Wetouch Technology Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The unaudited statements are prepared under U.S. GAAP. Wetouch manufactures and sells medium- to large-format touchscreen displays, primarily through PRC subsidiaries.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $15.23m | $5.26m | $25.95m | $8.77m |
| Gross profit | $7.90m | $2.66m | $13.04m | $4.30m |
| Gross margin | 51.9% | 50.7% | 50.5% | 49.1% |
| Operating income | $6.94m | $2.27m | $8.31m | $3.66m |
| Net income | $5.07m | $1.99m | $13.43m | $3.25m |
- Q2 revenue increased 186.8% year over year; six-month revenue increased 194.3%. Management attributed growth to higher shipment volume, selling prices, product mix, and a favorable RMB exchange-rate effect. Q2 units sold rose 145.6% to 711,548; six-month units rose 158.1% to 1,211,344.
- Q2 basic and diluted EPS were each reported as $0.20; six-month EPS was $0.42. Share-based awards issued in January increased the six-month weighted-average diluted shares to 32.65 million.
- At June 30, cash was $52.59m, current assets $64.55m, current liabilities $3.14m, total liabilities $3.14m, and equity $61.46m. No bank borrowings were reported at period-end.
- Six-month operating cash flow was $11.15m, investing cash flow was $17.76m, and financing cash flow was zero. Investing inflows included $17.80m in property-disposal proceeds. Cash increased $28.63m from year-end 2020.
Material changes and unusual items
- Revenue growth reflected recovery from COVID-19-related disruption in 2020, when the operating subsidiary was temporarily shut down, as well as new models and customer and regional expansion. Management also described a shift toward higher-end products; the product mix supported higher gross margins.
- Six-month net income includes a $7.63m gain on asset disposal related to government-directed relocation. It also includes $3.15m of share-based compensation for 310,830 shares and 631,080 warrants issued to a consulting provider. These items affect comparability with 2020.
- The PRC government ordered relocation of Sichuan Wetouch’s facilities by December 31, 2021. It received RMB115.2m (approximately $17.8m) in compensation and leased back the existing properties through December 31, 2021 at RMB300,000 per month. The company was seeking a new site and estimated acquisition and construction needs at approximately RMB170m ($26.2m), with no assurance that this estimate or timing would be sufficient. Operations were being transferred to Sichuan Vtouch; the company was dissolving Sichuan Wetouch, and Hong Kong Wetouch began dissolution proceedings.
- Accounts receivable were $11.59m; seven customers represented 99.8% of receivables. DSO was reported at 82 days, down from 161 days at year-end, but $8.75m of receivables was 1–3 months past due and $0.86m was 4–6 months past due.
Liquidity, outlook, and risks
- Management said cash, operating cash flow, and potential bank borrowings should fund operations, capital expenditures, and other needs for at least 12 months. It cautioned that changing conditions could require additional financing, which may not be available on acceptable terms and could dilute shareholders or add debt obligations.
- The company reported that $52.6m of PRC cash was intended to be indefinitely reinvested in the PRC; access to and remittance of funds may be affected by PRC foreign-exchange requirements. RMB movements also affect reported results.
- Customer concentration is significant: the top ten customers accounted for 98.2% of Q2 revenue and 97.0% of first-half revenue. Management also cited COVID-19 uncertainty and supplier/customer and market risks. No material legal proceedings, capital commitments, or off-balance-sheet arrangements were reported.
- No specific revenue or earnings guidance was provided. Management expected relocation-related acquisition and construction to be completed before year-end 2021, but noted the schedule and cost were uncertain. It estimated the 2021 effective tax rate would be similar to the first-half rate.
Investor verification points
- Verify the relocation schedule, new-facility funding and construction costs, continuity of production, and transfer of operations to Sichuan Vtouch.
- Assess the sustainability of earnings excluding the asset-disposal gain and share-based compensation, and confirm the underlying operating cash generation.
- Review customer concentration, receivable aging and collections, and exposure to a small group of customers and suppliers.
- Consider the filing’s disclosure that controls were not effective at June 30, 2021 because of material weaknesses, including limited segregation of duties and no formal audit committee with a financial expert.
- Reconcile the tax-rate disclosures: the financial statements imply a first-half 2021 effective rate of about 19.4% and 2020 of about 15.0%, while MD&A gives different figures (19.2% and 15.8% in one section, and 19.2% and 15.8%/other comparisons elsewhere). Confirm the company’s intended comparable rates.