Wetouch Technology Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited U.S. GAAP financial statements. Wetouch manufactures and sells medium- to large-format touchscreen displays, principally through subsidiaries in China. Comparisons are with Q1 2020 unless otherwise noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $10.71 million | $3.51 million; up 205.7% |
| Gross profit / margin | $5.14 million / 47.7% | $1.64 million / 45.7% |
| Operating income | $1.39 million | $1.39 million |
| Net income | $8.36 million | $1.26 million |
| Basic and diluted EPS | $0.25 | $0.04 |
| Operating cash flow | $13.77 million | $2.35 million |
| Investing cash flow | $17.77 million provided | No investing cash flow |
| Cash at period end | $54.48 million | $23.96 million at Dec. 31, 2020 |
| Current assets / liabilities | $59.19 million / $3.61 million | Current ratio approximately 16.4x |
Revenue growth reflected a 178.3% increase in units shipped, a higher average selling price, and favorable currency translation. Gross margin improved primarily from a shift toward higher-margin products. Operating expenses included $3.15 million of share-based compensation, including 310,830 shares and 631,080 warrants issued to a service provider. The filing reports no financing cash flows and presents no borrowings; debt obligations are not otherwise discussed as a material balance-sheet item.
Material changes and unusual items
- Net income included a $7.61 million gain on disposal associated with a government-directed relocation, and $0.69 million of government grant income. Operating income was essentially unchanged year over year, so reported net income growth was not solely from ongoing operations.
- On March 18, 2021, the operating subsidiary received RMB115.2 million (approximately $17.8 million) in compensation for surrendering land-use rights and demolishing its facilities. The company leased the property back from April through December 2021 for RMB300,000 per month.
- Property, plant and equipment and intangible assets were reported at zero at March 31, 2021, compared with $9.49 million and $0.97 million, respectively, at year-end 2020. The filing attributes this to the relocation and compensation arrangement.
- Accounts receivable fell to $4.50 million from $11.93 million net at year-end; management said DSO declined to 69 days from 161 days. Operating cash flow also reflected collections and other working-capital movements.
- Common shares outstanding increased to 31,811,523 from 31,500,693 at year-end. Warrants outstanding totaled 841,440, with a weighted-average exercise price of $0.01.
Liquidity, outlook and risks
Management believes cash, operating cash flows and potential bank borrowings will fund operations and requirements for at least 12 months, but says additional financing may be needed. The company estimates approximately RMB170 million (about $26.2 million) for a new facility site and construction, expects completion before December 31, 2021, and cautions that both the cost estimate and timing are uncertain. No formal revenue or earnings guidance is provided.
- Relocation and construction execution, required capital, and possible financing or shareholder dilution are key uncertainties.
- Cash is held primarily in PRC banks; management says PRC subsidiary cash is intended to be indefinitely reinvested in China. RMB convertibility, exchange-rate movements, and restrictions on remittances may affect access to funds and U.S.-dollar results.
- Customer concentration is substantial: the top ten customers represented 99.2% of Q1 2021 revenue. Five customers represented 85.9% of period-end receivables.
- Related-party transactions included $97,380 of sales and $628,604 due to related parties at quarter-end. The chairman and CEO has interests in certain related entities.
- Management concluded disclosure controls were not effective at March 31, 2021 because of material weaknesses, including inadequate segregation of duties and no formal audit committee with a financial expert. The filing reports no material change in internal control during the quarter.
- COVID-19 disrupted operations in early 2020; its future effect remains uncertain. The filing reports no material pending legal proceedings or capital expenditure commitments as of March 31, 2021.
Important facts for investors to verify
- Reconcile the $7.61 million disposal gain, $17.77 million cash proceeds, and removal of property and intangible assets; assess whether post-relocation operations and capacity are on track.
- Confirm the funding source and updated cost and timetable for the estimated RMB170 million replacement facility, and whether additional financing is required.
- Assess recurring earnings and cash generation apart from the disposal gain, government grants, and material share-based compensation.
- Evaluate customer concentration, collections, related-party balances and transactions, and the governance and remediation plan for ineffective controls.
- Check the filing’s period labels and narrative figures against the financial statements: some MD&A table headings and liability amounts appear inconsistent or contain apparent transcription errors, so the precise values should be confirmed from the filed statements.