10-Q: Wetouch Reports Mixed Q3, Advances New Facility

Wetouch Technology Inc. reports increased nine-month revenue and net income, but a decline in Q3 net income and gross profit, while progressing with its new production facility and addressing internal control weaknesses.

Summary

• Revenues for the nine months ended September 30, 2025, increased by 3.4% to $39.9 million, compared to $38.6 million in the same period of 2024.
• Net income for the nine months ended September 30, 2025, rose by 23.7% to $7.3 million, up from $5.9 million in the prior year period.
• For the three months ended September 30, 2025, revenues increased by 6.1% to $12.2 million, from $11.5 million in the same quarter of 2024.
• Gross profit for the three months ended September 30, 2025, decreased by 9.1% to $4.0 million, down from $4.4 million in the prior year quarter, with gross profit margin falling to 32.7% from 38.4%.
• Net income for the three months ended September 30, 2025, decreased by 7.4% to $2.5 million, compared to $2.7 million in the same quarter of 2024.
• Total volume shipped increased by 9.0% to 597,470 units for the three months ended September 30, 2025.
• The company is actively constructing new production facilities and office buildings, with building construction estimated to finish by the end of 2025 and production commencing in the second quarter of 2026.
• Cash and cash equivalents stood at $113.2 million as of September 30, 2025, up from $103.8 million at December 31, 2024.
• A material weakness in internal control over financial reporting was identified, related to a lack of competent financial reporting and accounting personnel and risk assessment procedures.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the nine-month financial performance shows solid growth in revenue and net income, the three-month results indicate a dip in profitability and gross margin. The company has strong cash reserves and is investing in a new facility, which are positive long-term indicators. However, the identified material weakness in internal controls, high customer/supplier concentration, and ongoing risks related to PRC operations and exchange rates temper the overall sentiment. The delay in facility completion is noted but seems to be managed.

Positives

• Nine-month revenues increased by 3.4% to $39.9 million, indicating overall growth.
• Nine-month net income significantly increased by 23.7% to $7.3 million, demonstrating improved profitability over the longer term.
• Nine-month gross profit margin improved to 34.4% from 32.7%, reflecting better cost management or product mix over the period.
• Cash and cash equivalents increased to $113.2 million, providing strong liquidity for operations and capital projects.
• Selling expenses decreased by 50.0% for the three months and 55.6% for the nine months, primarily due to increased use of online communications.
• Research and development expenses were nil for both the three and nine months ended September 30, 2025, indicating cost control in this area.
• Days Sales Outstanding (DSO) decreased to 62 days for the nine months ended September 30, 2025, from 64 days for the year ended December 31, 2024, suggesting improved accounts receivable management.
• The company is progressing with the construction of a new production facility, expected to commence production in Q2 2026, which could enhance future capacity and efficiency.

Negatives

• Gross profit for the three months ended September 30, 2025, decreased by 9.1% to $4.0 million.
• Gross profit margin for the three months ended September 30, 2025, declined to 32.7% from 38.4% in the prior year quarter, primarily due to a 13.8% increase in cost of goods sold.
• Net income for the three months ended September 30, 2025, decreased by 7.4% to $2.5 million.
• General and administrative expenses increased by 40.9% for the nine months ended September 30, 2025, primarily due to higher professional fees, credit loss of receivables, and amortization of right-of-use assets.
• Overseas market revenues decreased by 7.3% for the three months and 7.9% for the nine months, mainly due to lower sales volume and average selling prices in certain product categories.
• The average selling price of products decreased by 3.3% for the three months and 4.9% for the nine months, partially offsetting gains from increased sales volume.

Risks

• Significant reliance on a few top customers, with the top five accounting for 99.6% of revenue for the nine months ended September 30, 2025.
• Substantial amount of accounts receivable, which may become uncollectible.
• Potential fines and penalties from the Chinese government for not completing required filings.
• Challenges in upholding the quality and safety standards of products.
• Intense competition within the touchscreen display industry.
• Need for substantial additional financing to execute the business plan, particularly for the new facility.
• Risk of failure to secure a new parcel for constructing new buildings and facilities, or acquiring and installing new production lines.
• Revocation or unavailability of preferential tax treatments and government subsidies, or successful challenges to tax liability calculations by PRC tax authorities.
• 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.
• 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, leading to delisting or prohibition and potential 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.
• Credit risk related to accounts receivable and bank deposits primarily at state-owned banks in the PRC.
• Interest rate risk affecting repayment ability of existing debts and viability of securing future debt instruments.
• Currency risk due to a majority of transactions being denominated in RMB, which is not freely convertible, and restrictions on outbound transfers.

Future Outlook

The company plans to complete the construction of its new production facilities and office buildings by the end of 2025, with production expected to commence in the second quarter of 2026. This project is intended to be funded primarily by existing cash on hand and operating cash flows, with potential additional financing if required. The company also anticipates continued efforts to market new models and acquire new customers in existing markets, particularly in China, and to continue shifting its production mix towards higher-end touchscreen products.

Management Comments

• Management believes that the material weaknesses identified in internal control over financial reporting did not have an effect on financial results.
• Management believes that these weaknesses, if not properly remediated, could result in a material misstatement in financial statements in future periods.
• Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated.
• Management believes cash and cash equivalents provided by operating activities and financing activities will satisfy working capital needs, capital expenditures, and other liquidity requirements for at least the next 12 months.

Industry Context

Wetouch operates in the touchscreen display industry, specializing in mediumto large-sized projected capacitive touchscreens for diverse sectors including financial terminals, automotive, POS, gaming, lottery, medical, and HMI. The company's strategy to shift production towards higher-end products like industrial control computer, POS, and automotive touchscreens aligns with a broader industry trend towards more sophisticated and specialized display solutions. While domestic sales in China are growing, overseas sales have seen a decline, suggesting potential regional market shifts or increased competition in international markets. The ongoing construction of a new facility indicates a commitment to expanding production capacity and potentially improving efficiency to meet future demand and maintain competitiveness.

Corporate Governance

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 $614,372 as of September 30, 2025, from $149,211 as of December 31, 2024, for expenses paid on behalf of the Company.

Stakeholder Impact

• Shareholders: Mixed financial results (strong 9-month, weaker 3-month) and ongoing investment in new facilities could impact future share value. Internal control weaknesses pose a risk to financial reporting reliability.
• Customers: Increased sales volume and a shift towards higher-end products suggest continued focus on customer needs and market demand, particularly in the PRC market.
• Employees: The construction of new facilities may lead to future job opportunities or changes in operational roles. The identified internal control weakness highlights a need for improved financial reporting expertise.
• Suppliers: High concentration of raw material purchases from a few suppliers indicates potential dependency and risk for the company, but also stable relationships for those suppliers.
• Creditors: Strong cash position and positive operating cash flow for the nine months indicate good ability to meet short-term obligations, but potential future financing needs for the new facility could alter the debt profile.

Next Steps

• Complete the construction of new production facilities and office buildings by the end of 2025.
• Commence production in the new facilities in the second quarter of 2026.
• Continue to implement measures to remediate the identified material weaknesses in internal control over financial reporting.
• Evaluate and work to improve internal control over financial reporting related to identified material weaknesses.
• Report progress and status of remediation efforts to the Audit Committee periodically.
• Continue proactive efforts to market new models and obtain new customers in existing markets.
• Continue to shift production mix from traditional lower-end products to high-end products.

Key Dates

Recommendation

Wetouch Technology Inc. presents a mixed financial picture. While the nine-month results show robust growth in revenue and net income, indicating a positive long-term trajectory and effective strategic shifts towards higher-end products, the most recent quarter (Q3) experienced a decline in gross profit and net income, raising concerns about short-term profitability and margin pressure. The company's strong cash position and ongoing investment in a new production facility are favorable for future growth and operational efficiency. However, significant risks remain, including high customer and supplier concentration, the inherent uncertainties of operating in China, and the formally acknowledged material weakness in internal controls over financial reporting. These factors introduce a degree of uncertainty that warrants a cautious approach. A 'hold' recommendation is appropriate as investors should monitor the remediation of internal control weaknesses, the successful completion and ramp-up of the new facility, and the stabilization of quarterly profitability before considering a stronger position.

Keywords

touchscreen displays, SEC filing, 10-Q, financial results, China operations, manufacturing, projected capacitive touchscreens, automotive touchscreens, industrial control computer touchscreens, POS touchscreens, gaming touchscreens, medical touchscreens, multi-functional printer touchscreens, corporate governance, risk management, internal controls, capital expenditure, PRC regulations, WETH