ZK International Group Co., Ltd. — FY2022 Form 20-F
Reporting period: Fiscal year ended September 30, 2022; this is an annual report, not a standalone Q4 filing. Amounts below are in U.S. dollars unless stated otherwise. The company reports under U.S. GAAP.
Business context
ZK International is a British Virgin Islands holding company whose principal operations are in China, chiefly manufacturing and selling steel pipe, fittings and related products for water, gas and construction projects. It also has smaller blockchain, NFT and trading-platform ventures, and a 15.73% investment in CG Malta, a sports betting and casino operator. The company reported one operating segment, with more than 90% of revenue and assets in China.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $102.39 million | $99.41 million | +3.0% |
| Gross profit | $7.60 million | $6.47 million | +17.4% |
| Gross margin | 7.42% | 6.51% | +0.91 percentage points |
| Operating loss | $3.96 million | $3.65 million | Loss widened 8.5% |
| Net loss | $6.05 million | $3.80 million | Loss widened 59.2% |
| Operating cash flow | $(2.07) million | $(3.48) million | Use of cash narrowed |
| Cash and cash equivalents | $7.52 million | $13.53 million | Down $6.01 million |
| Total assets | $128.92 million | $133.66 million | Down $4.74 million |
| Total liabilities | $43.86 million | $44.54 million | Down $0.68 million |
- Cost of sales was $94.80 million. Approximate operating margin was negative 3.9% and net margin negative 5.9%.
- Short-term bank borrowings were $16.26 million, versus $21.39 million a year earlier; weighted-average borrowing rates were 4.91% and 4.66%, respectively. Convertible debentures had a $3.35 million carrying value and were current liabilities. Contractual obligations listed $19.61 million of bank loans and convertible debentures due within one year, excluding interest.
- Current assets of $66.77 million exceeded current liabilities of $43.85 million (current ratio approximately 1.52). Inventory was $21.14 million and current net accounts receivable was $28.36 million. Cash, cash equivalents and restricted cash at year-end totaled $7.62 million.
- Investing cash use was $2.11 million, mainly for intangible-asset development; financing cash use was $0.97 million. Cash declined by $5.99 million including exchange-rate effects.
Changes, outlook and notable items
- Management attributed revenue growth mainly to higher selling prices following raw-material cost increases. It reported sharp volume declines: steel-strip volume fell 63%, pipe volume 25%, and fitting volume 22%. Higher prices supported gross margin, but did not produce operating or net profitability.
- Interest expense increased to $3.45 million from $1.20 million. FY2022 also included a $2.77 million impairment write-off of the DeFi exchange platform, which management said was unlikely to recover its carrying value and likely to be disposed of before the end of its estimated useful life. Government grants contributed $496,740 of other income.
- Foreign-currency translation shifted from a $2.42 million gain in FY2021 to a $5.50 million loss in FY2022, primarily due to RMB depreciation against the U.S. dollar. Comprehensive loss was $11.56 million.
- Management said it expected current cash, operating cash generation and capital-market access to cover working-capital needs for at least 12 months, while also noting potential equity financing to support expansion. It expected COVID-related effects to ease in FY2023 after China ended prior restrictions, but said the impact remained difficult to estimate. Raw-material price increases, supply and delivery delays, and weaker customer orders had affected FY2022.
- Accounts receivable increased materially in operating cash-flow reconciliation. The company reported $35.89 million of receivables including long-term receivables; $1.81 million was aged over three years. It sold receivables from 144 customers without recourse, but the buyer’s stated payment of RMB 62.49 million is due no later than December 31, 2024; the discounted balance of $7.52 million was classified as long-term receivable.
- A $10.45 million long-term prepayment related to a proposed acquisition that was terminated; the company said it had an oral agreement to settle some or all of the deposit through patents. Subsequent to year-end, it acquired a patent appraised at RMB 4.99 million. The filing does not clearly establish the final settlement of the remaining prepayment.
- The company had invested $25 million in CG Malta for a 15.73% interest. A further investment commitment was reportedly waived in negotiations, but the filing says the related agreement had not yet been signed as of the report date. Management identifies potential Investment Company Act and PFIC risks if the investment is completed or grows.
- Potential PRC tax liabilities were $817,059 at year-end, excluding possible interest and penalties. Management believes it has adequate cash to meet potential assessments but cannot assure a reduction through negotiation. The filing also describes a long-standing court claim of RMB 4.4 million that management expects to collect from assets seized by the court.
- Nasdaq notified the company on October 13, 2022 that it failed the $1.00 minimum-bid-price requirement. It had until April 11, 2023 to regain compliance, subject to possible further conditions or delisting.
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of September 30, 2022, citing insufficient accounting and finance personnel with U.S. GAAP experience. Management planned to hire qualified personnel. The auditor gave an unqualified opinion on the financial statements, but did not audit internal-control effectiveness; no critical audit matters were reported.
Key risks and investor verification
- Verify subsequent collection and aging of receivables, including the terms and timing of the $7.52 million long-term receivable and the adequacy of the allowance for doubtful accounts.
- Assess refinancing and repayment capacity for current bank loans and convertible debentures, and confirm the status of any post-year-end amendments, conversions or renewals.
- Track operating cash generation, inventory levels, raw-material costs, customer order volumes and whether price increases can be sustained without further volume losses.
- Confirm the status and recoverability of the $10.45 million prepayment and any remaining CG Malta investment commitment; consider the implications of the $25 million investment for investment-company and PFIC status.
- Monitor the remediation of the material weakness in financial reporting, and review any later management assessment of control effectiveness.
- Check Nasdaq bid-price compliance and continued listing status, and monitor developments in PRC regulatory oversight, currency controls, dividend-transfer restrictions and audit-access rules.
- Consider concentration and execution risks: two suppliers accounted for 64.31% of FY2022 purchases; the company reports that operations and substantially all assets are in China, while cash held in China is not insured against bank loss.