10-K: Wetouch Technology Reports Mixed 2024 Results Amid Compliance Woes

Wetouch Technology Inc. reported a 6.5% revenue increase to $42.3 million in 2024, but net income declined by 27.7% to $6.0 million, alongside significant internal control weaknesses and Nasdaq non-compliance issues.

Summary

• Revenues increased by 6.5% to $42.3 million for the year ended December 31, 2024, up from $39.7 million in 2023.
• Gross profit decreased by 20.9% to $13.6 million in 2024, down from $17.2 million in 2023.
• Gross profit margin fell to 32.2% in 2024 from 43.3% in 2023, primarily due to a 29.9% increase in cost of goods sold and year-end sales discounts.
• Net income for 2024 was $6.0 million, a 27.7% decrease from $8.3 million in 2023.
• Total volume of touchscreens shipped increased by 4.8% to 2,060,870 units in 2024.
• Domestic sales accounted for 64.7% of revenues in 2024, a decrease from 69.7% in 2023, while international sales grew to 35.3% from 30.3%.
• The company identified material weaknesses in internal control over financial reporting, including a lack of competent financial reporting personnel and inadequate risk assessment procedures.
• Nasdaq notified the company of non-compliance for late periodic filings (Form 10-K for FY2024 and Form 10-Q for Q1 & Q2 2025) and for failing to meet the $1.00 minimum bid price requirement.
• The company is constructing new facilities in Sichuan Province, China, with an estimated completion by the end of 2025 and production commencement in Q1 2026, but faces delays in obtaining land use rights.
• R&D expenses were nil in 2024, a 100% decrease from $84,551 in 2023, though future increases are expected.

Sentiment

Score: 3

Explanation: Despite revenue growth, the significant decline in gross profit and net income, coupled with identified material weaknesses in internal controls and multiple Nasdaq non-compliance notices (late filings, bid price), indicates substantial operational and financial challenges. The delays in new facility construction and the incomplete CSRC filing further contribute to a negative outlook, outweighing the positive aspects of sales growth in specific segments.

Positives

• Total revenues increased by 6.5% to $42.3 million in 2024, demonstrating continued sales growth.
• Sales volume increased by 4.8% to 2,060,870 units in 2024.
• Overseas market revenue increased by 24.1% to $14.9 million, driven by higher demand for automotive, gaming, and industrial control touchscreens.
• The company successfully shifted its production mix towards higher-end touchscreens (automotive, gaming, medical, industrial control), which have greater growth potential and stronger demand.
• Days Sales Outstanding (DSO) decreased to 64 days in 2024 from 75 days in 2023, indicating faster collection of accounts receivables.
• Net cash provided by financing activities was $7.6 million in 2024, including $9.0 million from the 2024 Uplisting Offering.

Negatives

• Net income decreased significantly by 27.7% to $6.0 million in 2024.
• Gross profit declined by 20.9% to $13.6 million, and gross profit margin dropped by 11.1 percentage points to 32.2% in 2024.
• Cost of goods sold increased by 29.9% in 2024, primarily due to a 31.8% increase in raw material costs (chips accounting for 43%) and a 24.3% increase in labor costs.
• Selling expenses increased by 33.3% to $0.8 million in 2024.
• Research and development expenses were nil in 2024, indicating a halt in R&D investment for the year.
• The company identified material weaknesses in internal control over financial reporting, specifically a lack of competent financial reporting personnel and inadequate risk assessment procedures.
• Nasdaq issued notices of non-compliance for late periodic filings (Form 10-K for FY2024 and Form 10-Q for Q1 & Q2 2025) and for failing to maintain the $1.00 minimum bid price.
• The company withdrew its CSRC filing for the 2024 Uplisting Offering due to incomplete materials (lack of a commitment letter from the lead underwriter), potentially exposing it to substantial fines.
• Domestic sales revenue decreased by 1.2% in 2024, primarily due to weakened market demand in China and negative exchange rate impact.

Risks

• Weaknesses in financial reporting during audits could impair the ability to accurately report financial results and prevent fraud.
• Heavy dependence on top customers (top five accounted for 82.4% of revenues in 2024) poses a risk if these customers are not retained or new ones are not attracted.
• A significant amount of accounts receivable ($7.5 million as of December 31, 2024) could become uncollectible, affecting financial stability.
• The cyclical nature of the touchscreen display industry, with recurring periods of capacity increases, could lead to harmful price fluctuations.
• Failure to maintain product quality and safety standards could damage reputation and financial standing.
• Intense competition in the touchscreen display industry could reduce market share and profitability.
• Inadequate financing could restrict the ability to execute the business plan, especially for new facilities.
• Revocation or unavailability of preferential tax treatments and government subsidies, or successful challenges to tax liability calculations by PRC tax authorities, may necessitate payment of additional tax, 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 (e.g., indium tin oxide glasses, panels, chips) could adversely affect results of operations.
• Reliance on key executives and highly qualified managers, with no assurance of their retention.
• 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 (HFCAA) 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 the 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 (RMB against USD) could materially and adversely affect results of operations and investment value.
• By-laws limiting the judicial forum for disputes could restrict stockholder litigation options.
• Manipulative short selling could drive down the stock price.
• Direct exposure to negative publicity involving U.S.-listed Chinese companies could harm business and reputation.
• Large volumes of common stock being sold could negatively affect the market price.
• Non-payment of dividends means stockholders must rely on stock price appreciation for returns.
• Deteriorating U.S.-China relations could lower the stock price and complicate access to capital markets.
• Delisting from Nasdaq if the company fails to timely file periodic reports with the SEC or to maintain Nasdaq's minimum bid price.

Future Outlook

The company expects R&D expenses to increase in the future as it accelerates new product development and enhances existing offerings. It anticipates completing new building construction by the end of 2025 and commencing production at the new facilities in the first quarter of 2026, assuming timely receipt of land use rights. The company is diligently working to rectify Nasdaq compliance deficiencies by the October 13, 2025 deadline for late filings and the January 12, 2026 deadline for the minimum bid price requirement.

Management Comments

• "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."
• "We are committed to maintaining a strong internal control environment, and believe that these remediation efforts will deliver improvements in our control environment."
• "Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow."

Industry Context

Wetouch Technology operates in the highly competitive touchscreen display industry, specializing in mediumto large-sized projected capacitive touchscreens for niche markets such as financial terminals, automotive, POS, gaming, lottery, medical, and Human-Machine Interface (HMI). While the overall industry is competitive, the company faces fewer direct competitors in its specialized large-format segment, which demands more stable supply and longer product lifespans. The industry is characterized by rapid technological change and cyclical market conditions, with potential for price fluctuations due to supply and demand imbalances. The company's shift towards higher-end products in automotive and industrial control aligns with market trends for advanced display solutions.

Comparison to Industry Standards

• Wetouch specializes in mediumto large-sized projected capacitive touchscreens for specific industries (industrial HMI, gaming, financial services, lottery, automotive, medical, POS), facing fewer competitors in this niche compared to the broader touchscreen market.
• Competitors like Apex Material Technology Corp. primarily focus on resistive touch panels and recently started capacitive touchscreens for industrial HMI and medical, while Wetouch's products are more widely used across various industries.
• Elo Touch Systems Inc., a U.S.-based competitor with over 40 years of history, offers a broad selection of interactive displays but recently started capacitive touchscreen production primarily for POS and inquiry machines, whereas Wetouch has broader application.
• AbonTouch System Inc. also mainly focuses on resistive touch panels and recently expanded into capacitive touchscreens for POS, inquiry machines, and industrial HMI, similar to other competitors, but Wetouch maintains a wider industry application.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not aware of any material, active, pending, or threatened legal or administrative claims and proceedings as of the date of this Annual Report.

Related Party Transactions

• As of December 31, 2024, the company had an outstanding payable of approximately $149,211 due to Chengdu Wetouch Intelligent Optoelectronics Co., Ltd., an affiliate of Ms. Jiaying Cai, a former director and secretary of the Company. These advances were unsecured, non-interest bearing, and due on demand.

Stakeholder Impact

• Shareholders face significant risks including potential delisting from Nasdaq due to non-compliance with filing requirements and minimum bid price, which could severely impact stock liquidity and value.
• Shareholders should not expect cash dividends in the foreseeable future, as the company intends to retain earnings for business development and growth.
• Employees are subject to PRC labor laws, including social insurance and housing fund contributions, and the company's ability to adjust its workforce may be impacted by these regulations.
• Customers, particularly the top five who accounted for 82.4% of 2024 revenues, are critical to the company's success, and failure to retain them or attract new ones could materially affect business.
• Suppliers face the risk of the company not having long-term contracts, allowing for reductions in order quantities or termination of sales at any time, potentially impacting their business with Wetouch.

Next Steps

• Remediate identified material weaknesses in internal control over financial reporting by identifying skill gaps, improving the control environment, and establishing Sarbanes-Oxley Act compliance procedures.
• File outstanding Form 10-K for the year ended December 31, 2024, and Form 10-Qs for the quarters ended March 31 and June 30, 2025, by Nasdaq's extended deadline of October 13, 2025.
• Regain compliance with Nasdaq's $1.00 minimum bid price requirement by January 12, 2026, potentially through corporate actions.
• Complete the construction of new facilities by the end of 2025 and commence production in the first quarter of 2026, contingent on obtaining the certificate of land use right.
• Re-submit complete filing materials to the CSRC for the 2024 Uplisting Offering, including the commitment letter from the lead underwriter.

Key Dates

Recommendation

The filing reveals a concerning financial picture with a significant decline in net income and gross profit despite revenue growth, indicating deteriorating profitability. Critically, the company has disclosed material weaknesses in internal controls over financial reporting, which undermines confidence in its financial statements. Furthermore, multiple Nasdaq non-compliance notices for late filings and failure to meet the minimum bid price pose an imminent delisting risk, which would severely impair liquidity and investor value. Delays in new facility construction and an incomplete CSRC filing add to operational and regulatory uncertainties. These factors, combined with the inherent risks of operating in China and heavy customer concentration, suggest a high level of risk and a strong likelihood of further share price depreciation.

Keywords

Touchscreen Technology, Capacitive Touchscreens, SEC Filing, Annual Report, Financial Performance, Nasdaq Compliance, Internal Controls, China Operations, Risk Factors, Manufacturing, Automotive Touchscreens, Industrial HMI, Gaming Touchscreens, Medical Touchscreens, POS Touchscreens, Supply Chain, Corporate Governance, Capital Raise, HFCAA