Huadi International Group(HUDI) - 2022 Q4 - Annual Report

Part I - Company Information and Risk Factors Key Information Provides an overview of corporate structure, regulatory risks, selected financial data, and comprehensive business and share ownership risk factors Overview of Corporate Structure and Regulatory Environment Details the company's Cayman Islands holding structure, PRC regulatory risks, auditor's PCAOB inspection status, and lack of dividend distributions - The company operates as a Cayman Islands holding company with subsidiaries in China and does not use a Variable Interest Entity (VIE) structure[15] - The company's US-based auditor, TPS Thayer, is subject to PCAOB inspection, mitigating HFCAA delisting risk[21] - Legal counsel advises no current requirement for CSRC or CAC approval for its US listing, given minimal data handling and no national security implications[25][144] - No dividend distributions or asset transfers have occurred between the holding company and its subsidiaries to date; future PRC dividends are subject to statutory reserve fund restrictions[28][32][161] Selected Financial Data Presents FY2022 revenues of $76.4 million and net income of $1.9 million, reflecting revenue growth but declining net income and EPS from prior years Selected Consolidated Financial Data (in USD) | Financial Metric | FY 2022 (USD) | FY 2021 (USD) | FY 2020 (USD) | | :--- | :--- | :--- | :--- | | Revenue | $76,366,148 | $70,246,611 | $59,137,278 | | Gross Profit | $11,135,627 | $11,319,936 | $10,664,217 | | Operating Income | $2,352,541 | $2,577,979 | $4,605,057 | | Net Income | $1,948,054 | $2,557,045 | $3,356,299 | | EPS (basic and diluted) | $0.15 | $0.21 | $0.34 | | Total Assets | $84,636,527 | $100,245,863 | $69,123,370 | | Total Liabilities | $35,002,586 | $48,767,449 | $43,334,670 | | Total Shareholders' Equity | $49,633,941 | $51,478,414 | $25,788,700 | Risk Factors Highlights significant risks from China's macroeconomic policies, US-China trade tensions, COVID-19, PRC regulatory uncertainties, and reduced shareholder protections - Business Risks: The business is exposed to China's macro-control policies on the steel industry, economic slowdowns, US tariffs, and the ongoing effects of the COVID-19 pandemic which caused operational delays in FY2022[59][61][98] - China-Related Risks: The PRC government exerts substantial influence over business activities. The company faces uncertainties regarding future regulations on overseas listings, currency conversion controls, and restrictions on dividend payments from its PRC subsidiaries[132][142][170] - Shareholder Risks: The company is a 'controlled company' due to the Wang family's majority ownership, an 'emerging growth company' under the JOBS Act, and a 'foreign private issuer'. These statuses allow for exemptions from certain US corporate governance and reporting standards, potentially offering less protection to investors[105][216][218] - HFCAA Risk: While the company's US-based auditor is subject to PCAOB inspection, the report acknowledges the broader risks of the Holding Foreign Companies Accountable Act, which could lead to delisting if inspections were hindered for two consecutive years[21][192][198] Information on the Company Describes the company's business as a leading Chinese stainless steel pipe manufacturer, covering corporate structure, products, markets, suppliers, and PRC regulations Business Overview and Corporate Structure Outlines Huadi International Group's business as a leading stainless steel pipe manufacturer, detailing its multi-layered Cayman Islands holding structure and recent financial activities - The company's main business is the development, manufacturing, and sale of stainless steel seamless pipes, tubes, and bars[236] - The corporate structure is a multi-layered holding company: Huadi International (Cayman) owns Yongqiang Tuoxing (BVI), which owns HK Beach (Hong Kong), which owns Wenzhou Hongshun (PRC), which in turn owns 99% of the operating entity, Huadi Steel (PRC)[244][245][246] - In November 2022, the company closed a registered direct offering, selling 1,000,000 ordinary shares for gross proceeds of approximately $25 million[240] Products and Markets Focuses on the company's 3,000+ steel pipe products using CDS technique, serving Oil & Gas, Electric Energy, and Automotive markets, with most revenue from China - The company manufactures over 3,000 types of pipe and tube products, specializing in the Cold Drawn Seamless (CDS) technique for applications requiring high precision and strength[247][248] - Primary end-markets for its products are Oil & Gas, Electric Energy, Automotive, and other industrial applications like pharmaceutical and food industries[251][252][253][254] Revenue by Geographic Area (FY 2022) | Region | Sales (USD) | % of Total Sales | | :--- | :--- | :--- | | China | $64,787,186 | 84.69% | | US | $7,628,332 | 9.97% | | Taiwan | $1,296,863 | 1.70% | | Australia | $1,191,512 | 1.56% | | Marshall Islands | $730,039 | 0.95% | | Other | $868,364 | 1.13% | Suppliers, R&D, and Intellectual Property Discusses reliance on stainless steel billets, significant supplier concentration, R&D expenses, and intellectual property protection through patents and trademarks - In FY2022, the company had significant supplier concentration, with two suppliers accounting for 26.71% and 18.06% of total purchases, respectively[263][703] - The company holds 4 invention patents and 20 utility patents in China to protect its technology[299] - R&D expenses totaled $2,330,913 in FY2022, an increase from $2,057,547 in FY2021[301][388] Legal Proceedings and Regulations Covers ongoing legal disputes with Tangshan Sanyou Chemical Co., Ltd. and outlines the extensive PRC regulatory framework governing the company's operations - The company settled a legal case with Tangshan Sanyou Chemical Co., Ltd. in August 2022, agreeing to pay RMB 631,791[303][444] - A separate lawsuit filed by Huadi Group against Tangshan Sanyou Chemical Co., Ltd. for non-payment is currently on appeal after an initial judgment in favor of Tangshan Sanyou[305][306][446] Operating and Financial Review and Prospects (MD&A) Provides management's discussion and analysis of FY2022 financial performance, highlighting revenue growth, net income decline due to costs, and liquidity from cash and credit facilities Results of Operations Analyzes FY2022 results, showing 8.7% revenue growth to $76.4 million driven by higher prices and domestic sales, but a gross profit margin decline and 23.8% net income decrease Consolidated Results of Operations (in USD) | Metric | FY 2022 (USD) | FY 2021 (USD) | FY 2020 (USD) | | :--- | :--- | :--- | :--- | | Total Revenue | $76,366,148 | $70,246,611 | $59,137,278 | | Gross Profit | $11,135,627 | $11,319,936 | $10,664,217 | | Operating Income | $2,352,541 | $2,577,979 | $4,605,057 | | Net Income | $1,948,054 | $2,557,045 | $3,356,299 | - FY2022 revenue growth was driven by increased average selling prices to offset rising raw material costs and a 21.94% increase in domestic sales, while international sales decreased by 31.55%[353] - Gross profit margin decreased to 14.91% in FY2022 from 16.11% in FY2021, mainly due to increased raw material prices which drove up the cost of sales[358] Liquidity and Capital Resources Outlines the company's liquidity with $13.2 million cash and $8.0 million net cash from operations, supported by $21.2 million in bank loans secured by assets and shareholder guarantees - The company held $13,195,999 in cash and cash equivalents as of September 30, 2022[366] Summary of Cash Flows (in USD) | Cash Flow Activity | FY 2022 (USD) | FY 2021 (USD) | FY 2020 (USD) | | :--- | :--- | :--- | :--- | | Operating Activities | $8,027,856 | $(5,648,806) | $3,204,290 | | Investing Activities | $(206,175) | $(897,254) | $59,786 | | Financing Activities | $(9,744,857) | $21,276,173 | $(4,689,306) | Contractual Obligations as of Sep 30, 2022 (in USD) | Contractual Obligations | Total (USD) | Payment Due < 1 year (USD) | Payment Due 1-3 years (USD) | | :--- | :--- | :--- | :--- | | Short-term bank loans | $11,888,662 | $11,888,662 | - | | Long-term bank loans | $9,300,625 | - | $9,300,625 | | Total | $21,189,287 | $11,888,662 | $9,300,625 | Directors, Senior Management and Employees Introduces the leadership team, compensation, board practices, committee structures, and employee count, noting the board consists of 5 directors, mostly independent - The leadership team includes founder Di Wang as Chairman and Huisen Wang as CEO. Jianping Xiang was appointed as the new CFO in December 2022[397][399][400] - As of September 30, 2022, the company employed 360 people, with the largest departments being Production (35.3%) and Technical (20.8%)[286][287][435] - The Board of Directors has established Audit, Compensation, and Nomination committees, each composed of three independent directors[416] Major Shareholders and Related Party Transactions Identifies major shareholders, including Chairman Di Wang and Director Jueqin Wang, who collectively control the company, and details significant related party transactions in FY2022 - The company is a controlled entity, with Chairman Di Wang beneficially owning 58.54% and Director Jueqin Wang beneficially owning 11.69% of the ordinary shares[438] Key Related Party Transactions (FY 2022) | Related Party | Transaction Type | Amount (USD) | | :--- | :--- | :--- | | Taizhou Huadi Industrial Ltd. | Raw Material Purchases | $4,649,636 | | Taizhou Huadi Industrial Ltd. | Product Sales | $1,990,329 | Related Party Balances as of Sep 30, 2022 | Related Party | Balance Type | Amount (USD) | | :--- | :--- | :--- | | Taizhou Huadi Industrial Ltd. | Accounts Payable | $2,439,105 | | Taizhou Huadi Material Technology Co. | Advance from Customer | $395,498 | | Di Wang | Due to Related Party | $(281,156) | | Jueqin Wang | Due to Related Party | $(325,830) | Additional Information Provides details on corporate governance under Cayman Islands law, PRC foreign exchange regulations restricting capital flows, and the preferential 15% EIT rate for its main operating subsidiary - As a Cayman Islands exempted company, shareholder rights and corporate law differ from those in the U.S. For example, derivative actions by minority shareholders are more limited, and the process for mergers and acquisitions is governed by Cayman law[486][487][494] - PRC foreign exchange regulations impose controls on currency conversion, particularly for capital account items, which could affect the company's ability to transfer funds or pay dividends out of China[511] - The company's main PRC subsidiary, Huadi Steel, is recognized as a High and New Technology Enterprise (HNTE) and is eligible for a reduced Enterprise Income Tax (EIT) rate of 15%, compared to the standard 25%[523][720] Quantitative and Qualitative Disclosures About Market Risk Addresses market risks including foreign exchange risk from RMB-USD translation, commodity price risk from steel fluctuations, and interest rate risk, noting no use of derivative hedging instruments - The company's primary market risks are foreign exchange risk (RMB to USD), commodity price risk for steel, and interest rate risk on its variable-rate loans[557][665] - All revenues and most expenses are in RMB, creating translation risk when reporting in USD. The company does not use hedging instruments for foreign exchange exposure[558] Controls and Procedures Concludes that disclosure controls and procedures were ineffective as of September 30, 2022, due to a material weakness from insufficient U.S. GAAP accounting and finance personnel - Management concluded that as of September 30, 2022, disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting[565] - The identified material weakness is the lack of sufficient accounting and finance personnel with experience in U.S. GAAP[566] Part III - Financial Statements and Exhibits Financial Statements Presents audited consolidated financial statements for FY2022, 2021, and 2020, prepared under U.S. GAAP, including independent auditors' reports, balance sheets, income statements, cash flows, and detailed notes Notes to Consolidated Financial Statements Provides detailed information on corporate structure, significant accounting policies, asset and liability breakdowns, extensive related party transactions, and shareholders' equity changes including the 2021 IPO and prior reverse stock split - The company recognizes revenue from product sales when control is transferred to the customer, which typically occurs at delivery, following the principles of ASC 606[648][650] - In January 2021, the company completed its IPO of 3,125,000 shares at $8.00 per share, raising gross proceeds of approximately $25 million[716] - The company's main operating subsidiary, Huadi Steel, is eligible for a preferential 15% EIT rate due to its High and New Technology Enterprise (HNTE) status, which is valid through fiscal year 2022[720]