Wetouch Technology Inc. — Q1 2024 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. Wetouch manufactures and sells medium-to-large touchscreen displays for automotive, industrial, medical, gaming, POS and other applications, primarily through operations in China. Its common stock began trading on Nasdaq as WETH on February 21, 2024.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $14.88 million | $13.43 million; up 11.2% |
| Gross profit and margin | $3.34 million; 22.4% | $6.04 million; 45.0% |
| Operating income | $2.30 million | $4.30 million |
| Net income | $0.56 million | $2.79 million |
| Comprehensive income (loss) | $(1.37) million | $2.11 million |
| Operating cash flow | $(9.22) million | $2.72 million provided |
Revenue growth reflected 7.3% higher shipment volume and an 8.5% increase in average selling price, partly offset by a 5.1% adverse currency effect. Overseas revenue increased 34.1% to $5.50 million; mainland China revenue rose 1.1% to $9.37 million. Units shipped increased to 681,370 from 635,276.
Cost of revenue rose 56.7%, outpacing sales growth and reducing gross margin by 22.6 percentage points. Management attributed higher costs principally to a 66.9% increase in raw-material costs, including U.S. export controls affecting advanced computing and semiconductor-related inputs and supplier production constraints around the Chinese Spring Festival. Selling expenses increased to $460,000 from $51,000; general and administrative expenses declined to $531,000 from $1.67 million, partly reflecting the prior-period private-placement agent fee accrual.
Interest expense was $1.17 million, largely default interest charges recognized upon repayment of convertible notes. Net income fell 78.6% year over year. Foreign-currency translation loss was $1.93 million, contributing to the comprehensive loss.
Liquidity, debt and financing
At March 31, 2024, cash was $94.80 million, down from $98.04 million at December 31, 2023. Current assets were $110.04 million and current liabilities were $2.24 million. Accounts receivable increased to $10.94 million from $7.46 million; $5.93 million was 1–3 months past due and $452,000 was 4–6 months past due. Three customers represented 61.9% of receivables. The company reported DSO of 56 days, compared with 77 days at year-end.
Operating cash use of $9.22 million reflected, among other items, increases in receivables and prepaids and reductions in accrued liabilities. Investing cash use was $111,000. Financing provided $7.51 million, including $8.99 million of net proceeds from the February public offering, offset in part by note repayments. The company issued 2.16 million shares at $5.00 each for $10.8 million gross proceeds; shares outstanding at March 31 were 11,931,534.
Following the offering, Wetouch repaid the remaining five convertible promissory notes. The notes’ principal was $1.40 million; total payment including accrued interest and default charges was $2.59 million. At quarter-end, the balance sheet showed a $386,000 third-party loan and a $371,000 warrant liability; no convertible notes payable were reported. The company stated it expects cash, operating cash flows and bank borrowings to meet liquidity needs for at least 12 months, while warning that additional financing may be needed if circumstances change.
Outlook, risks and unusual items
- Management expected procurement costs for chips and other raw materials to stabilize as supplier production normalized after Q2 2024. This is a forecast, not a quantified earnings outlook; the filing provides no revenue or profit guidance.
- The new facility is under construction. MD&A estimates building construction completion by the end of 2024 and production commencement in Q3 2025; an accounting note separately estimates construction-in-progress completion by the end of Q1 2025. The report also cites a $0.7 million construction commitment and a plan to add a touch-machine construction area.
- The company states it failed to timely complete required CSRC filing procedures related to its overseas listing/offering. It had not received a penalty notice as of the report date; disclosed potential fines are RMB 1 million to RMB 10 million, with additional possible penalties for responsible individuals. It engaged PRC counsel to complete the filing.
- Customer concentration is substantial: the top ten customers accounted for 98.8% of Q1 2024 revenue. The company also depends on suppliers and faces raw-material availability, quality and pricing risks, currency exposure, and uncertainty around PRC regulation and remittance requirements.
- A construction-materials dispute involving Chengdu Hongxin Shunda Trading remained unresolved on appeal; management said the likelihood and amount of the contingency could not be estimated. The filing otherwise says there were no pending material legal proceedings as of its date.
- Disclosure controls were deemed ineffective at March 31, 2024 because of a material weakness involving inadequate segregation of duties, lack of formal procedures and insufficient internal-control risk assessment. Remediation was ongoing and had not addressed the weaknesses during Q1.
- After the SEC’s May 3, 2024 order concerning BF Borgers, the company dismissed that auditor on May 9 and engaged Enrome LLP. Management planned to redo the 2023 annual audit by year-end 2024; the filing warns of possible filing or financing delays and additional costs.
Most important facts for investors to verify
- Whether gross margin and raw-material costs improve as management expects, and how the trend affects earnings.
- Collection and aging of receivables, including exposure to the three largest customers and the concentrated customer base.
- Progress, cost and timing of the new facility, noting the differing completion estimates in the filing.
- Status and outcome of CSRC filings and any related penalties, and the unresolved construction-materials dispute.
- Completion of the 2023 audit redo, timely SEC reporting under the new auditor, and measurable remediation of the material weakness.