TDH Holdings, Inc. — FY2019 Form 20-F
Period: Fiscal year ended December 31, 2019. This is an annual report, not a quarterly filing; it does not provide standalone 2019 Q4 financial results. Amounts below are in U.S. dollars unless noted.
Business context
TDH develops, manufactures and sells pet food, treats and related products, principally through its China-based operating business. In November 2019, it temporarily suspended production amid sharply higher meat costs, weak production efficiency and difficulty renewing debt. It continued taking orders for outsourced production. The company also discontinued unprofitable overseas e-commerce operations.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $12.65 million | $23.67 million |
| Gross profit (loss) | ($1.52 million) | ($4.05 million) |
| Gross margin | (12.04%) | (17.12%) |
| Operating expenses | $5.44 million | $9.99 million |
| Operating loss | ($6.96 million) | ($14.04 million) |
| Net loss | ($8.63 million) | ($14.22 million) |
| Interest expense | $1.38 million | $0.23 million |
| Cash used in operations | $5.63 million | $2.17 million |
| Cash and cash equivalents at year-end | $5.11 million | $0.89 million |
Revenue fell 46.6%. Overseas sales declined 37%, domestic sales 34%, and e-commerce sales 98% to $83,779. The company attributed the fall mainly to rejecting unprofitable orders, reduced competitiveness on price, suspension of e-commerce activity and the production halt. Lower selling costs and improved gross margin narrowed the operating and net losses, but gross margin remained negative. Raw materials, particularly chicken and duck, were a major cost pressure.
At December 31, 2019, current assets were $7.19 million versus current liabilities of $14.46 million, a working-capital deficit of about $7.27 million. Total liabilities were $14.75 million and equity was $0.34 million. Short-term loans were $7.62 million; the filing says substantially all outstanding loans were in default. Cash including restricted cash was $6.50 million, of which $1.39 million was restricted or frozen. The filing reports approximately $13.05 million of indebtedness in default.
Cash from financing was $9.52 million, including $6.76 million in cash proceeds from share issuance and borrowings. The cash-flow statement reports investing cash inflow of $0.11 million. The filing reports 45,849,995 shares outstanding at year-end, up from 10,516,662 a year earlier. A private placement included shares issued to CEO Dandan Liu, with $4.24 million of subscription receivable settled against a loan payable to her.
Changes, outlook and material risks
- Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. Management planned to improve profitability and seek debt or equity funding, but had no third-party funding commitments and gave no assurance financing would be available.
- Debt, litigation and contingencies: Vendor proceedings involved 48 lawsuits; 46 were reported resolved through settlements or creditor judgments, with two ongoing. The estimated vendor settlements and judgments totaled about RMB11.8 million ($1.69 million). Courts ordered repayment of two loans totaling RMB40.48 million (about $5.80 million); the company reported no payment as of the filing. Additional lender cases and 97 former-employee labor arbitrations were disclosed. The company accrued about $0.4 million for employee claims.
- COVID-19: The company temporarily closed its office and remaining production facilities in February 2020 and resumed work in May. Management estimated first-five-month 2020 revenue of about $0.32 million, approximately 93% below the comparable period, and a net loss of about $0.65 million, approximately 66% lower. These were estimates; management said revenue remained negligible after resumption and the full-year impact could not be reasonably estimated.
- Other operating risks: The filing identifies commodity-cost volatility, customer and supplier concentration, reliance on contract manufacturers, restricted access to cash held in China, and potential limits on currency conversion. The ten largest retail partners represented 44% of 2019 net sales.
- Controls and listing: Management found disclosure controls and internal control over financial reporting ineffective at year-end due to a material weakness connected to management turnover and inadequate continuity controls. Remediation was planned by the end of 2020. Nasdaq had restored compliance, but imposed monitoring of the stockholders’ equity requirement through October 30, 2020; falling below $2.5 million could risk delisting.
- Unusual items: The company recorded $0.81 million of impairment on long-lived assets and $0.52 million of inventory write-downs in 2019. It reported no 2019 R&D expense, compared with $1.06 million in 2018.
No formal full-year 2020 financial guidance is provided. Management described plans to restart sales, improve operating efficiency and seek financing; the filing cautions that these plans may not be sufficient.
Key facts for investors to verify
- Whether the company can obtain funding, meet overdue obligations and address the auditor’s going-concern warning.
- Current status and payment terms of lender judgments, vendor settlements, employee claims and pledged or frozen assets.
- Whether production and sales recovered after the May 2020 restart, and whether reported interim COVID-19 estimates were realized.
- Whether gross margins improved, given the continuing cost and pricing pressures and the 2019 negative gross margin.
- Share dilution and related-party financing details, including the CEO subscription receivable offset against company debt.
- Remediation of the material weakness and continued Nasdaq equity compliance.
- Reconciliation of figures where the filing text differs: the MD&A and cash-flow statement report 2019 financing cash inflow as $9,520,386 and $9,520,716, respectively; the audited cash-flow statement reports $9,520,716.