Filing identity and reporting period
The supplied filing is Happiness Biotech Group Limited’s audited Form 20-F for the fiscal year ended March 31, 2020, filed July 24, 2020. It is not identified as a 2018 Q4 filing and does not identify Paranovus Entertainment Technology Ltd.; investors should confirm that this is the intended filing before relying on the information below. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Happiness Biotech is a Cayman Islands holding company whose operating subsidiaries are in China. Its principal business is producing and selling nutraceutical and dietary supplements; it also began producing disinfectants and non-medical face masks during the COVID-19 outbreak.
Financial performance and position
| Metric | FY ended Mar. 31, 2020 | FY ended Mar. 31, 2019 | Change |
|---|---|---|---|
| Revenue | $65.1 million | $63.9 million | Up 1.8% |
| Gross profit / margin | $30.4 million / 46.8% | $32.2 million / 50.4% | Profit down 5.7%; margin down 3.6 percentage points |
| Operating income | $15.4 million | $21.8 million | Down 29.5% |
| Net income | $12.7 million | $18.7 million | Down 32.2% |
| Basic and diluted EPS | $0.53 | $0.81 | Down from prior year |
| Operating cash flow | $10.8 million | $6.5 million | Up 64.7% |
| Cash and cash equivalents | $33.7 million | $14.8 million | Up $18.9 million |
| Total assets / liabilities | $85.1 million / $5.5 million | $65.7 million / $4.8 million | Assets and liabilities both increased |
| Working capital | $64.5 million | $50.1 million | Increased |
| Short-term bank borrowings | $2.0 million | $1.0 million | Increased |
Cash used in investing activities was $1.2 million, primarily for property and equipment. Cash provided by financing activities was $10.4 million, including $9.3 million of net IPO proceeds. The company reported no long-term debt. Its current assets were $70.0 million and current liabilities $5.5 million at March 31, 2020. Accounts receivable were $30.0 million, with a stated 180-day customer credit period and no doubtful-account allowance.
Material changes versus the prior year
- Revenue grew modestly, but cost of revenue rose 9.3%, reducing gross margin from 50.4% to 46.8%.
- Operating expenses rose 44.4% to $15.0 million. Selling and marketing expense increased 45.9%, and general and administrative expense increased 78.5%; the company cited promotion, online-sales startup activity, COVID-related support for experience-store operators, and a donation.
- Lucidum spore powder revenue increased 42.0% to $28.2 million and reached 43.4% of revenue. Cordyceps, Ejiao, vitamins and supplements, and American ginseng sales declined. Experience-store revenue rose to $26.8 million, or 41.2% of revenue, while traditional distribution revenue decreased.
- Foreign-currency translation loss was $3.4 million, compared with $3.0 million, reducing comprehensive income to $9.3 million from $15.7 million.
- The October 2019 IPO raised $11.0 million gross and $9.3 million net; outstanding ordinary shares increased from 23.0 million to 25.0 million.
Outlook, risks, contingencies and unusual items
- Management gave no quantified revenue or earnings guidance. It said cash, expected operating cash generation and possible related-party support should cover at least 12 months, while noting related-party funding was not committed and that further capital may be needed for planned expansion.
- COVID-19 disrupted production, logistics, distribution and tourism-dependent experience stores. The filing gives inconsistent estimates for the March 2020 quarter’s revenue decline: approximately 14.1% in one risk disclosure and approximately 50% in a subsequent-events disclosure. The filing says Cordyceps planting and harvesting stopped for about three months and an inventory loss was recorded.
- The company had not sold COVID-19 testing kits as of the report date and said it did not expect mass production because it could not conduct required clinical trials. It cautioned that disinfectants and masks might not generate meaningful revenue or profit.
- Gross-margin pressure reflected lower margins on certain Lucidum products and Cordyceps culture impairment losses. Inventory write-downs were $117,753.
- China operations and RMB-denominated assets expose the company to currency, regulatory, repatriation and political risks. The company reported no hedging of foreign-exchange exposure and said cash held in PRC banks was not federally insured.
- Management concluded that internal control over financial reporting and disclosure controls were not effective as of March 31, 2020. Identified material weaknesses concerned U.S. GAAP and SEC-reporting expertise and procedures to identify related-party transactions. The auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- Buildings and land-use rights with carrying values of approximately $5.1 million and $0.7 million, respectively, were pledged for short-term bank loans. The company reported no material pending legal proceedings, significant contractual obligations or off-balance-sheet arrangements. It had not paid dividends and did not expect to do so in the foreseeable future.
Important facts for investors to verify
- Confirm the issuer and period: the source is Happiness Biotech Group Limited’s FY2020 Form 20-F, not a Paranovus 2018 Q4 filing.
- Reconcile the conflicting COVID-19 quarterly revenue-decline disclosures (14.1% versus 50%) and assess the effect on the full-year results.
- Review receivable aging, subsequent collections and the basis for recording no allowance against $30.0 million of receivables.
- Check progress and evidence of remediation for the disclosed material weaknesses in financial reporting controls.
- Assess the sustainability of gross margins, the increased selling and marketing spending, and dependence on Lucidum products and tourism-linked experience stores.
- Verify debt maturities, pledged assets, cash availability and any restrictions on moving cash from China; consider the RMB translation exposure.