6-K
Huadi International Group Co., Ltd. (HUDI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2024
Commission File Number: 001-39904
HUADI
INTERNATIONAL GROUP CO., LTD.
(Translation of registrant’s name into English)
No. 1688 Tianzhong Street, Longwan District,Wenzhou, Zhejiang ProvincePeople’s Republic of China 325025Tel: +86-057786598888
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒ Form 40-F ☐
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes ☐ No ☒
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
EXHIBIT INDEX
| Exhibit No. | Description |
|---|---|
| 99.1 | Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Six Months ended March 31, 2024 and 2023 |
| 99.2 | Unaudited Interim Consolidated Financial Statements for the Six Months ended March 31, 2024 and 2023 |
| 101.INS | Inline XBRL Instance Document |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Huadi International Group Co., Ltd. | ||
|---|---|---|
| Date: August 6, 2024 | By: | /s/ Huisen Wang |
| Name: | Huisen Wang | |
| Title: | Chief Executive Officer |
2
Exhibit 99.1
OPERATINGAND FINANCIAL REVIEW AND PROSPECTS
IN CONNECTIONWITH THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OFAND FOR THE SIX MONTHS ENDED MARCH 31, 2024 AND 2023
In this report, as usedherein, and unless the context suggests otherwise, the terms “Huadi” “Company” “we” “us”or “ours” refer to the combined business of Huadi International Group Co., Ltd., its subsidiaries. References to “dollar”and “$” are to U.S. dollars, the lawful currency of the United States, and references to “Renminbi” and “RMB”are to the legal currency of China. References to “SEC” are to the Securities and Exchange Commission.
You should read the followingdiscussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financialstatements and the related notes included elsewhere in this report on Form 6-K and with the discussion and analysis of our financial conditionand results of operations contained in our Annual Report on Form 20-F for the fiscal year ended September 30, 2023 filed with the Securitiesand Exchange Commission on February 5, 2024 (the “2023 Annual Report”). This discussion may contain forward-lookingstatements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipatedin these forward-looking statements as a result of various factors, including those identified elsewhere in this report on Form 6-K, andthose listed in the 2023 Annual Report under “Item 3—Key Information—Risk Factors” or in other parts of the 2023Annual Report.
Results of Operations
The tables in the following discussion summarize our consolidated statements of operations for the periods indicated. This information should be read together with our consolidated financial statements included elsewhere in this press release. The operating results in any period are not necessarily of the results that may be expected for any future period.
| 2024 | 2023 | |||||
|---|---|---|---|---|---|---|
| Sales | $ | 36,613,509 | $ | 37,333,555 | ||
| Production service revenues | 469,277 | 618,897 | ||||
| Cost of sales | (32,267,602 | ) | (32,222,729 | ) | ||
| Gross profit | 4,815,184 | 5,729,723 | ||||
| Operating expenses: | ||||||
| Selling, general and administrative | 3,433,248 | 3,726,022 | ||||
| Research and development | 1,216,505 | 1,141,874 | ||||
| Foreign currency transaction gains | (29,409 | ) | (590,132 | ) | ||
| Total operating expenses | 4,620,344 | 4,277,764 | ||||
| Operating income | 194,840 | 1,451,959 | ||||
| Other income (expense): | ||||||
| Interest income (expenses), net | 17,492 | (268,260 | ) | |||
| Other income, net | 628,195 | 411,762 | ||||
| Total other income (expense), net | 645,687 | 143,502 | ||||
| Income before income taxes | 840,527 | 1,595,461 | ||||
| Income tax provision | (24,805 | ) | (141,374 | ) | ||
| Net income | 815,722 | 1,454,087 | ||||
| Net income attributable to non-controlling interests | 11,210 | 17,502 | ||||
| Net income attributable to Huadi International Group Co., Ltd. | $ | 804,512 | $ | 1,436,585 | ||
| Net income | $ | 815,722 | $ | 1,454,087 | ||
| Other comprehensive income: | ||||||
| Foreign currency translation adjustment | 447,604 | 2,229,754 | ||||
| Total comprehensive income | 1,263,326 | 3,683,841 | ||||
| Comprehensive income attributable to non-controlling interests | 15,686 | 39,800 | ||||
| Comprehensive income attributable to Huadi International Group Co., Ltd. | $ | 1,247,640 | $ | 3,644,041 |
Revenues
Revenues decreased slightly by approximately $0.9 million or 2.29%, to approximately $37.1 million for the six months ended March 31, 2024, compared to approximately $38.0 million for the six months ended March 31, 2023. The revenues denominated in RMB increased by approximately 2.5 million (equivalent to $0.3 million, using the average conversion rate for current period) or 0.93%. The increase in revenues was primarily driven by our sales growth in domestic market.
Gross profit
Our gross profit decreased slightly by approximately $0.9 million or 15.96%, to approximately $4.8 million for the six months ended March 31, 2024, compared to approximately $5.7 million for the six months ended March 31, 2023. Gross profit denominated in RMB decreased by approximately 5.3 million (equivalent to approximately $0.7 million, using the average conversion rate for current period) or 13.19%, the decrease of gross profit was mainly due to increased raw material prices which drove up the cost of sales, while weighted average selling price slightly decreased due to intense market competition. Gross profit margin was 12.98% for the six months ended March 31, 2024, as compared to 15.10% for the six months ended March 31, 2023.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses decreased by approximately $0.3 million or 7.86%, to approximately $3.4 million for the six months ended March 31, 2024, compared to approximately $3.7 million for the six months ended March 31, 2023. The decrease in selling, general and administrative expenses was primarily attributable to the reversal of expected credit losses.
Research and Development Expenses
Our research and development expenses increased slightly by approximately $0.1 million or 6.54%, to approximately $1.2 million for the six months ended March 31, 2024, compared to approximately $1.1 million for the six months ended March 31, 2023. Management is committed to expanding our research and development activities continually for more orders.
Foreign currency transaction gains
The Company incurred foreign currency transaction gains of approximately $29,000 for the six months ended March 31, 2024, compared to foreign currency transaction gains of approximately $0.6 million for the six months ended March 31, 2023.
Income from operations
As a result of the factors described above, we incurred operating income approximately $0.2 million for the six months ended March 31, 2024, compared to operating income approximately $1.5 million for the six months ended March 31, 2023, representing a decrease of operating income of approximately $1.3 million.
Other income and expense
Our total other income (expense), net increased by approximately $0.5 million or 349.95%, to other income approximately $0.6 million for the six months ended March 31, 2024, compared to other income approximately $0.1 million for the six months ended March 31, 2023. The increase was mainly attributable to $0.3 million decrease of interest expense as a result of the decrease of our short-term borrowings and long-term borrowings and an increase of government grants of $0.2 million.
Income tax provision
Our income tax expense for the six months ended March 31, 2024 decreased by approximately $0.1 million, compared to the corresponding period in 2023 due to the decrease in taxable income.
Net income
As a result of the combination of factors discussed above, our net income decreased by approximately $0.6 million to net income of approximately $0.8 million for the six months ended March 31, 2024, compared to net income of approximately $1.4 million for the six months ended March 31, 2023.
2
Foreign currency translation
The Company’s consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. The Company’s results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation adjustment gains for the six months ended March 31, 2024 was approximately $0.4 million, compared to a currency translation gain of approximately $2.2 million for the six months ended March 31, 2023, representing a decrease of approximately $1.8 million.
Liquidity and Capital Resources
As of March 31, 2024 and September 30, 2023, we had cash and cash equivalents of $7,803,550 and $20,192,460, respectively. We believe that our current cash, cash to be generated from our operations and access to capital market will be sufficient to meet our working capital needs for at least the next twelve months. However, we do not have any amounts committed to be provided by our related party. We are also not dependent upon future financing to meet our liquidity needs for the next twelve months. However, we plan to expand our business to implement our growth strategies in our existing market and strengthen our position in the marketplace. To do so, we will need more capital through equity financing to increase our production and meet market demands.
Substantially all of our operations are conducted in China and all of our revenues, expense, cash and cash equivalents are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.
With respect to retained earnings accrued after such date, our board of directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
We have limited financial obligations dominated in US dollars, thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on the liquidity, financial condition and results of operations of the Company.
3
Cash Flow Summary
| For the Six Months Ended<br> March 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Net cash used in operating activities | $ | (5,463,293 | ) | $ | (565,337 | ) |
| Net cash used in investing activities | (81,163 | ) | (53,908 | ) | ||
| Net cash (used in) provided by financing activities | (5,753,782 | ) | 5,483,015 | |||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (62,912 | ) | 1,262,779 | |||
| Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (11,361,150 | ) | 6,126,549 |
Operating activities
Net cash used in operating activities was approximately $5.5 million for the six months ended March 31, 2024, as compared to net cash used in operating activities which was approximately $0.6 million for the six months ended March 31, 2023.
Net cash used in operating activities for the six months ended March 31, 2024 was primarily attributable to i) a non-cash adjustment of credit loss reversal of approximately $0.6 million; ii) an increase in notes receivable of approximately $1.3 million, which was mainly due the notes received from new customers; iii) an increase in inventories of approximately $2.0 million, which was mainly due to more raw materials were prepared for upcoming orders; iv) an increase in advances to suppliers; v) a decrease in accounts payable of approximately $5.8 million; vi) a decrease in advances from customers of approximately $1.9 million; vii) a decrease in tax payable of approximately $1.1 million. The net cash used in operating activities was partially offset by i) net income approximately $0.8 million; ii) a non-cash adjustment of depreciation expense of approximately $0.4 million; iii) a decrease in accounts receivable of approximately $5.2 million; iv) an increase in notes payable of approximately $3.2 million.
Net cash used in operating activities for the six months ended March 31, 2023 was primarily attributable to i) a non-cash adjustment of foreign currency transaction gain of approximately $0.6 million; ii) an increase in notes receivable of approximately $3.3 million, which was mainly due the notes received from new customers; iii) an increase in inventories of approximately $4.0 million, which was mainly due to more raw materials were prepared for upcoming orders; and iv) a decrease in notes payable of approximately $0.5 million. The net cash used in operating activities was partially offset by i) net income approximately $1.5 million; ii) a non-cash adjustment of depreciation expense of approximately $0.4 million; iii) a decrease in accounts receivable of approximately $0.9 million; iv) a decrease in advance to suppliers of approximately $1.3 million, the decrease was mainly due to the raw material received; v) a decrease in other receivables of approximately $0.1 million; vi) an increase in accounts payable of approximately $3.0 million as a result of the increase of purchases in current period; and vii) an increase in taxes payable of approximately $0.6 million.
Investing activities
Net cash used in investing activities was approximately $81,000 for the six months ended March 31, 2024, as compared to approximately $54,000 for the six months ended March 31, 2023.
Net cash used in investing activities for the six months ended March 31, 2024 was attributable to the purchases of property, plant and equipment of approximately $81,000.
Net cash used in investing activities for the six months ended March 31, 2023 was attributable to the purchases of property, plant and equipment of approximately $54,000.
Financing activities
Net cash used in financing activities was approximately $5.8 million for the six months ended March 31, 2024, as compared to net cash provided by approximately $5.5 million for the six months ended March 31, 2023.
4
Net cash used in financing activities for the six months ended March 31, 2024 was primarily attributable to i) the repayment on short-term borrowings of approximately $4.5 million, which was partially offset by proceeds from short-term borrowings of approximately $2.5 million; ii) and the repayment on long-term borrowings of approximately $6.5 million, which was partially offset by proceeds from long-term borrowings of approximately $2.8 million.
Net cash provided by financing activities for the six months ended March 31, 2023 was primarily attributable to the proceeds from share issuance, net of offering costs of approximately $23 million. The net cash provided by financing activities was partially offset by repayment on short-term borrowings of approximately $12 million, repayment on long-term borrowings of approximately $5.2 million and repayment to related parties of approximately $0.3 million.
Statement Regarding Unaudited Financial Information
The unaudited financial information set forth above is subject to adjustments that may be identified when audit work is performed on the Company’s year-end financial statements, which could result in significant differences from this unaudited financial information.
Safe Harbor Statement
This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. When the Company uses words such as “may, “will, “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the actual results to differ materially from the Company’s expectations discussed in the forward-looking statements. These statements are subject to uncertainties and risks including, but not limited to, the following: the Company’s goals and strategies; the Company’s future business development; product and service demand and acceptance; changes in technology; economic conditions; reputation and brand; the impact of competition and pricing; government regulations; fluctuations in general economic and business conditions in China and assumptions underlying or related to any of the foregoing and other risks contained in reports filed by the Company with the Securities and Exchange Commission. For these reasons, among others, investors are cautioned not to place undue reliance upon any forward-looking statements in this press release. Additional factors are discussed in the Company’s filings with the U.S. Securities and Exchange Commission, which are available for review at www.sec.gov. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.
5
Exhibit 99.2
HUADI INTERNATIONAL GROUP CO., LTD.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED MARCH 31,2024 AND 2023
(UNAUDITED)
HUADI INTERNATIONAL GROUP CO., LTD.
TABLE OF CONTENTS
| Consolidated Financial Statements | |
|---|---|
| Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023 (Unaudited) | F-2 |
| Consolidated Statements of Income and Comprehensive Income for the six months ended March 31, 2024 and 2023 (Unaudited) | F-3 |
| Consolidated Statements of Changes in Shareholders’ Equity for the six months ended March 31, 2024 and 2023 (Unaudited) | F-4 |
| Consolidated Statements of Cash Flows for the six months ended March 31, 2024 and 2023 (Unaudited) | F-5 |
| Notes to Consolidated Financial Statements (Unaudited) | F-6 - F-26 |
F-1
HUADI INTERNATIONAL GROUP CO., LTD.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2024 AND SEPTEMBER 30, 2023
(UNAUDITED, IN U.S. DOLLARS, EXCEPT SHARE DATA)
| September 30, <br><br>2023 | ||||
|---|---|---|---|---|
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | 7,803,550 | $ | 20,192,460 | |
| Restricted cash | 1,796,993 | 769,233 | ||
| Accounts receivable, net of allowance for doubtful accounts of 1,553,365 and 2,391,641, respectively | 18,518,867 | 22,630,275 | ||
| Notes receivable, net | 8,797,326 | 7,661,035 | ||
| Inventories | 28,949,896 | 26,706,629 | ||
| Advances to suppliers, net | 2,829,893 | 2,105,902 | ||
| Advances to suppliers, net – related parties | 1,008,567 | - | ||
| Other receivables, net | 551,994 | 171,182 | ||
| Total current assets | 70,257,086 | 80,236,716 | ||
| Property, plant and equipment, net | 5,139,242 | 5,354,997 | ||
| Land use rights, net | 4,309,178 | 4,312,349 | ||
| Long-term investments | 12,647,037 | 12,515,817 | ||
| Deferred tax assets | 372,073 | 392,713 | ||
| Other noncurrent assets, net | 136,357 | 198,194 | ||
| TOTAL ASSETS | 92,860,973 | $ | 103,010,786 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable | 1,378,081 | $ | 3,434,031 | |
| Accounts payable - related parties | - | 3,692,394 | ||
| Accrued expenses and other current liabilities | 1,613,057 | 1,946,325 | ||
| Notes payable | 4,810,792 | 1,632,401 | ||
| Advances from customers | 1,535,878 | 2,393,021 | ||
| Advances from customers - related parties | 20,054 | 1,015,696 | ||
| Short-term borrowings | 2,494,513 | 4,442,870 | ||
| Long-term borrowings - current portion | 2,770 | 43,860 | ||
| Taxes payable | 2,988,446 | 4,009,849 | ||
| Total current liabilities | 14,843,591 | 22,610,447 | ||
| Long-term borrowings | 1,770,010 | 5,398,849 | ||
| Due to related parties - noncurrent portion | 300,236 | 317,680 | ||
| TOTAL LIABILITIES | 16,913,837 | 28,326,976 | ||
| COMMITMENTS AND CONTIGENCIES | ||||
| Shareholders’ equity: | ||||
| Common stock, 0.0002 par value, 250,000,000 shares authorized, 14,259,182 and 14,259,182 shares issued and outstanding at March 31, 2024 and September 30, 2023 | 2,852 | 2,852 | ||
| Additional paid-in capital | 67,280,709 | 67,280,709 | ||
| Statutory reserves | 981,257 | 874,518 | ||
| Retained earnings | 7,377,465 | 6,679,692 | ||
| Accumulated other comprehensive income (loss) | 14,349 | (428,779 | ) | |
| Total equity attributable to Huadi International Group Co., Ltd. | 75,656,632 | 74,408,992 | ||
| Equity attributable to non-controlling interests | 290,504 | 274,818 | ||
| Total shareholders’ equity | 75,947,136 | 74,683,810 | ||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 92,860,973 | $ | 103,010,786 |
All values are in US Dollars.
The accompanying notes are an integral part of these interim unaudited consolidated financial statements.
F-2
HUADI INTERNATIONAL GROUP CO., LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2024 AND2023(UNAUDITED, IN U.S. DOLLARS, EXCEPT SHARE DATA)
| 2024 | 2023 | |||||
|---|---|---|---|---|---|---|
| Sales | $ | 36,613,509 | $ | 37,333,555 | ||
| Production service revenues | 469,277 | 618,897 | ||||
| Cost of sales | (32,267,602 | ) | (32,222,729 | ) | ||
| Gross profit | 4,815,184 | 5,729,723 | ||||
| Operating expenses: | ||||||
| Selling, general and administrative | 3,433,248 | 3,726,022 | ||||
| Research and development | 1,216,505 | 1,141,874 | ||||
| Foreign currency transaction gains | (29,409 | ) | (590,132 | ) | ||
| Total operating expenses | 4,620,344 | 4,277,764 | ||||
| Operating income | 194,840 | 1,451,959 | ||||
| Other income (expense): | ||||||
| Interest income (expenses), net | 17,492 | (268,260 | ) | |||
| Other income, net | 628,195 | 411,762 | ||||
| Total other income (expense), net | 645,687 | 143,502 | ||||
| Income before income taxes | 840,527 | 1,595,461 | ||||
| Income tax provision | (24,805 | ) | (141,374 | ) | ||
| Net income | 815,722 | 1,454,087 | ||||
| Net income attributable to non-controlling interests | 11,210 | 17,502 | ||||
| Net income attributable to Huadi International Group Co., Ltd. | $ | 804,512 | $ | 1,436,585 | ||
| Net income | $ | 815,722 | $ | 1,454,087 | ||
| Other comprehensive income: | ||||||
| Foreign currency translation adjustment | 447,604 | 2,229,754 | ||||
| Total comprehensive income | 1,263,326 | 3,683,841 | ||||
| Comprehensive income attributable to non-controlling interests | 15,686 | 39,800 | ||||
| Comprehensive income attributable to Huadi International Group Co., Ltd. | $ | 1,247,640 | $ | 3,644,041 | ||
| Basic and diluted earnings per share | ||||||
| Basic | $ | 0.06 | $ | 0.10 | ||
| Diluted | $ | 0.06 | $ | 0.10 | ||
| Weighted average numbers of common shares outstanding | ||||||
| Basic | 14,259,182 | 14,028,071 | ||||
| Diluted | 14,259,182 | 14,028,071 |
The accompanying notes are an integral part of these interim unaudited consolidated financial statements.
F-3
HUADI INTERNATIONAL GROUP CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITYFOR THE SIX MONTHS ENDED MARCH 31, 2024 AND 2023
(UNAUDITED, IN U.S. DOLLARS, EXCEPT SHARE DATA)
| Shares | Amount | Additional<br> paid-in<br> capital | Retained earnings | Accumulated<br> other<br> comprehensive<br> income | Statutory Reserve | Shareholders’<br> equity to<br> Huadi<br> International <br> Group Co., Ltd. | Non-<br> controlling<br> interests | Total shareholders’<br> equity | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at September 30, 2022 | 13,239,182 | 2,648 | 44,211,313 | 3,802,265 | 873,059 | 494,223 | 49,383,508 | 250,433 | 49,633,941 | ||||||||||
| Share issuance | 1,000,000 | 200 | 23,009,800 | - | - | - | 23,010,000 | - | 23,010,000 | ||||||||||
| Appropriation for statutory reserve | - | - | - | (143,659 | ) | - | 143,659 | - | - | - | |||||||||
| Foreign currency translation gain | - | - | - | - | 2,207,456 | - | 2,207,456 | 22,298 | 2,229,754 | ||||||||||
| Net income | - | - | - | 1,436,585 | - | - | 1,436,585 | 17,502 | 1,454,087 | ||||||||||
| Balance at March 31, 2023 | 14,239,182 | 2,848 | 67,221,113 | 5,095,191 | 3,080,515 | 637,882 | 76,037,549 | 290,233 | 76,327,782 |
| Shares | Amount | Additionalpaid-incapital | Retained earnings | Accumulatedothercomprehensiveincome | Statutory Reserve | Shareholders’equity toHuadiInternational Group Co., Ltd. | Non-controllinginterests | Total shareholders’equity | ||
|---|---|---|---|---|---|---|---|---|---|---|
| Balance at September 30, 2023 | 14,259,182 | 2,852 | 67,280,709 | 6,679,692 | (428,779) | 874,518 | 74,408,992 | 274,818 | 74,683,810 | |
| Share issuance | - | - | - | - | - | - | - | - | - | |
| Appropriation for statutory reserve | - | - | - | (106,739 | ) | - | 106,739 | - | - | - |
| Foreign currency translation gain | - | - | - | - | 443,128 | - | 443,128 | 4,476 | 447,604 | |
| Net income | 804,512 | 804,512 | 11,210 | 815,722 | ||||||
| Balance at March 31, 2024 | 14,259,182 | 2,852 | 67,280,709 | 7,377,465 | 14,349 | 981,257 | 75,656,632 | 290,504 | 75,947,136 |
The accompanying notes are an integral part of these interim unaudited consolidated financial statements.
F-4
HUADI INTERNATIONAL GROUP CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2024 AND2023
(UNAUDITED, IN U.S. DOLLARS)
| 2024 | 2023 | |||||
|---|---|---|---|---|---|---|
| Cash Flows from Operating Activities: | ||||||
| Net income | $ | 815,722 | $ | 1,454,087 | ||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||
| Depreciation | 353,586 | 374,321 | ||||
| Amortization | 48,476 | 14,887 | ||||
| Bad debt expense (recovery) | (567,384 | ) | 63,255 | |||
| Deferred tax benefits | 24,805 | (9,488 | ) | |||
| Foreign currency transaction (gains) loss | (29,409 | ) | (590,132 | ) | ||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | 5,222,075 | 890,718 | ||||
| Notes receivable | (1,287,936 | ) | (3,297,585 | ) | ||
| Inventories | (1,967,053 | ) | (4,019,245 | ) | ||
| Advances to suppliers | (703,267 | ) | 1,286,625 | |||
| Advances to suppliers – related parties | (1,010,512 | ) | - | |||
| Other receivables | (382,670 | ) | 96,563 | |||
| Other noncurrent assets | (742 | ) | ||||
| Accounts payable | (2,095,988 | ) | 1,585,941 | |||
| Accounts payable - related parties | (3,738,303 | ) | 1,374,569 | |||
| Accrued expenses and other current liabilities | (354,407 | ) | (34,020 | ) | ||
| Notes payable | 3,167,373 | (477,344 | ) | |||
| Advances from customers | (883,933 | ) | 80,069 | |||
| Advances from customers – related parties | (1,008,232 | ) | - | |||
| Taxes payable | (1,065,494 | ) | 641,442 | |||
| Net cash used in operating activities | (5,463,293 | ) | (565,337 | ) | ||
| Cash Flows from Investing Activities: | ||||||
| Purchases of property, plant and equipment | (81,163 | ) | (53,908 | ) | ||
| Net cash used in investing activities | (81,163 | ) | (53,908 | ) | ||
| Cash Flows from Financing Activities: | ||||||
| Proceeds from short-term borrowings | 2,499,324 | 1,003,426 | ||||
| Repayments on short-term borrowings | (4,498,110 | ) | (13,054,572 | ) | ||
| Proceeds from long-term borrowings | 2,761,434 | 4,283,195 | ||||
| Repayments on long-term borrowings | (6,495,615 | ) | (9,472,341 | ) | ||
| Proceeds from share issuance, net of offering costs | - | 23,010,000 | ||||
| Repayments to related parties | (20,815 | ) | (286,693 | ) | ||
| Net cash (used in) provided by financing activities | (5,753,782 | ) | 5,483,015 | |||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (62,912 | ) | 1,262,779 | |||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (11,361,150 | ) | 6,126,549 | |||
| Cash and cash equivalents and restricted cash at the beginning of period | 20,961,693 | 14,543,245 | ||||
| Cash and cash equivalents and restricted cash at the end of period | $ | 9,600,543 | $ | 20,669,794 | ||
| Reconciliation of cash and cash equivalents and restricted cash to the Consolidated Balance Sheet | ||||||
| Cash and cash equivalents | $ | 7,803,550 | $ | 19,754,552 | ||
| Restricted cash | $ | 1,796,993 | $ | 915,242 | ||
| Total cash and cash equivalents and restricted cash at the end of period | $ | 9,600,543 | $ | 20,669,794 | ||
| Supplemental disclosures of cash flows information: | ||||||
| Cash paid for income taxes | $ | 362,992 | $ | 16,671 | ||
| Cash paid for interest | $ | 90,630 | $ | 290,086 |
The accompanying notes are an integral part of these interim unaudited consolidated financial statements.
F-5
HUADI INTERNATIONAL GROUP CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
| Entity Name | RegisteredLocation | Date of Incorporation | Ownership as of theissuance date of the report |
|---|
| Huadi International Group Co., Ltd. (“Huadi International”) | Cayman Island | September 27, 2018 | Parent |
| Yongqiang Tuoxing Limited. (“Yongqiang Tuoxing”) | British Virgin Island | October 2, 2018 | 100% by the Parent |
| Hong Kong Beach Limited. (“HK Beach”) | Hong Kong | November 7, 2018 | 100% by Yongqiang Tuoxing |
| Wenzhou Hongshun Stainless Steel Limited. (“Wenzhou Hongshun”) | Wenzhou,<br><br>China | June 3,2019 | 100% by HK Beach |
| Huadi Steel Group Limited. (“Huadi Steel”) | Wenzhou, <br><br>China | November 12,1998 | 99% by Wenzhou Hongshun |
| Huadi (Songyang) Co., Ltd. (“Huadi Songyang”) | Songyang,<br> <br>China | June 15, 2023 | 100% by HK Beach |
Huadi International Group Co., Ltd. (“HuadiInternational”)
Huadi International was incorporated on September 27, 2018 under the laws of Cayman Islands. Under its memorandum of association, Huadi International is authorized to issue 250,000,000 ordinary shares of a single class, par value $0.0002 per ordinary share. There are currently 14,259,182 issued and outstanding ordinary shares. Huadi International is a holding company and is currently not actively engaged in any business. Huadi International’s registered agent is Harneys Fiduciary (Cayman) Limited and its registered office is at 4th Floor, Harbour Place, 103 South Church Street, P.O. Box 10240, Grand Cayman, KY1-1002, Cayman Islands.
Yongqiang Tuoxing Limited (“YongqiangTuoxing”)
Yongqiang Tuoxing was incorporated on October 2, 2018 under the laws of British Virgin Islands. Under its memorandum of association, Yongqiang Tuoxing is authorized to issue 50,000 ordinary shares of a single class, par value $1.00 per ordinary share. Yongqiang Tuoxing is a wholly owned subsidiary of Huadi International and is currently not actively engaged in any business. Yongqiang Tuoxing’s registered agent is Harneys Corporate Services Limited and its registered office is at Craigmuir Chambers, Road Town, Tortola, VG1110, British Virgin Islands.
Hong Kong Beach Limited (“HK Beach”)
HK Beach was incorporated on November 7, 2018 under the laws of Hong Kong and is a wholly owned subsidiary of Yongqiang Tuoxing. HK Beach did not have any operations as of March 31, 2024.
WenzhouHongshun Stainless Steel Ltd. (“Wenzhou Hongshun”)
Wenzhou Hongshun was incorporated on June 3, 2019 in China and is a wholly owned subsidiary of HK Beach. Wenzhou Hongshun is a wholly-foreign owned enterprise organized under the laws of the People’s Republic of China. The registered principal activities of Wenzhou Hongshun are sales of stainless steel pipes, stainless steel bars, stainless steel elbows, stainless steel products, auto parts and components; import and export of goods, technology import and export. Wenzhou Hongshun did not have any operations as of March 31, 2024.
Huadi Steel Group Limited. (“Huadi Steel”)
Huadi Steel was incorporated on November 12, 1998 under the laws of the People’s Republic of China. Since August 18, 2015, Huadi Steel was owned by nine shareholders in People’s Republic of China (“PRC Shareholders”). Huadi Steel focuses on manufacturing of industrial stainless steel seamless pipes and tubes products with extensive distribution facilities and network in China.
Huadi (Songyang) Co., Ltd. (“Huadi Songyang”)
Huadi Songyang was incorporated on June 15, 2023 in China and is a wholly owned subsidiary of HK Beach. Huadi Songyang is a wholly-foreign owned enterprise organized under the laws of the People’s Republic of China. Huadi Songyang is established for the purpose of expanding product line of industrial steel pipe and tube products manufacture and distribution.
Except where the context otherwise requires and for purposes of these financial statements only, “the Company”, “we”, “us”, “our company”, “our” and “Huadi” refer to the above-mentioned entities.
F-6
Reorganization
In or about August 2019, the Company completed a corporate reorganization to roll several controlled entities (now referred to as the subsidiaries) into one legal corporation (the Company). Di Wang, one of the PRC Shareholders transferred 5% equity of Huadi Steel to a Hong Kong entity which was subsequently transferred to Wenzhou Hongshun on August 28, 2019. On August 22, 2019, Wenzhou Hongshun acquired 94% equity of Huadi Steel from the PRC Shareholders. As a result, Huadi Steel’s equity interest is 99% held by Wenzhou Hongshun and 1% held by Di Wang as of March 31, 2024.
During the years presented in these consolidated financial statements, control of these entities did not change as the Company was always under the control of PRC Shareholders. Accordingly, the combination has been treated as a corporate restructuring (reorganization) of entities under common control and thus the current capital structure has been retroactively presented in prior periods as if such structure existed at that time and in accordance with ASC 805-50-45-5, the entities under common control are presented on a combined basis for all periods to which such entities were under common control. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles in the United Stated of America (“US GAAP”) and have been consistently applied. The accompanying consolidated financial statements include the financial statements of the Company and its majority-owned and controlled subsidiaries. All significant inter-company transactions and balances have been eliminated upon consolidation.
Non-controlling interests
For the Company’s consolidated subsidiaries, non-controlling interests are recognized to reflect the portion of their equity that is not attributable, directly or indirectly, to the Company as the controlling shareholder. Non-controlling interests are classified as a separate line item in the equity section of the Company’s consolidated balance sheets and have been separately disclosed in the Company’s consolidated statements of income and comprehensive income to distinguish the interests from that of the Company.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Such estimates include, but are not limited to, allowances for credit losses, inventory valuation, useful lives of property, plant and equipment, intangible assets, impairment in equity investment, and income taxes related to realization of deferred tax assets and uncertain tax position. Actual results could differ from those estimates.
Foreign Currency Translation
The Company’s reporting currency is United States Dollars (“US$”). The financial records of the Company’s subsidiaries in People’s Republic of China (“PRC”) are maintained in their local currencies which are Chinese Yuan (“CNY” or “RMB”).
Transactions denominated in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currency at the prevailing rates of exchange at the balance sheet date. Transaction gains and losses are recorded in operating expense in the Consolidated Statements of Income and Comprehensive Income (Loss).
The financial statements of the Company’s subsidiaries in PRC are translated from RMB into US$. Assets and liabilities are translated into US$ using the applicable exchange rates at the balance sheet date. Equity accounts other than net income generated in the current period are translated into US$ using the appropriate historical rates. Revenues, expenses, gains and losses are translated into US$ using the average exchange rates for the relevant period. The resulted foreign currency translation adjustments are recorded as a component of other comprehensive (loss) / income in the Consolidated Statements of Income and Comprehensive Income (Loss), and the accumulated foreign currency translation adjustments are recorded as a component of accumulated other comprehensive (loss) / income in the Consolidated Balance Sheets.
F-7
The relevant exchange rates are listed below:
| September 30,<br> 2023 | March 31,<br> 2023 | ||||
|---|---|---|---|---|---|
| Period Ended RMB: exchange rate | 7.2203 | 7.2960 | 6.8676 | ||
| Period Average RMB: exchange rate | 7.2064 | 7.0533 | 6.9761 |
All values are in US Dollars.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash and deposits with financial institutions which are unrestricted as to withdrawal and use. Cash equivalents consist of highly liquid investments that are readily convertible to cash generally with original maturities of three months or less when purchased.
Restricted Cash
The Company has bank acceptance notes outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. Those notes are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset. Restricted cash is included in the beginning or ending balance of cash and cash equivalents and restricted cash in the consolidated statements of cash flows.
As of March 31, 2024 and September 30, 2023, restricted cash was $1,796,993 and $769,233, respectively. No restricted cash is held to ensure future credit availability.
Accounts Receivable, Net
Accounts receivables are recognized and carried at the originally invoiced amount, less an estimated allowance for credit losses. The Company consider historical collection experience, aging and customers’ industry to pool accounts receivable with similar risk characteristics, for those do not share risk characteristics, the Company evaluate them on an individual basis. The Company adopt loss rate method. Accounts receivable balances are written off after all collection efforts have been exhausted. Please refer to Note 2 - Allowance for credit losses for adoption of expected credit losses model.
Notes Receivable, Net
Notes receivable represent bank acceptance notes and commercial acceptance notes the Company receives from its customers in exchange for goods or services that it has transferred to customers. The notes generally range from three to six months from the date of issuance. Notes receivables are recognized and carried at the face value less an estimated allowance for credit losses. Please refer to Note 2 - Allowance for credit losses for adoption of expected credit losses model.
As part of the regular business and in case of immediate cash needs, the Company sells its notes receivable at a discount with or without recourse. Notes receivables are considered sold and derecognized from balance sheet when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the note receivables, and the Company has surrendered control over the transferred note receivables. If the Company does not surrender control, typically for those arrangements with recourse, the cash received from the purchaser is accounted for as a secured borrowing. In the case of arrangements with recourse, notes receivables are not derecognized.
Inventories, net
Inventories are stated at the lower of cost or net realizable value. Cost is principally determined using the weighted-average method. The Company records adjustments to inventory for excess quantities, obsolescence or impairment when appropriate to reflect inventory at net realizable value. These adjustments are based upon a combination of factors including current sales volume, market conditions, lower of cost or market analysis and expected realizable value of the inventory.
There were no write-downs recognized of inventories for the six months ended March 31, 2024 and 2023.
F-8
Advances to Suppliers, net
Advances to suppliers refer to advances for purchase of materials or other service agreements, which are applied against accounts payable when the materials or services are received.
The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would write off such amount in the period when it is considered as impaired.
The allowance for advance to suppliers recognized as of March 31, 2024 and September 30, 2023 was $173,337 and $171,538, respectively.
Property, Plant, and Equipment, net
Property, plant, and equipment are recorded at cost less accumulated depreciation and impairment. Depreciation commences upon placing the asset in usage and is recognized on a straight-line basis over the estimated useful lives of the assets with 5% of residual value, as follows:
| Useful lives | |
|---|---|
| Buildings | 10-50 years |
| Machinery and equipment | 5-20 years |
| Transportation vehicles | 3-10 years |
| Office equipment | 3-10 years |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of income and other comprehensive income in other income or expenses.
Land Use Rights, net
Under the PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership.” Land use rights are stated at cost less accumulated amortization. Land use rights are amortized using the straight-line method with the following estimated useful lives:
| Useful lives | |
|---|---|
| Land use rights | 50 years |
Long-term Investments
Effective October 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt the cost-minus-impairment measurement alternative for investments in equity securities without readily determinable fair values.
For equity investments that are accounted for using the cost-minus-impairment measurement alternative, the Company initially records equity investments at cost but is required to adjust the carrying value of such equity investments through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.
Advances from Customers
Advances from customers refer to advances received from customers regarding product sales, which are applied against accounts receivable when products are sold.
F-9
Allowance for credit losses
Allowance for credit losses represents management’s best estimate of probable losses inherent in the portfolio. Effective October 1, 2023, the Company adopted ASC 326, “Financial Instruments
- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective approach. This guidance replaced the “incurred loss” impairment methodology with an approach based on “expected losses” to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance requires financial assets to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset.
Under ASU 2016-13, the Company has exposure to credit losses for financial assets including accounts receivable, notes receivable, other receivable and other noncurrent assets. The Company considered various factors, including nature, historical collection experience, the age of the accounts receivable balances, credit quality and specific risk characteristics of its customers, current economic conditions, forecasts of future economic conditions, reversion period, and qualitative and quantitative adjustments to develop an estimate of credit losses. The Company has adopted loss rate method which is a combination of historical rate method and adjustment rate method, to estimate the credit loss.
Financial assets are presented net of the allowance for credit losses in the Consolidated Balance Sheets. The measurement of the allowance for credit losses is recognized through current expected credit loss expense. Current expected credit loss expense is included as a component of selling, general and administrative expenses in the consolidated statements of income and comprehensive income. Write-offs are recorded in the period in which the asset is deemed to be uncollectible. As of March 31, 2024, the allowance for credit losses of accounts receivable, notes receivable, other receivable and other noncurrent assets was $1,553,365, $229,486, $2,916 and $120,139, respectively.
Impairment of Long-lived Assets
The Company’s management reviews the carrying values of long-lived assets whenever events and circumstances, such as a significant decline in the asset’s market value, obsolescence or physical damage affecting the asset, significant adverse changes in the assets use, deterioration in the expected level of the assets performance, cash flows for maintaining the asset are higher than forecast, indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value.
There was no impairment charge recognized for long-lived assets for the six months ended March 31, 2024 and 2023.
Fair Value Measurement
Fair Value Measurements and Disclosures requires disclosure of the fair value of financial instruments held by the Company. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. |
|---|---|
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| --- | --- |
| ● | Level 3 inputs to the valuation methodology use one or more unobservable inputs which are significant to the fair value measurement. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
| --- | --- |
F-10
For the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, notes receivable, other receivables, accounts payable, other current liabilities, notes payable and bank loans, the carrying amounts approximate their fair values due to their short maturities as of March 31, 2024 and September 30, 2023.
The Company noted no transfers between levels during any of the periods presented. The Company did not have any instruments that were measured at fair value on a recurring nor non-recurring basis as of March 31, 2024 and September 30, 2023.
Value-added Tax (“VAT”)
Sales revenue represents the invoiced value of goods, net of VAT. All of the Company’s products are sold in the PRC and are subject to a VAT on the gross sales price. The Company is subject to a VAT rate of 17% before May 1, 2018, a VAT rate of 16% effective on May 1, 2018, and the most current VAT rate of 13% effective on April 1, 2019. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products.
Revenue Recognition
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on October 1, 2018 using the modified retrospective approach. There is no adjustment to the opening balance of retained earnings at October 1, 2018, since there was no change to the timing and pattern of revenue recognition upon adoption of ASC 606. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services and is recorded net of value-added tax (“VAT”). To achieve that core principle, the Company applies the following steps:
Step 1: Identify the contract (s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
The Company derives its revenues from two sources: (1) revenue from sales of steel piping products, (2) revenue from production service.
| (1) | Revenue<br>from sales of steel piping products |
|---|
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In the principal versus agent consideration, since no another party is involved in transactions, the Company is a principal.
In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.
The Company does not routinely permit customers to return products, while in certain conditions product changes are allowed. The customer does not have the option to purchase the warranty separately. Also, the warranty does not provide a service to the customer beyond fixing defects that existed at the time of sale. Thus, the warranty is assurance-type, and historically customer returns have been immaterial.
F-11
Sales revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied at a point in time). The Company sells its products either under free onboard (“FOB”) shipping point term or under FOB destination term. For sales under FOB shipping point term, the Company recognize revenues when products are loaded on the ships. Product delivery is evidenced by warehouse shipping logs as well as assigned shipping bills from the shipping companies. For sales under FOB destination term, the Company recognize revenues when the products are delivered and accepted by customers. Product delivery is evidenced by signed receipt documents and title transfers upon delivery. Prices are determined based on negotiations with the Company’s customers and are not subject to adjustment. As a result, the Company expects returns to be minimal.
| (2) | Revenue<br>from production service |
|---|
The Company identifies the product processing agreement as contract. For each contract, the Company considers the promise to provide production service, each of which are distinct, to be the identified performance obligations. In the principal versus agent consideration, since no another party is involved in transactions, the Company is a principal. The transaction price is clearly stated on the contract and not subject to adjustment. Production service revenue is recognized when production order is completed and transferred to customers.
Contract costs
Contract costs include contract acquisition costs and contract fulfillment costs which are all recorded within prepayments, deposits, and other assets in the consolidated balance sheets.
Contract acquisition costs consist of incremental costs incurred by the Company to originate contracts with customers. Contract acquisition costs, which generally include costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate. Contract fulfillments costs consist of costs incurred by the Company to fulfill a contract with a customer and are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Capitalized contract fulfillment costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract. Contract fulfillment costs are recognized in cost of revenue during the period that the related costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs are related. There were no contract fulfillment cost and contract acquisition costs as of March 31, 2024 and 2023.
Contract balance
The Company does not have amounts of contract assets since revenue is recognized at a point in time. Contract liabilities are presented as advance from customers on the consolidated balance sheet. Contract liabilities are recognized when the Company receives prepayment from customers resulting from purchase order or product processing agreement. Contract liabilities will be recognized as revenue when the products are delivered. As of March 31, 2024 and September 30, 2023 the balance of advance from customers amounted to $1,555,932 and $3,408,717, respectively. For the six-month ended March 31, 2024 and 2023, the beginning balance of advance from customers of $2,639,083 and $ 2,936,772 were recognized as revenue when the products are delivered.
F-12
Government Grants
Government grants are recognized when received and all the conditions for their receipt have been met.
Government grants for compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related cost are recognized in profit or loss in the period in which they become receivable.
For the six months ended March 31, 2024 and 2023, the Company received government grants for expenses of $584,671, and $333,999, respectively. The grants were recorded as other income in the consolidated statements for income.
Research and Development Costs
Research and development activities are directed toward the development of new products as well as improvements in existing processes. These costs, which primarily include salaries, contract services and supplies, are expensed as incurred.
Shipping and Handling Costs
Shipping and handling costs are expensed when incurred and are included in selling, general and administrative expense. Shipping and handling costs were $750,055 and $502,826 for the six months ended March 31, 2024 and 2023, respectively.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Advertising costs were $143,932 and $56,507 for the six months ended March 31, 2024 and 2023, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method whereby it calculates deferred tax assets or liabilities for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and credits by applying enacted tax rates applicable to the years in which those temporary differences are expected to be reversed or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as non-current amounts.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
To the extent applicable, the Company records interest and penalties as other expense. All of the tax returns of the Company’s PRC subsidiaries remain subject to examination by PRC tax authorities for five years from the date of filing. The fiscal years for tax purpose in PRC is December 31.
F-13
The Company and its subsidiaries are not subject to U.S. tax laws and local state tax laws. The Company’s income and that of its related entities must be computed in accordance with Chinese and foreign tax laws, as applicable, and all of which may be changed in a manner that could adversely affect the amount of distributions to shareholders. There can be no assurance that Income Tax Laws of PRC will not be changed in a manner that adversely affects shareholders. In particular, any such change could increase the amount of tax payable by the Company, reducing the amount available to pay dividends to the holders of the Company’s ordinary shares.
Earnings Per Share
Earnings (loss) per share is calculated in accordance with ASC 260 Earnings per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is computed in accordance with the treasury stock method and based on the weighted average number of ordinary shares and dilutive common share equivalents. Dilutive common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive. There were no dilutive common share equivalents outstanding for the six months ended March 31, 2024 and 2023.
Certain Risks and Concentration
Exchange Rate Risks
The Company operates in PRC, which may give rise to significant foreign currency risks mainly from fluctuations and the degree of volatility of foreign exchange rates between the USD and the RMB.
Currency Convertibility Risks
Substantially all of the Company’s operating activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with other information such as suppliers’ invoices, shipping documents and signed contracts.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of cash and cash equivalents, restricted cash, notes receivable. As of March 31, 2024 and September 30, 2023, none of the Company’s bank accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) insurance. To limit the exposure to credit risk relating to deposits, the Company primarily places deposits with large financial institutions in China which management believes are of high credit quality and the Company also continually monitors their credit worthiness. Cash balances in bank accounts in PRC are protected under Deposit Protection Scheme in accordance with the Deposit Protection Scheme Ordinance. The maximum protection is up to RMB500,000 per depositor per Scheme member, including both principal and interest. Concentration of credit risks with respect to accounts receivables is linked to the concentration of revenue. To manage credit risk, the Company performs ongoing credit evaluations of customers’ financial condition.
F-14
Interest Rate Risks
The Company is subject to interest rate risk. The Company has bank interest bearing loans charged at variable interest rates. Some bank interest bearing loans are charged at fixed interest rates within the reporting period, the Company is subject to the risk of adverse changes in the interest rates charged by the banks when these loans are refinanced.
Risks and Uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
Liquidity Risks
Our primary sources of liquidity consist of existing cash balances, cash flows from our operating activities and availability under our revolving credit facility. Our ability to generate sufficient cash flows from our operating activities is primarily dependent on our sales of steel pipe, tube and ancillary products to our customers at margins sufficient to cover fixed and variable expenses.
As of March 31, 2024 and September 30, 2023, we had cash and cash equivalents of $7,803,550 and $20,192,460, respectively. We believe that our current cash, cash to be generated from our operations and access to loans from our related parties will be sufficient to meet our working capital needs for at least the next twelve months. However, we do not have any amounts committed to be provided by our related party. We plan to expand our business to implement our growth strategies in our existing market and strengthen our position in the marketplace. To do so, we will need more capital through equity financing to increase our production and meet market demands.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of accounting standards until they would apply to private companies.
F-15
New Accounting Pronouncements Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, the provisions of ASC 326 shall be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted the new standard beginning October 1, 2023 using the modified retrospective transaction method. The impact of adopting the new standard was not material to the consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280)”. The amendment in this ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments also require a public entity to disclose the title and position of the chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. For a public entity with a single reportable segment, the ASU requires the entity to provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company will adopt this ASU on October 1, 2024. The Company does not expect the adoption to have a material impact on the Company’s consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU requires that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). The ASU is effective for public business entities for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. The Company will adopt this ASU on October 1, 2026. The Company does not expect the adoption to have a material impact on the Company’s consolidated financial statements and related disclosures.
Except as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
F-16
NOTE 3 – ACCOUNTS RECEIVABLE, NET
Accounts receivable, net as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31,<br> 2024 | September 30, <br> 2023 | |||||
|---|---|---|---|---|---|---|
| Accounts receivable | $ | 20,072,232 | $ | 25,021,916 | ||
| Less: allowance for credit losses | (1,553,365 | ) | (2,391,641 | ) | ||
| Accounts receivable, net | $ | 18,518,867 | $ | 22,630,275 |
The Company’s customers are primarily governmental entities, state-owned entities and construction companies. Due to the nature of these customers and the practice of the industry, the Company generally allows credit period of 180 days to its customers.
Changes in the allowance for credit losses as of March 31, 2024 and September 30, 2023 are as follow:
| March 31,<br> 2024 | September 30, <br> 2023 | |||||
|---|---|---|---|---|---|---|
| Beginning balance | $ | 2,391,641 | $ | 2,197,396 | ||
| Addition (reduction) of credit losses allowance | (865,015 | ) | 257,784 | |||
| Write-off | - | - | ||||
| Exchange difference | 26,739 | (63,539 | ) | |||
| Ending balance | $ | 1,553,365 | $ | 2,391,641 |
For the six months ended March 31, 2024, the Company recorded a reversal of credit loss expense of $865,015, which was mainly because the Company adopted ASC 326 “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” using the modified retrospective approach. For the six months ended March 31, 2023, the Company recorded credit loss expense of $63,255.
NOTE 4 – NOTES RECEIVABLE, NET
Notes receivable, net as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31,<br> 2024 | September 30, <br> 2023 | ||||
|---|---|---|---|---|---|
| Notes receivable | $ | 9,026,812 | $ | 7,661,035 | |
| Less: allowance for credit losses | (229,486 | ) | - | ||
| Notes receivable, net | $ | 8,797,326 | $ | 7,661,035 |
Notes receivable mainly represents bank acceptance notes and commercial acceptance notes received from the Company’s customers. These notes with 3-6 months maturity dates were issued by customers to pay their payable balances to the Company.
F-17
Changes in the allowance for credit losses as of March 31, 2024 are as follow:
| March 31,<br> 2024 | |||
|---|---|---|---|
| Beginning balance | $ | - | |
| Addition (reduction) of credit losses allowance | 229,929 | ||
| Write-off | - | ||
| Exchange difference | (443 | ) | |
| Ending balance | $ | 229,486 |
Factored notes receivables with recourse amounted $2,494,513 and $4,442,870 were recorded as short-term borrowings as of March 31, 2024 and September 30, 2023, respectively.
NOTE 5 – INVENTORIES, NET
Inventories, net as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31,<br> 2024 | September 30,<br> 2023 | |||
|---|---|---|---|---|
| Raw materials | $ | 17,410,025 | $ | 13,243,104 |
| Work in process | 269,044 | 247,113 | ||
| Finished goods | 11,270,827 | 13,216,411 | ||
| Total inventories | 28,949,896 | $ | 26,706,629 | |
| Less: inventory valuation allowance | - | - | ||
| Inventories, net | $ | 28,949,896 | $ | 26,706,629 |
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT,NET
Property, plant, and equipment as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31,<br> 2024 | September 30, <br> 2023 | |||||
|---|---|---|---|---|---|---|
| Buildings | $ | 2,944,016 | $ | 2,913,471 | ||
| Machinery and equipment | 9,785,992 | 9,631,702 | ||||
| Transportation vehicles | 1,024,220 | 1,013,593 | ||||
| Office equipment | 645,236 | 611,129 | ||||
| Total property, plant, and equipment, at cost | 14,399,464 | 14,169,895 | ||||
| Less: accumulated depreciation | (9,260,222 | ) | (8,814,898 | ) | ||
| Property, plant, and equipment, net | $ | 5,139,242 | $ | 5,354,997 |
Depreciation expense was $353,586 and $374,321 for the six months ended March 31, 2024 and 2023, respectively. The Company had no impairment and disposal of property, plant and equipment for the six months ended March 31, 2024 and 2023.
As of March 31, 2024 and September 30, 2023, the Company pledged buildings to secure banking facilities granted to the Company. The carrying values of the pledged buildings to secure bank borrowings by the Company are shown in Note 11.
F-18
NOTE 7 – LAND USE RIGHTS, NET
Land use rights as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31,<br> 2024 | September 30, <br> 2023 | |||||
|---|---|---|---|---|---|---|
| Land use rights, cost | $ | 4,874,939 | $ | 4,824,826 | ||
| Less: accumulated amortization | (565,761 | ) | (512,477 | ) | ||
| Land use rights, net | $ | 4,309,178 | $ | 4,312,349 |
Amortization expense was $48,476 and $14,887 for the six months ended March 31, 2024 and 2023, respectively.
NOTE 8 – LONG-TERM INVESTMENTS
Long-term investments consisted of the following as of March 31, 2024 and September 30, 2023:
| March 31,<br><br> 2024 | September 30, <br> 2023 | |||
|---|---|---|---|---|
| Huashang Micro Finance Co. | $ | 5,262,939 | $ | 5,208,333 |
| Longwan Rural Commercial Bank | 6,229,935 | 6,165,296 | ||
| Wenzhou Longlian Development Co., Ltd | 1,154,163 | 1,142,188 | ||
| Total long-term investments, at cost | $ | 12,647,037 | $ | 12,515,817 |
| Add: upward adjustments | - | - | ||
| Less: impairment and downward adjustments | - | - | ||
| Long-term investments | $ | 12,647,037 | $ | 12,515,817 |
In 2009, the Company made an investment of RMB 90,000,000 ($13,203,257 in USD) to acquire 22.5% in Huashang Micro Finance Co. (“Huashang”), a finance company offers micro loans to its customers. In 2015, as the result of a capital reduction, the Company’s ownership was reduced by 3.5% to 19% for a cash consideration of RMB 52,000,000 ($8,535,827 in USD). The Company carries this investment at cost-minus-impairment measurement alternative on its consolidated balance sheets. The Company did not receive dividend income from Huashang during the six months ended March 31, 2024 and 2023.
In 2011, the Company made an investment of RMB 8,333,400 ($1,307,982 in USD) to acquire 8.3334% in Wenzhou Longlian Development Co., Ltd. (“Longlian”), a property and infrastructure development company. The Company carries this investment at the cost-minus-impairment measurement alternative on its consolidated balance sheets. The Company did not receive any dividend income from Longlian during the six months ended March 31, 2024 and 2023.
In 2012, the Company made an investment of RMB 44,982,000 ($7,172,207 in USD) to acquire 2.1% in Longwan Rural Commercial Bank. (“LRCB”), a private bank accepting deposits and providing short-term or long-term lending to its customers. The Company carries this investment at at cost-minus-impairment measurement alternative on its consolidated balance sheets. The Company did not receive dividend income from LRCB during the six months ended March 31, 2024 and 2023.
The ownership percentage of the above long-term investments has not changed during the six months ended March 31, 2024. During the six months ended March 31, 2024 and 2023, no impairment of long-term investment was recognized.
F-19
NOTE 9 – NOTES PAYABLE
Notes payable consisted of bank notes payable of $4,810,792 and $1,632,401 provided by the Company to its suppliers as of March 31, 2024 and September 30, 2023, respectively. These short-term bank notes can be endorsed and assigned to suppliers as payments for purchases. The bank notes payables are generally payable within six months. These short-term notes payables are guaranteed by the bank for their full face value. In addition, the banks usually require the Company to deposit a certain amount of fund at the bank as a guarantee deposit, which is classified on the consolidated balance sheets as restricted cash.
NOTE 10 – ACCRUED EXPENSESAND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following as of March 31, 2024 and September 30, 2023:
| March 31,<br> 2024 | September 30, <br> 2023 | |||
|---|---|---|---|---|
| Accrued payroll and other welfare | 1,402,287 | 1,591,880 | ||
| Other accrued expenses | 210,770 | 354,445 | ||
| Total | 1,613,057 | 1,946,325 |
NOTE 11 – SHORT-TERM AND LONG-TERM BORROWINGS
Short-term and long-term borrowings consisted of the following as of March 31, 2024 and September 30, 2023:
| March 31,<br><br> 2024 | September 30, <br> 2023 | |||
|---|---|---|---|---|
| Short-term borrowings | $ | 2,494,513 | $ | 4,442,870 |
| Long-term borrowings | ||||
| Current portion | $ | 2,770 | $ | 43,860 |
| Non-current portion | 1,770,010 | 5,398,849 | ||
| Total long-term borrowings | $ | 1,772,780 | $ | 5,442,709 |
Short-term borrowings
Short-term borrowings outstanding at March 31, 2024 and September 30, 2023 were undue factored notes receivable with recourse as shown in Note 4. These notes receivable will be expired in no more than six months from March 31, 2024.
Long-term borrowings
Long-term borrowings consisted of the following at March 31, 2024:
| Bank Name | Amount - RMB | Amount - | Issuance Date | Expiration Date | Interest |
|---|
| Agricultural Bank | | 2,850,000 | | 10/12/2023 | 10/11/2026 | | 3.45 | % |
| Agricultural Bank | | 9,950,000 | | 10/30/2023 | 10/25/2026 | | 3.45 | % |
| Total | RMB | 12,800,000 | | | | | | |
All values are in US Dollars.
Long-term borrowings consisted of the following at September 30, 2023:
| Bank Name | Amount - RMB | Amount - | Issuance Date | Expiration Date | Interest |
|---|
| Agricultural Bank | | 9,930,000 | | 4/28/2022 | 4/25/2025 | | 3.95 | % |
| Agricultural Bank | | 9,940,000 | | 12/9/2022 | 12/8/2025 | | 3.95 | % |
| Agricultural Bank | | 9,940,000 | | 12/15/2022 | 12/13/2025 | | 3.95 | % |
| Agricultural Bank | | 9,900,000 | | 9/26/2023 | 9/25/2026 | | 3.45 | % |
| Total | RMB | 39,710,000 | | | | | | |
All values are in US Dollars.
F-20
The following is a maturity analysis of long-term borrowings as of March 31, 2024:
| RMB | |||
|---|---|---|---|
| Years ending March 31, | |||
| 2025 | 20,000 | ||
| 2026 | 20,000 | ||
| 2027 | 12,760,000 | ||
| 2028 | - | ||
| 2029 and thereafter | - | ||
| Total | 12,800,000 |
All values are in US Dollars.
Pledges and Guarantees
The Company’s short-term and long-term bank borrowings are pledged by its assets as listed below:
| March 31, 2024 | September 30, <br> 2023 | |||
|---|---|---|---|---|
| Buildings, net | $ | 24,110 | $ | 23,860 |
| Land use right, net | 413,886 | 414,738 | ||
| Total | $ | 437,996 | $ | 438,598 |
Interest expense
For the six months ended March 31, 2024 and 2023, interest expense on all short-term borrowings, long-term borrowings and discounts on notes receivable amounted to $90,630 and $219,908, respectively.
NOTE 12 – CUSTOMER AND SUPPLIER CONCENTRATIONS
Significant customers and suppliers are those that account for greater than 10% of the Company’s revenues and purchases.
Customer concentration
The Company had no significant customer during the six months ended March 31, 2024. There was one customer accounted for a significant portion of total accounts receivable for the six months ended March 31, 2024, which accounted for 19.46% of the Company’s total accounts receivable.
The Company sold a substantial portion of products to one customer (10.98% of total revenues) during the six months ended March 31, 2023. As of March 31, 2023, two significant customers’ accounts receivable were $730,067 and $6,305,357, accounted for 3.36% and 29.01% of the total accounts receivable, respectively.
The loss of our significant customers or the failure to attract new customers could have a material adverse effect on our business, consolidated results of operations and financial condition.
F-21
Supplier concentration
For the six months ended March 31, 2024, three suppliers accounted for 29.16%, 13.51% and 10.61% of the Company’s total purchase. There were two suppliers that have significant concentration (over 10%) of total accounts payable for the six months ended March 31, 2024, which accounted for 35.44% and 29.66% of the Company’s total accounts payable.
For the six months ended March 31, 2023, two suppliers accounted for 24.81%, and 12.27% of the Company’s total raw material purchases. There were three suppliers that have significant concentration (over 10%) of total accounts payable as of March 31, 2023, which accounted for 51.53%, 13.75% and 10.83% of the Company’s total accounts payable.
The Company believes there are numerous other suppliers that could be substituted should these suppliers become unavailable or non-competitive.
NOTE 13 – RELATED PARTY TRANSACTIONS
1) Nature of relationships with related parties:
| Name | Relationship with the Company |
|---|
| Taizhou Huadi Industrial Ltd. (“Taizhou Huadi”) | An entity 30% owned by Jueqin Wang, principal shareholder of the Company |
| Huashang Micro Finance Co. (“Huashang”) | An entity 19% owned by the Company |
| Taizhou Huadi Material Technology Co. (Huadi Material) | An entity 100% owned by Jueguang Wang, Immediate family member of Jueqin Wang |
| Wenzhou Maituo International Trade Ltd. (“Wenzhou Maituo”) | An entity controlled by Meiling Wang, Immediate family member of Jueqin Wang |
| Jueqin Wang | Principal shareholder of the Company |
| Di Wang | Principal shareholder of the Company |
| Jueguang Wang | Immediate family member of Jueqin Wang |
| Meiling Wang | Immediate family member of Jueqin Wang |
| Bing Zhang | Principal shareholder of the Company |
2) Related party transactions
Six Months Ended March 31, 2024
During the six months ended March 31, 2024, the Company purchased a total of $1,832 raw materials from Taizhou Huadi. These raw materials primarily consisted of stainless steel bars and stainless steel strips.
During the six months ended March 31, 2024, the Company purchased a total of $368,424 raw materials from Huadi Material and sold a total of $7,341 steel materials to Huadi Material. As of March 31, 2024, the Company had advance balance of $1,008,567 to this entity.
During the six months ended March 31, 2024, the Company leased an office to Huashang with annual rent amounted $29,182, and the Company recorded $15,632 rental income. As of March 31, 2024, the Company had advance balance of $20,054 from this entity.
Six Months Ended March 31, 2023
During the six months ended March 31, 2023, the Company purchased $686,727 in raw materials from Taizhou Huadi. These raw materials primarily consisted of stainless steel bars and stainless steel strips. As of March 31, 2023, the balance of accounts payable to Taizhou Huadi was $3,922,725.
3) Related party balances
Net outstanding balances with related parties consisted of the following as of March 31, 2024 and September 30, 2023:
| Accounts | Name of related parties | March 31,<br> <br>2024 | September 30,<br> 2023 | ||||
|---|---|---|---|---|---|---|---|
| Advances to suppliers | Taizhou Huadi Material Technology Co. | $ | 1,008,567 | $ | - | ||
| Accounts payable | Taizhou Huadi Industrial Ltd. | - | 3,692,394 | ||||
| Advances from customers | Taizhou Huadi Material Technology Co. | - | 385,605 | ||||
| Advances from customers | Wenzhou Maituo International Trade Ltd. | - | 623,629 | ||||
| Advances from customers | Huashang Micro Finance Co. | 20,054 | 6,462 | ||||
| Due to related parties – noncurrent portion | Jueqin Wang | (300,236 | ) | (317,680 | ) |
F-22
NOTE 14 – SHAREHOLDERS’ EQUITY
Ordinary shares
Shares Issuances
On November 7, 2022, the Company entered into a securities purchase agreement with two institutional investors pursuant to which the Company agreed to sell up to 3,500,000 ordinary shares, par value $0.0002 per share, in a registered direct offering. On November 9, 2022, the Company closed the Offering for the sale of 1,000,000 ordinary shares. The Company received gross proceeds from the sale of the Shares of approximately $25,000,000, before deducting placement agent fees and other offering expenses. The Company has agreed to grant each purchaser, for a period of one ninety (90) days after the closing date, or for an additional thirty (30) days thereafter at the election of the Company, the right to purchase additional ordinary shares in an aggregate amount equal to up to 250% of the Shares issued or issuable to each purchaser pursuant to the Purchase Agreement, on the same terms, conditions and price at the purchase of the ordinary shares. Management determined that these warrants are equity instruments because the warrants are both a) indexed to its own stock; and b) classified in stockholders’ equity. The warrants were recorded at their fair value on the date of grant as a component of stockholders’ equity. As of March 31, 2024, all warrants have expired.
Non-controlling interests
Non-controlling interests represent the interest of non-controlling shareholder in Huadi Steel based on his proportionate interests in the equity of that company adjusted for its proportionate share of income or losses from operations. In August 2019, Wenzhou Hongshun acquired 99% equity percentage of Huadi Steel from the PRC Shareholders. As the result, Huadi Steel’s equity interest is 99% held by Wenzhou Hongshun and 1% held by Di Wang. The non-controlling interest in Huadi Steel was 1% as of both March 31, 2024 and September 30, 2023.
Restricted net assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiary. Relevant PRC statutory laws and regulations permit payments of dividends by WFOEs and Huadi Steel (collectively, the “Huadi PRC Subsidiaries”) only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Huadi PRC Subsidiaries.
Huadi PRC Subsidiaries are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their respective registered capital. In addition, Huadi PRC Subsidiaries may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at their discretion. Huadi PRC Subsidiaries may allocate a portion of their respective after-tax profits based on PRC accounting standards to a discretionary surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.
As a result of the foregoing restrictions, Huadi PRC Subsidiaries are restricted in their ability to transfer their assets to the Company. Foreign exchange and other regulations in the PRC may further restrict Huadi PRC Subsidiaries from transferring funds to the Company in the form of dividends, loans and advances. As of March 31, 2024 and September 30, 2023, amounts restricted are the paid-in-capital and statutory reserve of Huadi PRC Subsidiaries as follows:
| March 31,<br><br> 2024 | September 30, <br> 2023 | |||
|---|---|---|---|---|
| Statutory reserves | $ | 981,257 | $ | 874,518 |
| Paid-in-capital | 14,835,036 | 13,775,036 | ||
| Total restricted net assets | $ | 15,816,293 | $ | 14,649,554 |
F-23
NOTE 15 – INCOME TAXES
Enterprise Income Taxes (“EIT”)
Cayman Islands
Huadi International is incorporated in Cayman Island as an offshore holding company. Under the current laws of the Cayman Islands, Huadi International is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Yongqiang Tuoxing is incorporated in British Virgin Islands as an offshore holding company. Under the current laws of the British Virgin Islands, Yongqiang Tuoxing is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no British Virgin Islands withholding tax will be imposed.
Hong Kong
HK Beach is established in Hong Kong. Under the current Hong Kong Inland Revenue Ordinance, companies are subject to 16.5% income tax or on its taxable income generated from operations in Hong Kong. On December 29, 2017, Hong Kong government announced a two-tiered profit tax rate regime. Under the two-tiered tax rate regime, the Company’s Hong Kong subsidiary, HK Beach, the first HK$2.0 million assessable profits will be subject to an 8.25% lower tax rate and the remaining taxable income will continue to be taxed at the existing 16.5% tax rate. The two-tiered tax regime becomes effective from the assessment year of 2018 and 2019, which is on or after April 1, 2018. The application of the two-tiered rates is restricted to only one nominated enterprise among connected entities. HK Beach is nominated by the Company as the entity to apply the two-tiered rates among the group for the assessment years of 2024, 2023 and 2022.
PRC
Wenzhou Hongshun is established in PRC and is subject to statutory income tax rate at 25%.
Huadi Steel, the Company’s main operating subsidiary in PRC, was entitled High and New Technology Enterprise (“HNTE”) and enjoyed preferential tax rate of 15% for a three-year validity period from fiscal year 2019, and the HNTE certificate was renewed on December 24, 2022. Thus, Huadi Steel is eligible for a 15% preferential tax rate from fiscal year 2020 to fiscal year 2025. As of March 31, 2024, the tax years ended December 31, 2017 through December 31, 2023 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities.
Huadi Songyang is established in PRC and is subject to statutory income tax rate at 25%.
Income taxes for the six months ended March 31, 2024 and 2023 are attributed to the Company’s continuing operations in China and consisted of:
| 2024 | 2023 | ||||
|---|---|---|---|---|---|
| Current income tax | $ | - | $ | 150,862 | |
| Deferred income tax | 24,805 | (9,488 | ) | ||
| Total income tax expense (benefits) | $ | 24,805 | $ | 141,374 |
Income tax expense reconciliation are as follows:
| 2024 | 2023 | |||||
|---|---|---|---|---|---|---|
| Income before taxes | $ | 840,527 | $ | 1,595,461 | ||
| PRC EIT tax rates | 15 | % | 15 | % | ||
| Tax at the PRC EIT tax rates | $ | 126,079 | 239,319 | |||
| Rate differences in various jurisdictions | 45,789 | - | ||||
| Tax effect of R&D expenses deduction | (182,476 | ) | (171,281 | ) | ||
| Tax effect of non-taxable investment income and government grant | - | 23,097 | ||||
| Tax effect of non-deductible expenses | 35,413 | 50,239 | ||||
| Income tax expenses (benefits) | $ | 24,805 | $ | 141,374 |
F-24
Deferred tax assets
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset at March 31, 2024 and September 30, 2023 are presented below:
| March 31,<br><br> 2024 | September 30, <br> 2023 | |||||
|---|---|---|---|---|---|---|
| Deferred tax assets: | ||||||
| Allowance for credit losses | $ | 311,886 | $ | 392,713 | ||
| Loss carryforward | 73,150 | 2,076 | ||||
| DTA allowance | (12,963 | ) | (2,076 | ) | ||
| Total | $ | 372,073 | $ | 392,713 |
Uncertain tax positions
The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of March 31, 2024 and September 30, 2023 the Company did not have any significant unrecognized uncertain tax positions.
Taxes payable consist of the following:
| March 31,<br><br> 2024 | September 30, <br> 2023 | ||||
|---|---|---|---|---|---|
| Income tax payable | $ | 3,182,236 | $ | 3,507,752 | |
| VAT and tax payable (receivable) | (193,790 | ) | 502,097 | ||
| Total tax payable | $ | 2,988,446 | $ | 4,009,849 |
NOTE 16 – COMMITMENT AND CONTINGENCIES
As of March 31, 2024 and September 30, 2023, the Company has no material purchase commitments or significant leases.
From time to time, the Company is involved in various legal proceedings, claims and other disputes arising from commercial operations, employees, and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although the Company can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on the Company, the Company believes that any ultimate liability resulting from the outcome of such proceedings to the extent not otherwise provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations or liquidity. As of March 31, 2024 and September 30, 2023, the Company had no pending legal proceedings outstanding.
NOTE 17 – SEGMENT REPORTING
ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different products. Based on management’s assessment, the Company has determined that it has only one operating segment as defined by ASC 280.
Revenue disaggregation
The following table presents revenue by business lines:
| For the Six Months Ended<br><br> March 31, | ||||
|---|---|---|---|---|
| 2024 | 2023 | |||
| Revenue | ||||
| Sales | $ | 36,613,509 | $ | 37,333,555 |
| Production service revenue | 469,277 | 618,897 | ||
| Total revenue | $ | 37,082,786 | $ | 37,952,452 |
F-25
Geographical areas
The following table presents revenues by geographic areas for the six months ended March 31, 2024.
| March 31, 2024 | ||||
|---|---|---|---|---|
| Sales Amount (In ) | As %<br> of Sales | |||
| Top 5 geographic areas: | ||||
| China | 86.03 | % | ||
| USA | 6.96 | % | ||
| Cayman | 2.24 | % | ||
| India | 2.00 | % | ||
| The United Arab Emirates | 1.85 | % | ||
| Other foreign countries | 0.92 | % |
All values are in US Dollars.
The following table presents revenues by geographic areas for the six months ended March 31, 2023.
| March 31, 2023 | ||||
|---|---|---|---|---|
| Sales Amount (In ) | As %<br> of Sales | |||
| Top 5 geographic areas: | ||||
| China | 86.90 | % | ||
| US | 11.00 | % | ||
| India | 1.01 | % | ||
| United Arab Emirates | 0.63 | % | ||
| Australia | 0.36 | % | ||
| Other foreign countries | 0.10 | % |
All values are in US Dollars.
Due to the nature of the Company’s products, it is impractical to disclose revenues generated from each product or each group of similar products. Also, as the Company’s long-lived assets are primarily located in the PRC, no geographical segments are presented.
NOTE 18 – OTHER INCOME (EXPENSE), NET
Other income (expense), net for the six months ended March 31, 2024 and 2023 consisted of the following:
| For the Six Months Ended<br><br> March 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Government grants | $ | 584,671 | $ | 333,999 | |
| Rental income | 67,232 | - | |||
| Other net miscellaneous income (expenses) | (23,708 | ) | 77,763 | ||
| Total | $ | 628,195 | $ | 411,762 |
NOTE 19 – SUBSEQUENT EVENTS
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the unaudited financial statements are issued. The Company has evaluated all events or transactions that occurred after March 31, 2024, up through August 6, 2024, the Company issued the unaudited consolidated financial statements and concluded that no other material subsequent events except for the disclosed below:
Bank borrowings
Borrowings repayment and renewal
From March 31, 2024 to the date the unaudited consolidated financial statements were available to be issued, the Company repaid part of its long-term borrowings of $695,262 (RMB 5,020,000). As the date the audited consolidated financial statements were available to be issued, the Company has no new bank borrowings.
F-26