Huadi International Group Co., Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended September 30, 2021. The filing is an annual Form 20-F, not a quarterly Q4 report; quarterly results are not separately provided. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business Context
Huadi manufactures and sells stainless steel seamless pipes, tubes and bars through its PRC operating subsidiary, primarily serving oil and gas, electric power, automotive, chemical, food, medical and industrial markets. Approximately 81.22% of fiscal 2021 revenue came from China; the United States contributed 8.78% and India 6.41%. The company operates as a single reportable segment and had 382 employees at September 30, 2021.
Key Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $70.25 million | $59.14 million | +18.79% |
| Gross profit | $11.32 million | $10.66 million | +6.15% |
| Gross margin | 16.11% | 18.03% | Down 1.92 percentage points |
| Operating income | $2.58 million | $4.61 million | Down 44.02% |
| Net income | $2.56 million | $3.36 million | Down 23.81% |
| Net income attributable to Huadi | $2.53 million | $3.32 million | Down 23.81% |
| Basic and diluted EPS | $0.21 | $0.34 | Down from $0.34 |
| Operating cash flow | $(5.65) million | $3.20 million | Declined by $8.85 million |
| Capital expenditures, net investing cash flow | $(0.90) million | $0.06 million | Net investing outflow |
| Cash flow from financing | $21.28 million | $(4.69) million | Primarily IPO proceeds |
| Cash and cash equivalents | $15.35 million | $0.80 million | Substantially increased |
| Total assets | $100.25 million | $69.12 million | +45.04% |
| Total liabilities | $48.77 million | $43.33 million | +12.54% |
| Shareholders’ equity | $51.48 million | $25.79 million | +99.61% |
Revenue growth reflected stronger demand, higher average selling prices and domestic sales growth of approximately 12.40% amid construction-material shortages. Gross profit increased, but margin contracted because of higher steel input costs and international freight expenses.
Operating expenses increased 44.28% to $8.74 million. SG&A rose 69.72% to $6.68 million, mainly due to IPO-related consulting and compliance costs and higher freight expense. R&D expense was $2.06 million, slightly below $2.12 million in fiscal 2020.
Net other expense improved to $0.11 million from $1.03 million, supported by approximately $1.95 million of other income, including government grants and dividend income. The company received government grants of approximately $1.19 million in fiscal 2021.
Liquidity, Debt and Working Capital
- Current assets were $77.08 million against total liabilities of $48.77 million.
- Accounts receivable, net of allowance, increased to $25.28 million from $15.53 million. Average receivable turnover increased to approximately 106 days from 93 days.
- Inventories increased to $22.72 million from $20.84 million, while advances to suppliers increased to $9.36 million, including $5.55 million owed to a related-party supplier.
- Short-term borrowings totaled RMB215.52 million, or approximately $33.46 million, from 31 loans provided by five banks. The loans generally mature within six months to one year and are expected by management to be renewed. Buildings and, in the prior year, a long-term investment were pledged; major shareholders and others also provided guarantees.
- The company reported no material defaults and stated that cash, expected operating cash flow and financing access should meet working-capital needs for at least the next 12 months. However, operating cash flow was negative in fiscal 2021 and substantially all borrowings are short-term.
- Cash flow included restricted cash of $1.30 million; cash and cash equivalents plus restricted cash totaled $16.65 million at September 30, 2021.
Material Changes Versus the Prior Period
- Revenue recovered from the COVID-19-affected fiscal 2020 period, with particularly strong domestic demand and higher selling prices.
- Profitability weakened despite revenue growth because of lower gross margin, higher SG&A and continued interest expense.
- Operating cash flow turned negative as receivables, notes receivable, inventory and supplier advances increased. Management reported sales outstanding of 106 days versus 93 days.
- The January 2021 IPO of 3,125,000 shares at $8.00 per share generated approximately $25 million of gross proceeds and approximately $21.68 million net cash proceeds. Shares outstanding increased to 13,127,000 at fiscal year-end from 10,000,000.
- Equity increased primarily because of the IPO, retained earnings and foreign-currency translation gains.
- On November 20, 2021, the company replaced Briggs & Veselka Co. with TPS Thayer, LLC as independent registered public accounting firm.
Outlook, Commentary, Risks and Unusual Items
Management did not provide formal revenue, earnings or margin guidance. It expects pandemic effects to decline in fiscal 2022 as vaccination progresses and reported recovery in domestic and international demand during fiscal 2021. Management plans to expand production, develop new products and strengthen its position in the water-supply market, potentially requiring additional equity capital.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective as of September 30, 2021 because the company lacked sufficient accounting and finance personnel with U.S. GAAP experience. The auditor was not engaged to attest to internal controls.
- Customer and collection risk: One customer represented 10.67% of revenue and 24.31% of accounts receivable. The substantial increase in receivables and negative operating cash flow makes collection timing important.
- Supplier and related-party risk: Three suppliers represented 12.84%, 12.84% and 11.47% of raw-material purchases. The company purchased $6.38 million of raw materials from related party Taizhou Huadi in fiscal 2021 and held $5.55 million of supplier advances with that entity.
- Commodity and margin risk: Steel and energy prices, supply shortages, freight costs and the ability to pass costs to customers materially affect margins. The company does not hedge commodity or foreign-exchange exposure.
- Financing risk: Liquidity depends significantly on short-term bank loans that must be renewed or refinanced. Subsequent to year-end through January 31, 2022, the company repaid approximately $16.98 million and borrowed approximately $15.36 million of bank loans, with no reported payment default.
- Legal matters: Tangshan Sanyou Chemical alleged product defects and sought RMB1.23 million. In a related collection action, a November 22, 2021 judgment favored Tangshan Sanyou and ordered Huadi Steel to compensate it; Huadi appealed on December 4, 2021. The ultimate exposure is not clear from the filing.
- China and market risks: The filing highlights PRC regulatory and foreign-exchange controls, potential overseas-listing and cybersecurity requirements, tariffs and trade restrictions, economic slowdown, COVID-19 disruption, environmental compliance, customer concentration, lack of insurance and difficulty enforcing U.S. judgments in China or the Cayman Islands.
- Control and governance: The company is controlled by Di Wang and Jueqin Wang, who collectively control all issued shares according to the filing. The company may rely on foreign-private-issuer and controlled-company exemptions from certain Nasdaq governance requirements.
- Subsequent equity item: Underwriter warrants were exercised on a cashless basis on November 2, 2021, resulting in issuance of 65,232 shares.
Most Important Facts for Investors to Verify
- Reconcile the fiscal 2021 negative operating cash flow with reported net income and assess the collectability of the $25.28 million receivable balance.
- Confirm renewal terms, collateral, guarantees and interest rates for the $33.46 million of short-term borrowings.
- Review the remediation plan and progress for the material weakness in U.S. GAAP accounting and financial reporting personnel.
- Assess the financial and product-liability consequences of the Tangshan Sanyou litigation and appeal.
- Evaluate the commercial terms, recoverability and conflict-of-interest safeguards for related-party purchases and supplier advances.
- Verify the effect of raw-material prices, freight costs and customer pricing on the 16.11% gross margin.
- Confirm post-year-end share issuances, current shares outstanding and the resulting dilution from underwriter warrants.
- Review PRC regulatory, currency-conversion, dividend-repatriation and Nasdaq listing risks, as well as the company’s ability to fund expansion without additional equity financing.