Huadi International Group Co., Ltd. — Form 20-F Summary
Business context and reporting period
This Form 20-F reports the fiscal year ended September 30, 2020, rather than a standalone calendar fourth quarter. Huadi manufactures industrial stainless steel seamless pipes and tubes in China, with sales primarily in China and international markets. The statements were prepared under U.S. GAAP and audited by Briggs & Veselka Co. The company had 10,000,000 ordinary shares outstanding at September 30, 2020.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Sales | $57.8 million | $65.5 million | Down 11.8% |
| Production service revenue | $1.4 million | — | New revenue stream |
| Total revenue | $59.1 million | $65.5 million | Down approximately 9.7% |
| Gross profit | $10.7 million | $14.6 million | Down 27.1% |
| Gross margin | 18.0% | 22.3% | Down 4.3 percentage points |
| Operating income | $4.5 million | $8.4 million | Down 46.8% |
| Operating margin | 7.5% | 12.8% | Down 5.3 percentage points |
| Net income attributable to Huadi | $3.3 million | $5.4 million | Down 38.4% |
| Basic and diluted EPS | $0.34 | $0.54 | Down 37.0% |
| Net cash provided by operations | $3.2 million | $2.3 million | Up 36.6% |
At September 30, 2020, total assets were $69.1 million and shareholders’ equity was $25.8 million, compared with $68.8 million and $21.2 million, respectively, in 2019. Cash and cash equivalents were $0.8 million, with restricted cash of $0.9 million. Current assets totaled $47.3 million against current liabilities of approximately $43.3 million.
Short-term borrowings were $31.2 million, compared with $31.5 million in 2019. The borrowings were primarily bank loans with interest rates generally ranging from approximately 4.2% to 5.6%, secured by assets and supported by guarantees from shareholders and other parties. Interest expense was $2.2 million. Accounts receivable, net, was $15.5 million, inventories were $20.8 million, and advances to related-party suppliers were $5.3 million.
Operating cash flow improved despite lower earnings, primarily reflecting collections of other receivables and working-capital movements. Investing activities provided $0.1 million, including proceeds from asset disposals. Financing activities used $4.7 million, and cash, including restricted cash, declined to $1.7 million from $3.0 million.
Material changes versus the prior comparable period
- COVID-19-related restrictions temporarily closed the company’s offices and production facilities in February 2020; offices reopened February 18, 2020, and production subsequently became fully operational.
- International sales declined from approximately $17.9 million to $11.9 million, a 34% reduction. Domestic demand remained comparatively stable.
- Revenue decreased by approximately $6.4 million, while gross profit and operating income declined more sharply, indicating significant margin pressure.
- Research and development expense increased to $2.1 million from $1.8 million, while selling, general and administrative expense declined to $3.9 million from $4.5 million.
- Other income increased to $1.3 million from $0.2 million, including a $0.7 million gain on disposal of fixed assets and government grants of approximately $0.4 million.
- Accumulated deficit improved from $3.5 million to $0.2 million, primarily through FY2020 earnings and foreign-currency translation gains.
- Inventory increased approximately 16.8% and related-party supplier advances remained substantial. Purchases from Taizhou Huadi, a related party, totaled $14.5 million, and sales to that entity totaled $3.2 million.
Outlook, risks, contingencies, and unusual items
Management stated that cash, operating cash flow, and expected access to loans would be sufficient for working-capital needs for at least the following twelve months, but noted that related-party financing was not contractually committed. Management also indicated that additional equity capital may be required to expand production and meet market demand. No formal revenue or earnings guidance was provided.
- COVID-19 may continue to affect export demand, supply-chain lead times, raw-material prices, transportation, customer orders, and operating costs. The filing states that the long-term effects remain uncertain.
- The company is exposed to PRC political, economic, legal, regulatory, foreign-exchange, currency-convertibility, interest-rate, credit, and tax risks.
- Three suppliers represented 32.05%, 16.60%, and 11.16% of total purchases, creating supplier-concentration risk. Two customers represented 26.31% of accounts receivable, although no customer exceeded 10% of FY2020 revenue.
- Accounts receivable included a $2.9 million allowance for doubtful accounts. Customer credit terms generally extend up to 180 days.
- The company had no material purchase commitments, significant leases, or pending legal proceedings as of September 30, 2020. Management stated that any other claims or disputes were not expected to materially affect financial condition or liquidity.
- Subsequent to year-end, the company refinanced bank loans, repaying $16.1 million and borrowing $17.6 million through March 30, 2021, with no reported defaults.
- On October 9, 2020, the company completed a two-for-one reverse stock split. On January 26, 2021, it completed an IPO of 3,125,000 shares at $8.00 per share, generating approximately $25 million in gross proceeds before offering expenses.
Important facts for investors to verify
- Reconcile the filing’s statement that the company repaid all debt and obligations during FY2020 with the reported $31.2 million of short-term borrowings at September 30, 2020 and the subsequent refinancing activity.
- Assess liquidity after considering only $0.8 million of unrestricted cash, $31.2 million of short-term borrowings, pledged assets, and the absence of committed related-party financing.
- Evaluate the sustainability of FY2020 margins, particularly the decline in gross margin from 22.3% to 18.0% and operating margin from 12.8% to 7.5%.
- Review recoverability of $20.8 million of inventory, $15.5 million of net receivables, and $5.3 million of advances to related-party suppliers.
- Examine related-party transactions, including significant raw-material purchases, sales, receivables, advances, and shareholder-supported borrowings.
- Confirm the effects of the reverse stock split, IPO, warrants, and post-year-end equity financing on share count, dilution, and per-share comparability.
- Monitor the effect of COVID-19, export-market weakness, supplier concentration, currency movements, and PRC regulatory or tax changes on future results.