sheet reports no bank borrowings. Cash increased by $30.10 million from year-end 2020, including $17.80 million of asset-disposal proceeds. Nine-month investing cash flow was $17.61 million, and financing cash flow was zero. Accounts receivable were $11.34 million; the filing reports DSO of 65 days, down from 161 days at December 31, 2020.
Material changes versus the prior comparable period
- Q3 revenue declined 5.9%; management attributed the decrease to a 12.5% fall in units shipped and insufficient raw materials, partly offset by higher average selling prices. Q3 shipments were 531,210 units versus 607,261.
- Q3 gross margin declined 9.1 percentage points, primarily due to lower sales volume. Net income fell 29.8%, with higher income-tax expense also weighing on the comparison.
- Nine-month revenue rose 79.2%, with unit volume up 62.0% and average selling price up 10.5%. Management cited recovery from COVID-19-related disruption in 2020, marketing of new models and expansion into customers and regions.
- Nine-month net income more than doubled, but the comparison includes the $7.63 million disposal gain and $3.15 million share-based compensation expense in 2021. Gross margin nevertheless declined 2.5 percentage points, which management attributed mainly to higher raw-material and product costs.
- Property, plant and equipment declined from $9.49 million at year-end 2020 to $0.19 million at September 30, 2021; intangible assets declined to zero, reflecting the relocation and asset-disposal process.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management expects cash, operating cash flow and financing resources to meet needs for at least 12 months, while noting that additional financing may be needed.
- The company estimated approximately RMB170 million ($26.4 million) for acquiring land and constructing new production facilities and offices. It was searching for a site and expected completion before December 31, 2021, but warned that timing and sufficiency of the estimate were uncertain. Relocation was required by December 31, 2021.
- COVID-19 impacts remained uncertain. The filing also identifies raw-material availability and cost, RMB exchange-rate and conversion restrictions, and potential customer and supplier concentration as risks. The top ten customers accounted for 98.1% of Q3 revenue and 96.7% for the first nine months; seven customers represented 97.6% of receivables at quarter-end.
- Management concluded disclosure controls and procedures were not effective at September 30, 2021, citing material weaknesses including limited segregation of duties and the lack of a formal audit committee with a financial expert.
- After quarter-end, the company issued a convertible note with $250,000 principal, 8% annual interest and a three-year warrant for 200,000 shares. It received $225,000 in proceeds due to the note’s original discount. Conversion and warrant terms may result in dilution. The company had also filed a registration statement and applied to list on Nasdaq.
- The company reported no material active, pending or threatened legal proceedings, no capital expenditure commitments as of September 30, and no off-balance-sheet arrangements. It states that significant PRC cash is intended to remain indefinitely reinvested, which may constrain repatriation.
Important facts for investors to verify
- Whether the relocation, new-site acquisition and facility construction were completed on schedule, and the resulting total funding requirement and operating impact.
- Whether raw-material supply constraints and cost pressures persist, and whether gross margins recover as sales volume and product mix change.
- The sustainability of earnings excluding the disposal gain and the effects of share-based compensation, grants and tax items.
- Receivable collections, customer concentration and the availability of cash for use outside the PRC.
- Progress in addressing the disclosed internal-control weaknesses and the terms, dilution effects and registration status of the post-quarter note and warrants.