TDH Holdings, Inc. — 2018 Annual Report (Form 20-F)
Reporting period: Fiscal year ended December 31, 2018. Although the request specifies 2018 Q4, this filing reports annual results; it does not provide standalone fourth-quarter financial statements. Amounts below are in U.S. dollars unless stated otherwise.
Business context
TDH develops, manufactures and sells pet food and related products, primarily in China and overseas. The company reported one operating segment. Its 2018 operations were affected by the relocation of its Canning facility, which reduced stated daily production capacity from 18 tons to 12 tons, and by higher raw-material costs, production restrictions and weaker demand in some markets.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $23.67 million | $28.98 million |
| Gross profit (loss) | $(4.05) million | $8.30 million |
| Gross margin | (17.12)% | 28.63% |
| Operating income (loss) | $(14.04) million | $0.27 million |
| Net income (loss) | $(14.22) million | $0.12 million |
| Basic and diluted EPS | $(1.49) | $0.01 |
| Cash and cash equivalents at year-end | $0.89 million | $2.35 million |
| Operating cash flow | $(2.17) million | $(2.67) million |
| Investing cash flow | $(6.59) million | $(0.85) million |
| Financing cash flow | $7.73 million | $5.26 million |
| Current liabilities | $19.14 million | $8.66 million |
| Total liabilities | $19.37 million | $8.66 million |
| Equity (deficit) | $(1.94) million | $11.15 million |
Revenue fell 18% year over year. Cost of revenue rose about 34% to $27.73 million, exceeding revenue; management attributed the deterioration to higher meat input costs, weaker sales, relocation-related inefficiency and inventory damage. Operating expenses increased 24% to $9.99 million, including a $1.60 million goodwill impairment. The company recorded a $1.67 million inventory write-down and an allowance for sales returns of $0.89 million.
Working capital was negative $11.34 million, versus positive $6.92 million at year-end 2017. Short-term loans rose to $8.26 million from $1.40 million; related-party short-term loans were $1.06 million, and notes payable were $2.46 million. Cash, cash equivalents and restricted cash totaled $2.70 million, of which $1.81 million was current restricted cash and not freely available. Most cash was held in uninsured Chinese bank accounts and may not be readily deployable outside China.
Investing outflows included approximately $5.63 million for property and equipment and $0.85 million for land-use rights, primarily related to the Lingang facility acquired in 2018. Management expected that facility to begin production at the end of 2019.
Material changes and unusual items
- Overseas sales declined 25% to $15.83 million, and e-commerce sales declined 34% to $3.80 million. Domestic sales increased 97% to $4.10 million. The company cited competition, lost customers, higher costs and constrained production.
- South Korean revenue fell 47%, which management attributed to losing a major customer. The company also declined some overseas orders it said would not cover production and delivery costs.
- The Canning facility relocation reduced production capacity and contributed to lower product quality, sales returns, canceled orders and inventory write-downs. Local production and electricity restrictions during the June 2018 Shanghai Cooperation Organization summit added pressure.
- The company acquired Belgium-based TDH Group BVBA and TDH JAPAN from CEO Rongfeng Cui for 1,092,912 shares valued at approximately $1.05 million. It then recorded a full $1.60 million impairment of acquisition-related goodwill.
- The company adopted ASC 606 in 2018 using the modified retrospective method. The filing reports a $46,519 opening retained-earnings adjustment and states that the standard reduced 2018 revenue by $145,365 relative to the prior accounting method.
Outlook, liquidity and risks
The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. Management said available cash and operating revenue were insufficient to cover obligations for the next 12 months and proposed improving profitability and obtaining additional debt or equity financing. The filing provides no quantified revenue or earnings guidance and gives no assurance that financing or turnaround plans will be sufficient.
A $3.12 million China Construction Bank loan tied to the Lingang facility had an 84-month stated term, but was classified as current because the company failed to meet financial covenants at year-end and subsequently and did not expect to meet them within 12 months. The filing describes acceleration risk if a breach is not cured or waived. A January 2019 Nasdaq notice cited failure to meet the $1.00 minimum bid-price requirement and set July 8, 2019 as the initial compliance deadline.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness in controls over the Canning facility relocation. Remediation was ongoing, with completion targeted by the end of fiscal 2019. Other disclosed risks include dependence on major customers and contract manufacturers, volatile raw-material costs, product quality and recall exposure, PRC regulatory and currency-transfer restrictions, and related-party dealings. The filing also estimates unpaid housing provident fund contributions for some employees at no more than $104,000; it reported no demand or order from authorities as of the filing date.
Important facts for investors to verify
- Going concern and funding: Verify available unrestricted cash, near-term obligations, financing commitments and subsequent funding raised.
- Debt covenant status: Confirm whether the CCB covenant breach was waived or cured, and whether any lender accelerated or amended repayment terms.
- Operating recovery: Verify Lingang’s actual start-up, restored capacity, product-quality performance, customer retention and sales trends after the filing date.
- Control remediation and listing: Confirm whether the material weakness was remediated and whether Nasdaq bid-price compliance was regained by the stated deadline.
- Reported balance consistency: Reconcile the filing’s inventory figures: the balance sheet reports $3.02 million, while the inventory note reports $2.95 million net. Also reconcile the $0.89 million cash balance with the separate bank-deposit schedule reporting $0.84 million.
- Related parties and concentration: Review the CEO-related acquisitions, related-party borrowings and sales, and customer receivable concentration; two customers represented 55.61% of year-end accounts receivable.