ZK International(ZKIN) - 2024 Q4 - Annual Report

Regulatory Compliance and Risks - ZK International's current auditor, Fortune CPA, Inc., is not subject to PCAOB inspection, which poses risks for compliance under the HFCAA[16] - The PCAOB announced it secured complete access to inspect audit firms in mainland China and Hong Kong in 2022, but future inspections remain uncertain[15] - ZK International has not been identified under the HFCAA, but potential delisting risks exist if the PCAOB cannot inspect its auditor for two consecutive years[16] - The approval requirements from the China Securities Regulatory Commission for future offerings may pose additional risks to the company's ability to raise capital[24] - New cybersecurity laws and regulations may affect the company's ability to conduct business and accept foreign investments[98] - Approval from the CSRC may be required for future offerings, which could impact the company's ability to list on overseas exchanges[99] - The CSRC has implemented new filing procedures for overseas securities offerings by PRC domestic enterprises, effective March 31, 2023[102] - The PRC government has issued new regulations emphasizing the need for stricter oversight of overseas listings by PRC-based companies, which may hinder the company's ability to raise additional capital[120] Operational and Market Risks - The company operates through subsidiaries primarily based in China, which exposes it to significant legal and operational risks due to Chinese government regulations[18] - Recent regulatory actions in China may impact the company's ability to conduct business and accept foreign investments, leading to potential depreciation of its ordinary shares[18] - The PRC Data Security Law and Personal Information Protection Law may affect the company's operations, although it currently does not require approval from PRC authorities for foreign investments[22] - The company faces scrutiny and negative publicity related to U.S.-listed Chinese companies, which could harm its business operations and reputation[26] - The Chinese government's influence over business operations may lead to significant changes in the company's operational landscape and financial stability[21] - The company's operations are significantly influenced by political, economic, and social conditions in China, which could adversely affect its competitive position and demand for products[27] - Trade barriers and taxes may reduce the company's ability to conduct business internationally, potentially harming profitability due to decreased sales in targeted emerging markets[28] - The ongoing COVID-19 pandemic has materially impacted operations in Zhejiang Province, with future financial conditions remaining uncertain[34] - The company faces intense competition in the pipe and fitting products market, which could pressure margins and adversely affect financial conditions[35] - Supply chain disruptions due to fragmentation and local protectionism in China may adversely impact the company's manufacturing capabilities and distribution[40] Financial Performance and Capital Structure - The company relies on dividends from its subsidiaries for cash needs, which could be limited by regulatory constraints on dividend payments[17] - The company's reliance on dividends from PRC subsidiaries for cash needs may be restricted by PRC regulations, affecting its ability to fund operations and pay dividends to shareholders[33] - Revenue is primarily generated in Renminbi, which is not freely convertible, potentially limiting the ability to pay dividends due to currency exchange restrictions[80] - A withholding tax rate of up to 10% applies to dividends paid to non-PRC-resident enterprises, which may be reduced to 5% under certain conditions[81] - The company may face delays or restrictions in making loans or capital contributions to its PRC subsidiaries due to PRC regulations[83] - Loans to PRC subsidiaries must be registered with the local SAFE and cannot exceed statutory limits[84] - Future capital contributions to PRC subsidiaries are subject to registration or approval by MOFCOM, which may affect the ability to use proceeds from future offerings[85] - The company does not expect to pay any cash dividends in the foreseeable future, as earnings will be used for business operations[65] - The company recorded a foreign currency translation adjustment loss of $861,280 for the fiscal year ended September 30, 2024, compared to a gain of $(549,332) in 2023 and a loss of $(5,504,385) in 2022[126] - The company is subject to a preferential income tax rate of 15% as a certified high-tech enterprise, but may face challenges from PRC taxing authorities regarding tax liabilities[136] Shareholder and Market Dynamics - The market price of the company's ordinary shares has been volatile, which could affect its ability to issue additional shares or obtain financing[47] - The company is not in compliance with Nasdaq's minimum bid price requirement of $1.00 per share and has until February 10, 2025, to regain compliance[48] - A reverse share split ratio of 1-for-7 was approved by the board on January 14, 2025, to help regain compliance with Nasdaq listing rules[48] - The concentration of ownership among officers and directors, who beneficially own approximately 24% of outstanding shares, may impact management decisions and shareholder outcomes[185] - The ordinary shares may face suspension and delisting from Nasdaq if compliance with listing rules is not regained, potentially leading to trading difficulties in the over-the-counter market[208] - A determination that the ordinary shares constitute a "penny stock" could impose stricter trading rules, resulting in reduced trading activity and lower prices[208] Management and Operational Challenges - The company is heavily reliant on senior management and key personnel, with potential risks associated with their loss or competition for their services[159][161] - The company may face significant costs and business disruptions due to insufficient insurance coverage for natural disasters or accidents[172] - The company is subject to increased legal and financial compliance costs due to public company regulations, which may strain resources and divert management's attention[190] - The company may experience litigation risks due to increased visibility of its business and financial condition as a public entity[191] - The company may face competitive disadvantages due to the obligation to disclose information publicly, which private competitors are not required to do[195] Economic and Industry Factors - The company is susceptible to fluctuations in general economic conditions, which could adversely affect operating results and revenue growth[169] - A slowdown in the Chinese economy, particularly in the real estate and hospitality sectors, could negatively affect demand for the company's products, which rely on consumer spending[140] - Revenue is at risk of decreasing if the construction industry, which is a primary market for the company's products, experiences a prolonged slowdown[142] - Fluctuations in the availability and cost of raw materials could materially affect the company's earnings and production capabilities[143][144] - The company experienced net cash usage of $6,475,650 in operating activities for the fiscal year ended September 30, 2024, indicating potential liquidity challenges[146] - Two vendors accounted for 51% of total purchases in the fiscal year ended September 30, 2024, highlighting dependency on key suppliers[147] - The company plans to explore strategic acquisitions to support growth, but may face challenges in identifying suitable candidates and integrating them effectively[153][154]