10-Q: Wetouch Q1 Net Income Soars 317% Amid Strong Gross Profit

Sentiment:

Quarterly Report 8 October 2025 10:14 AM

Wetouch Technology Inc. reported a significant increase in net income and gross profit for the first quarter of 2025, driven by higher sales volume and improved cost management, despite ongoing internal control weaknesses.

Delay expectedThe company's new facility construction, which started in August 2021, was delayed and suspended due to the outbreak of Covid-19 and government-ordered shutdowns in China.The completion of the new facility building construction is now rescheduled and extended to the end of December 31, 2025, with production commencing in the second quarter of 2026.

Capital raiseThe company may seek additional financing if existing cash on hand ($106.4 million as of March 31, 2025) and cash flows generated from operations prove insufficient to support the timely completion of the new facility project.

Better than expectedNet income increased by 316.7% to $2.5 million.Gross profit increased by 69.7% to $5.6 million, with gross profit margin improving to 36.9%.Revenues grew by 2.7% to $15.3 million, driven by an 11.9% increase in sales volume.Operating income increased by 73.9% to $4.0 million.Interest expenses were eliminated due to the repayment of convertible notes.

Summary

Net income for the three months ended March 31, 2025, surged by 316.7% to $2.5 million, up from $0.6 million in the same period of 2024.
Revenues increased by 2.7% to $15.3 million in Q1 2025, compared to $14.9 million in Q1 2024, primarily due to an 11.9% increase in sales volume.
Gross profit dramatically rose by 69.7% to $5.6 million, with the gross profit margin expanding to 36.9% from 22.4% in the prior year period.
Operating income increased by 73.9% to $4.0 million for Q1 2025, benefiting from higher gross margin and an 80.0% reduction in selling expenses.
The company continues construction of its new production facilities in Chengdu, with building completion expected by the end of 2025 and production commencement in Q2 2026.
A material weakness in internal controls over financial reporting, related to a lack of competent personnel and risk assessment procedures, remains unaddressed as of March 31, 2025.

Sentiment

Score: 7

Explanation: The company demonstrated strong financial performance with significant increases in net income, gross profit, and operating income, alongside improved cash flow from operations. Strategic shift to higher-end products and progress on new facility construction are positive. However, the unaddressed material weakness in internal controls and high customer/supplier concentration introduce notable risks, tempering overall sentiment.

Positives

Net income increased by 316.7% to $2.5 million for Q1 2025, demonstrating strong profitability growth.
Gross profit increased by 69.7% to $5.6 million, with gross profit margin improving significantly to 36.9% from 22.4% year-over-year.
Revenues grew by 2.7% to $15.3 million, driven by an 11.9% increase in total sales volume (762,545 units in Q1 2025 vs. 681,370 units in Q1 2024).
Selling expenses decreased by 80.0% to $0.1 million, reflecting improved cost efficiency in sales and marketing.
Operating income increased by 73.9% to $4.0 million, indicating strong operational leverage.
Interest expenses were nil in Q1 2025, a 100% reduction from $1.2 million in Q1 2024, following the full repayment of convertible promissory notes in February 2024.
Days Sales Outstanding (DSO) improved to 55 days as of March 31, 2025, from 64 days at December 31, 2024, indicating better accounts receivable management.
The company is shifting its production mix towards higher-end products like industrial control computer touchscreens, POS touchscreens, gaming touchscreens, and multi-functional printer touchscreens, which have greater growth potential and stronger demand.

Negatives

Overseas market revenue decreased by 10.9% to $5.0 million in Q1 2025, primarily due to a 9.9% decrease in average selling price in RMB and a 1.2% negative impact from exchange rates.
Average selling price of products decreased by 6.9% overall, with specific decreases in medical touchscreens (25.5%) and industrial control computer touchscreens (1.2%) in the PRC domestic market.
General and administrative expenses increased significantly by 220.0% to $1.6 million, mainly due to higher professional fees and amortization of prepaid marketing research fees.
Research and development expenses were nil in Q1 2025, a 100% decrease from $42,738 in Q1 2024, which could indicate reduced investment in future innovation.
A material weakness in internal controls over financial reporting, identified in the 2024 annual report, remains unaddressed as of March 31, 2025, posing a risk of future material misstatements.
The company has significant customer concentration, with the top five customers accounting for 22.1%, 16.9%, 15.8%, 15.1%, and 12.4% of Q1 2025 revenue, and the top ten customers accounting for 99.7% of total revenue.
Supplier concentration is also high, with the top four raw material suppliers accounting for approximately 48.2% of total raw material purchases in Q1 2025.

Risks

Significant reliance on top customers, with failure to attract new customers or retain existing ones potentially impacting business, financial condition, and results of operations.
Substantial accounts receivable may become uncollectible, posing a credit risk.
Potential fines and penalties from the Chinese government for not completing required filings.
Challenges in upholding the quality and safety standards of products.
Difficulty in competing effectively within the touchscreen display industry.
Business plan execution may be compromised without substantial additional financing.
Failure to secure a new parcel for constructing new buildings and facilities, or acquiring and installing new production lines, could materially and adversely affect the business.
Revocation or unavailability of preferential tax treatments and government subsidies, or successful challenges to tax liability calculations by PRC tax authorities, may lead to higher tax payments, interest, and penalties.
Significant interruptions in the operations of third-party suppliers could disrupt operations.
Fluctuations in the cost, availability, and quality of raw materials may adversely affect results of operations.
Reliance on key executives and highly qualified managers, with retention not assured.
Absence of long-term contracts with suppliers allows them to reduce order quantities or terminate sales at any time.
Failure to adopt new technologies to evolving customer needs or emerging industry standards may materially and adversely affect the business.
Lack of business liability or disruption insurance exposes the company to significant costs and business disruption.
Adverse regulatory developments in Mainland China may subject the company to additional regulatory review, restrictions, disclosure requirements, and SEC scrutiny, increasing compliance costs and hindering future securities offerings.
Common stock may be prohibited from trading in the U.S. under the Holding Foreign Companies Accountable Act if PCAOB inspection of the auditor is incomplete, potentially leading to delisting or prohibition and decline in stock value.
Changes in China's economic, political, or social conditions or government policies may adversely affect business and operations.
Uncertainties regarding the PRC legal system, including enforcement and sudden changes in laws and regulations, could adversely affect the company and limit legal protections.
Fluctuations in exchange rates could materially and adversely affect results of operations and investment value.
As a holding company, operations are primarily conducted through a PRC subsidiary, facing risks and uncertainties associated with restrictions on capital flows, dividend payments, currency conversion, cybersecurity, data privacy, and governmental discretion over overseas securities offerings.
Most cash is maintained in Renminbi in mainland China and may be subject to PRC restrictions on outbound transfers.
Material weakness in internal controls over financial reporting due to lack of competent financial reporting and accounting personnel with U.S. GAAP understanding and lack of risk assessment procedures.

Future Outlook

The company expects to complete the building construction for its new production facilities by the end of 2025 and commence production in the second quarter of 2026. It plans to fund this project primarily with existing cash on hand and operating cash flows, but may seek additional financing if necessary. The company is also evaluating the impact of new FASB accounting standards updates (ASU 2024-03, ASU 2025-01, ASU 2025-02) on its future financial statements and disclosures.

Management Comments

"We plan to fund the project primarily with our existing cash on hand, which totaled approximately $106.4 million as of March 31, 2025, and cash flows generated from operations, and we may seek additional financing if needed to support the timely completion of the project."
"Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively."
"During the first quarter of 2025, the management has not addressed the material weaknesses on internal control and will continue to implement the above improvement plans to ensure our financial reporting in compliance with US GAAP and SEC filing requirements."

Industry Context

The company operates in the dynamic touchscreen display industry, specializing in mediumto large-sized projected capacitive touchscreens for diverse sectors including financial terminals, automotive, POS, gaming, lottery, medical, and HMI. Its strategic shift towards higher-end products like industrial control computer touchscreens and multi-functional printer touchscreens aligns with market trends favoring advanced display technologies and specialized applications. The growth in domestic sales, despite a decrease in average selling price, suggests competitive pricing strategies or increased market penetration in China. The decline in overseas revenue, however, indicates potential challenges in international markets or intense competition, possibly exacerbated by exchange rate fluctuations. The continued investment in new production facilities reflects a commitment to scaling capacity and enhancing technological capabilities to meet future demand and maintain competitiveness.

Comparison to Industry Standards

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Internal Control Deficiency	Identified material weakness in internal controls over financial reporting due to lack of competent financial reporting and accounting personnel with U.S. GAAP understanding and lack of risk assessment procedures. This weakness remains unaddressed as of March 31, 2025.	2025-03-31	Could result in a material misstatement in financial statements in future periods if not properly remediated, affecting the reliability of financial reporting.

Legal Proceedings

As of the date of this Report, the company is not aware of any material, active, pending or threatened legal or administrative claims and proceedings to which the Company or any of its subsidiaries is a party, or to which any of their property is subject.

Related Party Transactions

Amounts due to Chengdu Wetouch Intelligent Optoelectronics Co., Ltd., an affiliate of Ms. Jiaying Cai (a director of the Company), increased to $400,513 as of March 31, 2025, from $149,211 as of December 31, 2024, for expenses paid on behalf of the Company.

Stakeholder Impact

Shareholders: Positive financial results (increased net income, gross profit, EPS) could lead to increased shareholder value. However, unaddressed internal control weaknesses and concentration risks pose potential long-term concerns.
Customers: Increased sales volume and a strategic shift to higher-end products suggest continued efforts to meet customer demand and offer advanced solutions. Concentration of revenue among top customers indicates high reliance on a few key relationships.
Employees: The ongoing construction of new facilities and R&D projects may imply future job creation or stability, particularly in the Chengdu region.
Suppliers: High concentration of raw material purchases from a few suppliers (top four accounting for 48.2%) indicates potential supply chain risk if relationships with these key suppliers are disrupted.
Regulatory Bodies: The identified material weakness in internal controls and the company's operations in China subject to evolving PRC laws and regulations (e.g., capital flows, data privacy) will likely maintain regulatory scrutiny.

Next Steps

Complete building construction for new production facilities by the end of 2025.
Commence production at the new facilities in the second quarter of 2026.
Obtain the construction license for the new facility by the second half of 2025.
Obtain the certificate of land use right by the second half of 2026.
Continue implementing measures to remediate material weaknesses in internal controls over financial reporting.
Evaluate the impact of new FASB accounting standards updates (ASU 2024-03, ASU 2025-01, ASU 2025-02) on financial statements and disclosures.

Key Dates

Date	Description
1992-08	Company (formerly Gulf West Investment Properties, Inc.) originally incorporated in Nevada.
2006-08	PRC promulgated a Bankruptcy Law.
2007-06-01	PRC Bankruptcy Law became effective.
2008-01-01	PRC statutory income tax rate became 25%.
2011-05-06	Sichuan Wetouch formed in the PRC.
2016-07-19	Sichuan Wetouch became 100% held by HK Wetouch.
2017-02-23	Sichuan Wetouch became a Wholly Foreign-Owned Enterprise (WFOE) in PRC.
2017-10	Sichuan Wetouch granted preferential income tax rate of 15% until October 11, 2020.
2020-08-14	BVI Wetouch incorporated under the laws of British Virgin Islands.
2020-09-11	BVI Wetouch became the holding company of Hong Kong Wetouch Electronics Technology Limited.
2020-10-09	Reverse Merger closed, making BVI Wetouch a wholly-owned subsidiary of the Company.
2020-10-21	Sichuan Wetouch granted HNTE status, entitling it to a reduced income tax rate of 15% until October 20, 2023.
2020-12-03	Hong Kong Wetouch Technology Limited (HK Wetouch) incorporated.
2020-12-22	Company authorized issuance of shares and warrants for legal services.
2020-12-30	Sichuan Vtouch incorporated in Chengdu, Sichuan.
2021-01-01	Company authorized issuance of shares and warrants for consulting services.
2021-03	Sichuan Wetouch under government directed relocation order.
2021-03-02	HK Wetouch acquired all shares of Hong Kong Wetouch.
2021-03-16	Sichuan Vtouch entered into a leasing agreement for the Demised Properties.
2021-04-01	Lease for Demised Properties commenced.
2021-06	Hong Kong Wetouch completed its dissolution process.
2021-07-23	Sichuan Vtouch entered into a contract for the purchase of a land use right for a new facility.
2021-07-28	Sichuan Vtouch made a security deposit to obtain a construction license for its new facility.
2021-08	New facility construction started.
2021-10-27	Issuance date of one of the convertible promissory notes.
2021-11-05	Issuance date of one of the convertible promissory notes.
2021-11-16	Issuance date of one of the convertible promissory notes.
2021-11-29	Issuance date of one of the convertible promissory notes.
2021-12-02	Issuance date of one of the convertible promissory notes.
2022-04-14	Company issued common stock upon cashless exercise of Note Warrants.
2022-04-27	Company issued common stock upon cashless exercise of Note Warrants.
2022-09-01	Company issued common stock upon cashless exercise of Note Warrants.
2022-09-21	6,211 shares issued upon exercise of warrants for legal services.
2022-10-30	Lease for Demised Properties renewed.
2022-12-28	Start of period for amendments to Notes extending term.
2023-01-19	Company sold 8,000,000 shares of common stock in a private placement.
2023-01-20	Company received net proceeds of $40 million from private placement.
2023-02-17	Board of directors authorized a reverse stock split.
2023-03-30	Sichuan Wetouch deconsolidated.
2023-04-06	End of period for amendments to Notes extending term.
2023-05	Company entered into two third-party consulting service agreements.
2023-07-16	Board of directors approved a 1-for-20 reverse stock split and filed certificate of change.
2023-08-29	Start of period for amendments to Notes regarding Nasdaq listing repayment.
2023-09-09	End of period for amendments to Notes regarding Nasdaq listing repayment.
2023-09-11	Reverse stock split approved by Financial Industry Regulatory Authority (FINRA).
2023-09-12	Reverse stock split took effect.
2023-10-30	Lease for Demised Properties renewed.
2023-11-27	FASB issued Accounting Standards Update No. 2023-07, Segment Reporting.
2023-12-14	FASB issued Accounting Standards Update No. 2023-09, Income Taxes.
2024-02-20	Company issued 2,160,000 shares of common stock in a public offering.
2024-02-21	Company's common stock began trading on the Nasdaq Capital Market under WETH.
2024-02-23	Company closed its public offering and made full payment of remaining five outstanding promissory notes.
2024-02-29	Company advanced market research fees to two unrelated individuals.
2024-08-09	Lease for Demised Properties renewed, extending term to October 31, 2025.
2024-11	FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures.
2025-01-06	FASB issued ASU 2025-01 clarifying interim effective date of ASU 2024-03.
2025-03	FASB issued ASU 2025-02 Liabilities (405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 122.
2025-03-31	End of the current quarterly reporting period.
2025-04-11	Sichuan Vtouch entered into a supplemental construction contract for facility construction project.
2025-10-07	Number of common stock shares issued and outstanding reported as 11,931,534.
2025-10-08	Date of filing of the Quarterly Report on Form 10-Q.
2025-10-31	Extended term for the lease of Demised Properties.
2025-12-31	Expected completion of new facility building construction.
2026-02-28	Original payable date for market research fee advances.
2026-08-29	Extended payable date for market research fee advances.
2026-Q2	Expected commencement of production at new facilities.
2026-H2	Estimated obtainment of construction license and land use right certificate.
2026-12-15	Effective date for ASU 2024-03 for annual reporting periods beginning after this date.
2027-12-15	Effective date for ASU 2024-03 for interim periods within annual reporting periods beginning after this date.

Recommendation

hold

The company delivered exceptionally strong financial results for Q1 2025, with significant growth in net income, gross profit, and operating income, alongside improved cash flow and DSO. The strategic focus on higher-end products and investment in new facilities are positive long-term drivers. However, the persistent and unaddressed material weakness in internal controls over financial reporting is a critical concern that introduces significant uncertainty and risk to the reliability of future financial statements. Additionally, high customer and supplier concentration, coupled with inherent risks of operating in China, warrant caution. While the financial performance is impressive, the governance and control issues suggest a 'hold' recommendation until there is clear evidence of effective remediation of the material weakness, which would de-risk the investment significantly.

Keywords

Touchscreen Displays, Capacitive Touchscreens, SEC Filing, Quarterly Report, Financial Results, China Operations, WETH, Manufacturing, Industrial Control, POS Systems, Gaming, Medical Devices, Automotive Touchscreens, Corporate Governance, Internal Controls, Risk Management

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