Dogness (International) Corporation — FY2021 Form 20-F
Reporting period: Fiscal year ended June 30, 2021, with audited comparisons to fiscal 2020 and 2019. The request metadata says “2020 Q4,” but this filing is an annual report for FY2021, not a quarterly filing. Financial statements are prepared under U.S. GAAP.
Business context
Dogness designs and manufactures pet products, including leashes, collars, harnesses and connected pet products, primarily in China. Products are sold domestically and internationally, largely through retailers and distributors. The company reported one operating segment.
Key financial results
| Metric | FY2021 | FY2020 | Change or context |
|---|---|---|---|
| Revenue | $24.32 million | $19.17 million | Up 26.9% |
| Gross profit / margin | $9.16 million / 37.6% | $2.39 million / 12.5% | Margin improved 25.1 percentage points |
| Operating income (loss) / margin | $1.86 million / 7.6% | ($8.72 million) / (45.5%) | Returned to operating profit |
| Net income (loss) | $1.30 million | ($8.54 million) | Basic and diluted EPS: $0.05 vs. ($0.33) |
| Operating cash flow | $3.75 million | ($2.21 million) | Turned positive |
| Investing cash flow | ($11.25 million) | ($2.46 million) | Primarily construction and facility investment |
| Financing cash flow | $11.05 million | $3.04 million | Included $6.61 million net proceeds from January 2021 equity financing |
| Cash and restricted cash at year-end | $4.94 million | $1.27 million | Included $4.91 million cash and $23,312 restricted cash |
| Total assets / liabilities / equity | $93.85 million / $28.94 million / $64.90 million | $63.55 million / $12.04 million / $51.51 million | Assets and liabilities increased substantially |
- Intelligent pet product revenue rose 80.2% to $7.80 million, or 32.1% of revenue; traditional pet products rose 8.5% to $14.33 million. New dyeing and other services contributed $846,873.
- Domestic China revenue increased 40.1% to $13.69 million; international revenue increased 13.1% to $10.63 million. Export sales were 43.7% of total revenue, versus 49.0% in FY2020.
- Management attributed the gross-margin recovery to production-line improvements, lower unit costs and the prior year’s inventory reserve and other unusual charges. FY2020 included a $1.17 million inventory markdown, $1.04 million fixed-asset disposal loss, and $281,680 fixed-asset impairment.
- Operating expenses fell 34.3% to $7.30 million. R&D expense declined 64.6% to $540,613; management said it expects R&D spending to rise as product development expands.
Liquidity, debt and commitments
- Current assets were $14.27 million versus current liabilities of $21.26 million, a working-capital deficit of approximately $7.00 million. Cash and restricted cash totaled $4.94 million.
- Bank loans totaled approximately $8.06 million at June 30, 2021, including $704,446 short-term and $7.35 million long-term debt. The loans are secured by subsidiary assets and include personal guarantees from the CEO and, for certain borrowings, family members. Scheduled loan repayments include approximately $1.50 million within one year.
- Accrued liabilities and other payables were $11.74 million, including approximately $10.7 million of unpaid construction costs. Post-year-end construction payments reduced remaining construction commitments from about $10.9 million to $5.93 million by the report date.
- Contractual obligations reported after subsequent payments totaled $25.29 million, including $9.87 million of capital-injection obligations, $5.93 million of remaining construction expenditures, $8.19 million of bank-loan repayments and $1.29 million of lease commitments.
- Management said operating cash flow, financing proceeds, bank borrowing renewals, related-party borrowing and potential additional equity financing were expected to provide liquidity for at least 12 months from the financial statements’ release date. It cautioned that financing may not be available on acceptable terms and that construction spending could be adjusted.
Material changes, outlook and risks
- The FY2021 improvement followed FY2020’s steep revenue and margin decline, which management linked to COVID-19 disruption, U.S.-China trade tensions, lower traditional-product sales and higher production costs. FY2021 revenue remained below FY2019’s $26.22 million.
- Management reported COVID-related factory shutdowns in early 2020 and ongoing uncertainty around customer orders, collections, supply chains, shipping, port congestion and international demand. It warned revenue and cash flows could underperform in the following 12 months.
- Management is shifting toward smart products, online sales and domestic customers, while pursuing cost savings and production efficiency. The filing provides no specific numerical earnings or revenue guidance.
- Customer concentration is significant: the three largest customers represented 32.0%, 9.1% and 6.9% of FY2021 revenue. The largest customer, Dongguan Anyi Trading, accounted for 32.0%. Management warned that lost orders from key customers could be difficult to replace.
- Tax exposure is material: taxes payable were $4.44 million at year-end, including $669,650 accrued surcharge for overdue income tax. Management was negotiating a settlement with local authorities but could not assure an agreement; additional tax, interest or penalties could be assessed.
- Related-party activity included $1.21 million of sales to Dogness Network, $3.02 million of purchases from related parties, $2.00 million due to the CEO on demand and non-interest-bearing, and rental income from related parties. Verify terms, approvals and collection of related-party receivables.
- Management concluded internal control over financial reporting was ineffective at June 30, 2021, citing insufficient qualified accounting personnel and inadequate documented closing procedures. Disclosure controls were also reported ineffective. The auditor did not attest to internal controls.
- The FY2021 auditor gave an unqualified opinion on the financial statements. The prior-year auditor’s report included a going-concern matter citing significant losses and working-capital deficiency; management’s FY2021 liquidity assessment was more favorable but remains dependent on planned financing and operating assumptions.
- Other significant risks include variable-rate debt and collateral, unhedged RMB exposure, raw-material price volatility, PRC regulatory and foreign-exchange restrictions, uninsured PRC bank deposits, facility and land-use risks, and competition and adoption risk for newer smart products. No material legal proceeding was reported.
Important facts for investors to verify
- Whether the company can meet near-term debt, tax and construction commitments while maintaining adequate cash and working capital.
- Whether the reported gross-margin recovery is sustainable, especially as smart-product sales grow and R&D spending increases.
- Customer and supplier concentration, including the 32.0% revenue exposure to the largest customer and purchases from related-party supplier Linsun.
- Progress in remediating ineffective internal controls and disclosure controls, and the quality and timeliness of subsequent SEC reporting.
- Resolution and final amount of PRC tax liabilities, surcharges and any potential penalties.
- Share dilution and control: January 2021 financing included warrants; July 2021 financing raised approximately $3.4 million net and included placement-agent warrants. The CEO controls the Class B shares, which carry three votes each.