ZK International Group Co., Ltd. — FY2020 Form 20-F
Reporting period: Fiscal year ended September 30, 2020; filed February 9, 2021. This is an annual report, not a standalone Q4 report. The company manufactures and sells steel strip, pipe and fittings, principally for water and gas infrastructure in China. Financial statements are prepared under U.S. GAAP and amounts below are U.S. dollars.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $86.85 million | $63.88 million |
| Gross profit / margin | $3.94 million / 4.54% | $15.64 million / 24.49% |
| Operating income (loss) | ($1.88 million) | $8.65 million |
| Net income (loss) | ($0.84 million) | $8.19 million |
| Operating cash flow | $0.46 million | $8.46 million |
| Cash and cash equivalents | $3.76 million | $3.45 million |
| Total assets | $86.45 million | $78.40 million |
| Current assets / current liabilities | $64.78 million / $40.88 million | $58.85 million / $34.58 million |
| Short-term bank borrowings | $17.37 million | $16.28 million |
| Total liabilities / equity | $41.15 million / $45.30 million | $34.58 million / $43.82 million |
FY2020 basic and diluted loss per share was $0.05, versus earnings per share of $0.49 in FY2019. Current assets exceeded current liabilities by approximately $23.91 million. Bank loans were generally six-to-twelve-month revolving facilities, with a reported weighted-average annual interest rate of 5.55%. Total contractual obligations were $18.06 million, mostly due within one year.
Changes versus FY2019
- Revenue rose 35.95%, but sales mix shifted sharply toward low-margin stainless-steel coil and strip: 56.09% of revenue versus 25.53% the prior year. Management said the inventory-reduction and cash-flow strategy during COVID-19 contributed to this mix.
- Gross profit fell 74.80%, and gross margin contracted by 19.95 percentage points. Management attributed this to discounted prices for some customers and a higher share of low-margin products; it reported approximately 0.15% gross margin on coil products versus 7.58% on water and gas piping products.
- The company moved from operating and net profits to losses. Lower selling, administrative and R&D expenses did not offset the gross-profit decline.
- Operating cash flow decreased to $0.46 million. Accounts receivable increased by approximately $4.80 million; year-end net receivables were $31.39 million, including $0.65 million aged over three years. Reported days sales outstanding improved to 119 days from 163.
- Cash increased modestly, while current liabilities rose. Four vendors represented 70.10% of purchases; one supplier represented 67.70% of accounts payable at year-end.
Cash, debt, unusual items and developments
- Cash from operations was $0.46 million; investing activities used $1.16 million, mainly for equipment; financing activities provided $0.76 million. Cash rose by $0.31 million to $3.76 million.
- The balance sheet included an $11.84 million long-term deposit pledged to two prospective acquisition targets. The deposits had no definite term, and the acquisitions remained subject to legal and financial due diligence and approval. A separate failed investment resulted in a $0.26 million loss after a court ordered forfeiture of a deposit and additional compensation.
- The September 30, 2020 sale of subsidiary Wenzhou Zhenglong generated $0.54 million in reported gain; the subsidiary’s operations were described as preliminary and immaterial.
- The company recorded a $1.43 million income-tax recovery and carried a $3.19 million uncertain-tax-position liability. It disclosed potential additional tax, interest or penalties and uncertainty about whether local tax reductions would be accepted by national authorities. Zhejiang Zhengkang’s preferential 15% tax status was stated to run through September 16, 2021.
- After year-end, the company completed a $1.4 million convertible-debenture financing at 5% interest, convertible at a formula price subject to a $0.62 floor; all principal and interest were converted into 1,394,253 shares by the report date. In January 2021, it issued 1,784,992 shares at $1.40 for gross proceeds of approximately $2.50 million. These proceeds were intended for working capital and general corporate purposes.
Management outlook, risks and controls
Management said it expected available cash, operating cash generation and capital-market access to meet working-capital needs for at least 12 months, while also noting that growth and capacity expansion could require additional capital. No quantified earnings or revenue guidance was provided. Strategic priorities included expanding production, developing products and engineering solutions, and growing exports and other markets. The xSigma DeFi and xTF initiatives were at a preliminary stage and described as immaterial to consolidated results; xTF was planned for release in Q2 2021 and was not a regulated financial product.
COVID-19 temporarily closed facilities in early February 2020; operations reopened February 18 and returned to full operation in early March. Management cited customer demand weakness, temporary price discounts, supplier delays and higher raw-material and transport costs, and warned that future pandemic and economic developments could further affect operations. Other disclosed risks include intense price competition, raw-material price and supply volatility, reliance on short-term bank renewals, receivable collection, customer and supplier concentration, PRC tax and regulatory uncertainty, currency controls and RMB movements, and restrictions on moving funds from China. The company reported no material off-balance-sheet arrangements and no material purchase commitments as of year-end.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at September 30, 2020 because of a material weakness: insufficient accounting and finance personnel with U.S. GAAP experience. The company planned to hire personnel with U.S. GAAP reporting and control experience. The auditor gave an unqualified opinion on the financial statements, but did not express an opinion on internal control effectiveness. The company stated it did not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the rapid revenue growth can be sustained while restoring higher-margin pipe and fitting sales and gross margins.
- Collectability and aging of the $31.39 million receivable balance, and the recoverability and availability of the $11.84 million acquisition deposits.
- Renewal, repayment terms and collateral requirements for $17.37 million of short-term bank debt, including the impact of post-year-end financings and share dilution.
- Resolution and potential exposure related to the $3.19 million uncertain-tax-position liability, including any interest or penalties.
- Progress in remediating the material weakness in financial reporting controls and the company’s ability to produce reliable U.S. GAAP reporting.
- Reconcile reported comprehensive-income figures: the filing gives $1.482 million of total comprehensive income in the audited statements, while selected data shows $1.476 million, the amount attributable to the company.