CN Energy Group, Inc. — FY2021 Form 20-F
Reporting period: Fiscal year ended September 30, 2021, with comparisons to FY2020 and FY2019. This is an annual report, not a standalone 2021 fourth-quarter filing. The company is a British Virgin Islands holding company whose operations are conducted in China. Financial statements are prepared under U.S. GAAP. The auditor issued an unqualified opinion on the consolidated financial statements; it did not audit internal-control effectiveness.
Business context and results
CN Energy manufactures wood-based activated carbon, its main business, and generates biomass electricity during production. It also provides limited technical services. FY2021 revenue was driven by higher activated-carbon sales volume; all reported revenue was generated in China.
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $19.85 million | $12.48 million | +59.1% |
| Gross profit | $2.62 million | $3.36 million | -22.1% |
| Gross margin | 13.2% | 26.9% | -13.7 percentage points |
| Operating income | $0.58 million | $2.00 million | -70.9% |
| Net income | $1.30 million | $2.34 million | -44.7% |
| Operating cash flow | -$11.59 million | -$1.82 million | Greater cash use |
- Activated-carbon revenue rose 61.8% to $19.57 million as sales volume increased 57.7% to 15,018 tons. Average selling price in RMB declined, despite a higher reported U.S.-dollar average price following RMB appreciation.
- Cost of revenue increased 89.0% to $17.23 million. Activated-carbon unit cost rose 21.4%, reflecting more externally sourced product, higher wood-chip and utility costs, and a $429,000 retrospective non-deductible VAT charge recorded in cost of revenue.
- FY2021 net income includes $1.08 million of government subsidy income. The filing reports a $975,000 deemed dividend related to conversion of preferred shares; consequently, net income attributable to shareholders was $321,360, versus consolidated net income of $1.30 million. Basic and diluted EPS were $0.02.
Cash, liquidity and debt
- At September 30, 2021, cash was $190,758 and a one-year term deposit was $3.10 million. Current assets were $48.89 million, current liabilities $5.64 million, and working capital $43.24 million. Total assets were $68.96 million and shareholders’ equity $62.68 million.
- Cash from operations was negative $11.59 million, principally reflecting a $9.13 million increase in advances to suppliers. Investing cash outflow was $27.92 million, including supplier-related receivables/prepayments, a term deposit and facility spending. Financing cash inflow was $38.02 million, primarily from the IPO and a private placement.
- Current and non-current bank loans totaled approximately $1.52 million at year-end; the balance sheet also reported $1.43 million due to related parties, interest-free, unsecured and payable on demand. Reported contractual obligations included approximately $1.60 million of loans and lease payments, excluding significant facility construction and equipment commitments.
- Supplier advances, net, were $10.80 million; other receivables were $21.15 million, including $12.38 million of one-year working-capital support to two suppliers bearing 7% interest and amounts due from suppliers that could not deliver materials. By February 10, 2022, the company reported that $7.3 million of supplier advances had been utilized; it also reported subsequent refunds and bankers’ acceptances for certain receivables.
- Accounts receivable were $12.38 million, with three customers representing 46%, 31% and 20% of the balance. The company reported collecting approximately 71.8% of the September 2021 balance by February 10, 2022.
Material changes and unusual items
- Revenue growth did not translate into higher operating profit: higher unit costs, the VAT charge and increased public-company, compensation and audit/legal expenses contributed to sharply lower margins and operating income.
- FY2021 tax expense was $437,349, with a 25.2% effective rate versus 6.8% in FY2020. The company cited a $135,000 prior-year tax assessment and a higher relative tax impact from non-PRC entities. It expects activated carbon to qualify for a specified tax exemption from 2021, subject to applicable requirements.
- Customer concentration increased: three customers accounted for approximately 44%, 33% and 11% of total sales in FY2021. Three suppliers accounted for 26%, 25% and 16% of purchases.
- The company raised approximately $20.6 million net in its February 2021 IPO and $17.0 million net in a June 2021 private placement. Shares outstanding increased to 20,319,276 at year-end from 10,000,000 a year earlier.
Outlook, risks and contingencies
- Management stated that current operations should meet daily working-capital needs over the next 12 months, while noting the need to improve collections and exercise caution. No specific revenue or earnings guidance was provided.
- The Manzhouli facility was under construction. The first stage was expected to be completed by September 2022, with planned investment of about RMB140 million and designed annual capacity of 5,000 tons of activated carbon. The filing also disclosed about $6.9 million of equipment commitments and $5.2 million of groundwork obligations at September 2021. Construction timing, permits, costs and funding remain execution risks.
- A separate Lishui facility for water-purification activated carbon was being developed after year-end; the company expected operation in April 2022 subject to permits. It disclosed a subsequent equipment purchase agreement of RMB18.9 million.
- COVID-19 and government responses disrupted production, supply and construction in FY2021. Management said the future financial effects could not be reasonably estimated. Raw-material supply and pricing, production interruptions, reliance on third-party manufacturers, customer and supplier concentration, and environmental compliance are material business risks.
- Management identified a material weakness in internal control over financial reporting: insufficient in-house accounting personnel with U.S. GAAP and SEC reporting expertise. Management was evaluating hiring and training measures; it had not concluded the weakness was remediated.
- The company disclosed inadequate social-insurance and housing-fund contributions for some employees, unregistered leases that could expose it to fines, and no environmental-risk insurance. It reported no material legal proceedings.
- Regulatory, currency-conversion and dividend-repatriation risks in China remain. The company reported no dividends and does not expect to pay them in the foreseeable future.
Most important facts for investors to verify
- Collection, realization and credit support for the large supplier advances and other receivables, including the status and collectability of bankers’ acceptances and guarantees/collateral.
- Whether cash generation and available financing can fund working capital and the Manzhouli and Lishui projects without further dilution or increased borrowing.
- Whether activated-carbon margins recover after the FY2021 unit-cost increases and the significant margin decline.
- Customer and supplier concentration, continued raw-material availability, and the company’s ability to reduce reliance on third-party manufacturers.
- Progress in remediating the material internal-control weakness and the effect of the prior-period VAT and income-tax assessments.
- Construction progress, final costs, required permits and the timing and commercial contribution of the planned facilities.