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 2020
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 4, 2020, the Registrant announced its unaudited financial results for the first six months of fiscal year 2020.
Summary
Financial Results
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
(USD,
except for %)
|
|
2019
|
|
|
2018
|
|
|
%
Change
|
|
|
Sales
|
|
$
|
11,476,555
|
|
|
$
|
12,836,651
|
|
|
|
(10.6)
|
%
|
|
Cost
of sales
|
|
|
(7,695,649)
|
|
|
|
(8,208,059)
|
|
|
|
(6.2)
|
%
|
|
Gross
profit
|
|
|
3,780,906
|
|
|
|
4,628,592
|
|
|
|
(18.3)
|
%
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
933,861
|
|
|
|
1,155,750
|
|
|
|
(19.2)
|
%
|
|
General
and administrative expenses
|
|
|
2,936,038
|
|
|
|
2,821,646
|
|
|
|
4.1
|
%
|
|
Research
and development expenses
|
|
|
148,528
|
|
|
|
538,680
|
|
|
|
(72.4)
|
%
|
|
Total
operating expenses
|
|
|
4,018,427
|
|
|
|
4,516,076
|
|
|
|
(11.0
|
)%
|
|
(Loss)
income from operations
|
|
|
(237,521)
|
|
|
|
112,516
|
|
|
|
(311.1)
|
%
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(125,384)
|
|
|
|
400,104
|
|
|
|
(131.3)
|
%
|
|
Foreign
transaction exchange gain
|
|
|
46,905
|
|
|
|
526,745
|
|
|
|
(91.1)
|
%
|
|
Other
income (expense)
|
|
|
(3,766)
|
|
|
|
16,322
|
|
|
|
(123.1)
|
%
|
|
Total
other income (expenses)
|
|
|
(82,245)
|
|
|
|
943,171
|
|
|
|
(108.7)
|
%
|
|
(Loss)
income before income taxes
|
|
|
(319,766)
|
|
|
|
1,055,687
|
|
|
|
(130.3)
|
%
|
|
Provision
for income taxes
|
|
|
104,730
|
|
|
|
329,096
|
|
|
|
(68.2)
|
%
|
|
Net
(loss) income
|
|
$
|
(424,496)
|
|
|
$
|
726,591
|
|
|
|
(158.4)
|
%
|
Financial
Results for Six Months Ended December 31, 2019
Revenues
Revenues
decreased by approximately $1.4 million, or 10.6%, to approximately $11.5 million for the six months ended December 31, 2019 from
approximately $12.8 million for the six months ended December 31, 2018. The decrease in revenue was primarily attributable to
the decrease of sales volume of 43.90%, offset by the increase of average selling price of 59.4% as compared to the six months
ended December 31, 2018.
The
decrease in sales volume was mainly due to two reasons: (1) During the six months ended December 31, 2019, in order to improve
some lower margin traditional products from our current product offering structure, we started to upgrade our lines of traditional
pet leashes, pet collars, pet harnesses, gift suspenders, and other pet accessory products, while shifting our focus and resources
to produce and promote the sales of higher margin intelligent pet products. As sales efforts shifted from certain traditional
pet leashes, pet collars and pet harnesses products to these intelligent pet products, our sales volume of our pet leashes, pet
collars, pet harnesses, other pet accessories, gift suspenders and retractable dog leashes decreased. (2) Due to the negative
impact from the ongoing trade dispute between China and the United States, several of our major customers located in the United
States reduced their purchase orders from us during the six months ended December 31, 2019. The China-US trade dispute started
in September 2018 and the tariff for some products has jumped from 10% to 25%, since May 10, 2019. Such tariffs have affected
the pricing of affected products as well, as we have historically absorbed such tariff costs within the price of products we sell.
We anticipate a further reduction of our export sales to the United States in the coming months due to uncertainties arising from
the China-US continuous dispute on the trade deals as well as the negative impact from the COVID-19 outbreak and spread.
The
increase in our average selling price by 59.4% during the six months ended December 31, 2019 as compared to the same period of
2018 was largely due to increased sales of our intelligent pet products, which sell at higher average selling prices than our
traditional products. Our intelligent pet products sales account for approximately 18.4% of our total sales during the six months
ended December 31, 2019, as compared to approximately 4.4% in the same period of 2018.
Revenue
by Product Type
Our
pet collars, pet leashes, intelligent pet products, gift suspenders, pet harnesses, other pet accessories and retractable dog
leashes accounted for 24.1%, 22.1%, 18.4%, 14.5%, 8.9%, 4.5% and 3.7% of our total sales, respectively, during the first half
of fiscal 2020, as compared to 26.7%, 24.1%, 4.4%, 16.2%, 14.6%, 8.1% and 5.9% of our total sales, respectively, during the first
half of fiscal 2019.
Sales
of climbing hooks to sport equipment companies accounted for 3.8% of our total sales during the six months ended December 31,
2019. We had no such sales in the same period of 2018.
|
|
|
Revenue
by Product Type
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Product
category
|
|
Revenue
|
|
|
%
of
total
Revenue
|
|
|
Revenue
|
|
|
%
of
total
Revenue
|
|
|
Variance
|
|
|
Variance
%
|
|
|
Pet
collars
|
|
$
|
2,764,380
|
|
|
|
24.1
|
%
|
|
$
|
3,423,555
|
|
|
|
26.7
|
%
|
|
$
|
(659,175)
|
|
|
|
(19.3
|
)%
|
|
Pet
leashes
|
|
|
2,533,043
|
|
|
|
22.1
|
%
|
|
|
3,094,754
|
|
|
|
24.1
|
%
|
|
|
(561,711)
|
|
|
|
(18.2
|
)%
|
|
Intelligent
pet products
|
|
|
2,110,239
|
|
|
|
18.4
|
%
|
|
|
568,474
|
|
|
|
4.4
|
%
|
|
|
1,541,765
|
|
|
|
271.2
|
%
|
|
Gift
suspenders
|
|
|
1,661,916
|
|
|
|
14.5
|
%
|
|
|
2,074,218
|
|
|
|
16.2
|
%
|
|
|
(412,302)
|
|
|
|
(19.9)
|
%
|
|
Pet
harnesses
|
|
|
1,025,927
|
|
|
|
8.9
|
%
|
|
|
1,875,311
|
|
|
|
14.6
|
%
|
|
|
(849,384)
|
|
|
|
(45.3
|
)%
|
|
Other
pet accessories
|
|
|
511,782
|
|
|
|
4.5
|
%
|
|
|
1,037,831
|
|
|
|
8.1
|
%
|
|
|
(526,049)
|
|
|
|
(50.7)
|
%
|
|
Retractable
dog leashes
|
|
|
427,183
|
|
|
|
3.7
|
%
|
|
|
762,508
|
|
|
|
5.9
|
%
|
|
|
(335,325)
|
|
|
|
(44.0
|
)%
|
|
Climbing
hooks
|
|
|
442,085
|
|
|
|
3.8
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
442,085
|
|
|
|
100
|
%
|
|
Total
|
|
$
|
11,476,555
|
|
|
|
100.0
|
%
|
|
$
|
12,836,651
|
|
|
|
100.0
|
%
|
|
$
|
(1,360,096)
|
|
|
|
(10.6
|
)%
|
|
|
|
Quantity
sold for six
months ended December 31,
|
|
|
|
|
|
%
of
|
|
|
Average
unit price for six
months ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Quantity
variance
|
|
|
Quantity
variance
|
|
|
2019
|
|
|
2018
|
|
|
Price
Difference
|
|
|
Pet
collars
|
|
$
|
1,060,207
|
|
|
|
2,384,063
|
|
|
$
|
(1,323,856)
|
|
|
|
(55.5
|
)%
|
|
$
|
2.6
|
|
|
$
|
1.4
|
|
|
$
|
1.2
|
|
|
Pet
leashes
|
|
|
572,412
|
|
|
|
1,222,145
|
|
|
|
(649,733)
|
|
|
|
(53.2
|
)%
|
|
|
4.4
|
|
|
|
2.5
|
|
|
|
1.9
|
|
|
Intelligent
pet products
|
|
|
58,361
|
|
|
|
20,043
|
|
|
|
38,318
|
|
|
|
191.2
|
%
|
|
|
36.2
|
|
|
|
28.4
|
|
|
|
7.8
|
|
|
Gift
suspenders
|
|
|
4,054,922
|
|
|
|
6,016,973
|
|
|
|
(1,962,051)
|
|
|
|
(32.6
|
)%
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
Pet
Harnesses
|
|
|
363,870
|
|
|
|
967,215
|
|
|
|
(603,345)
|
|
|
|
(62.4
|
)%
|
|
|
2.8
|
|
|
|
1.9
|
|
|
|
0.9
|
|
|
Other
pet accessories
|
|
|
484,047
|
|
|
|
1,638,656
|
|
|
|
(1,154,609)
|
|
|
|
(70.5
|
)%
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
Retractable
dog leashes
|
|
|
86,962
|
|
|
|
164,485
|
|
|
|
(77,523)
|
|
|
|
(47.1
|
)%
|
|
|
4.9
|
|
|
|
4.6
|
|
|
|
0.3
|
|
|
Climbing
hooks
|
|
|
323,263
|
|
|
|
-
|
|
|
|
323,263
|
|
|
|
100
|
%
|
|
|
1.4
|
|
|
|
-
|
|
|
|
1.4
|
|
|
Total
|
|
$
|
7,004,044
|
|
|
|
12,413,580
|
|
|
|
(5,409,536)
|
|
|
|
(43.6
|
)%
|
|
$
|
1.6
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
Pet
collars
Revenue
from pet collars decreased by approximately $0.6 million, or 19.3%, from $3.4 million for the six months ended December 31, 2018,
to $2.8 million for the six months ended December 31, 2019. The decrease was mainly driven by a 55.5% or approximately 1.3 million
units decrease in sales volume, offset by an increased average unit selling price of $1.2 per unit during the six months ended
December 31, 2019 as compared to the same period of 2018.
The
decrease in sales volume was the result of our reduced production and sales of traditional pet products, as well as reduced sales
orders received from several large customers in the United States affected by the negative impact of the ongoing trade dispute
between China and the United States. The increase of average selling price for pet collars was mainly because we sold more Dogness
brand products instead of OEM products and we sold more leather pet collars instead of fabric pet collars during the six months
ended December 31, 2019.
Pet
leashes
Revenue
from non-retractable pet leashes decreased by approximately $0.6 million, or 18.2%, from $3.1 million for the six months ended
December 31, 2018, to $2.5 million for the six months ended December 31, 2019. The decrease was primarily due to the decrease
in sales volume of 0.65 million units, offset by an increased average unit selling price of $1.9 per unit during the six months
ended December 31, 2019 as compared to the same period of 2018.
During
the six months ended December 31, 2019, as a result of our business strategy shift from focusing on the sales of traditional pet
products to focusing on the sales of our intelligent pet products, we reduced the manufacturing and sales of some low-end pet
leash products made of fabric. In addition, we received reduced purchase orders from both domestic and overseas customers and
accordingly, our sales volume of pet leashes decreased. The increase in our selling price of pet leash products was because we
sold more customized leather dog leashes with higher costs in order to meet the specific needs from several large customers. We
charged higher selling price to these customers to fulfill the customized sales orders.
Intelligent
pet products
Our
intelligent pet products primarily include App-controlled smart pet feeders, pet water fountains, and smart pet toys. Revenue
from intelligent pet products increased by approximately $1.5 million, or 271.2%, to approximately $2.1 million for the six months
ended December 31, 2019 from $0.6 million for the six months ended December 31, 2018. The increase was mainly driven by a 191.2%
increase in sales volume, as well as the increased average unit selling price of $7.8 per unit during the six months ended December
31, 2019 as compared to the same period of 2018. Among the total increase of $1.5 million, $0.9 million increase was from sales
to customers in China domestic market and remaining $0.6 million increase was from sales to customers in overseas market.
Compared
with other products, intelligent pet products typically have high selling price due to high-tech concept. As part of our strategic
changes, we have shifted our focus and resources from traditional pet products to new, smart, and high value innovative smart
pet products. We have seen the increased sales during the six months ended December 31, 2019, and are expected the sales of intelligent
pet products will continue to be one of the primary sources of revenue in the near future.
Gift
suspenders
Revenue
from gift suspenders decreased by approximately $0.4 million, or 19.9%, from $2.1 million for the six months ended December 31,
2018, to $1.7 million for the six months ended December 31, 2019. The decrease in revenue was mainly driven by 32.6% decrease
in sales volume during the six months ended December 31, 2019 when we reduced the manufacturing and sales low-end gift suspender
products primarily made of fabric as compared to the same period of 2018. The average selling price for gift suspenders remained
consistent during the six months ended December 31, 2019 as compared to the same period of 2018.
Pet
harnesses
Revenue
from pet harnesses decreased by approximately $0.9 million, or 45.3%, from $1.9 million for the six months ended December 31,
2018, to $1.0 million for the six months ended December 31, 2019. The decrease in revenue was due to a 62.4% decrease in sales
volume, offset by an increased average unit selling price of $0.9 per unit during the six months ended December 31, 2019 as compared
to the same period of 2018. The decrease in sales volume was the result of our reduced production and sales of traditional pet
products, as well as reduced sales orders received from several large customers in the United States affected by the negative
impact of the ongoing trade dispute between China and the United States. The increase in our selling price of pet harness products
was because we fulfilled more customized sales orders in order to meet the specific needs from several large customers. We charged
higher selling price to these customers to fulfill the customized sales orders than we would charge for non-customized orders.
Other
pet accessories
Other
pet accessories include various dog comfort wrap harnesses, pet muzzles, metal chain traffic leashes, pet belt and ropes, and
other products, which are normally customized to fulfill customers’ purchase orders. Revenue from other pet accessories
decreased by 50.7%, to approximately $0.5 million for the six months ended December 31, 2019, from $1.0 million for the six months
ended December 31, 2018. The decrease in revenue was driven by a 70.5% decrease in sales volume, offset by an increased average
unit selling price of $0.5 per unit during the six months ended December 31, 2019 as compared to the same period of 2018. The
decrease in sales volume was mainly due to reduced purchase orders from major customers located in the United States.
Retractable
dog leashes
Revenue
from retractable dog leashes decreased by 44.0%, to approximately $0.4 million for the six months ended December 31, 2019, from
$0.8 million for the six months ended December 31, 2018. The decrease in revenue was mainly driven by 47.1% decrease in sales
volume, offset by an increased average unit selling price of $0.3 per unit during the six months ended December 31, 2019 as compared
to the same period of 2018. The decrease in sales volume was mainly due to reduced purchase orders from major customers located
in the United States due to increased tariffs related to the China-US trade dispute.
Climbing
hooks
To
meet the increasing market demand for outdoor equipment, we produced and sold climbing hooks to sports equipment companies. Revenue
from climbing hooks was $0.4 million for the six months ended December 31, 2019. There were no climbing hook sales in the same
period of 2018.
Revenue
by Geographic Area
The
following table sets forth the breakdown of our revenue by geographic areas for the six months ended December 31, 2019 and 2018:
|
|
|
For
the six months ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Countries
|
|
Revenue
|
|
|
%
of
total
Revenue
|
|
|
Revenue
|
|
|
%
of
total
Revenue
|
|
|
Variance
|
|
|
Variance%
|
|
|
Mainland
China
|
|
$
|
6,138,185
|
|
|
|
53.5
|
%
|
|
$
|
7,683,197
|
|
|
|
59.9
|
%
|
|
$
|
(1,545,012)
|
|
|
|
(20.1
|
)%
|
|
United
States
|
|
|
2,283,744
|
|
|
|
19.9
|
%
|
|
|
2,963,086
|
|
|
|
23.1
|
%
|
|
|
(679,342)
|
|
|
|
(22.9
|
)%
|
|
Europe
|
|
|
1,195,122
|
|
|
|
10.4
|
%
|
|
|
1,260,242
|
|
|
|
9.8
|
%
|
|
|
(65,120)
|
|
|
|
(5.2
|
)%
|
|
Japan
and other Asian countries and regions
|
|
|
1,112,127
|
|
|
|
9.7
|
%
|
|
|
678,886
|
|
|
|
5.3
|
%
|
|
|
433,241
|
|
|
|
63.8
|
%
|
|
Australia
|
|
|
523,383
|
|
|
|
4.6
|
%
|
|
|
110,960
|
|
|
|
0.9
|
%
|
|
|
412,423
|
|
|
|
371.7
|
%
|
|
Canada
|
|
|
161,353
|
|
|
|
1.4
|
%
|
|
|
58,353
|
|
|
|
0.4
|
%
|
|
|
103,000
|
|
|
|
176.5
|
%
|
|
Central
and south America
|
|
|
62,641
|
|
|
|
0.5
|
%
|
|
|
81,927
|
|
|
|
0.6
|
%
|
|
|
(19,286)
|
|
|
|
(23.5
|
)%
|
|
Total
|
|
$
|
11,476,555
|
|
|
|
100
|
%
|
|
$
|
12,836,651
|
|
|
|
100
|
%
|
|
$
|
(1,360,096)
|
|
|
|
(10.6
|
)%
|
The
breakdown of sales by product types in China domestic market is as follows:
|
Domestic
sales by product type
|
|
For
the Years ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Changes
|
|
|
Product
category
|
|
Revenue
|
|
|
%
of total revenue
|
|
|
Revenue
|
|
|
%
of total revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet
collars
|
|
$
|
1,314,072
|
|
|
|
21.4
|
%
|
|
$
|
1,742,454
|
|
|
|
22.7
|
%
|
|
$
|
(428,382
|
)
|
|
|
(24.6
|
)%
|
|
Pet
leashes
|
|
|
1,402,371
|
|
|
|
22.9
|
%
|
|
|
2,031,166
|
|
|
|
26.4
|
%
|
|
|
(628,795
|
)
|
|
|
(31.0
|
)%
|
|
Intelligent
pet products
|
|
|
1,449,651
|
|
|
|
23.6
|
%
|
|
|
522,240
|
|
|
|
6.8
|
%
|
|
|
927,411
|
|
|
|
177.6
|
%
|
|
Gift
suspenders
|
|
|
504,842
|
|
|
|
8.2
|
%
|
|
|
752,923
|
|
|
|
9.8
|
%
|
|
|
(248,081
|
)
|
|
|
(32.9
|
)%
|
|
Pet
harnesses
|
|
|
582,578
|
|
|
|
9.5
|
%
|
|
|
1,199,976
|
|
|
|
15.6
|
%
|
|
|
(617,398
|
)
|
|
|
(51.5
|
)%
|
|
Other
pet accessories
|
|
|
409,693
|
|
|
|
6.7
|
%
|
|
|
826,559
|
|
|
|
10.8
|
%
|
|
|
(416,866
|
)
|
|
|
(50.4
|
)%
|
|
Retractable
dog leashes
|
|
|
153,048
|
|
|
|
2.5
|
%
|
|
|
607,879
|
|
|
|
7.9
|
%
|
|
|
(454,831
|
)
|
|
|
(74.8
|
)%
|
|
Climbing
hooks
|
|
|
321,929
|
|
|
|
5.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
321,929
|
|
|
|
100
|
%
|
|
Total
sales in China domestic market
|
|
$
|
6,138,184
|
|
|
|
100.0
|
%
|
|
$
|
7,683,197
|
|
|
|
100.0
|
%
|
|
$
|
(1,545,013
|
)
|
|
|
(20.1
|
)%
|
Our
domestic sales decreased approximately $1.5 million or 20.1%, from approximately $7.7 million in the six months ended December
31, 2018 to approximately $6.1 million in the six months ended December 31, 2019. The decrease was mainly due to reduced customer
orders of our traditional pet products. As a result of our business strategy shift from focusing on sales of traditional pet products
to focusing on promoting the sales of our intelligent pet products, we reduced the manufacturing and sales of some low-end pet
leash products made of fabric. As a result, our sales of pet collars, pet leashes, gift suspenders, pet harnesses, other pet accessories
and retractable dog leashes, decreased approximately $0.4 million, $0.6 million, $0.2 million, $0.6 million, $0.4 million and
$0.5 million, respectively, during the six months ended December 31, 2019 as compared to the same period of 2018. However, our
sales of intelligent pet products increased approximately $0.9 million or 177.6% as compared to the same period in of 2018 because
of our strategic change. Our outdoor sports accessories sales, mainly climbing hooks, also increased by approximately $0.3 million
in China’s domestic market during the six months ended December 31, 2019.
With
the booming of pet culture in China, more and more young consumers have become pet owners in Mainland China. There are growing
demands for smart pet products, including App-controlled smart pet food feeders, pet water fountains, pet tracking devices and
smart pet toys. In addition, the shopping channels are diversified due to the rapid change of technology and lifestyle. The younger
generations are more tech savvy and more willing to purchase products from popular online shopping sites, including JD, Tmall
and Taobao, and from live streaming sales platforms hosted by influencers. Therefore, during the six months ended December 31,
2019, we increased our marketing activities and sales efforts in domestic market, especially on those online shopping sites and
channels. This led to the increase of our sales of intelligent pet products by $0.9 million during the six months ended December
31, 2019 as compared to the same period of 2018.
The
breakdown of sales by product types in international markets is as follows:
|
International
sales by product type
|
|
For
the Years ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Product
category
|
|
Revenue
|
|
|
%
of total revenue
|
|
|
Revenue
|
|
|
%
of total revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet
collars
|
|
$
|
1,450,307
|
|
|
|
27.2
|
%
|
|
$
|
1,681,101
|
|
|
|
32.6
|
%
|
|
$
|
(230,794
|
)
|
|
|
(13.7
|
)%
|
|
Pet
leashes
|
|
|
1,130,671
|
|
|
|
21.2
|
%
|
|
|
1,063,588
|
|
|
|
20.6
|
%
|
|
|
67,083
|
|
|
|
6.3
|
%
|
|
Intelligent
pet products
|
|
|
660,588
|
|
|
|
12.4
|
%
|
|
|
46,234
|
|
|
|
0.9
|
%
|
|
|
614,354
|
|
|
|
1,328.8
|
%
|
|
Gift
suspenders
|
|
|
1,157,074
|
|
|
|
21.7
|
%
|
|
|
1,321,295
|
|
|
|
25.7
|
%
|
|
|
(164,221
|
)
|
|
|
(12.4
|
)%
|
|
Pet
harnesses
|
|
|
443,350
|
|
|
|
8.3
|
%
|
|
|
675,335
|
|
|
|
13.1
|
%
|
|
|
(231,985
|
)
|
|
|
(34.4
|
)%
|
|
Other
pet accessories
|
|
|
102,089
|
|
|
|
1.9
|
%
|
|
|
211,272
|
|
|
|
4.1
|
%
|
|
|
(109,183
|
)
|
|
|
(51.7
|
)%
|
|
Retractable
dog leashes
|
|
|
274,136
|
|
|
|
5.1
|
%
|
|
|
154,629
|
|
|
|
3.0
|
%
|
|
|
119,507
|
|
|
|
77.3
|
%
|
|
Climbing
hooks
|
|
|
120,156
|
|
|
|
2.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
120,156
|
|
|
|
100.0
|
%
|
|
Total
international sales
|
|
$
|
5,338,371
|
|
|
|
100.0
|
%
|
|
$
|
5,153,454
|
|
|
|
100.0
|
%
|
|
$
|
184,917
|
|
|
|
3.6
|
%
|
Our
total sales in international markets increased slightly by approximately $0.2 million or 3.6%, from approximately $5.1 million
in the six months ended December 31, 2018 to approximately $5.3 million in
the six months ended December 31, 2019. Our international sales were primarily affected
by decreased export sales to the United States and Europe, compensated by increased export sales to Australia, Canada,
Japan and other Asian countries and regions.
Due
to the continued negative impact of the China-US tariff dispute, our export sales to the United States decreased approximately
$0.7 million or 22.9%, during the six months ended December 31, 2019 when we received reduced purchase orders from several large
customers in the United States, as compared to the same period of 2018. To mitigate the negative impact of the ongoing trade dispute
between China and the United States, we strengthened our marketing efforts to promote our sales to other countries and regions,
such as Australia, Canada, Japan and other Asian countries and regions. Our export sales to Australia, Canada, Japan and other
Asian countries and regions increased by 371.7%, 176.5% and 63.8%, respectively, during the six months ended December 31, 2019,
as compared to the same period of 2018.
In
terms of our international sales by product type and mix, sales of our traditional pet collars, gift suspenders, pet harnesses,
other pet accessories, decreased by approximately 13.7%, 12.4%, 34.4% and 51.7%, respectively, during the six months ended December
31, 2019 as compared to the same period of 2018. However, our sale of intelligent pet products increased approximately $0.6 million
or 1,328.8%, our retractable dog leashes increased by $0.1 million or 77.3% and our climbing hooks increased by approximately
$0.1 million, respectively, during the six months ended December 31, 2019, as compared to the same period of 2018. International
intelligent pet product sales increased at a significantly higher rate than domestic intelligent pet product sales because such
products were only introduced in 2018 and minimal international sales occurred that in year.
We
have started working with large retail chains in the US and Canada for the distribution of their smart pet products under the
Company’s own brand rather than just serving as an OEM supplier. We expect the revenue to be generated from these efforts
could mitigate, at least in part, offset the decreased OEM sales in the United States. We also expect that the newly developed
intelligent pet products will become the leading revenue source for our international sales, as we have already seen a clear trend
in our domestic market.
Sales
to related parties
In
our fiscal year 2019, we acquired 10% of the ownership interest in Dogness Network Technology Co., Ltd (“Dogness Network”)
and 13% of the ownership interest in Linsun Smart Technology Co., Ltd (“Linsun”), for the purpose of working together
to develop new products and new technologies in smart pet tech area.
During
the six months ended December 31, 2019 and 2018, we sold certain intelligent pet products to Dogness Network and Linsun, accordingly
reported related party sales of $588,733 and $206,052, which accounted for 5.1% and 1.6% of our total revenue for the six months
ended December 31, 2019 and 2018, respectively. Our sales to related party do not have right of return and we do not provide other
credits or sales incentive to related party customers. Pricing for related and unrelated customers are on substantially the same
terms. As of December 31, 2019, we had $434,125 receivable from Dogness Network, and as of the date of this filing, $194,566 has
been collected back and we anticipate to fully collect the remaining amount before June 30, 2020.
Cost
of revenues
Cost
of revenues decreased by approximately $0.5 million, or 6.2%, from approximately $8.2 million in the six months to approximately
$7.7 million for the six months ended December 31, 2019. The decrease in our cost of revenues was mainly due to the decrease of
sales volume by 43.6% in the current period. As a percentage of revenues, the cost of goods sold increased by 3.2 percentage points
to 67.1% in the current period from 63.9% in the same period of the prior fiscal year. This was mainly because the increased costs
associated with our intelligent pet products and increased costs associated with our fulfillment of certain customized orders
for our leather pet collars and leashes products.
Gross
profit
For
the six months ended December 31, 2019, gross profit decreased by approximately $0.8 million to approximately $3.8 million, from
approximately $4.6 million for the same period of 2018, primarily attributable to decreased sales volume of our traditional pet
products and increased costs associated with our intelligent pet products and leather pet collars and leashes. Overall gross profit
margin was 32.9%, a decrease of 2.7 percentage points, compared to 36.1% for the same period of the prior fiscal year.
Gross
margins for pet leashes, pet harnesses, retractable dog leashes, pet collars decreased by 11.6 percentage points, 4.3 percentage
points, 7.4 percentage point and 5.5 percentage points, respectively, in the six months ended December 31, 2019 as compared to
the same period of 2018. The decrease was mainly due to the increased raw material costs because we produced more leather products
instead of fabric products to fulfill customized orders, as well as the increased salary expenses due to higher labor costs as
compared to the same period last year.
Gross
margin for our intelligent pet products, other pet accessories and gift suspender increased by 8.3 percentage points, 6.5 percentage
points and 1.2 percentage points, as compared to the same period of 2018. The increase in gross margin was primarily attributable
to our improvements in technical design and functionality of the component and parts for intelligent pet products, other pet accessories
and gift suspender, as a result, the average unit selling price on our intelligent pet products, other pet accessories and gift
suspender increased by 27.3%, 76.2%, and 36.6%, respectively, as compared to the same period of 2018.
Gross
margin for climbing hooks was 28.2% during the six months ended December 31, 2019. As noted above, no climbing hoods were sold
during the six months ended December 31, 2018. The gross margin for climbing hooks is within our expectation.
Gross
profits by product type were as follows:
|
|
|
For
the six months ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Product
category
|
|
Gross
profit
|
|
|
Gross
profit %
|
|
|
Gross
profit
|
|
|
Gross
profit %
|
|
|
Variance
in Gross
profit
|
|
|
Variance
in Gross
profit %
|
|
|
Pet
collars
|
|
$
|
861,365
|
|
|
|
31.2
|
%
|
|
$
|
1,256,541
|
|
|
|
36.7
|
%
|
|
$
|
(395,176
|
)
|
|
|
(5.5
|
)%
|
|
Pet
leashes
|
|
|
636,320
|
|
|
|
25.1
|
%
|
|
|
1,134,887
|
|
|
|
36.7
|
%
|
|
|
(498,567
|
)
|
|
|
(11.6
|
)%
|
|
Intelligent
pet products
|
|
|
904,132
|
|
|
|
42.8
|
%
|
|
|
196,171
|
|
|
|
34.5
|
%
|
|
|
707,961
|
|
|
|
8.3
|
%
|
|
Gift
suspenders
|
|
|
563,683
|
|
|
|
33.9
|
%
|
|
|
678,785
|
|
|
|
32.7
|
%
|
|
|
(115,102
|
)
|
|
|
1.2
|
%
|
|
Pet
harnesses
|
|
|
358,666
|
|
|
|
35.0
|
%
|
|
|
735,971
|
|
|
|
39.2
|
%
|
|
|
(377,305
|
)
|
|
|
(4.2
|
)%
|
|
Other
pet accessories
|
|
|
182,167
|
|
|
|
35.6
|
%
|
|
|
302,045
|
|
|
|
29.1
|
%
|
|
|
(119,878
|
)
|
|
|
6.5
|
%
|
|
Retractable
dog leashes
|
|
|
149,885
|
|
|
|
35.1
|
%
|
|
|
324,192
|
|
|
|
42.5
|
%
|
|
|
(174,307
|
)
|
|
|
(7.4
|
)%
|
|
Climbing
hooks
|
|
|
124,688
|
|
|
|
28.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
124,688
|
|
|
|
100
|
%
|
|
Total
|
|
$
|
3,780,906
|
|
|
|
32.9
|
%
|
|
$
|
4,628,592
|
|
|
|
36.1
|
%
|
|
$
|
(847,686
|
)
|
|
|
(3.2
|
)%
|
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 decreased by $0.2 million, or 18.6% from $1.1 million in the six months ended December 31,
2018, to $0.9 million in the six months ended December 31, 2019. The decrease in selling expense was primarily due to decreased
exhibition fees by $91,229 and decreased marketing expenses by $135,504 because we only attended 2 major exhibition shows during
the six months ended December 31, 2019. For the same period of 2018, we attended 4 major exhibition shows. As a percentage of
sales, our selling expenses were 8.1% and 9.0% of our total revenues for the six months ended December 31, 2019 and 2018, respectively.
General
and administrative expenses
General
and administrative expenses increased by approximately $0.1 million, or 4.1%, from approximately $2.8 million in the six months
ended December 31, 2018, to approximately $2.9 million in the six months ended December 31, 2019. The slight increase was mainly
due to increased bad debts by approximately $0.2 million because we accrued additional bad debt on our accounts receivable based
on collectability assessment, and increased depreciation and amortization by approximately $0.3 million because our Meijia plant
has been put into production during the six months ended December 31, 2019, increased rental expenses by approximately $0.2 million
because we leased a piece of land to build a warehouse in Dongguan city, offset by decreased consulting fees and professional
fees by approximately $0.4 million because we reduced business strategy related consultation with third-parties during current
period than we did in the same period of last year, and decreased salaries by approximately $0.2 million. As a percentage of sales,
our general and administrative expenses were 25.6% and 22.0% of our total revenues for the six months ended December 31, 2019
and 2018, respectively.
Research
and development expenses
Research
and development expenses decreased by approximately $0.4 million, or 72.4%, from approximately $0.5 million in the six months
ended December 31, 2018, to approximately $0.1 million in the six months ended December 31, 2019. As a percentage of sales, our
research and development expenses were 1.3% and 4.2% of our total revenues for the six months ended December 31, 2019 and 2018,
respectively. The decrease was due to larger development costs to develop cutting edge smart pet products were incurred in the
six months ended December 31, 2018. Although our research and development expenses decreased during the six months ended December
31, 2019, in order to meet customer demand, we may incur additional R&D expenses in the near future to improve some of the
functions and exterior designs of our existing products and use environmentally-friendly materials to develop more new high-tech
products.
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, 2019 and 2018, the Company had other expense of approximately $82,245 and other income of $0.9 million, respectively. For
the six months ended December 31, 2019, our other expenses included $104,040 bank loan interest due to higher loan balance compared
to the same period last year, offset by a foreign exchange gain of $46,905 in the current period due to the favorable USD, Euro,
and other currency exchange rates against RMB on our foreign currency denominated account receivables. For the six months ended
December 31, 2018, our other income of $0.9 million was comprised of a foreign exchange gain of $0.5 million due to favorable
USD, Euro, and other currency exchange rates against the RMB on the Company’s foreign currency denominated account receivable
and $0.4 million in interest income from the Company’s short-term investments.
Income
tax
Income
tax expense decreased by approximately $0.2 million or 68.2%, from approximately $0.3 million in the six months ended December
31, 2018, to approximately $0.1 million in the six months ended December 31, 2019. The decrease was consistent with the decrease
in our taxable income for the six months ended December 31, 2019.
We
had accrued tax liabilities of approximately $3.1 million and $2.9 million as of December 31, 2019 and June 30, 2019, 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 is currently actively working with the local tax authority and 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
loss
Net
loss was approximately $0.42 million for the six months ended December 31, 2019, a decrease of $1.15 million or 158.4%, from a
net income $0.73 million in the same period of 2018. The decrease in net income was the result of decreased sales and gross profit
as discussed above.
Cash
flows
Net
cash provided by operating activities was $1.8 million for the six months ended December 31, 2019, including net loss of $0.5
million, adjusted for non-cash items for approximately $2.3 million, offset adjustments for changes in working capital around
$0.1 million. The adjustments for changes in working capital mainly included increased accounts receivable of $0.3 million and
increased accounts payable of $0.8 million, offset by the increased inventory stockpile of $1.0 million mainly due to increased
work-in-process inventory to meet increased market demand for our intelligent pet products during the six months ended December
31, 2019.
Net
cash used in investing activities was $4.2 million for the six months ended December 31, 2019, comparing to $2.0 million net cash
provided by investing activities for the six months ended December 31, 2018. The decrease in investing cash flow was mainly due
to the proceeds of $3.6 million received upon maturity for short-term investments, offset by $7.3 million investment on construction
in progress, $0.2 million investment on property, plant and equipment, and $0.2 million capital investments in Linsun and Dogness
Network.
Net
cash provided by financing activities was $1.3 million for the six months ended December 31, 2019, comparing to $1.7 million net
cash used in financing activities for the six months ended December 31, 2018. The increase in financing cash flow was mainly due
to the proceeds of approximately $4.3 million from bank loans, offset by the repayment of $2.8 million for bank loans upon maturity.
Commitments
and Contractual Obligations
The
following table presents the Company’s material contractual obligations as of December 31, 2019:
|
Contractual
Obligations
|
|
Total
|
|
|
Less
than 1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5
years
|
|
|
Operating
leases commitment (1)
|
|
$
|
1,525,251
|
|
|
$
|
191,134
|
|
|
$
|
415,542
|
|
|
$
|
423,972
|
|
|
$
|
494,603
|
|
|
Repayment
of bank loan (2)
|
|
|
4,305,420
|
|
|
|
4,305,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity
investments obligation (3)
|
|
|
531,002
|
|
|
|
531,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
injection obligation (4)
|
|
|
15,574,095
|
|
|
|
734,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,839,303
|
|
|
Capital
expenditure commitments on Dongguan Jiasheng (5)
|
|
|
5,209,558
|
|
|
|
5,209,558
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
27,145,326
|
|
|
$
|
10,971,906
|
|
|
$
|
415,542
|
|
|
$
|
423,972
|
|
|
$
|
15,333,906
|
|
|
(1)
|
The
Company’s subsidiary Dogness Jiasheng leases manufacturing facilities and administration office spaces under multiple
operating lease agreements. We adopted ASU No. 2016-02—Leases (Topic 842) on July 1, 2019, using a modified retrospective
transition method. This transition approach provides a method for recording existing leases only at the date of adoption and
does not require previously reported balances to be adjusted. In addition, we elected the package of practical expedients
permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the
historical lease classification. Adoption of the new standard resulted in the recording of lease assets and lease liabilities
of approximately $5.4 million and $1.5 million, respectively, as of December 31, 2019.
|
|
|
|
|
(2)
|
As
of December 31, 2019, the Company had a loan balance of RMB 18 million ($2,583,252) borrowed from Bank of Communications
of China. The loan has a term of one year from September 5, 2019 to September 5, 2020 with effective interest rate of
5.873% per annum.
As
of December 31, 2019, the Company had a loan balance of RMB 12 million ($1,722,168) borrowed from Industrial and Commercial
Bank of China. The loan has a term of one year from August 9, 2019 to August 8, 2020 with effective interest rate of 5.655%
per annum.
|
|
(3)
|
In
November 2018, the Company entered into an equity investment agreement with Dogness Network
Technology Co., Ltd (“Network”) to invest RMB 8.0 million ($1,148,112) to
acquire 10% of the shares of Network. As of the date of this filing, the Company made
capital contribution of RMB 4.4 million ($631,462) and still has the obligation
to make further capital injection of RMB 3.6 million($516,650) within the next
12 months from December 31, 2019.
|
|
(4)
|
On
July 6, 2018, a new entity named Dogness Intelligence Technology Co., Ltd. (“Intelligence”),
was incorporated under the laws of the People’s Republic of China in Guangzhou
City, Guangdong Province, China with a total registered capital of RMB 80 million (approximately
$11.5 million). One of the Company’s subsidiaries, Dongguan Jiasheng, owns 58%
of Intelligence and accordingly is required to contribute RMB 46.4 million (approximately
$6.7 million) of capital to this new entity. As of the date of this filing, Dongguan
Jiasheng has not made the capital contribution. Pursuant to the article of incorporation
of Intelligence, the Company is required to complete the capital contribution before
May 22, 2038.
On
January 15, 2020, one of the Company’s subsidiaries, Dongguan Dogness, entered into an agreement with one of the
original shareholders of Dogness Pet Culture (Dongguan) Co. Ltd. (“Dogness Culture”), who is related to Mr.
Silong Chen, our Chief Executive Officer, to acquire 51.2% ownership interest of Dogness Culture with nominal consideration.
Dogness Culture was originally incorporated on December 14, 2018 and had no active business operations since its inception.
The related party established Dogness Culture at the request of the Company, with the intention of promptly transferring
ownership interests to Dongguan Dogness once Dogness Culture was formed.
On
April 3, 2020, the share transfer was approved by local business registration office with a total registered capital of
RMB 10 million (approximately $1.4 million). Dongguan Dogness paid its share of the registered capital of RMB 5.12 million
(approximately 0.73 million) on April 16, 2020. Dogness Culture will be mainly focused on developing and cultivating pet
culture, guiding pet related consumption and expanding potential pet related consumer markets.
The
Company is also obligated to make registered capital contributions to its subsidiary Zhangzhou Meijia Metal Product Ltd.
(“Meijia”) and Dongguan Jiasheng Enterprise Ltd. (“Dongguan Jiasheng”) to meet the requirement
of State Administration for Industry and Commerce (“SAIC”) of China. As of December 31, 2019, future registered
capital contribution commitments for Meijia and Dongguan Jiasheng was RMB 21 million (approximately $3 million) and RMB
36 million (approximately $5.2 million), respectively. During January to May 2020, the Company made additional capital
contribution of RMB 1.05 million (approximately $0.15 million) into Meijia, and RMB 21.0 million (approximately $3.0 million)
into Dongguan Jiasheng. As a result, as of the date of this filing, future capital contribution to Meijia and Dogguan
Jiasheng has been lowered down to approximately $2.9 million and $2.2 million, respectively, which is required to complete
the capital injection before 2025 and 2040, respectively.
|
|
(5)
|
The
Company’s subsidiary Dongguan Jiasheng plans to expand the factory including a
warehouse with original estimated budgeted costs of RMB 75 million ($10.8 million). As
of December 31, 2019, the Company has already spent RMB 38.7 million ($5.6 million) and
estimated additional RMB 36.3 million ($5.2 million) will be spent on the remaining construction
work, window frames and interior and exterior decoration in calendar years 2020 and 2021.
Subsequently,
from January 2020 to May 2020, the Company spent an additional RMB 12.7 million ($1.8 million) on this project. As of
the date of this filing, the Company’s future capital commitment on this warehouse is approximately RMB 23.6 million
($3.4 million). The actual investment amount might be adjusted based on further confirmed capital needs. The construction
is expected to be completed by first quarter 2021.
|
As
a result of the above-mentioned subsequent payment for the registered capital injection to meet the SAIC requirement and capital
expenditure on the construction in progress (“CIP”) project, the Company’s material contractual obligations
as of the date of this filing has been lowered down to the following:
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
Operating leases commitment
|
|
$
|
1,525,251
|
|
|
$
|
191,134
|
|
|
$
|
415,542
|
|
|
$
|
423,972
|
|
|
$
|
494,603
|
|
|
Repayment of bank loan
|
|
|
4,305,420
|
|
|
|
4,305,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Equity investments obligation
|
|
|
516,650
|
|
|
|
516,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital injection obligation
|
|
|
11,674,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,674,836
|
|
|
Capital expenditure commitments on Dongguan Jiasheng
|
|
|
3,386,940
|
|
|
|
3,386,940
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
21,409,097
|
|
|
$
|
8,400,144
|
|
|
$
|
415,542
|
|
|
$
|
423,972
|
|
|
$
|
12,169,439
|
|
We
plan to fund these CIP projects through our working capital generated from our operations, bank borrowings, the proceeds from
the IPO and other capital raising activities.
As
of December 31, 2019, the Company had future minimum capital expenditure commitment of approximately $11 million related to operating
lease, repayment of bank loans, equity investment obligation, capital injection obligation and its construction-in-progress projects
within the next twelve months. Subsequently, the Company invested additional $1.8 million on construction of its warehouse during
January to April 2020 period. As of the date of this filing, total capital expenditure commitment for the next 12 months has been
lowered down from $11.0 million as of December 31, 2019 to approximately $8.4 million.
We
plan to meet our future capital expenditure commitment through our working capital generated from our operations, bank borrowings,
the proceeds from the IPO and other capital raising activities. Our major capital source including the following:
As
of December 31, 2019, we had cash and cash equivalents of approximately $1.4 million. We also had short-term investments of approximately
$7.3 million because we used the excessive cash from the IPO proceeds to purchase interest-bearing wealth management financial
products from banks and such short-term investments have maturities ranging from one to three months. These short-term investments
are highly liquid and can be used as working capital when needed. We also had outstanding accounts receivable of approximately
$4.6 million (including accounts receivable of approximately $4.2 million from third-party customers and approximately $0.4 million
accounts receivable from related parties), among which approximately $3.7 million or 79.6% has been subsequently collected back
during January to May 2020 , and become available for use in our operation as working capital if necessary.
As
of December 31, 2019, we had outstanding bank loans of approximately $4.3 million (RMB 30 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. We
expect that we would be able to renew all of our existing bank loans upon their maturity based on past experience and our good
credit history. Subsequently, on February 6, 2020, one of the Company’s subsidiaries in the U.S., Dogness Group LLC, signed
a loan agreement with Cathay Bank and obtained a line of credit $1.2 million for two years at the U.S. prime rate.
We
are now also exploring additional capital raising opportunities. Management expects to generate significant amount of revenue
from the newly developed intelligent pet products, which may further strengthen our cash position.
As
of December 31, 2019, our current assets were approximately $21.2 million, and our current liabilities were approximately $10.4
million, which resulted in working capital of approximately $10.8 million and a current ratio of 2.0:1. Total shareholders’
equity as of December 31, 2019 was approximately $60.0 million.
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
Coronavirus
(“COVID-19”) Impact
Our
operations are also affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020,
was declared a pandemic by the World Health Organization. The COVID-19 outbreak is causing lockdowns, travel restrictions, and
closures of businesses. Our business has been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent.
From
late January 2020 to the middle of February 2020, we had to temporarily suspend our manufacturing activities due to government
restrictions. During the temporary business closure period, our employees had very limited access to our manufacturing facilities
and the shipping companies were not available and as a result, we experienced difficulty delivering our products to our customers
on a timely basis. In addition, due to the COVID-19 outbreak, some of our customers or suppliers may experience financial distress,
delay or default on their payments, reduce the scale of their business, or suffer disruptions in their business due to the outbreak.
Any increased difficulty in collecting accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses,
or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations.
We
have gradually resumed our sales activities and productions in China since middle February 2020. Our business activities have
been fully brought back to normal track in late March 2020. However, due to COVID-19 impact, the number of our employees decreased
approximately 10% due to travel restrictions. As of the date of this filing, the COVID-19 coronavirus outbreak in China appears
to have slowed down and most provinces and cities have resumed business activities under the guidance and support of the government.
However, there is still significant uncertainty around the world regarding the breadth and duration of business disruptions related
to COVID-19, which could continue to impact our export sales to the U.S. and other international markets. Although our U.S. office
remained open, some of our staff in that office worked remotely. All staff are back to regular schedule since May 1, 2020. In
addition, we have experienced reduced orders and slower responses from customers and other business partners as a result of such
third parties’ staff working from home. On the other hand, we have seen the mix of fulfilled by merchant orders on shopping
platforms increase due to such platforms’ slower shipping schedules for certain of our products
In
light of the current circumstances and available information, we estimate that for the period from January to April 2020, our
revenues could be approximately 50% lower as compared to the same period of last year, to an estimated amount of $4.6 million.
To mitigate the impact of COVID-19 pandemic, our sales team increases sales and marketing efforts to work with online sales channels,
large ecommerce platforms and large wholesalers, such as JD, Tmall, Taobao, Amazon, BestBuy and Costco. We have seen a sign of
consumption rebound from both our domestic and international sales. We are currently upgrading our products and optimizing product
categories to get ready for the expected demand rebound. We expect the negative impact of the COVID-19 coronavirus outbreak on
our business to be temporary and our revenues to grow after the pandemic for both of our innovative smart pet products and high-quality
traditional pet products.
Dogness
Pet Culture (Dongguan) Co. Ltd.
On
January 15, 2020, one of the Company’s subsidiaries, Dongguan Dogness, entered into an agreement with one of the original
shareholders of Dogness Pet Culture (Dongguan) Co. Ltd. (“Dogness Culture”), who is related to Mr. Silong Chen, our
Chief Executive Officer, to acquire 51.2% ownership interest of Dogness Culture with nominal consideration. Dogness Culture was
originally incorporated on December 14, 2018 and had no active business operations since its inception. The related party established
Dogness Culture at the request of the Company, with the intention of promptly transferring ownership interests to Dongguan Dogness
once Dogness Culture was formed.
Total
registered capital of Dogness Culture is RMB 10 million (approximately $1.4 million). On April 16, 2020, Dongguan Dogness contributed
RMB 5.12 million (approximately 0.73 million) into Dogness Culture which represents 51.2% of total registered capital. The remaining
ownership interests are owned by two unrelated parties. Dogness Culture will mainly focus on developing and cultivating pet culture,
guiding pet related consumption and expanding potential pet related consumer markets.
Bank
Line of Credit
On
February 6, 2020, one of the Company’s subsidiaries in the U.S., Dogness Group LLC, signed a loan agreement with Cathay
Bank to allow Dogness Group LLC to borrow a total of $1.2 million for two years at the U.S. prime rate. The loan is secured by
a general security agreement covering the Plano, Texas office building property of Dogness Group LLC. The purpose of this loan
is to expand the business operation and increase the marketing and sales activities in the United States and other international
markets. As of the date of this filing, Dogness Group LLC has received $900,000 from this loan.
Meijia
Manufacturing Facility Started the Production Run
On
March 16, 2018, the Company acquired 100% of the equity interests in Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”)
from its original shareholder, for a total cash consideration of RMB 71.0 million ($10.7 million). After the acquisition, the
Company started building its own facilities and office spaces to expand the production capacity in order to fulfill increased
customer orders. The Company invested approximately RMB 110 million ($16.0 million) on the renovation and purchase of equipment
and machinery to bring Meijia manufacturing facility into use. Meijia plant started test operations in August 2019, and has started
normal production since December 2019 upon passing the final inspection conducted by the local government. The Company expects
that the Meijia plant will reach its designed production capacity by June 2021.
Increase
in the capital contribution to Meijia and Dongguan Jiasheng
Zhangzhou
Meijia Metal Product Ltd.
The
Company’s subsidiary Meijia was incorporated under the laws of the People’s Republic of China with a total registered
capital of RMB 60.0 million (approximately $8.6 million). Before June 30, 2019, RMB 30 million (approximately $4.3 million)
capital contribution has been made.
During
the six months ended December 31, 2019, the Company made additional capital contribution of RMB 9.0 million (approximately $1.3
million) in Meijia. Between January 2020 and the date of this filing, the Company made additional capital contribution of RMB
1.05 million (approximately $0.15 million). The total paid registered capital of Meijia is RMB 40.05 million (approximately $5.7
million) as of the date of this filing. Pursuant to the articles of incorporation of Meijia, the Company is required to complete
the remaining $2.9 million capital contribution into Meijia before December 30, 2025 as the Company’s available funds permit.
Dongguan
Jiasheng Enterprise Ltd.
The
Company’s subsidiary Dongguan Jiasheng was incorporated under the laws of the People’s Republic of China with a total
registered capital of RMB 50.0 million (approximately $7.2 million). Before June 30, 2019, RMB 10 million (approximately $1.4
million) capital contribution has been made.
During
the six months ended December 31, 2019, the Company made additional capital contribution of RMB 4.0 million (approximately $0.6
million) in Dongguan Jiasheng. Between January 2020 and the date of this filing, the Company made additional capital contribution
of RMB 21.0 million (approximately $3.0 million). The total paid registered capital of Dongguan Jiasheng is RMB 35.0 million (approximately
$5.0 million) as of the date of this filing. Pursuant to the articles of incorporation of Dongguan Jiasheng, the Company is required
to complete the remaining $2.2 million capital contribution into Dongguan Jiasheng before January 14, 2040 as the Company’s
available funds permit.
Recent
Accounting Pronouncements
Recently
Adopted Accounting Pronouncements
The
Company adopted ASU No. 2016-02—Leases (Topic 842) on July 1, 2019, using a modified retrospective transition method permitted
under ASU No. 2018-11. This transition approach provides a method for recording existing leases only at the date of adoption and
does not require previously reported balances to be adjusted. In addition, we elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease
classification. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of approximately
$5.4 million and $1.5 million, respectively, as of December 31, 2019. The standard did not materially impact our consolidated
net earnings and had no impact on cash flows.
Accounting
Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,” or ASU 2016-13. ASU 2016-13 requires companies to measure credit losses utilizing a methodology
that reflects expected credit losses and requires consideration of a range of reasonable information to estimate credit losses
on certain types of financial instruments, including trade receivables and available-for-sale debt securities. ASU 2016-13 is
effective for fiscal years beginning after December 15, 2022, including those interim periods within those fiscal years. The Company
is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption
of this guidance to have a material impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement,” or ASU 2018-13. ASU 2018-13 removes, modifies and adds certain disclosure
requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers
and the valuations process, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3
fair value measurements, including the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential impact on its disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU
2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic
740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after
December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect adoption
of the new guidance to have a significant impact on our financial statements.
UNAUDITED
INTERIM CONDENSED CONSOLIDATED FINANCIAL DATA
DOGNESS
(INTERNATIONAL) CORPORATION
Unaudited
Condensed Consolidated Balance Sheets
(In
USD)
|
|
|
As of
|
|
|
|
|
December 31, 2019
|
|
|
June 30, 2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,396,520
|
|
|
$
|
2,550,152
|
|
|
Short-term investments
|
|
|
7,290,511
|
|
|
|
11,073,200
|
|
|
Accounts receivable, net
|
|
|
4,158,469
|
|
|
|
5,164,380
|
|
|
Accounts receivable - related parties
|
|
|
542,809
|
|
|
|
244,764
|
|
|
Inventories, net
|
|
|
6,202,977
|
|
|
|
5,362,731
|
|
|
Prepayments and other current assets
|
|
|
1,578,144
|
|
|
|
1,527,397
|
|
|
Total current assets
|
|
|
21,169,430
|
|
|
|
25,922,624
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
41,386,972
|
|
|
|
35,516,368
|
|
|
Operating lease right-of-use assets
|
|
|
5,436,624
|
|
|
|
-
|
|
|
Intangible assets, net
|
|
|
2,191,073
|
|
|
|
2,226,798
|
|
|
Long term prepayments for land lease
|
|
|
-
|
|
|
|
4,107,550
|
|
|
Long term investments in equity investees
|
|
|
1,244,370
|
|
|
|
995,131
|
|
|
Deferred tax assets
|
|
|
328,605
|
|
|
|
255,456
|
|
|
TOTAL ASSETS
|
|
$
|
71,757,074
|
|
|
$
|
69,023,927
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
4,305,420
|
|
|
$
|
2,914,000
|
|
|
Accounts payable
|
|
|
663,248
|
|
|
|
543,158
|
|
|
Accounts payable - related parties
|
|
|
662,399
|
|
|
|
-
|
|
|
Advance from customers
|
|
|
241,716
|
|
|
|
179,306
|
|
|
Taxes payable
|
|
|
3,033,247
|
|
|
|
2,909,097
|
|
|
Accrued liabilities and other payable
|
|
|
1,301,907
|
|
|
|
1,526,862
|
|
|
Operating lease liability - current
|
|
|
191,134
|
|
|
|
-
|
|
|
Total current liabilities
|
|
|
10,399,071
|
|
|
|
8,072,423
|
|
|
Operating lease liability - noncurrent
|
|
|
1,334,117
|
|
|
|
-
|
|
|
Total liabilities
|
|
|
11,733,188
|
|
|
|
8,072,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Common Shares, $0.002 par value, 100,0000,0000 shares authorized, 25,913,631 issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common shares A
|
|
|
33,689
|
|
|
|
33,689
|
|
|
Common shares B
|
|
|
18,138
|
|
|
|
18,138
|
|
|
Additional paid-in capital
|
|
|
53,150,531
|
|
|
|
52,827,145
|
|
|
Statutory reserves
|
|
|
191,716
|
|
|
|
191,716
|
|
|
Retained earnings
|
|
|
11,274,536
|
|
|
|
11,657,630
|
|
|
Accumulated other comprehensive (deficit)
|
|
|
(4,714,164
|
)
|
|
|
(3,894,300
|
)
|
|
Total stockholders’ equity
|
|
|
59,954,446
|
|
|
|
60,834,018
|
|
|
Noncontrolling interest
|
|
|
69,440
|
|
|
|
117,486
|
|
|
Total equity of Dogness (International) Corporation
|
|
|
60,023,886
|
|
|
|
60,951,504
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
71,757,074
|
|
|
$
|
69,023,927
|
|
DOGNESS
(INTERNATIONAL) CORPORATION
Unaudited
Condensed Consolidated Statement of
Operations
and Other Comprehensive Loss
(In
USD)
|
|
|
For the Six Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
10,887,822
|
|
|
$
|
12,630,599
|
|
|
Revenues - related parties
|
|
|
588,733
|
|
|
|
206,052
|
|
|
Total Revenues
|
|
|
11,476,555
|
|
|
|
12,836,651
|
|
|
Cost of revenues
|
|
|
(7,695,649
|
)
|
|
|
(8,208,059
|
)
|
|
Gross Profit
|
|
|
3,780,906
|
|
|
|
4,628,592
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
933,861
|
|
|
|
1,155,750
|
|
|
General and administrative expenses
|
|
|
2,936,038
|
|
|
|
2,821,646
|
|
|
Research and development expenses
|
|
|
148,528
|
|
|
|
538,680
|
|
|
Total operating expenses
|
|
|
4,018,427
|
|
|
|
4,516,076
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(237,521
|
)
|
|
|
112,516
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Interest income (expenses), net
|
|
|
(125,384
|
)
|
|
|
400,104
|
|
|
Foreign transaction exchange gain (loss)
|
|
|
46,905
|
|
|
|
526,745
|
|
|
Other income, net
|
|
|
(3,766
|
)
|
|
|
16,322
|
|
|
Total other income (expense)
|
|
|
(82,245
|
)
|
|
|
943,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(319,766
|
)
|
|
|
1,055,687
|
|
|
Provision for income taxes
|
|
|
104,730
|
|
|
|
329,096
|
|
|
Net income (loss)
|
|
|
(424,496
|
)
|
|
|
726,591
|
|
|
Less: net loss attributable to noncontrolling interest
|
|
|
(41,402
|
)
|
|
|
-
|
|
|
Net income (loss) attributable to Company
|
|
|
(383,094
|
)
|
|
|
726,591
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(826,508
|
)
|
|
|
(1,862,350
|
)
|
|
Comprehensive loss
|
|
|
(1,251,004
|
)
|
|
|
(1,135,759
|
)
|
|
Less: net loss attributable to noncontrolling interest
|
|
|
(48,046
|
)
|
|
|
-
|
|
|
Comprehensive loss attributable to the Company
|
|
$
|
(1,202,958
|
)
|
|
$
|
(1,135,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,913,631
|
|
|
|
25,913,631
|
|
|
Diluted
|
|
|
25,913,631
|
|
|
|
25,913,631
|
|
DOGNESS
(INTERNATIONAL) CORPORATION
Unaudited
Condensed Consolidated Statements of Cash Flows
(In
USD)
|
|
|
For the Six Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(424,496
|
)
|
|
$
|
726,591
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,241,048
|
|
|
|
643,777
|
|
|
Share-based compensation for services
|
|
|
323,386
|
|
|
|
341,127
|
|
|
Loss on disposition of fixed assets
|
|
|
34,420
|
|
|
|
-
|
|
|
Changes in inventory reserve
|
|
|
77,338
|
|
|
|
(4,747
|
)
|
|
Change in bad debt allowance
|
|
|
205,829
|
|
|
|
(38,609
|
)
|
|
Deferred tax expenses (benefit)
|
|
|
(58,936
|
)
|
|
|
(9,498
|
)
|
|
Unrealized foreign exchange gain
|
|
|
168,416
|
|
|
|
68,314
|
|
|
Amortization of operating lease right-of-use assets
|
|
|
301,090
|
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
332,251
|
|
|
|
(878,054
|
)
|
|
Inventories
|
|
|
(980,685
|
)
|
|
|
(1,037,754
|
)
|
|
Prepayments and other assets
|
|
|
(207,510
|
)
|
|
|
(4,258,776
|
)
|
|
Accounts payables
|
|
|
783,274
|
|
|
|
1,036,739
|
|
|
Accrued expenses and other liabilities
|
|
|
(203,790
|
)
|
|
|
(467,613
|
)
|
|
Advance from customers
|
|
|
64,412
|
|
|
|
(52,411
|
)
|
|
Accretion of discounted operating lease liability
|
|
|
(57,218
|
)
|
|
|
-
|
|
|
Taxes payable
|
|
|
166,354
|
|
|
|
356,989
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,765,183
|
|
|
|
(3,573,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(225,789
|
)
|
|
|
(7,268,272
|
)
|
|
Additions to construction in progress
|
|
|
(7,346,106
|
)
|
|
|
-
|
|
|
Proceeds from disposition of fixed assets
|
|
|
5,847
|
|
|
|
-
|
|
|
Long-term investments in investees
|
|
|
(244,704
|
)
|
|
|
(471,224
|
)
|
|
Purchase of intangible assets
|
|
|
(18,509
|
)
|
|
|
(22,031
|
)
|
|
Proceeds upon maturity of short-term investments
|
|
|
3,585,204
|
|
|
|
9,715,318
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,244,057
|
)
|
|
|
1,953,791
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans
|
|
|
4,268,100
|
|
|
|
-
|
|
|
Repayment of short-term bank loans
|
|
|
(2,845,400
|
)
|
|
|
(1,734,102
|
)
|
|
Repayment of related party loans
|
|
|
(82,870
|
)
|
|
|
(9,045
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
1,339,830
|
|
|
|
(1,743,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(14,588
|
)
|
|
|
(519,421
|
)
|
|
Net decrease in cash
|
|
|
(1,153,632
|
)
|
|
|
(3,882,703
|
)
|
|
Cash, beginning of period
|
|
|
2,550,152
|
|
|
|
7,085,235
|
|
|
Cash, end of period
|
|
$
|
1,396,520
|
|
|
$
|
3,202,532
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information:
|
|
|
|
|
|
|
|
|
|
Cash paid for income tax
|
|
$
|
9,538
|
|
|
$
|
16,751
|
|
|
Cash paid for interest
|
|
$
|
104,040
|
|
|
$
|
55,993
|
|
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 4, 2020
|
|
|
Dogness (NASDAQ:DOGZ)
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