U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 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 June 2019
Commission
File Number: 001-38304
DOGNESS
(INTERNATIONAL) CORPORATION
(Registrant’s
name)
Tongsha
Industrial Estate, East District
Dongguan,
Guangdong
People’s
Republic of China 523217
+86
769-8875-3300
(Address
of principal executive offices)
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 [X] Form 40-F [ ]
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Explanatory
Note:
On
June 18, 2019, the Registrant issued a press release announcing its financial results for the first six months of fiscal
year 2019, which press release is attached as Exhibit 99.1 to this Form 6-K.
Summary
Financial Results
|
|
|
Six Months Ended December
31,
|
|
|
|
|
|
(USD, except for %)
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Sales
|
|
$
|
12,836,651
|
|
|
$
|
14,832,705
|
|
|
|
(13.5
|
)%
|
|
Cost of sales
|
|
|
(8,208,059
|
)
|
|
|
(8,818,550
|
)
|
|
|
(6.9
|
)%
|
|
Gross profit
|
|
|
4,628,592
|
|
|
|
6,014,155
|
|
|
|
(23.0
|
)%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
1,155,750
|
|
|
|
532,287
|
|
|
|
117.1
|
%
|
|
General and administrative expenses
|
|
|
2,821,646
|
|
|
|
1,583,049
|
|
|
|
78.2
|
%
|
|
Research and development expense
|
|
|
538,680
|
|
|
|
170,387
|
|
|
|
216.2
|
%
|
|
Total operating expenses
|
|
|
4,516,076
|
|
|
|
2,285,723
|
|
|
|
97.6
|
%
|
|
Income from operations
|
|
|
112,516
|
|
|
|
3,728,432
|
|
|
|
(97.0
|
)%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
400,104
|
|
|
|
(153,154
|
)
|
|
|
(361.2
|
)%
|
|
Foreign transaction exchange gain (loss)
|
|
|
526,745
|
|
|
|
(175,053
|
)
|
|
|
(400.9
|
)%
|
|
Other income
|
|
|
16,322
|
|
|
|
1,506
|
|
|
|
983.8
|
%
|
|
Total other income (expenses)
|
|
|
943,171
|
|
|
|
(326,701
|
)
|
|
|
(388.7
|
)%
|
|
Income before income taxes
|
|
|
1,055,687
|
|
|
|
3,401,731
|
|
|
|
(69.0
|
)%
|
|
Provision for income taxes
|
|
|
329,096
|
|
|
|
511,010
|
|
|
|
(35.6
|
)%
|
|
Net income
|
|
$
|
726,591
|
|
|
$
|
2,890,721
|
|
|
|
(74.9
|
)%
|
Financial
Results for Six Months Ended December 31, 2018
Revenues
Revenues
decreased by approximately $2.0 million, or 13.5%, to approximately $12.8 million for the six months ended December 31, 2018 from
approximately $14.8 million for the same period of the prior fiscal year. The decrease in revenue was primarily attributable to
a sales volume decrease of 10.3% and a decrease in average selling price of 3.6% as compared to the same period of fiscal 2018.
The decrease in sales volume was mainly due to the negative impact of increased tariffs during the six months ended December 31,
2018 on some of our products as a result of the trade dispute between China and the United States started since September 2018,
which led to reduced purchase orders from several of our major customers located in the United States. Starting on May 10, 2019,
the tariff has jumped from 10% to 25%, and we are anticipating a further cutting-down of our export sales to the United States
in the coming months due to uncertainties arising from the China-US continuous talks on the trade deals.
Revenue
by Geographic Area
|
|
|
For the six months ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Countries
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Variance
|
|
|
Variance %
|
|
|
United States
|
|
$
|
2,963,086
|
|
|
|
23.1
|
%
|
|
$
|
6,071,386
|
|
|
|
40.9
|
%
|
|
$
|
(3,108,300
|
)
|
|
|
(51.2
|
)%
|
|
Europe
|
|
|
1,260,242
|
|
|
|
9.8
|
%
|
|
|
951,754
|
|
|
|
6.4
|
%
|
|
|
308,488
|
|
|
|
32.4
|
%
|
|
Australia
|
|
|
110,960
|
|
|
|
0.9
|
%
|
|
|
185,127
|
|
|
|
1.2
|
%
|
|
|
(74,166
|
)
|
|
|
(40.1
|
)%
|
|
Canada
|
|
|
58,353
|
|
|
|
0.5
|
%
|
|
|
92,328
|
|
|
|
0.6
|
%
|
|
|
(33,975
|
)
|
|
|
(36.8
|
)%
|
|
Central and south America
|
|
|
81,927
|
|
|
|
0.6
|
%
|
|
|
103,891
|
|
|
|
0.7
|
%
|
|
|
(21,964
|
)
|
|
|
(21.1
|
)%
|
|
Japan and other Asian countries and regions
|
|
|
112,490
|
|
|
|
0.9
|
%
|
|
|
207,383
|
|
|
|
1.4
|
%
|
|
|
(94,893
|
)
|
|
|
(45.8
|
)%
|
|
China
|
|
|
8,249,593
|
|
|
|
64.3
|
%
|
|
|
7,220,836
|
|
|
|
48.7
|
%
|
|
|
1,028,757
|
|
|
|
14.2
|
%
|
|
Total
|
|
$
|
12,836,651
|
|
|
|
100
|
%
|
|
$
|
14,832,706
|
|
|
|
100
|
%
|
|
$
|
(1,996,055
|
)
|
|
|
(13.5
|
)%
|
Our
export sales to the United States decreased approximately $3.1 million or 51.2%, during the first half of fiscal 2019, as compared
to the same period of fiscal 2018. Due to the uncertainties and higher tariff created by the China-U.S. trade dispute, several
major customers in the United States reduced their purchase orders from us by approximately 1.0 million units or 19% as compared
to the same period of fiscal 2018.
We
have increased our marketing activities and sales efforts in domestic market in the wake of the growing pet consumption market
in China in general. With more pet ordinances and regulations being enforced by local authorities, Chinese pet owners are required
to keep dogs on leashes. As a result, we expect growing demand from pet owners in China for our quality products. The total sales
in our domestic market increased by approximately $1.0 million or 14.2% as compared to the same period of fiscal 2018.
We
also expanded our sales channels to more European countries in fiscal 2019, such as Germany, Poland, Greece, Bulgaria and Ireland.
Our export sales to Europe increased by $308,488 or 32.4% in the six months ended December 31, 2018 as compared to the same period
of last year.
Our
increase in sales in China and Europe partially offset our decreased sales in the United States.
Revenue
by Product Type
Our
pet collars, pet leashes, gift suspenders and pet harnesses continued to account for the greatest percentages of total sales at
26.7%, 24.1%, 16.2% and 14.6% of total sales, respectively, during the first half of fiscal 2019, compared to 37.1%, 22.4%, 11.6%
and 17.6% of total sales, respectively, in the first half of fiscal 2018. Sales of our retractable dog leashes slightly decreased
from 6.2% of our total sales in the six months ended December 31, 2017 to 5.9% of our total sales for the six months ended December
31, 2018 due to decreased sales volume as affected by reduced export sales to the United States. We launched our intelligent pet
products in March 2018 and intelligent pet products account for 4.4% of our total sales during the first half of fiscal 2019.
We had no such sales in the same period of fiscal 2018.
|
|
|
Revenue by Product Type
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Product category
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Variance
|
|
|
Variance %
|
|
|
Pet leashes
|
|
$
|
3,094,754
|
|
|
|
24.1
|
%
|
|
$
|
3,328,950
|
|
|
|
22.4
|
%
|
|
$
|
(234,196
|
)
|
|
|
(7.0
|
)%
|
|
Pet collars
|
|
|
3,423,555
|
|
|
|
26.7
|
%
|
|
|
5,504,792
|
|
|
|
37.1
|
%
|
|
|
(2,081,237
|
)
|
|
|
(37.8
|
)%
|
|
Pet harnesses
|
|
|
1,875,311
|
|
|
|
14.6
|
%
|
|
|
2,610,480
|
|
|
|
17.6
|
%
|
|
|
(735,169
|
)
|
|
|
(28.2
|
)%
|
|
Gift suspenders
|
|
|
2,074,218
|
|
|
|
16.2
|
%
|
|
|
1,726,310
|
|
|
|
11.6
|
%
|
|
|
347,908
|
|
|
|
20.2
|
%
|
|
Retractable dog leashes
|
|
|
762,508
|
|
|
|
5.9
|
%
|
|
|
919,254
|
|
|
|
6.2
|
%
|
|
|
(156,746
|
)
|
|
|
(17.1
|
)%
|
|
Intelligent pet products
|
|
|
568,474
|
|
|
|
4.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
568,474
|
|
|
|
-
|
|
|
Other pet accessories
|
|
|
1,037,831
|
|
|
|
8.1
|
%
|
|
|
742,920
|
|
|
|
5.0
|
%
|
|
|
294,911
|
|
|
|
39.7
|
%
|
|
Total
|
|
$
|
12,836,651
|
|
|
|
100.0
|
%
|
|
$
|
14,832,706
|
|
|
|
100.0
|
%
|
|
$
|
(1,996,055
|
)
|
|
|
(13.5
|
)%
|
|
|
|
Quantity sold for six
months ended December
31,
|
|
|
|
|
|
% of
|
|
|
Average unit price for six
months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Quantity
variance
|
|
|
Quantity
variance
|
|
|
2018
|
|
|
2017
|
|
|
Price
Difference
|
|
|
Pet leashes
|
|
|
1,222,145
|
|
|
|
2,072,485
|
|
|
|
(850,340
|
)
|
|
|
(41.0
|
)%
|
|
$
|
2.5
|
|
|
$
|
1.6
|
|
|
$
|
0.9
|
|
|
Pet collars
|
|
|
2,384,063
|
|
|
|
4,062,335
|
|
|
|
(1,678,272
|
)
|
|
|
(41.3
|
)%
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
-
|
|
|
Pet Harnesses
|
|
|
967,215
|
|
|
|
1,198,133
|
|
|
|
(230,918
|
)
|
|
|
(19.3
|
)%
|
|
|
1.9
|
|
|
|
2.2
|
|
|
|
(0.3
|
)
|
|
Gift suspenders
|
|
|
6,016,973
|
|
|
|
5,255,411
|
|
|
|
761,562
|
|
|
|
14.5
|
%
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
-
|
|
|
Retractable dog leashes
|
|
|
164,485
|
|
|
|
199,622
|
|
|
|
(35,137
|
)
|
|
|
(17.6
|
)%
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
-
|
|
|
Intelligent pet products
|
|
|
20,043
|
|
|
|
-
|
|
|
|
20,043
|
|
|
|
-
|
|
|
|
28.4
|
|
|
|
-
|
|
|
|
28.4
|
|
|
Other pet accessories
|
|
|
1,638,656
|
|
|
|
1,043,814
|
|
|
|
594,842
|
|
|
|
57.0
|
%
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
Total
|
|
|
12,413,580
|
|
|
|
13,831,800
|
|
|
|
(1,418,220
|
)
|
|
|
(10.3
|
)%
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
(0.1
|
)
|
Pet
leashes
Revenue from pet leashes decreased by approximately
$0.2 million, or 7.0%, from $3.3 million in the six months ended December 31, 2017, to $3.1 million in the six months ended December
31, 2018. The decrease was mainly driven by a 41.0% decrease in sales volume during the period compared to the same period of
the prior fiscal year, compensated by an increase in average unit price by $0.9 per unit or 56%, which was mainly due to more
higher cost leather dog leashes were sold. The decrease in our export sales volume for pet leashes was due to reduced purchase
orders from major customers located in the United States.
Pet
collars
Revenue
from pet collars decreased by approximately $2.1 million, or 37.8%, from $5.5 million in the six months ended December 31, 2017,
to $3.4 million in the six months ended December 31, 2018. The decrease in revenue was due to a 41.3% decrease in sales volume
during the six months ended December 31, 2018. Our export for pet collars sales decreased 43.9% in the six months ended December
31, 2018, comparing to the same period last year due to reduced purchase orders from major customers located in the United States.
The average selling price for pet collars remained consistent compared to the same period of the prior fiscal year.
Pet
harnesses
Revenue
from pet harnesses decreased by approximately $0.7 million, or 28.2%, from $2.6 million in the six months ended December 31, 2017,
to $1.9 million in the six months ended December 31, 2018. The decrease in revenue was due to a 19.3% decrease in sales volume
during the six months ended December 31, 2018. Our export for pet harnesses sales decreased 56.4% in the six months ended December
31, 2018, comparing to the same period last year due to reduced purchase orders from major customers located in the United States.
The average selling price for pet harnesses decreased by $0.3 per unit comparing to the same period of the prior fiscal year because
we lowered the selling price on several pet harnesses products in order to promote the sales to customers.
Gift
suspender
Revenue
from gift suspender increased by approximately $0.4 million, or 20.2%, from $1.7 million in the six months ended December 31,
2017, to $2.1 million in the six months ended December 31, 2018. The increase in revenue was due to a 14.5% increase in sales
volume during the six months ended December 31, 2018. Our export for gift suspender sales increased 60.8% in the six months ended
December 31, 2018, comparing to the same period last year. The average selling price for gift suspender remained consistent compared
to the same period of the prior fiscal year.
Retractable
dog leashes
Revenue
from retractable dog leashes decreased by 17.1%, to approximately $0.8 million during the six months ended December 31, 2018,
from $0.9 million in the six months ended December 31, 2017. The decrease in revenue was attributable to a 17.6% decrease in the
sales volume of retractable dog leashes during the six months ended December 31, 2018, as compared to the same period of last
year due to reduced purchase orders from major customers located in the United States.
Intelligent
pet products
Sales
of our intelligent pet products amounted to approximately $0.6 million in the six months ended December 31, 2018 as compared to
$Nil for the same comparative period of 2017. As a new product we launched in March 2018, our intelligent pet product line includes
app-controlled pet food containers and feeders, pet water containers and dispensers, and smart pet toys. As compared with other
products, intelligent pet products typically have high selling price. We are increasing our focus on new, smart and innovative
pet products and expect sales of intelligent pet products will continue to increase in the near future.
Other
pet accessories
Other
pet accessories include various dog comfort wrap harnesses, pet muzzles, metal chain traffic leashes, pet belt and ropes, etc.,
which are normally customized to fulfill customers’ purchase orders. Revenue from other pet accessories increased by 39.7%,
to approximately $1 million during the six months ended December 31, 2018, from $0.7 million in the six months ended December
31, 2017. The increase in revenue was attributable to a 57.0% increase in the sales volume of other pet accessories during the
six months ended December 31, 2018, as compared to the same period of last year.
Sales
to related party
During
the six months ended December 31, 2018, we invested RMB 2.0 million to eventually acquire 10% of the ownership interest in Dogness
Network Technology Co., Ltd (“Dogness Network”) in order to work together with Dogness Network to develop new products
and new technologies in smart pet tech area. We sold certain intelligent pet products to Dogness Network and accordingly reported
related party sales of $206,052, which accounted for 1.6% of our total revenue for the six months ended December 31, 2018. As
of the date of this filing, we have received partial payment from Dogness Network and we anticipate to fully collect the remaining
amount before June 30, 2019. There were no such related party sales in the same period of last fiscal year.
Cost
of revenues
Cost of revenues decreased by approximately
$0.6 million, or 6.9%, to $8.2 million in the six months ended December 31, 2018, from approximately $8.8 million in the same
period of the prior fiscal year. The decrease in our cost of revenues was mainly due to the decrease of sales volume by 13.5%
in the current period. As a percentage of revenues, the cost of goods sold increased by approximately 4.4% to 63.9% in the current
period from 59.5% in the same period of the prior fiscal year. This was mainly because more higher cost leather materials instead
of fabric materials have been used in the production in order to fulfill customer purchase orders of our pet leashes and pet collars
in fiscal 2019, which increased our related production cost to certain extent.
Gross
profit
During the six months ended December 31,
2018, gross profit decreased by approximately $1.4 million to approximately $4.6 million, from approximately $6.0 million in the
same period of the prior fiscal year, primarily attributable to decreased sales volume of our pet leash, pet collars, pet harnesses
and retractable dog leash, and increased cost of revenue on pet leashes and pet collars because more higher cost leather materials
have been used to fulfil customer orders. Overall gross profit margin was 36.1%, a decrease of 4.4 percentage points, compared
to 40.5% in the same period of the prior fiscal year.
Gross
margins for pet leashes, pet collars and gift suspenders decreased by 1.9 percentage points, 4.8 percentage points and 7.8 percentage
points, respectively, as compared to the same period in fiscal 2018. The decrease was mainly due to the increased raw material
costs because we produced more leather products instead of fabric products, as well as the increased salary expenses due to higher
labor costs as compared to the same period last year.
Gross
margin for pet harnesses and other pet accessories decreased by 3.4 percentage points and 10.1 percentage points, respectively,
as compared to the same period in fiscal 2018. The decrease was mainly due to the decreased average unit selling price when we
lowered down the selling price on certain products in order to promote sales to customers.
Gross
margin for retractable dog leashes increased by 5.2 percentage points, as compared to the same period in fiscal 2018. The increase
was mainly a result of the improved material and functionality of our retractable dog leash products, which reduced the cost of
production per unit, and increased the gross margin.
Gross
margin for our intelligent pet products was 34.5% during the six months ended December 31, 2018. The gross margin for intelligent
pet products is within our expectation.
Gross
profits by product type were as follows:
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Product category
|
|
Gross
profit
|
|
|
Gross
profit %
|
|
|
Gross
profit
|
|
|
Gross
profit %
|
|
|
Variance
in Gross
profit
|
|
|
Variance
in Gross
profit %
|
|
|
Pet leashes
|
|
$
|
1,134,887
|
|
|
|
36.7
|
%
|
|
$
|
1,285,758
|
|
|
|
38.6
|
%
|
|
$
|
(150,871
|
)
|
|
|
(1.9
|
)%
|
|
Pet collars
|
|
|
1,256,541
|
|
|
|
36.7
|
%
|
|
|
2,282,617
|
|
|
|
41.5
|
%
|
|
|
(1,026,076
|
)
|
|
|
(4.8
|
)%
|
|
Pet harnesses
|
|
|
735,971
|
|
|
|
39.2
|
%
|
|
|
1,112,320
|
|
|
|
42.6
|
%
|
|
|
(376,349
|
)
|
|
|
(3.4
|
)%
|
|
Gift suspenders
|
|
|
678,785
|
|
|
|
32.7
|
%
|
|
|
699,399
|
|
|
|
40.5
|
%
|
|
|
(20,614
|
)
|
|
|
(7.8
|
)%
|
|
Retractable dog leashes
|
|
|
324,192
|
|
|
|
42.5
|
%
|
|
|
342,809
|
|
|
|
37.3
|
%
|
|
|
(18,617
|
)
|
|
|
5.2
|
%
|
|
Intelligent pet products
|
|
|
196,171
|
|
|
|
34.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
196,171
|
|
|
|
34.5
|
|
|
Other pet accessories
|
|
|
302,045
|
|
|
|
29.1
|
%
|
|
|
291,252
|
|
|
|
39.2
|
%
|
|
|
10,793
|
|
|
|
(10.1
|
)%
|
|
Total
|
|
$
|
4,628,592
|
|
|
|
36.1
|
%
|
|
$
|
6,014,155
|
|
|
|
40.5
|
%
|
|
$
|
(1,385,563
|
)
|
|
|
(4.4
|
)%
|
Selling
expenses
Selling
expenses primarily included expenses incurred for participating in various trade shows to promote product sales, salary and sales
commission expenses paid to the Company’s sales personnel, customs clearance charges for product exports, and shipping and
delivery expenses. Selling expenses increased by $0.6 million, or 117.1% from $0.5 million in the six months ended December 31,
2017, to $1.1 million in the six months ended December 31, 2018. The increase in selling expense was primarily due to increased
trade show expenses by $148,065, increased sales and marketing expenses by $325,950, and an increased sales commission expense
by $54,049. Due to the our decreased export sales to the United States due to the higher tariff, in order to promote the sales
to European market and China domestic market, we initiated more promotion activities to these targeted markets and we participated
in some trade shows in these markets, which led to increased trade shows expense and marketing expenses as mentioned above. On
the other hand, our advertising expense through social media decreased by $17,947 and our duty and customs declaration expense
decreased by $18,259 due to reduced export sales to the United States during the period compared to the same period of the prior
fiscal year. As a percentage of sales, our selling expenses were 9.0% and 3.6% of our total revenues for the six months ended
December 31, 2018 and 2017, respectively.
General
and administrative expenses
General
and administrative expenses increased by approximately $1.2 million, or 78.2%, from approximately $1.6 million in the six months
ended December 31, 2017, to approximately $2.8 million in the six months ended December 31, 2018. The increase was mainly due
to increased salaries of approximately $0.3 million due to higher labor costs, and increased public company maintenance expenses
such as auditing fees, IR fees, legal counsel fees, capital market advisory fees as well as notarization fees. As a percentage
of sales, our general and administrative expenses were 22.0% and 10.7% of our total revenues for the six months ended December
31, 2018 and 2017, respectively.
Research
and development expenses
Research
and development expenses increased by approximately $0.3 million, or 216.2%, from approximately $0.2 million in the six months
ended December 31, 2017, to approximately $0.5 million in the six months ended December 31, 2018. As a percentage of sales, our
research and development expenses were 4.2% and 1.1% of our total revenues for the six months ended December 31, 2018 and 2017,
respectively. The increase was due to the Company’s continuous efforts to develop cutting edge smart products for pets,
as well as to improve some of the functions and exterior designs of our existing products in order to meet customer demands. We
expect R&D expenses to continue to increase, as we continue to expand our research and development activities to increase
the use of environmentally-friendly materials, and develop more new high-tech products to meet customer demands.
Other
income (expense)
Other
income (expense) primarily included interest income or expense and foreign exchange gain or loss. For the six months ended December
31, 2018, the Company had other income of approximately $0.9 million and had other expense of $0.3 million for the same period
of the prior fiscal year. The other income was mainly attributable to the foreign exchange gain of $0.5 million in the current
period due to the favorable USD, Euro, and other currency exchange rates against RMB on our foreign currency denominated account
receivables, as well as $0.4 million interest income from our short-term investments.
Income
tax
Income
tax expense decreased by approximately $0.3 million in six months ended December 31, 2018, or 35.6%, from approximately $0.5 million
in the six months ended December 31, 2017, to approximately $0.3 million in the six months ended December 31, 2018. The decrease
was consistent with the decrease in our taxable income for the six months ended December 31, 2018.
We
had accrued tax liabilities of approximately $2.6 million and $2.3 million as of December 31, 2018 and June 30, 2018, respectively,
mostly related to our unpaid income tax and business tax in China. According to PRC taxation regulation, if tax has not been fully
paid, tax authorities may impose tax and late payment penalties within three years. In practice, since all of the taxes owed are
local taxes, the local tax authority is typically more flexible and willing to provide incentives or settlements with local small
and medium-size businesses to relieve their burden and to stimulate the local economy. Management has discussed with local tax
authorities regarding the outstanding tax payable balance after the Company successfully completed its IPO and is in the process
of negotiating a settlement plan agreement. Management believes it is likely that the Company can reach an agreement with the
local tax authority to fully settle its tax liabilities within one year but cannot guarantee such settlement will ultimately occur.
Net
income
Net
income was approximately $0.73 million for the first half of fiscal 2019, a decrease of $2.2 million or 74.9%, from $2.9 million
in the same period of the prior fiscal year. The decrease in net income was the result of decreased sales and gross profit, and
increased operating expenses as discussed above.
Cash
and cash flows
As of December 31, 2018, we had we had
cash and cash equivalents of approximately $3.2 million. Cash from the IPO proceeds were used to purchase short-term investments
of approximately $17.5 million, which consists of wealth management financial products with maturities within one to three months.
These short-term investments are highly liquid upon maturity and can be used as working capital when needed.
Our current assets were approximately $33.8
million, and our current liabilities were approximately $7.7 million, which resulted in a current ratio of 4.4:1. Total shareholders’
equity as of December 31, 2018 was approximately $60.6 million.
As
of December 31, 2018, we have outstanding loans of approximately $2.9 million from various banks in China. To secure these debts,
we pledged certain land use rights and buildings as collateral to safeguard these bank loans, and Mr. Silong Chen and his parents
also jointly signed a maximum guarantee agreement to provide additional guarantee to these bank loans.
Net cash used in operating activities was
$3.6 million for the six months ended December 31, 2018, comparing to $4.1 million net cash provided by operating activities for
the six months ended December 31, 2017. The decrease in operating cash flow was mainly due to decreased net income during the
current period, increased inventory stockpile of approximately $1 million to meet the anticipated increased customer demands during
the second half of fiscal year 2019 and increased prepayments of approximately $4.3 million to our suppliers to secure our raw
material purchase, offset by increased accounts payables of approximately $1 million.
Net cash provided by investing activities
was $2.0 million for the six months ended December 31, 2018, comparing to $0.8 million net cash used in investing activities for
the six months ended December 31, 2017. The increase in investing cash flow was mainly due to the proceeds upon maturity of $9.7
million short-term investment, offset by $7.3 million investment on property, plant and equipment, and $0.5 million capital expenditure
in our investments in Linsun Smart Technology Co., Ltd (“Linsun”) and Dogness Network Technology Co., Ltd for certain
ownership interest in these entities in order to jointly develop new products and new technologies in the smart pet tech area,
we accounted for these investments using the cost method .
Net
cash used in financing activities was $1.7 million for the six months ended December 31, 2018, comparing to $48.5 million net
cash provided by financing activities for the six months ended December 31, 2017. The decrease in financing cash flow was mainly
due to the repayment of $1.7 million for bank loans upon maturity. We received cash in net proceeds from initial public offering
approximately $50.2 million for the six months ended December 31, 2017, which caused our cash from financing activities in the
six months ended December 31, 2017 was higher than in the six months ended December 31, 2018.
Commitments
and Contractual Obligations
The
following table presents the company’s material contractual obligations as of December 31, 2018:
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
Operating leases commitment (1)
|
|
$
|
4,595,030
|
|
|
$
|
331,545
|
|
|
$
|
491,324
|
|
|
$
|
911,924
|
|
|
$
|
2,860,237
|
|
|
Repayment of bank loan (2)
|
|
|
2,923,498
|
|
|
|
2,923,498
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Capital expenditure commitments on Meijia (3)
|
|
|
6,800,000
|
|
|
|
6,800,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Capital expenditure commitments on Dongguan Jiasheng (4)
|
|
|
9,700,000
|
|
|
|
3,990,000
|
|
|
|
5,710,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
24,018,528
|
|
|
$
|
14,045,043
|
|
|
$
|
6,201,324
|
|
|
$
|
911,924
|
|
|
$
|
2,860,237
|
|
|
(1)
|
The
Company’s subsidiary Dogness Jiasheng leases manufacturing facilities and administration office spaces under multiple
operating lease agreements.
|
|
|
|
|
(2)
|
The
Company signed a credit agreement with Bank of Communications of China Dongguan Branch, which allows the Company to have access
of maximum amount of approximately $4.4 million (RMB 30 million) during August 17, 2018 to August 13, 2019, and this revolving
credit is renewable upon maturity. As of December 31, 2018, the Company had a loan balance of $2,923,498 (RMB 20 million)
under this credit agreement. The loan has a term of one year from August 21, 2018 to August 20, 2019 with effective interest
rate of 5.873% per annum.
|
|
|
|
|
(3)
|
The
Company acquired Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”) in fiscal year 2018. Meijia owns the land
use right to a land parcel of 19,144.54 square meters and a factory and office buildings of an aggregate of 18,912.38 square
meters. Total original budgeted capital expenditure for Meijia acquisition and post-acquisition decoration and equipment purchase
was RMB 160 million. The Company paid $10.7 million (RMB 71 million ) in March 2018 to acquire Meijia and planned to use additional
$13.1 million (RMB 90 million ) on decoration and purchase of equipment and machinery to bring Meijia manufacturing facility
into use. As of December 31, 2018, the Company already spent approximately $6.3 million (RMB 43 million) decoration costs.
From January 2019 up to the date of this filing, additional approximately $3.6 million (RMB 25 million) has been spent on
machinery and equipment purchase and installation. The Company will spend additional approximately $3.2 million (RMB $22 million)
on machinery and equipment purchase and installation in the next few months. Meijia plant is expected to start the manufacturing
in October 2019.
|
|
|
|
|
(4)
|
The
Company’s subsidiary Dongguan Jiasheng also plans to build a warehouse with original estimated budgeted costs of RMB
140 million ($20.3 million). The budget has been recently revised to approximately $12.3 million (RMB 85 million) based on
discussions with local planning authorities. The Company has already spent approximately $2.6 million (RMB 17.8 million) as
of December 31, 2018, and will spend additional $9.7 million on the remaining construction work in 2019 and 2020. The construction
is expected to be completed by the end of 2020.
|
Presently,
our principal sources of liquidity are generated from our operations, proceeds from our IPO, and loans from commercial banks.
In assessing its liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue sources
in the future and our operating and capital expenditure commitments. As of December 31, 2018, our estimated future minimum capital
expenditures for the next 12 months are around $14 million. We plan to fund these investment through our working capital generated
from our operations, bank borrowings, the proceeds from the IPO and other capital raising activities.
As
of December 31, 2018, we had approximately $3.2 million cash and approximately $17.5 million short-term investments with maturities
within one to three months. We also had outstanding accounts receivable of approximately $6 million, among which approximately
$5.2 million has been subsequently collected back during January to April 2019, and become available for use in our operation
as working capital if necessary.
As
of December 31, 2018, we had outstanding bank loans of approximately $2.9 million, and an unused line of credit of $1.5 million
(RMB 10 million) with the bank that is available for withdrawal whenever we need the fund. We expect that we will be able to renew
all of the existing bank loans upon their maturity based on past experience and the Company’s good credit history. We are
now also exploring additional capital raising opportunities. Management expects to generate significant amount of revenue from
the new developed intelligent pet products, which may further strength our cash position.
Based
on the current operating plan, we believe that the above-mentioned measures collectively will provide sufficient liquidity for
the Company to meet its future liquidity and capital requirement for at least next 12 months from the date of this filing.
Recent
developments
We
have recently invested RMB 1.5 million out of an approved RMB 3.0 million to acquire 13% ownership interest in third party Linsun
Smart Technology Co., Ltd (“Linsun”). Linsun will share its related technologies, patents and manufacturing capabilities
with Dogness after the acquisition. Going forward, Dogness and Linsun will further develop new products and new technologies in
the smart pet tech area together.
We
have recently invested RMB 2.0 million out of an approved RMB 8.0 million to acquire 10% of the ownership interest in Dogness
Network Technology Co., Ltd (“Network”) in order to integrate the industrial chain and to further develop new products
and new technologies in smart pet tech area. The remaining RMB 6.0 million investment is expected before June 2019.
Because
we do not have the ability to exercise significant influence over the operating and financial policies in both Linsun and Network
due to insignificant investments and minor share holdings, we account for our investments in these two entities using the cost
method.
The
Board has approved the investment of RMB 3.5 million to jointly open Dogness Pet Store with Mr. Liwen Zheng, his company Changxuan
Yuandong Co., Ltd., and Mr. Shiting Deng.
In
order to expand into the Japanese market and expedite the development of new smart pet products, we have invested $250,000 for
51% ownership interest to establish and operate Japan Dogness Company. The Japan Dogness Company was established in February 2019.
In
connection with these initiatives and to incentivize the Company’s employees, the Board has granted options to purchase
1.2 million Class A Common Shares to certain management and employees at an exercise price of $3.50 per share. This grant was
made pursuant to the employee incentive plan.
On
November 28, 2018, Dongguan Jiasheng was recognized as a High-technology Company by Chinese government. As a result, revenues
generated by Dongguan Jiasheng will be subject to a favorable income tax rate of 15%. The High-technology certificate is valid
for three year and is subject to renewal.
In
January 2019, we entered two lease agreements to lease one property with building areas of 4439 square meters and a piece of land
of 191 square meters located in Tongsha Industry Zone, Dongcheng District, Dongguan, China. The leased building and land will
provide additional administration office spaces and parking space for our subsidiary Dongguan Jiasheng.
On
May 23, 2019, we signed a service termination agreement with TJ Capital Management, L.P. to terminate the consulting service previously
entered on November 10, 2017 because TJ Capital has not performed certain specified services. As a result, the options granted
under the original service agreement are also cancelled or void. There was no stock-based compensation expense accrued for the
six months ended December 31, 2018 and 2017 and up to the date of the termination of this agreement, because TJ Capital has not
provided the services.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL DATA
Unaudited
Condensed Consolidated Balance Sheets
(In
USD)
|
|
|
As of
|
|
|
|
|
December 31, 2018
|
|
|
June 30, 2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,202,532
|
|
|
$
|
7,085,235
|
|
|
Short-term investments
|
|
|
17,479,325
|
|
|
|
28,233,035
|
|
|
Accounts receivable, net
|
|
|
6,036,343
|
|
|
|
5,641,501
|
|
|
Accounts receivable - related parties
|
|
|
238,364
|
|
|
|
-
|
|
|
Inventories, net
|
|
|
5,673,259
|
|
|
|
4,153,583
|
|
|
Due from related party
|
|
|
8,982
|
|
|
|
-
|
|
|
Prepayments and other current assets
|
|
|
1,203,611
|
|
|
|
1,105,783
|
|
|
Total current assets
|
|
|
33,842,416
|
|
|
|
46,219,137
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term investments
|
|
|
471,224
|
|
|
|
-
|
|
|
Long term prepayment
|
|
|
4,107,550
|
|
|
|
-
|
|
|
Property, plant and equipment, net
|
|
|
26,843,483
|
|
|
|
20,950,685
|
|
|
Intangible assets, net
|
|
|
2,313,381
|
|
|
|
2,390,571
|
|
|
Deferred tax assets
|
|
|
30,927
|
|
|
|
22,297
|
|
|
TOTAL ASSETS
|
|
$
|
67,608,981
|
|
|
$
|
69,582,690
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
2,923,498
|
|
|
$
|
4,835,200
|
|
|
Accounts payable
|
|
|
1,267,039
|
|
|
|
351,375
|
|
|
Accounts payable - related party
|
|
|
104,975
|
|
|
|
-
|
|
|
Advance from customers
|
|
|
178,888
|
|
|
|
240,216
|
|
|
Accrued liabilities and other payable
|
|
|
624,488
|
|
|
|
1,120,579
|
|
|
Taxes payable
|
|
|
2,565,193
|
|
|
|
2,295,788
|
|
|
Total current liabilities
|
|
|
7,664,081
|
|
|
|
8,843,158
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.002 par value, 100,0000,0000 shares authorized, 25,913,631
and 15,000,0000 issued and outstanding at December 31, 2018 and June 30, 2018, respectively
|
|
|
|
|
|
|
|
|
|
Class A Common Shares
|
|
|
33,689
|
|
|
|
33,689
|
|
|
Class B Common Shares
|
|
|
18,138
|
|
|
|
18,138
|
|
|
Additional paid-in capital
|
|
|
52,486,018
|
|
|
|
52,144,891
|
|
|
Statutory reserves
|
|
|
164,367
|
|
|
|
164,367
|
|
|
Retained earnings
|
|
|
10,989,789
|
|
|
|
10,263,198
|
|
|
Accumulated other comprehensive (deficit)
|
|
|
(3,747,101
|
)
|
|
|
(1,884,751
|
)
|
|
Total stockholders’ equity
|
|
|
59,944,900
|
|
|
|
60,739,532
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
67,608,981
|
|
|
$
|
69,582,690
|
|
Unaudited
Condensed Consolidated Statement of
Income
and Other Comprehensive Income (Loss)
(In
USD)
|
|
|
For the Six Months Ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,630,599
|
|
|
$
|
14,832,705
|
|
|
Revenues - related parties
|
|
|
206,052
|
|
|
|
-
|
|
|
Total Revenues
|
|
|
12,836,651
|
|
|
|
14,832,705
|
|
|
Cost of revenues
|
|
|
(8,208,059
|
)
|
|
|
(8,818,550
|
)
|
|
Gross Profit
|
|
|
4,628,592
|
|
|
|
6,014,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
1,155,750
|
|
|
|
532,287
|
|
|
General and administrative expenses
|
|
|
2,821,646
|
|
|
|
1,583,049
|
|
|
Research and development expenses
|
|
|
538,680
|
|
|
|
170,387
|
|
|
Total operating expenses
|
|
|
4,516,076
|
|
|
|
2,285,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
112,516
|
|
|
|
3,728,432
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Interest income (expenses), net
|
|
|
400,104
|
|
|
|
(153,154
|
)
|
|
Foreign transaction exchange gain (loss)
|
|
|
526,745
|
|
|
|
(175,053
|
)
|
|
Other income, net
|
|
|
16,322
|
|
|
|
1,506
|
|
|
Total other income (expense)
|
|
|
943,171
|
|
|
|
(326,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,055,687
|
|
|
|
3,401,731
|
|
|
Provision for income taxes
|
|
|
329,096
|
|
|
|
511,010
|
|
|
Net income
|
|
|
726,591
|
|
|
|
2,890,721
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(1,862,350
|
)
|
|
|
364,042
|
|
|
Comprehensive income (loss)
|
|
$
|
(1,135,759
|
)
|
|
$
|
3,254,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per share - Basic and
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic and diluted
|
|
|
25,913,631
|
|
|
|
15,775,285
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
(In
USD)
|
|
|
For the Six Months Ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
726,591
|
|
|
$
|
2,890,721
|
|
|
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
643,777
|
|
|
|
576,755
|
|
|
Share based compensation for services
|
|
|
341,127
|
|
|
|
-
|
|
|
Changes in inventory reserve
|
|
|
(4,747
|
)
|
|
|
(18,735
|
)
|
|
Recovery of doubtful account
|
|
|
(38,609
|
)
|
|
|
(33,593
|
)
|
|
Deferred tax expenses (benefit)
|
|
|
(9,498
|
)
|
|
|
9,730
|
|
|
Unrealized foreign exchange gain
|
|
|
68,314
|
|
|
|
123,823
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(878,054
|
)
|
|
|
(885,680
|
)
|
|
Inventories
|
|
|
(1,037,754
|
)
|
|
|
(2,319,591
|
)
|
|
Prepayments and other assets
|
|
|
(4,258,776
|
)
|
|
|
(28,083
|
)
|
|
Accounts payables
|
|
|
1,036,739
|
|
|
|
1,110,063
|
|
|
Accrued expenses and other liabilities
|
|
|
(467,613
|
)
|
|
|
2,461,702
|
|
|
Advance from customers
|
|
|
(52,411
|
)
|
|
|
(196,510
|
)
|
|
Taxes payable
|
|
|
356,989
|
|
|
|
452,151
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,573,925
|
)
|
|
|
4,142,753
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(7,268,272
|
)
|
|
|
(819,309
|
)
|
|
Long-term investments
|
|
|
(471,224
|
)
|
|
|
-
|
|
|
Purchase of intangible assets
|
|
|
(22,031
|
)
|
|
|
-
|
|
|
Proceeds upon maturity of short-term investments
|
|
|
9,715,318
|
|
|
|
-
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,953,791
|
|
|
|
(819,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net Proceeds from initial public offering
|
|
|
-
|
|
|
|
50,200,285
|
|
|
Repayment of short-term bank loans
|
|
|
(1,734,102
|
)
|
|
|
(918,660
|
)
|
|
Repayment of related party loans
|
|
|
(9,045
|
)
|
|
|
(736,894
|
)
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,743,147
|
)
|
|
|
48,544,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(519,421
|
)
|
|
|
(18,861
|
)
|
|
Net increase (decrease) in cash
|
|
|
(3,882,703
|
)
|
|
|
51,849,314
|
|
|
Cash, beginning of period
|
|
|
7,085,235
|
|
|
|
1,504,596
|
|
|
Cash, end of period
|
|
$
|
3,202,532
|
|
|
$
|
53,353,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information:
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax
|
|
$
|
16,751
|
|
|
$
|
40,624
|
|
|
Cash paid for interest
|
|
$
|
55,993
|
|
|
$
|
154,479
|
|
Exhibits
The
following document is filed herewith:
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
Dogness (International) Corporation
|
|
|
|
|
|
|
By:
|
/s/ Silong Chen
|
|
|
Name:
|
Silong Chen
|
|
|
Title:
|
Chief Executive Officer
|
|
|
|
(Principal Executive Officer) and
Duly Authorized Officer
|
|
|
|
|
|
Dated: June 18, 2019
|
|
|
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