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iso4217:USD
xbrli:shares
iso4217:USD
xbrli:shares
iso4217:CNY
utr:sqft
iso4217:JPY
DOGZ:Integer
xbrli:pure
Part
I
Item
1. Identity of Directors, Senior Management and Advisers
Not
applicable for annual reports on Form 20-F.
Item
2. Offer Statistics and Expected Timetable
Not
applicable for annual reports on Form 20-F.
Item
3. Key Information
A.
Selected Financial Data
In
the table below, we provide you with historical selected financial data for the fiscal years ended June 30, 2021, 2020, and 2019. This
information is derived from our consolidated financial statements included elsewhere in this annual report. Historical results are not
necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data,
it is important that you read it along with the historical financial statements and related notes and “Item 5. Operating and Financial
Review and Prospects” included elsewhere in this annual report. Our audited consolidated financial statements are prepared and
presented in accordance with Generally Accepted Accounting Principles in the United States of America, or U.S. GAAP.
|
|
For Fiscal
|
|
|
For Fiscal
|
|
|
For Fiscal
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(audited)
|
|
|
(audited)
|
|
|
(audited)
|
|
Statement of operation data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
24,320,121
|
|
|
$
|
19,171,358
|
|
|
$
|
26,216,515
|
|
Gross profit
|
|
|
9,155,213
|
|
|
|
2,391,370
|
|
|
|
9,430,005
|
|
Operating expenses
|
|
|
7,297,420
|
|
|
|
11,106,837
|
|
|
|
8,790,435
|
|
(Loss) Income from operations
|
|
|
1,857,793
|
|
|
|
(8,715,467
|
)
|
|
|
639,570
|
|
Other income (expense)
|
|
|
82,695
|
|
|
|
343,079
|
|
|
|
1,143,904
|
|
Provision for income taxes
|
|
|
641,460
|
|
|
|
164,537
|
|
|
|
380,296
|
|
Net (loss) income
|
|
|
1,299,028
|
|
|
$
|
(8,536,925
|
)
|
|
$
|
1,403,178
|
|
(Loss) earnings per share, basic and diluted
|
|
|
0.05
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Ordinary Shares outstanding (basic)
|
|
|
27,499,367
|
|
|
|
25,913,631
|
|
|
|
25,913,631
|
|
Balance
sheet data:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current assets
|
|
$
|
14,266,131
|
|
|
$
|
11,627,458
|
|
|
$
|
25,922,624
|
|
|
$
|
46,344,652
|
|
|
$
|
8,669,463
|
|
Total assets
|
|
|
93,845,408
|
|
|
|
63,551,261
|
|
|
|
69,023,927
|
|
|
|
69,708,205
|
|
|
|
17,518,060
|
|
Current liabilities
|
|
|
21,262,335
|
|
|
|
10,769,734
|
|
|
|
8,072,423
|
|
|
|
8,968,673
|
|
|
|
10,160,919
|
|
Total liabilities
|
|
|
28,943,003
|
|
|
|
12,043,333
|
|
|
|
8,072,423
|
|
|
|
8,968,673
|
|
|
|
10,160,919
|
|
Total equity
|
|
$
|
64,902,405
|
|
|
$
|
51,507,928
|
|
|
$
|
60,951,504
|
|
|
$
|
60,739,532
|
|
|
$
|
7,357,141
|
|
Exchange
Rate Information
Our
financial information is presented in U.S. dollars. The financial position and results of the operations of HK Dogness, HK Jiasheng,
Dongguan Dogness, Dongguan Jiasheng, Meijia and Intelligence Guangzhou are determined using the Chinese Renminbi (“RMB”),
the local currency, as the functional currency. Dogness Japan uses Japanese Yen as the functional currency, while Dogness Overseas and
Dogness Group use U.S Dollar as their functional currency.
The
results of operations and the consolidated statements of cash flows denominated in foreign currencies are translated at the average rate
of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated
at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical
rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts
related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the
corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from
period to period are included as a separate component of accumulated other comprehensive income included in consolidated statements of
changes in equity. Gains and losses from foreign currency transactions are included in the consolidated statement of income and comprehensive
income.
The
relevant exchange rates are listed below:
|
|
|
June 30, 2021
|
|
|
|
June 30, 2020
|
|
|
|
June 30, 2019
|
|
Year-end spot rate
|
|
|
US$1=RMB 6.4566
|
|
|
|
US$1=JPY 111.1
|
|
|
|
US$1=RMB 7.0721
|
|
|
|
US$1=JPY 107.5
|
|
|
|
US$1=RMB 6.8657
|
|
|
|
US$1=JPY 107.5
|
|
Average rate
|
|
|
US$1=RMB 6.6221
|
|
|
|
US$1=JPY 106.6
|
|
|
|
US$1=RMB 7.0323
|
|
|
|
US$1=JPY 107.5
|
|
|
|
US$1=RMB 6.8226
|
|
|
|
US$1=JPY 111.1
|
|
We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case
may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct
regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency
hedging transactions.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
|
|
Midpoint of Buy and Sell Prices for U.S. Dollar per RMB
|
|
Period
|
|
Period-End
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
2014
|
|
|
6.1484
|
|
|
|
6.1458
|
|
|
|
6.2080
|
|
|
|
6.0881
|
|
2015
|
|
|
6.4917
|
|
|
|
6.2288
|
|
|
|
6.4917
|
|
|
|
6.0933
|
|
2016
|
|
|
6.9448
|
|
|
|
6.6441
|
|
|
|
7.0672
|
|
|
|
6.4494
|
|
2017
|
|
|
6.5074
|
|
|
|
6.7578
|
|
|
|
6.9535
|
|
|
|
6.4686
|
|
2018
|
|
|
6.8776
|
|
|
|
6.6163
|
|
|
|
7.1786
|
|
|
|
6.6822
|
|
2019
|
|
|
6.9618
|
|
|
|
6.9081
|
|
|
|
7.1786
|
|
|
|
6.6822
|
|
2020
|
|
|
6.5250
|
|
|
|
6.9042
|
|
|
|
7.1681
|
|
|
|
6.5208
|
|
2021 (through October 22, 2021)
|
|
|
6.3839
|
|
|
|
6.4668
|
|
|
|
6.5716
|
|
|
|
6.3674
|
|
As
of October 22, 2021, the exchange rate is RMB 6.3839 to $1.00.
B.
Capitalization and Indebtedness
Not
applicable for annual reports on Form 20-F.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable for annual reports on Form 20-F.
D.
Risk Factors
Before
you decide to purchase our Class A Common Shares, you should understand the high degree of risk involved. You should consider carefully
the following risks and other information in this report, including our consolidated financial statements and related notes. If any of
the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result,
the trading price of our Class A Common Shares could decline, perhaps significantly.
Please
also read carefully the section below entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks
Related to Our Business
We
face risks related to health epidemics that could impact our sales and operating results.
Our
business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of
respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases,
and other adverse public health developments, particularly in China, could have a material and adverse effect on our business operations.
These could include disruptions or restrictions on our ability to resume the general shipping agency services, as well as temporary closures
of our facilities and ports or the facilities of our customers and third-party service providers. Any disruption or delay of our customers
or third-party service providers would likely impact our operating results and the ability of the Company to continue as a going concern.
In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could
adversely affect the economies and financial markets of China and many other countries, resulting in an economic downturn that could
affect demand for our services and significantly impact our operating results.
The
coronavirus disease 2019 (COVID-19) has had a significant impact on our operations since January 2020 and could materially adversely
affect our business and financial results for the remaining months of the 2020 calendar year.
Our
ability to manufacture and/or sell our products may be impaired by damage or disruption to our manufacturing, warehousing or distribution
capabilities, or to the capabilities of our suppliers, logistics service providers or distributors as a result of the impact from the
COVID-19. This damage or disruption could result from events or factors that are impossible to predict or are beyond our control, such
as raw material scarcity, pandemics, government shutdowns, disruptions in logistics, supplier capacity constraints, adverse weather conditions,
natural disasters, fire, terrorism or other events.
The
COVID-19 pandemic, which has spread rapidly across the globe, resulted in adverse economic conditions and business disruptions. In reaction
to this outbreak, governments worldwide have imposed varying degrees of preventative and protective actions, such as temporary travel
bans, forced business closures, and stay-at-home orders, all in an effort to reduce the spread of the virus. Since this outbreak, business
activities in China and many other countries including U.S. have been disrupted by a series of emergency quarantine measures taken by
the government. The Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of
business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not limited to, the
temporary closure of the Company’s factory and operations beginning in early February until late March 2020, limited support from
the Company’s employees, delayed access to raw material supplies and inability to deliver products to customers on a timely basis,
the Company’s business was negatively impacted. While the spread of the disease has gradually returned under control in China,
COVID-19 could still adversely affect our business and financial results in the future. As a result, there is a possibility that the
Company’s revenues and operating cash flows may be significantly lower than expected for fiscal year 2022.
We
may incur liability for unpaid taxes, including interest and penalties.
In
the normal course of business, our Company may be subject to challenges from various PRC taxing authorities regarding the amounts of
taxes due. PRC taxing authorities may take the position that the Company owes more taxes than it has paid. The Company recorded tax liabilities
of $4.4 million, $2.8 million and $2.9 million as of June 30, 2021, 2020, and 2019, respectively, for the possible underpayment
of income and business taxes. It is possible that the tax liability of the Company for past taxes may be higher than those amounts, if
the PRC authorities determine that we are subject to penalties or that we have not paid the correct amount. Although the Company’s
management believes it may be able to negotiate with local PRC taxing authorities a reduction to any amounts that such authorities
may believe are due and a reduction to any interest or penalties thereon, we have no guarantee that we will be able to negotiate such
a reduction. To the extent our Company is able to negotiate such amounts, national-level taxing authorities may take the position that
localities are without power to reduce such liabilities, and such PRC taxing authorities may attempt to collect unpaid taxes, interest
and penalties in amounts greatly exceeding management’s estimates.
If
our largest customers reduce their orders with us, such revenues would be very difficult to replace.
Although
we have also sold our products through distributors and trading companies, some of our largest customers are Petco and Pet Valu, which
are by far the largest pet specialty chains in North America. Petco has around 1600 stores in the US and Pet Valu has around 600 stores
in Canada. There is not another brick-and-mortar
customer that presents the opportunity that these customers present to us. As a result, if we were to lose these accounts or if these
customers purchased less of our products in the future, it would be difficult to replace those lost revenues.
Our
smart products have only recently entered distribution.
While
we are optimistic that our smart products such as collars, harnesses, feeders and robots will be important products for our company in
the future, we only recently begun to sell them and thus do not know whether they will prove popular with consumers. We have exhibited
these products at expos in multiple countries and have begun to receive orders, but our revenues for all smart products was approximately
$7.8 million, $4.3 million and $2.1 million during the years ended June 30, 2021, 2020 and 2019, respectively. As a result, we do not
have an accurate gauge of how well accepted they will be by consumers. If consumers do not appreciate our smart products, we may not
sell enough products to grow our market share in this new industry.
Our
smart products are not as well-known as those of our competitors.
There
are a variety of competitors providing smart collars, smart feeders and smart treaters for dogs and cats that are more well-known than
our products. We are aware of more than a dozen competitors to our smart products, some of which have been on the market for several
years. Because smart collars are still a relatively new industry, we do not believe that there is a single leader. Nevertheless, we face
competition from more well-known products like the Whistle GPS Pet Tracker and Tractive, as well as products from more well-established,
better capitalized companies in the United States such as Garmin, which produces varieties of dog training and tracking devices. Similarly,
companies such as PetSafe, Petzi, Petcube, Arf Pets, and Furbo market food and treat dispensers with functionalities that in some cases
are similar to our products. If we are unable to achieve recognition for our technology or if consumers opt to use products from companies
they recognize more than our company, our smart collar and harness products may not be well accepted.
Our
smart collars and harnesses are currently between generations.
We
debuted our C2 and H2 smart collars and harnesses in 2016. These products were designed to operate over 2G telephone technology. While
this platform was sufficient to meet the needs of the products, 2G speeds lag far behind currently available 4G and now 5G technology.
As a result, our C2 and H2 products have thus far obtained a very limited customer base. For this reason, we have been researching and
developing our next generation of smart collars and harnesses to operate with today’s higher internet speeds in mind. Before we
are able to bring these products to market, we anticipate that our sales of smart collars and harnesses, along with subscriptions for
ongoing cellular services for those products, will be nominal. If and when we are able to introduce our next generation of smart collars
and harnesses, we are unable to predict the extent to which consumers will be drawn to such new products.
Our
smart collars rely on third-party cellular telephone companies and application developers for functionality.
One
of the features of our smart collars is the ability to communicate between the owner’s cell phone and the collar, even when the
two are too far away to communicate directly. We achieve this by having a SIM card in the smart collar so that, so long as the collar
has a cell phone signal, it will communicate with the telephone. We cooperate with cell phone companies in our target markets to provide
cellular service to these SIM cards. If this cooperation were to end or if the cellular service we receive is not reliable or more expensive
than we anticipate, the market for our products could be harmed.
In
addition, the Dogness smartphone App on which our smart collars rely are still under development and test by a company, Dogness Network
Technology Co., Ltd (“Dogness Network”), in which we have a minority interest. Our company owns 10% of Dogness Network. Dogness
Network plans to derive its revenues from subscriptions for services provided through the Dogness smartphone App in the near future,
and we will purchase such products from Dogness Network and resell to our customers. We may benefit only by virtue of our 10% interest
in Dogness Network. In fiscal year 2021, subscription revenues were approximately $1.8 million from about 68,100 users. If Dogness Network
were to stop supporting the application or impair its functionality, our smart collars and harnesses could become unusable or have decreased
value to end users.
To
the extent we were unable to cooperate with such third parties in the future, we would need to locate and cooperate with other service
providers, and we cannot guarantee that we would be able to do so under terms that are satisfactory to us, if at all.
Our
software platform may not interface with applications consumers want to be integrated.
In
the connected home, consumers are increasingly aware of the interconnection among applications and devices, such as speakers that can
turn on lights or adjust the temperature. Some customers purchase products based on how they will interact with other services and products
that the customers already use. If we are unable to anticipate and accommodate these desires, customers may choose other products that
do interact with their preferred services. Although we may incorporate such functionality in future generations of our products, not
all of our current products integrate into Apple’s, Google’s or Amazon’s smart home platforms. Our Dogness CAM feeder,
App feeder, and App mini feeder work with Amazon Alexa.
We
are also dependent on third party application stores that may prevent us from timely updating our current products or uploading new products.
In addition, our products interoperate with servers, mobile devices and software applications predominantly through the use of protocols,
many of which are created and maintained by third parties. We therefore depend on the interoperability of our products with such third-party
services, mobile devices and mobile operating systems, as well as cloud-enabled hardware, software, networking, browsers, database technologies
and protocols that we do not control. Any changes in such technologies that degrade the functionality of our products or give preferential
treatment to competitive services could adversely affect adoption and usage of our platform. Also, we may not be successful in developing
or maintaining relationships with key participants in the mobile industry or in developing products that operate effectively with a range
of operating systems, networks, devices, browsers, protocols and standards. In addition, we may face different fraud, security and regulatory
risks from transactions sent from mobile devices than we do from personal computers. If we are unable to effectively anticipate and manage
these risks, or if it is difficult for our customers to access and use our platform, our business, results of operations and financial
condition may be harmed.
Our
online platform may not be attractive to third party vendors.
We
are currently developing an online platform on Chinese retail websites that will allow pet owners to purchase products from vendors that
advertise and sell their products through our application. While we are hopeful that we will be able to develop a product that is appealing
to vendors, we have not yet obtained any commitments from any third-party vendors to make use of the platform. Because our ultimate success
in making this platform a vibrant social and shopping site depends on pet owners making use of it, is impossible to foresee whether the
platform will be successful in attracting vendors and pet owners.
Price
increases in raw materials and sourced products could harm the Company’s financial results.
Our
primary raw materials are plastic, leather, nylon, polyester, chemical fiber blended fabric, metal, GPPS and HIPS, most of which are
extracted from crude oil. These raw materials are subject to price volatility and inflationary pressures. Our success is dependent, in
part, on our continued ability to reduce our exposure to increases in those costs through a variety of programs, including sales price
adjustments based on adjustments in such raw material costs, while maintaining and improving margins and market share. We also rely on
third-party manufacturers as a source for a minor portion of components for our products. These manufacturers are also subject to price
volatility and labor cost and other inflationary pressures, which may, in turn, result in an increase in the amount we pay for sourced
products. Raw material and sourced product price increases may more than offset our productivity gains and price increases and may adversely
impact our financial results.
Our
plan to vertically integrate our production may not provide the benefits we foresee.
Over
the last several years, we have increasingly produced our products in-house. We have made this strategic decision because of our belief
that it will facilitate our control over the costs of components in our products. The price of components is extremely important where
the per-unit sales price is as low as it is in our industry. Thus, we believe it is important to control costs as much as possible.
That
being said, when we produce components in-house that we previously purchased from a third-party supplier, we may not benefit from the
economies of scale that a dedicated third-party supplier could see. Moreover, we invest in infrastructure for such production, such as
buying machines and leasing additional facility space; in the event new technology is developed to produce components of our products
more cheaply than we can with our existing infrastructure, we could find that our operating results are negatively impacted, compared
with what we would see if we were purchasing from third parties. In such case, our products could be more expensive than those of our
competitors that purchase from third-party suppliers, which could make our products less attractive to customers.
Our
reliance on third party logistics providers may put us at risk of service failures for our customers.
We
rely on third parties to ship our products from China to our customers. We compete based on price, quality and reliability, so a failure
to deliver our products on time to our large customers could harm our reputation. To the extent we are unable to meet their demand for
products or do not deliver products on time, we stand a substantial risk of losing key accounts. Because we rely on third parties for
logistics services, we may be unable to avoid supply chain failures, even if we are able to meet our manufacturing obligations to customers.
If
we fail to protect our intellectual property rights, it could harm our business and competitive position.
We
rely on a combination of patent, trademark, domain name and trade secret laws and non-disclosure agreements and other methods to protect
our intellectual property rights. Our Chinese subsidiaries own 117 patents and 179 trademarks in China and 85 patents and 14 trademarks
outside China, all of which have been properly registered with regulatory agencies such as the State Intellectual Property Office and
Trademark Office of China’s State Administration for Industry and Commerce (“SAIC”). This intellectual property has
allowed our products to earn market share in the pet products industry.
The
process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued,
and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents
and patent applications may also be challenged, invalidated or circumvented.
We
also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If
our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known
to our competitors.
In
accordance with Chinese intellectual property laws and regulations, we will have to renew our trademarks once the terms expire. However,
patents are not renewable. Some of our patents, particularly utility mode and design patents, have only 10 years of protection and will
end in the near future. Once these patents expire, our products may lose some market share if they are copied by our competitors. Then,
our business revenue might suffer some loss as well.
Implementation
of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement
difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United
States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we
may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of
our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result
in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.
Our
Chinese patents and registered marks may not be protected outside of China due to territorial limitations on enforceability.
In
general, patent and trademark rights have territorial limitations in law and are valid only within the countries in which they are registered.
At
present, Chinese enterprises may register their trademarks overseas through two methods. One is to file an application for trademark
registration in each single country or region in which protection is desired, while the other is to apply via the Madrid system for international
trademark registration. By the second way, under the provisions of the Madrid Agreement concerning the International Registration of
Marks (the “Madrid Agreement”) or the Protocol Relating to the Madrid Agreement concerning the International Registration
of Marks (the “Madrid Protocol”), applicants may designate their marks in one or more member countries via the Madrid system
for international registration.
As
of the date of the filing, we have registered 179 trademarks in China. We have also registered our key trademarks in Japan, Australia,
Korea, Hong Kong, Taiwan and the United States.
Similar
with trademarks, Chinese enterprises may also register their patents overseas through two methods. One is to file an application for
patent registration in each single country or region, and the other is to file international application with the China Intellectual
Property Office or the International Bureau of World Intellectual Property Organization under the Patent Cooperation Treaty. However,
such international application may relate to invention or utility model patents, but does not include industrial design patents.
Currently,
most of our patents and trademarks are registered in China. If we do not register them in other jurisdictions, they may not be protected
outside of China. As a result, our business and competitive position could be harmed.
We
may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business
and have a material adverse effect on our financial condition and results of operations.
Our
success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual
property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk
of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’
proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments
in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell
our branded products in either China or other countries, including the United States and other countries in Asia. The validity and scope
of claims relating to patents in our industry involve complex scientific, legal and factual questions and analysis and, as a result,
may be highly uncertain. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal
and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical
and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party
could cause us to:
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pay
damage awards;
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seek
licenses from third parties;
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pay
ongoing royalties;
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redesign
our branded products; or
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be
restricted by injunctions,
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each
of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring
or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results
of operations.
Outstanding
bank loans may reduce our available funds.
As of June 30, 2021, we had approximately $8.0
million in outstanding bank loans, with expected repayment of approximately $1.5 million in one year, $1.4 million in two years
and $3.3 million in three years. The loans are guaranteed by the fixed assets of the Company’s subsidiaries and are also
personally guaranteed by our Chief Executive Officer and certain of his family members. While we believe we have sufficient capital
resources to repay these bank loans with support from Mr. Silong Chen, our Chief Executive Officer, there can be no guarantee that we
will be able to pay all amounts when due or to refinance the amounts on terms that are acceptable to us or at all. If we are unable to
make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.
While
we do not believe they will impact our liquidity, the terms of the debt agreements impose significant operating and financial restrictions
on us. These restrictions could also have a negative impact on our business, financial condition and results of operations by significantly
limiting or prohibiting us from engaging in certain transactions, including but not limited to: incurring or guaranteeing additional
indebtedness; transferring or selling assets currently held by us; and transferring ownership interests in certain of our subsidiaries.
The failure to comply with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not
waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this
occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on favorable terms, if any.
If
the village cooperative from which we rent our factory in Dongguan fails to provide ownership certificates or construction approvals
on demand, our ability to use our facilities may be impaired.
We
lease our production facility from Dongguan Dongcheng District Tongsha Huanggongkeng Co-op (“Huanggongkeng”). We understand
that, as is not uncommon in our area, Huanggongkeng did not obtain prior government approval before constructing the facilities and thus
may be unable to provide evidence of government approval. If the local authority were to request proof of such approval, operations at
our facility could be interrupted until Huanggongkeng was able to provide evidence of such approvals. If Huanggongkeng were unable to
rectify this issue, we could find our operations halted indefinitely.
If
the value of our property decreases, we may not be able to refinance our current debt.
All
of our current debt is secured by either mortgages on real and other business property or guarantees by some of our shareholders. If
the value of our real property decreases, we may find that banks are unwilling to loan money to us secured by our business property.
A drop in property value could also prevent us from being able to refinance that loan when it becomes due on acceptable terms or at all.
Our
new facilities in Zhangzhou and Dongguan may be more expensive than anticipated to complete.
In March 2018, we purchased all of the equity
interests in Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”), for a total cash consideration of approximately $11.0
million (RMB 71.0 million) (“Acquisition Cost”), which has been fully paid upon consummation of the Meijia acquisition
transaction. Because Meijia had no substantial operations and its property consisted of a land use right and factory and office buildings,
we accounted for the acquisition as a purchase of assets. After the acquisition, we started building our own facilities and office spaces
to expand the production capacity in order to fulfill increased customer orders. Total budgeted capital expenditure to bring Meijia manufacturing
facility into use was originally estimated to be completed at a cost of RMB110 million ($17.0 million). The actual costs have been adjusted
based on additional works required for waterproofing, sewage pipeline and hazardous waste leakage prevention. As a result, total actual
costs incurred as of June 30, 2021, amounted to RMB118.5 million ($18.4 million). 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. Meijia
plant has reached its fully production capacity as of June 30, 2021.
In addition to our Zhangzhou facility, we are
also building new manufacturing and operating facilities, which include warehouse, workshops, office building, security gate, employee
apartment building, electrical transformer station and exhibition hall, etc. The total budget is approximately RMB 230.8 million ($35.8
million). As of June 30, 2021, the Company had substantially completed this project and transferred most of the related CIP to fixed
assets. As of June 30, 2021, the Company has made total payments of approximately RMB 161.3 million ($25.0 million) in connection to
this project, which resulted in future minimum capital expenditure payments of RMB 69.5 million ($10.8 million).
The
Company’s subsidiary Dogness Culture is also working on a project to decorate a pet themed retail store. Total budget is RMB 2.2
million ($0.3 million). As of June 30, 2021, the Company has spent RMB 1.5 million ($0.2 million). This project was fully completed by
June 30, 2021.
As a result of the above, the Company’s
future capital expenditure payable on Dongguan Jiasheng and on the pet store under Dogness Culture amounted to approximately $10.9
million as of June 30, 2021. Subsequently, from July 2021 to October 2021, the Company made payment of RMB32.1 million
($5.0 million) on the above-mentioned construction projects. As a result, the Company’s future capital expenditure payable
on CIP has been lowered down from approximately $10.9 million as of June 30, 2021 to approximately $5.9 million as
of the date of this report.
We
may find in the course of development that construction costs come in above budget, that we exceed projected timelines, and that we face
other challenges and inconveniences that make our development plans less successful than we expect. If these were to occur, we could
find the costs and effort of development distract our management from our business development strategies and that our financial results
are negatively affected as a result.
We
may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing
when needed.
We
may need to obtain additional debt or equity financing to fund future capital expenditures and initiatives. Additional debt financing
may include conditions that would restrict our freedom to operate our business, such as conditions that:
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limit our ability to pay dividends or require us to seek consent for the payment of dividends;
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increase our vulnerability to general adverse economic and industry conditions;
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require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash
flow to fund capital expenditures, working capital and other general corporate purposes; and
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limit our flexibility in planning for, or reacting to, changes in our business and our industry.
We
cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
The
loss of any of our key customers could reduce our revenues and our profitability.
Our
key customers are principally retail pet specialty stores and mass merchandisers. For the year ended June 30, 2021, sales to our three
largest customers amounted in the aggregate to approximately 32.0%, 9.1% and 6.9% of our total revenue. For the year ended June 30, 2020,
sales to our three largest customers amounted in the aggregate to approximately 27.6%, 6.5% and 4.4% of our total revenue. For the year
ended June 30, 2019, sales to our three largest customers accounted for 28.1%, 13.5% and 5.6% of the Company’s total revenue. There
can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply
these customers at current levels or at all. Any failure to pay by these customers could have a material negative effect on our company’s
business. In addition, having a relatively small number of customers may cause our quarterly results to be inconsistent, depending upon
when these customers pay for outstanding invoices. During the years ended June 30, 2021, 2020 and 2019, we had one, one and two customers
that accounted for 10% or more of our revenues.
Our
bank accounts are not fully insured or protected against loss.
We
maintain our cash with various banks and trust companies located in mainland China. Our cash accounts in the PRC are not insured or otherwise
protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds,
we would lose the cash on deposit with that particular bank or trust company.
We
are substantially dependent upon our senior management and key research and development personnel.
We
are highly dependent on our senior management to manage our business and operations and our key research and development personnel for
the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on
our Chief Executive Officer, Mr. Silong Chen.
While
we provide the legally required personal insurance for the benefit of our employees, we do not maintain key person life insurance on
any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations.
Competition for senior management and our other key personnel is intense, and the pool of suitable candidates is limited. We may be unable
to quickly locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior
management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners
and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a confidentiality
and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce
these provisions in the event of a dispute between us and any member of our senior management or key personnel.
In
our efforts to develop new products, we compete for qualified personnel with technology companies and research institutions. Although
we have our own research and development team, we also rely heavily on our cooperation with another software development company, which
has been helping us develop our high-tech products. This relationship has become an important part of our company’s business development.
If this relationship becomes unstable or is terminated in the future, we may be unable to meet our business and financial goals.
Failure
to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business
and prospects.
Our
growth strategy includes increasing market penetration of our existing products, developing new products and increasing the number and
size of customers we serve. Pursuing these strategies has resulted in, and will continue to result in, substantial demands on management
resources. In particular, the management of our growth will require, among other things:
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continued
enhancement of our research and development capabilities;
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stringent
cost controls and sufficient liquidity;
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strengthening
of financial and management controls;
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increased
marketing, sales and support activities; and
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hiring
and training of new personnel.
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If
we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
Because
we rely on Hong Kong entities to fulfill orders from many of our customers, we may be exposed to claims of value-added tax underreporting.
Many
of our international customers order our products by placing an order with HK Jiasheng or HK Dogness, our Hong Kong subsidiaries. These
subsidiaries then procure the products from our mainland China operating companies. When these products are sold from our China operating
company to our Hong Kong trading company, the price paid is set at what we believe to be a fair value. Further, we have informed the
applicable tax bureaus of the pricing of products. Nevertheless, the tax bureau in the future may claim that we have engaged in transfer
pricing to avoid payment of value-added tax (“VAT”) because the price our Hong Kong subsidiary charges to the customer may
be higher than the price our China subsidiary charges to our Hong Kong subsidiary. Under PRC law, the VAT is refundable on export, so
we believe there is limited risk in the event that we were called upon to pay VAT on such transfers from China to Hong Kong, but a failure
to report proper VAT payable could expose us to penalties and interest for failing to pay it on time.
We
may be subject to penalties under relevant PRC laws and regulations due to failure to make full social security and housing fund contributions
for some of our employees.
In
the past, contributions by some of our PRC subsidiaries for some of their employees to the social security and housing funds may not
have been in compliance with relevant PRC regulations. Pursuant to the Regulation on the Administration of Housing Accumulation Funds,
as amended in 2002, the relevant housing fund authority may order an enterprise to pay outstanding contributions within a prescribed
time limit. Pursuant to the PRC Social Insurance Law promulgated in 2010, the social security authority may order an enterprise to pay
the outstanding contributions within a prescribed time limit, and may impose penalties if there is a failure to do so. To the extent
the relevant authorities determine we have underpaid, some of our PRC subsidiaries may be required to pay outstanding contributions and
penalties to the extent they did not make full contributions to the social security housing funds.
Risks
Related to Doing Business in China
Increased
taxes, duties, tariffs or other restrictions on trade (including Section 301 tariffs imposed by the United States Trade Representative
on imported Chinese goods), could adversely affect our financial performance.
In
August 2017, the U.S. President directed the United States Trade Representative (“USTR”) to consider investigating China’s
laws, policies, practices or actions affecting U.S. intellectual property and forced technology transfers. Based on the findings of the
USTR in March 2018 that China’s polices are “unreasonable or discriminatory, and burden or restrict U.S. commerce”,
the U.S. President signed a memorandum proposing, among other things, to implement tariffs on certain Chinese imports under Section 301
of the Trade Act of 1974. Since the announcement in May 2018 of a 25% tariff on $50 billion worth of Chinese imports to the U.S., the
United States has made multiple announcements of increases in the scope of tariffs covered and the rate of tariffs charged. Current tariffs
cover approximately $550 billion of Chinese products imported to the United States and have tariff rates of between 15% and 25%, with
proposals to increase to up to 30%.
The
U.S. government has taken a variety of actions that may lead to potential changes to U.S. and international trade policies, including
recently-imposed tariffs affecting certain products manufactured in China. During the year ended June 30, 2021, our Company paid more
than $32,958 in connection with such U.S. imposed tariffs. It is unknown whether and to what extent new tariffs (or other new laws or
regulations) will be adopted, or the effect that any such actions would have on us or our industry and customers. Although we currently
sell our products FOB Shenzhen and thus complete our sales outside the United States, any unfavorable government policies on international
trade, such as capital controls or tariffs, may affect the demand for our products and services, impact the competitive position of our
products or prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or regulations are
implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions
due to the recent U.S.-China trade tension, such changes could have an adverse effect on our business, financial condition, results of
operations.
Labor
laws in the PRC may adversely affect our results of operations.
On
June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, which became effective on January 1, 2008 and was further
amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly
affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority
and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect
our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus
materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers
provide social welfare packages to all employees, increasing our labor costs. Under the Regulations on the Administration of Housing
Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish
a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing
funds. To the extent competitors from outside China are not affected by such requirements, we could be at a comparative disadvantage.
Moreover,
although our Chinese subsidiaries have been actively complying with China’s Labor Contract Law, some of our employees have voluntarily
requested that we not provide social welfare packages to them because they do not want their salaries and bonus to be deducted proportionally
as required by law. These employees are mostly migrant laborers and historically have very high turnover rates. Thus, some of our Chinese
subsidiaries’ practices do not strictly comply with Labor Contract Law, even though these practices are very common and popular
in many labor-intensive companies of China. Although the aggregate amount we pay these employees as salary exceeds the amount (including
social welfare payment) we would be required to pay under applicable minimum wage laws, if a regulatory agency determined that this practice
violated the Labor Contract Law, we may be required to pay additional compensation to affected employees.
Under
the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC shareholders.
China
passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective on January 1,
2008. Under the EIT Law, resident enterprises pay income tax at the rate of 25% for their worldwide income while non-resident enterprises
pay 20% for their income generated from China. As far as the definition of resident enterprises, according to the EIT Law, an enterprise
established outside of China with “de facto management bodies” within China is considered a “resident enterprise.”
The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation of China issued the Notification 82 Concerning Relevant Issues Regarding Cognizance
of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of De Facto Management
Bodies (“Notification 82”) further interpreting the application of the EIT Law and its implementation to offshore entities
controlled by a Chinese enterprise or group. Pursuant to the Notification 82, an enterprise incorporated in an offshore jurisdiction
and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise”
if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial
or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books,
corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior
management are often resident in China. A resident enterprise would have to pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC stockholders.
While
some of our businesses are conducted in Hong Kong, Dogness International Corporate does have a PRC individual as our primary controlling
shareholder. Although Notification 82 did not mention offshore companies incorporated by Chinese individuals, Notification 82 did mention
that the facts-oriented recognition is more important than format in the case of recognizing de facto management. Therefore, it is highly
likely that we will be classified as a Chinese-controlled offshore incorporated enterprise within the meaning of Notification 82, so
we believe Notification 82 will likely apply to us.
As
for our Hong Kong businesses, we do not believe that we meet some of the conditions outlined. As trading companies, the key assets and
records of HK Jiasheng and HK Dogness including the resolutions and meeting minutes of our board of directors and the resolutions and
meeting minutes of our shareholders, are located and maintained outside the PRC. Accordingly, we believe that HK Jiasheng and HK Dogness
should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body”
as set forth in Notification 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination
by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body”
as applicable to our offshore entities, we will continue to monitor our tax status.
If
the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of
unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide
taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China
source income would be subject to PRC enterprise income tax at a rate of 25%. Second, under the EIT Law and its implementing rules, dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued
with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is
imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring
our shares.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We
may be subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers
of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for
the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment
of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption.
Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors
of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program,
which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining
or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all
contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually.
It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities
be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions
of the FCPA and Chinese anti-corruption laws.
However,
our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors
of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may
result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we acquire.
Adverse
changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth
of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Substantially
all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects
are subject to economic, political and legal developments in China. Although China claims that the Chinese economy is no longer a planned
economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of
resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in
certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general
or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. In
response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the
economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth
or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business,
our growth rate or strategy, our results of operations could be adversely affected as a result.
Governmental
control of currency conversion may affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency
out of China. We receive substantially most of our revenues in RMB. Under our current corporate structure, our income is primarily derived
from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC
subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is
to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in
foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands,
we may not be able to pay dividends in foreign currencies to our security-holders.
We
are a holding company and we rely for funding on dividend payments from our subsidiaries, some of which are subject to restrictions under
PRC laws.
We
are a holding company incorporated in the British Virgin Islands, and we operate our core businesses through our subsidiaries in the
PRC, Hong Kong and the United States. The availability of funds for us to pay dividends to our shareholders and to service our indebtedness
depends largely upon dividends received from the PRC Subsidiaries. If the PRC Subsidiaries incur debt or losses, their ability to pay
dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will
be restricted. PRC laws require that dividends be paid only out of the after-tax profit of the PRC Subsidiaries calculated according
to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC
laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory
reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other
agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends
to us. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service
our indebtedness.
Our
business may be materially and adversely affected if any of the PRC Subsidiaries declares bankruptcy or becomes subject to a dissolution
or liquidation proceeding.
The
Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise
will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or
are demonstrably, insufficient to clear such debts.
The
PRC Subsidiaries hold certain assets that are important to our business operations. If any of the PRC Subsidiaries undergoes a voluntary
or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering
our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
According
to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration
Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to
Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of the PRC Subsidiaries undergoes a voluntary or involuntary
liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required,
but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is
a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.
Our
subsidiaries’ financial statements are prepared under different accounting standards than our consolidated financial statements.
We
prepare the financial statements for each of our subsidiaries that are PRC legal entities in accordance with the requirements of generally
accepted accounting principles in China, or PRC GAAP. These financial statements drive how we calculate the taxes payable for operations
of these subsidiaries. By contrast, we prepare the consolidated financial statements for Dogness in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP. The process of consolidating the financial statements and changing from PRC
GAAP to U.S. GAAP requires us to make certain adjustments on consolidation. This can result in some discrepancies between the financial
statements used to prepare our tax filings in China and the financial statements audited by our independent registered accounting firm
and subsequently filed with the SEC. To the extent the discrepancies between PRC GAAP and U.S. GAAP are material, we could find, for
example, that a PRC subsidiary shows taxable income for which payment of taxes is due, while our U.S. GAAP-audited financial statements
show taxable loss.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
Changes
in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s
political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial
condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to
convert U.S. dollars we receive from any securities offering in the United States into RMB for our operations, appreciation of the RMB
against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to
convert our RMB into U.S. dollars for the purpose of paying dividends on our Common Shares or for other business purposes, appreciation
of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations
of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness
of our products against products of foreign manufacturers or products relying on foreign inputs.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions
on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Since
our major operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets
of our company, our directors and executive officers.
Part
of our business is located in Hong Kong, but major operations and assets are located in the PRC. In addition, most of our executive officers
and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result,
it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us
or any of these persons. See “Enforceability of Civil Liabilities.”
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct most of our business through our subsidiaries in Hong Kong and Mainland China. Our operations in Mainland China are governed
by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in
China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes.
Prior court decisions may be cited for reference but have limited precedential value. Even so, there is still high uncertainty regarding
the application of law toward foreign investments.
Since
1979 when China started its reform and opening policy, PRC legislation and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, the interpretation and enforcement of these laws and regulations involve uncertainties
due to its ruling party’s political influence. As a result, laws and regulations may vary from time to time and especially some
may be subject to political interpretation. This uncertainty may bring about laws and regulations changes unfavorable to foreign investment.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have
to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and
could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism
and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism
and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial
accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result
of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased
in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC
enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our company and our business. If we become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations
and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless,
our company and business operations will be severely hampered and your investment in our shares could be rendered worthless.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders
to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute
profits to us, or otherwise adversely affect us.
The
SAFE promulgated the Notice on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or Notice 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local
branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or
financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle
undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital
increase, capital reduction, share transfer or exchange, merger or spin off).
Of
our current shareholders, five pre-IPO shareholders are individual Chinese residents to whom Notice 37 applies. The remaining pre-IPO
shareholders are enterprises and Hong Kong residents, to whom Notice 37 does not apply; provided, however, that to the extent the shareholders
of such enterprises are themselves Chinese residents, Notice 37 would apply to such individuals. As of the date of this report, none
of the shareholders who are Chinese residents who hold such shares directly or through a Hong Kong enterprise has submitted registration
under Notice 37. Although such individuals have promised to complete registration at the time they pay the company’s capital contribution
prior to completion of this offering, there can be no assurance such registration will be completed in a timely manner.
We
have requested PRC residents whom we know hold direct or indirect interests in our company to make the necessary applications, filings
and amendments as required under Notice 37 and other related rules. However, we cannot assure you that the registration will be duly
and timely completed with the local SAFE branch or qualified banks. In addition, we may not be informed of the identities of all of the
PRC residents holding direct or indirect interests in our company. As a result, we cannot assure you that all of our shareholders or
beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations
or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure
by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and prospects.
Failure
to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or
trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.
Other
than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of
the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended
and supplemented, the ‘‘Individual Foreign Exchange Rules’’). Under the Individual Foreign Exchange Rules, any
PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives
overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations
may be subject to warnings, fines or other liabilities.
We
may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in
or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage
accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no
control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary
approval and registration procedures required by the Individual Foreign Exchange Rules.
It
is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement
will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure
by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions
on their operations, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our
business, results of operations and financial condition.
Our
business operations may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which came into effect on January 1, 2020.
Along with the Foreign Investment Law, the Implementing Rules of Foreign Investment Law promulgated by the State Council and the Interpretation
of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law promulgated by the Supreme
People’s Court became effective on January 1, 2020. Since the Foreign Investment Law and its current implementation and interpretation
rules are relatively new, uncertainties still exist in relation to their further application and improvement. According to the Foreign
Investment Law, “foreign investment” refers to investment activities carried out directly or indirectly by foreign natural
persons, enterprises, or other organizations, or “foreign investors,” including the following: (i) foreign investors establishing
foreign-invested enterprises in China alone or collectively with other investors; (ii) foreign investors acquiring shares, equities,
properties, or other similar rights of Chinese domestic enterprises; (iii) foreign investors investing in new projects in China alone
or collectively with other investors; and (iv) foreign investors investing through other ways prescribed by laws, regulations, or guidelines
of the State Council.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign- invested entities that operate
in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list”.
It is unclear whether the “negative list” to be published pursuant to the Foreign Investment Law will differ from the current
Special Administrative Measures for Market Access of Foreign Investment (Negative List) (2020 Version). The Foreign Investment Law provides
that foreign-invested entities operating in “restricted” industries will require market entry clearance and other approvals
from relevant PRC government authorities. As of the date hereto, the current business activities of our PRC subsidiaries are not in the
“negative list”, and foreign investors are allowed to hold 100% equity interests of our PRC subsidiaries under the Foreign
Investment Law. We have no plans at the present to change our PRC subsidiaries’ business activities in the future. However, China’s
economic, political and social conditions, as well as changes in any government policies, laws and regulations may be quick with little
advance notice. We may face substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations
and rules that may materially and adversely affect our business operations.
Chinese
economic growth slowdown may harm our business.
Since
2014, Chinese economic growth has been slowing down from double-digit GDP speed. This situation has impacted many types of service industries,
such as restaurant and tourism, and some manufacturing industry. Our business operations in China mainly rely on pet products, which
are influenced by economic growth slowdown. Therefore, if China’s economic growth continues to slow down, then our products will
be adversely affected due to the slow expansion or shrinkage of the pet products industry.
Land-use
rights policy may cause significantly adverse effect to our operation.
China
has very conservative land ownership and land use policy. All the lands in China belong either to the nation or collective units. Many
of our PRC entities’ current office and factory buildings are leased from the local village, which is a collective unit and legal
owner of the land acknowledged by the local government. However, under PRC laws obtaining the land use rights is not easy and there is
no guarantee that we will successfully obtain a piece of ideal land even if we have enough capital. So, if we are unable to obtain the
land use rights in a timely manner, or even if we do obtain a piece of land in time, but the location is not convenient for our business,
our development may be unstable and our business operations and plans will be adversely affected.
If
we were to lose our certification as a National High Tech Enterprise, we could face higher tax rates than we currently pay for much of
our revenues.
In
October 2015, Dongguan Jiasheng was approved as a National High Tech Enterprise. This certification entitles Dongguan Jiasheng to favorable
tax rates of 15%, rather than the unified rate of 25% that Dongguan Jiasheng would pay if it was not so certified. For the years ended
June 30, 2021, 2020 and 2019, the total taxes payable by Dongguan Jiasheng would have increased by $117,514, $Nil and $3,003,
respectively if Dongguan Jiasheng was not certified as a National High Tech Enterprise. In the event Dongguan Jiasheng were to lose the
benefit of the favorable tax rate in the future, we could see significant increases in the amount of taxes we pay, meaning that our operating
results could be materially harmed, even in the absence of a decrease in our operations.
Risks
Related to Our Corporate Structure and Operation
Our
dual class structure concentrate a majority of voting power in our Chief Executive Officer, who is the only owner of our Class B Common
Shares.
Our
Class B Common Shares have three votes per share, and our Class A Common Shares have one vote per share. Our directors, executive officers,
and their affiliates, hold in the aggregate approximately 57.0% of the voting power of our capital stock as of June 30, 2021. Because
of the three-to-one voting ratio between our Class B and Class A Common Shares, the holder of our Class B Common Shares collectively
control a majority of the combined voting power of our Common Shares and therefore is able to control all matters submitted to our shareholders
for approval. The sole owner of such Class B Common Shares is our Chief Executive Officer, Mr. Silong Chen, who owns 9,069,000 Class
B Common Shares through Fine victory holding company Limited. This concentrated control may limit or preclude your ability to influence
corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any
merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring shareholder approval.
In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in
your best interest as one of our shareholders.
Future
transfers by holders of Class B Common Shares will generally result in those shares converting to Class A Common Shares, subject to limited
exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B Common Shares to Class A Common
Shares will have the effect, over time, of increasing the relative voting power of those holders of Class B Common Shares who retain
their shares in the long term.
The
obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.
As
a publicly listed company in the United States, we are required to file periodic reports with the Securities and Exchange Commission
upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements
or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access
to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as
a U.S.-listed public company, we will be governed by U.S. laws that our non-publicly traded competitors are not required to follow. To
the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing
could affect our results of operations.
We
are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As
a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different
times, which may make it more difficult for you to evaluate our performance and prospects.
We
are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange
Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic
reporting companies. For example, we are not required to issue quarterly reports or proxy statements. We are not required to disclose
detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report
equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery
regime.
As
a foreign private issuer, we are exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure
that select groups of investors are not privy to specific information about an issuer before other investors. However, we are still subject
to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations
imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive
the same information about us and at the same time as the information provided by U.S. domestic reporting companies.
As
a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable to U.S.
issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. If we opt to rely
on such exemptions in the future, such decision might afford less protection to holders of our Class A Common Shares.
Section
5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent,
and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive compensation and nomination
of directors. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements.
Our Board of Directors could make such a decision to depart from such requirements by ordinary resolution.
The
corporate governance practice in our home country, the British Virgin Islands, does not require a majority of our board to consist of
independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board of directors
would not consist of independent directors if we relied on the foreign private issuer exemption, fewer board members would be exercising
independent judgment and the level of board oversight on the management of our company might decrease as a result. In addition, we could
opt to follow British Virgin Islands law instead of the Nasdaq requirements that mandate that we obtain shareholder approval for certain
dilutive events, such as an issuance that will result in a change of control, certain transactions other than a public offering involving
issuances of 20% or greater interests in the company and certain acquisitions of the shares or assets of another company. For a description
of the material corporate governance differences between the Nasdaq requirements and British Virgin Islands law, see “Description
of Share Capital — Differences in Corporate Law”.
An
insufficient amount of insurance could expose us to significant costs and business disruption.
While
we have purchased insurance, including export transportation, product liability and account receivable insurance, to cover certain assets
and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. For example,
our subsidiaries do not have coverage of business interruption insurance. If we were to incur substantial losses or liabilities due to
fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially
and adversely affected. For the scope of coverage of our insurance, see “BUSINESS — Our Insurance Coverage”.
Risks
Related to Ownership of Our Class A Common Shares
We
are an “emerging growth company,” and we cannot be certain whether the reduced reporting requirements applicable to emerging
growth companies will make our Class A Common Shares less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as
we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval
of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could
lose that status sooner if our revenues reach $1.07 billion, if we issue $1.07 billion or more in non-convertible debt in a three year
period, or if the market value of our Class A Common Shares held by non-affiliates exceeds $700 million as of any December 31 before
that time, in which case we would no longer be an emerging growth company as of the following June 30. We cannot predict if investors
will find our Class A Common Shares less attractive because we may rely on these exemptions. If some investors find our Class A Common
Shares less attractive as a result, there may be a less active trading market for our Class A Common Shares and our share price may be
more volatile. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time
as those standards apply to private companies.
Because
we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth
company” our financial statements may not be comparable to companies that comply with these accounting standards as of the public
company effective dates.
We
have elected to use the extended transition period for complying with new or revised accounting standards under Section 107(b) of the
JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for
public and private companies until those standards apply to private companies. As a result of this election, our financial statements
may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently,
our financial statements may not be comparable to companies that comply with public company effective dates. Because our financial statements
may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing
our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity
of our Class A Common Shares. We cannot predict if investors will find our Class A Common Shares less attractive because we plan to rely
on this exemption. If some investors find our Class A Common Shares less attractive as a result, there may be a less active trading market
for our Class A Common Shares and our share price may be more volatile.
If
we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our Class A Common Shares may decline.
Prior
to our initial public offering in 2017, we were a private company with limited accounting personnel and other resources with which to
address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal
control over financial reporting. However, in preparing our consolidated financial statements in connection with this annual report,
we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting,
as defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, and other control
deficiencies. One material weakness identified relates to (i) a lack of full-time accounting and financial reporting personnel with appropriate
knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) a lack of an effective review process by management, which
led to material audit adjustments for the year ended June 30, 2020 and (iii) lack of risk assessment in accordance with the requirement
of COSO 2013 framework. Following the identification of the material weaknesses and control deficiencies, we have taken and plan to continue
to take remedial measures, including (i) engaging a Chief Financial Officer who holds a Ph.D in accounting and a CPA license in the United
States and hiring external financial consultants with experience in U.S. GAAP and SEC reporting obligations (ii) hiring more qualified
accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function
and to set up a financial and system control framework; (iii) implementing regular and continuous U.S. GAAP accounting and financial
reporting training programs for our accounting and financial reporting personnel; (iv) setting up an internal audit function as well
as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall
internal control;. However, the implementation of these measures may not fully address the material weaknesses in our internal control
over financial reporting. Our failure to correct the material weaknesses or our failure to discover and address any other material weaknesses
or control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable
financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial
reporting significantly hinders our ability to prevent fraud.
As
a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in
such internal control. In addition, we are required to furnish a report by management on the effectiveness of our internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. As of the date of this report, management has concluded that such
controls are ineffective.
In
addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over
financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth
company,” which may be up to five full years following the date of our initial public offering. If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner
or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is
unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our Class A Common Shares could be negatively
affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and
Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our
management team has limited experience in managing a U.S. public company and complying with laws applicable to such company, the failure
of which may adversely affect our business, financial conditions and results of operations.
Our
current management team has limited experience in managing a U.S. publicly traded company, interacting with public company investors
and complying with the increasingly complex laws pertaining to U.S. public companies. Prior to the completion of our initial public offering,
we mainly operated our businesses as a private company in the PRC. As a result of our IPO, our company became subject to significant
regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors,
and our management currently has no experience in complying with such laws, regulations and obligations. Our management team may not
successfully or efficiently manage our transition to becoming a U.S. public company. These new obligations and constituents will require
significant attention from our senior management and could divert their attention away from the day-to-day management of our business,
which could adversely affect our business, financial conditions and results of operations.
The
requirements of being a public company may strain our resources and divert management’s attention.
As
a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other
applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations
will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and
increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange
Act requires, among other things, that we file annual and current reports with respect to our business and operating results. In addition,
as long as we are listed on the Nasdaq Global Market, we are also required to file semi-annual financial statements.
We
expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate
activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements.
While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000
and $1 million per year that we did not experience prior to commencement of our initial public offering.
As
a result of disclosure of information in filings required of a public company, our business and financial condition will become more
visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims
are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved
in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely
affect our business, brand and reputation and results of operations.
We
also expect that being a public company and these rules and regulations will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These
factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve
on our audit committee and compensation committee, and qualified executive officers.
The
market price of our Class A Common Shares may be volatile or may decline regardless of our operating performance.
If
you purchase our Class A Common Shares, you may not be able to resell those shares at or above your purchase price. The market price
of our Class A Common Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
●
actual or anticipated fluctuations in our revenue and other operating results;
●
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
●
actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who
follow our company, or our failure to meet these estimates or the expectations of investors;
●
announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships,
joint ventures, or capital commitments;
●
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
●
lawsuits threatened or filed against us; and
●
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
In
addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market
prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate
to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods
of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources
and the attention of management from our business, and adversely affect our business.
We
do not intend to pay dividends for the foreseeable future.
We
currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare
or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A Common Shares
if the market price of our Class A Common Shares increases.
There
may not be an active, liquid trading market for our Class A Common Shares.
Prior
to our initial public offering, there was no public market for our Class A Common Shares. An active trading market for our Class A Common
Shares may not be sustained. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not
active. The initial public offering price was determined by negotiations between us and the underwriters based upon a number of factors
which are described in the “Plan of Distribution” section. The initial public offering price may not be indicative of prices
that will prevail in the trading market.
We
are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce judgments
against our company.
Most
of our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the
U.S., and much of the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect
service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
In
addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the
United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect
to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders
of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe
that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments
of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in
original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal
in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts
of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction
without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything
to make up for the losses suffered.
Lastly,
under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders. The principal
protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our
Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company conducted in accordance with the
general law and the Articles and Memorandum.
There
are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common
law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as
the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of
a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board
of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent
documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law
or the provisions of the company’s Memorandum and Articles of Association, then the courts will grant relief. Generally, the areas
in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business
or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control
the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company
has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than
the rights afforded minority shareholders under the laws of many states in the United States.
Our
board of directors may decline to register transfers of Class A Common Shares in certain circumstances.
Our
board of directors may, in its sole discretion, decline to register any transfer of any Class A Common Share which is not fully paid
up or on which we have a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument of transfer
is lodged with us, accompanied by the certificate for the shares to which it relates and such other evidence as our board of directors
may reasonably require to show the right of the transferor to make the transfer; (ii) the instrument of transfer is in respect of only
one class of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case of a transfer to joint holders,
the number of joint holders to whom the share is to be transferred does not exceed four; (v) the shares conceded are free of any lien
in favor of us; or (vi) a fee of such maximum sum as Nasdaq may determine to be payable, or such lesser sum as our board of directors
may from time to time require, is paid to us in respect thereof.
If
our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was lodged,
send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’ notice
being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such times
and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers
shall not be suspended nor the register closed for more than 30 days in any year.
You
may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.
British
Virgin Islands law provides shareholders with only limited rights to requisition a general meeting and does not provide shareholders
with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association.
Our Articles of Association allow our shareholders holding shares representing in aggregate not less than 30% of our voting share capital
in issue, to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting
and to put the resolutions so requisitioned to a vote at such meeting.
Although
our Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary
general meetings not called by such shareholders, any shareholder may submit a proposal to our Board of Directors for consideration of
inclusion in a proxy statement. Advance notice of at least seven (7) calendar days is required for the convening of our annual general
shareholders’ meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists
of at least one shareholder present in person or by proxy, representing not less than one-half of the total issued voting power of our
company. In the event we do not have quorum at the time set for the meeting, we are required to adjourn the meeting until the following
week, at which time quorum will be satisfied if shares representing at least one-third of the total issued voting power of our company
are present in person or by proxy. Because our Class A Common Shares are entitled to one (1) vote and our Class B Common Shares are entitled
to three (3) votes, the presence of holders of the Class B Common Shares will have a significant impact on whether any meeting of shareholders
has quorum.
Item
4. Information on the Company
A.
History and Development of the Company
Dogness
(International) Corporation (“Dogness”) was incorporated as a British Virgin Islands company limited by shares under the
BVI Business Companies Act, 2004, on July 11, 2016. Dogness has an indefinite term. Dogness was established to operate principally as
a holding company. Dogness and its subsidiaries (collectively the “Company”) are principally engaged in the design and manufacture
of pet products, including leashes and smart products, and lanyards in the People’s Republic of China (“PRC” or “China”).
Most products are exported to the U.S. and Europe and sold to pet stores, including major pet store chains. The share capital of Dogness
is US$200,000, divided into 100,000,000 Common Shares of par value US$0.002 each. In connection with the formation of Dogness, 15,000,000
Common Shares were issued to Silong Chen, Dogness’ founder and Chief Executive Officer.
Mr.
Silong Chen, the founding shareholder of the Company, sold 5,931,000 of his Common Shares to a total of nine (9) unrelated private investors
for aggregated proceeds of $18,843,000, at a weighted average price of $3.18 per share. After the sale, Mr. Silong Chen,
the founding shareholder of the Company owned 60.46% equity interest of the Company.
After
such Common Shares were sold, the shareholders unanimously agreed to establish two classes of Common Shares: (a) 90,931,000 authorized
Class A Common shares, of which 16,844,631 Class A Common Shares are issued and outstanding, (b) 9,069,000 authorized Class B Common
Shares, all of which are issued and outstanding. Mr. Chen, through Fine victory holding company Limited, is the only holder of Class
B Common Shares.
Dogness
(Hongkong) Pet’s Products Co., Limited (“HK Dogness”) was incorporated in Hong Kong on March 10, 2009 as a private
company limited by shares. In a private company limited by shares — which is the most common way to establish a limited
company in Hong Kong — the liability of members is limited by the articles of association to the amount unpaid on
the shares held by such members. By comparison, in a company limited by guarantee, no share capital is required and member liability
is limited by the articles of association to the amount that the members respectively undertake to contribute in the event the company
is wound up; this type of limited company is more common for non-profit organizations.
HK
Dogness was established to operate principally as a trading company. The share capital of HK Dogness is HK$10,000, divided into 10,000
shares of HK$1.00 each. In connection with the formation of HK Dogness, all 10,000 shares were issued to Silong Chen, Dogness’
founder and Chief Executive Officer. On August 15, 2016, Silong Chen transferred his shares in HK Dogness to a third party who held on
Mr. Chen’s behalf in preparation for the subsequent transfer to Dogness; however, Silong Chen continued to control such shares.
After such interim transfer, the shares in HK Dogness were transferred to Dogness on January 9, 2017.
Jiasheng
Enterprise (Hongkong) Co., Limited (“HK Jiasheng”) was incorporated in Hong Kong on July 12, 2007 as a private company limited
by shares. HK Jiasheng was established to operate principally as a trading company. The share capital of HK Jiasheng is HK$10,000, divided
into 10,000 shares of HK$1.00 each. In connection with the formation of HK Jiasheng, all 10,000 shares were issued to Silong Chen, Dogness’
founder and Chief Executive Officer.
Dogness
Intelligent Technology (Dongguan) Co., Ltd. (“Dongguan Dogness”) was incorporated in China on October 26, 2016. Dongguan
Dogness was established to operate principally as a holding company. Dongguan Dogness has RMB 10 million in registered capital. In connection
with the formation of Dongguan Dogness, Silong Chen, Dogness’ founder and Chief Executive Officer, became the sole shareholder
of Dongguan Dogness.
Dongguan
Jiasheng Enterprise Co., Ltd. (“Dongguan Jiasheng”) was incorporated in China on May 15, 2009. Dongguan Jiasheng was established
to develop and manufacture pet leash and lanyard products. Dongguan Jiasheng has RMB 10,000,000 in registered capital. In connection
with the formation of Dongguan Jiasheng, Silong Chen, Dogness’ founder and Chief Executive Officer, became the sole shareholder
of Dongguan Dogness.
The
reorganization of the legal structure was completed on January 9, 2017. The reorganization involved the incorporation of Dogness, a BVI
holding company, and Dongguan Dogness, a PRC holding company; and the transfer of HK Dogness, HK Jiasheng, and Dongguan Jiasheng (collectively,
the “Transferred Entities”) from the Controlling Shareholder to Dogness and Dongguan Dogness. Prior to the reorganization,
the Transferred Entities’ equity interests were 100% controlled by the Controlling Shareholder.
On
November 24, 2016, the Controlling Shareholder transferred his 100% ownership interest in Dongguan Jiasheng to Dongguan Dogness, which
is 100% owned by HK Dogness and considered a wholly foreign-owned entity (“WFOE”) in PRC. On January 9, 2017, the Controlling
Shareholder transferred his 100% equity interests in HK Dogness and HK Jiasheng to Dogness. After the reorganization, Dogness owns 100%
equity interests of subsidiaries listed above.
In
January 2018, the Company formed a Delaware limited liability company, Dogness Group LLC (“Dogness Group”), with its operation
focusing primarily on product sales in the U.S. In February 2018, Dogness Overseas Ltd (“Dogness Overseas”) was established
in the British Virgin Islands as a holding company, which owns all of the interests in Dogness Group. All of the equity of Dogness Overseas
is owned by Dogness (International) Corporation.
On
March 16, 2018, the Dongguan Dogness entered into a share purchase agreement to acquire 100% of the equity interests in Zhangzhou Meijia
Metal Product Co., Ltd (“Meijia”) from its original shareholder, Long Kai (Shenzhen) Industrial Co., Ltd (“Longkai”),
for a total cash consideration of approximately $11.0 million (or RMB 71.0 million). After the acquisition, Mejia became Dongguan
Dogness’ wholly-owned subsidiary. The acquisition of Meijia enabled the Company to build its own facility instead of leasing manufacturing
facilities and to expand its production capacity sustainably to meet increased customer demand. Meijia plant has reached its fully
production capacity as of June 30, 2021.
On
July 6, 2018, a new entity called Dogness Intelligence Technology Co., Ltd. (“Intelligence Guangzhou”), 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 $12.4 million). One of the Company’s subsidiaries, Dongguan Jiasheng, owns 58% of Intelligence,
which means that Dongguan Jiasheng will need to contribute RMB 46,400,000 (approximately $6.8 million) of capital to this new entity.
As of the date of this report, Dongguan Jiasheng has not yet made the payment of the registered capital. Intelligence Guangzhou will
be the research and manufacturing facility for the Company’s fast growing intelligent pet products.
Dogness
Pet Culture (Dongguan) Co., Ltd. (“Dogness Culture”) was incorporated on December 14, 2018 with registered capital of RMB
10 million (approximately $1.5 million). The capital was not paid and there were no active business operations. On January 15,
2020, the Company’s subsidiary, Dongguan Dogness, entered into an agreement with one of the original shareholders of Dogness Culture,
who is related to Mr. Silong Chen, the Chief Executive Officer, to acquire 51.2% ownership interest of Dogness Culture for a nominal
fee. Dongguan Dogness thereafter contributed cash consideration of RMB 5.12 million (approximately $0.79 million) on April 16,
2020 along with other shareholders’ capital contributions of RMB 4.88 million (approximately $0.67 million). Dogness Culture will
mainly focus on developing and expanding pet food market in China in the near future.
On
February 5, 2019, in order to expand into the Japanese market and expedite the development of new smart pet products, Dogness Japan Co.
Ltd. (“Dogness Japan”) was incorporated in Japan. The Company invested $142,000 for 51% ownership interest in Dogness
Japan, with the remaining 49% owned by an unrelated individual. Due to the negative impact of COVID-19 and because no material revenue
was generated since its inception, on November 28, 2020, the Board approved to the sale of the Company’s 51% ownership interest
to the remaining shareholder of Dogness Japan. Due to the negative impact of COVID-19 and because no material revenue was generated
since its inception, on November 28, 2020, the Board approved to the sale of the Company’s 51% ownership interest to the remaining
shareholder of Dogness Japan.
At
the completion of these transactions, (i) Dogness holds 100% of the equity of each of Dogness Overseas, HK Jiasheng and HK Dogness; (ii)
Dogness Overseas owns 100% of the equity of Dogness Group; (iii) HK Dogness holds 100% of the equity of Dongguan Dogness; (iv) Dongguan
Dogness holds 100% of the equity of Dongguan Jiasheng, Meijia and Dogness Culture; and (v) Dongguan Jiasheng owns 58% of the equity of
Intelligence and. By virtue of these ownership relationships, Dogness is the parent, directly or indirectly, of each of Meijia, HK Jiasheng,
HK Dogness, Dongguan Dogness, Dogness Culture, Dogness Group, Dongguan Jiasheng, and Intelligence Guangzhou, and such entities’
financial results are consolidated with those of Dogness; provided that only 58% of the equity of Intelligence Guangzhou and 51.2% of
the equity of Dogness Culture are so consolidated.
B.
Business Overview
Overview
Technology
can bring pets and their caregivers closer together. At Dogness we combine our research and development expertise with customer feedback
to make products that improve pets’ lives. We create and manufacture fun, useful and high-quality products for everyone to experience.
We believe that high technology pet products must be accessible and reliable to capture pet lovers’ imagination and to enhance
their pets’ lives.
Dogness
has been making the highest quality collars, harnesses, and traditional and retractable leashes since 2003, featuring stylish design
and rugged engineering. Beginning with smart collars and harnesses in 2016, based on the belief that internet-connected products could
improve the lives of pets and their caregivers, Dogness developed a suite of smart products, moving past these first products into smart
feeders, fountains, treat dispensers and robots to interact with pets.
Dogness
focuses on connected pet care, to link pets and pet caregivers and ultimately to integrate the “Smart Pet Ecosystem” into
a single cohesive platform that integrates smart technology into pets’ lives. The Smart Pet Ecosystem has four major areas: smart
pet technology, pet care, leashes and collars, and pet health and wellness.
Smart
Pet Technology
Through
a single platform, the Dogness mobile app, the Company’s smart products allow pet owners to remotely see, hear, speak, feed, play,
and interact with their pets in different ways. We accomplish all of this with a tool the owner likely already has, a smart phone. The
Dogness app is available for both Android and iOS and communicates with the smart product anywhere the phone and smart product both have
Wi-Fi or cellular service. If your dog will listen to you from across the room, you can tell her to roll over from around the world.
Dogness
Smart Wearables: Our smart wearable collars and harnesses feature integrated electronics, which allows us to pair high quality collars
with a lightweight smart component and LED lights. We have focused on the important details for dog owners, allowing owners to locate
their pets, direct their pets’ movements, communicate with their dogs, provide tailored instantaneous feedback to problem barking
and keep track of exercise and other biodata.
Dogness
Smart iPet Robot: Pet owners will be able to see their pets through a camera, hear their pets through a built-in microphone, interact
with their pets by feeding them treats, and play with their pets through an interactive laser pointer. Pet owners have full control over
the 360-degree mobility of the robot through the Dogness app and can securely take and save pictures and videos of their dogs.
Dogness
Mini Treat Robot: Space-conscious pet owners can see their pets through a stationary tilting camera that securely records photo and
video, hear their pets through a built-in microphone, interact with their pets by feeding them treats, and play with them through an
interactive laser pointer.
Dogness
Smart CAM Feeder: Pet owners can now ensure that their pets are well-fed and on-schedule. Able to hold around 6.5 pounds of dry food,
the smart feeder helps pet owners ensure the health of their pets, even when away from home. Pet owners can see their pets’ eating
habits night and day through a built-in camera with night vision and call their pets to the feeder through a voice recording that can
be programmed to be played at meal times.
Dogness
Smart Fountain: The smart fountain ensures that pets stay hydrated with a source of clean filtered water from a patented filtering
technology. Additional features include an oxygenating, free-falling, recirculating water stream for optimal freshness, the ability to
increase or decrease the flow of water, a replaceable carbon water filter and a nano filter to maintain water freshness, a submersible
pump for quiet operation, dishwasher-safe material, and an easily assembled and disassembled design.
Dogness
Smart Fountain Mini and Smart Fountain Plus: In addition to our Smart Fountain, we have developed the Smart Fountain Mini (1L capacity)
and Smart Fountain Plus (3.2L capacity) for additional options for pet owners. The Smart Fountain Mini enables our products to be used
in smaller spaces, while the Smart Fountain Plus ensures an even larger reservoir for pets. Both fountains maintain a constant flow of
water, so pets can drink water that is as fresh as from the faucet. The Smart Fountains have a three-stage filtering system, which ensures
the water flowing out is filtered, fresh and clean.
Dogness
Smart CAM Treater: Allows pet owners to see their pets night and day through a 160-degree full HD camera with night vision, hear
their pets through a built-in microphone, interact with their pets by speaking to them through a built-in speaker, and play with their
pets by tossing them treats.
Dogness
App Feeder and App Feeder Mini: Pet owners can ensure that their pets are well-fed and on-schedule. Able to hold around 6.5 pounds
of dry food, the App feeder enables pet owners to set up their pet’s feeding schedule from the App via their mobile phone, even
when away from home. App Feeder Mini holds around 2.0 pounds of dry food and is suitable for cats and small dogs.
Dogness
C6 GPS Tracker “Discover”: Pet owners can have peace of mind knowing where their pets are anytime when they open the
GPS Tracker App on their mobile phones. The Trackers are 4G compatible and allow the owners to keep track of the location of their pets.
They can also set up virtual fences and the GPS Tracker App will alert the pet parents if their pets are beyond the fences. The Trackers
also moinitor and provide the pets’ activity level statistics.
Pet
Care
Our
pet care products currently focus on high quality pet shampoos. We launched these shampoo products in August 2018.
We
have two lines of shampoos, which are focused on and tailored to Chinese online and offline consumption. Our One on One Service line
is focused on consumer purchasers and consists of dog and cat shampoo products that feature natural plant and amino acid composition.
In addition to universal-purpose products, we have also developed seven breed-tailored shampoo products for golden retrievers, poodles,
huskies, bulldogs, border collies and corgis. Our Professional Bathing & Spa line is focused on professional purchasers, like dog
and cat groomers. These products consist of bathing products, hair conditioners and essential oil products.
Leashes
and Collars
Traditional
Product Lines: We produce collars, harnesses and leashes in seven main series (Classic, Elegance, Luxury, LED, Holiday, Special Function,
and Cat series). Given the choices available to customers, we currently manufacture between 500 and 600 traditional products and can
add additional options to meet customer preferences. Our traditional product lines use leather, nylon, Teflon-coated fabrics and other
materials to suit consumer preferences. Not only do we produce these products; we also design fabric patterns and invent improved components
such as a comfort curved buckle for collars and locking closing mechanism for leashes.
Retractable
Leashes: In addition to our newest smart products, we have devoted significant effort to designing and manufacturing some of the
finest retractable leashes available. Retractable leashes balance freedom for the dog with control for the owner. If used well, a retractable
leash promotes good communication between the two, as the dog has exactly as much room to roam as the owner permits, and this amount
can be adjusted to suit the environment and circumstances. Dogness also offers an updated retractable leash to enhance the pet walking
experience. The new leash allows pet owners to attach Dogness accessories to their retractable leashes, which currently include an LED
light for better visibility in low light settings; a convenience box to store items such as doggie bags, treats, or keys; and a Bluetooth
speaker to listen to music or answer calls.
Other
Products: In addition to collars, leashes and harnesses, we also produce lanyards for use by humans and ornaments that attach to
collars. As to the lanyards, we produce such lanyards using our fabric weaving machines. Because we have our production in-house, we
can design lanyards that match a customer’s need, in terms of color, size, quantity and pattern. Our hanging ornament series uses
high-quality electroplating techniques to create fashionable accents for pet collars. We make a variety of patterns in bright and vibrant
colors, as well as custom bells for cat collars.
Pet
Health and Wellness
One
of our new research areas is pet-focused health and wellness products. One of our subsidiaries is currently serving as a distributor
of a few premium pet food brands from overseas. While we do not currently offer our own branded products for sale in this category, we
are currently developing supplements and nutrition products in consultation with veterinarians and pharmacists and anticipate introducing
these products in the future.
Operations
Dogness
has marketing and sales networks all over the world and has businesses in Dallas, Dongguan, Hong Kong and Zhangzhou. Senior management,
R&D and production, marketing, customer service and finance operate from Dogness’ headquarters in Dongguan, Guangdong Province,
which also serves as the manufacturing base for smart products and dog leashes. Dogness Group LLC in Dallas, Texas, USA serves as the
sales and service center for all international markets and R&D center for pet health and wellness. The company’s factory in
Zhangzhou, Fujian serves as a material production base, responsible for sample dyeing, ribbon dyeing and electroplating. One of Dogness’
competitive advantages comes from integrating the whole industrial chain, including retraction ropes, textiles, printing and dyeing,
mold development, and hardware and plastics. In addition, Dogness’ subsidiary in the United States has R&D and
design centers for pet smart products, forming a complete supply chain system with manufacturing bases in China. We benefit from vertically
integrated manufacturing operations, which allow us to design, machine and assemble the vast majority of our products in house, so we
can easily incorporate improvements in design.
Market
Background
Our
company’s primary market is mainland China, with approximately 56.3%, 51.0% and 57.5% of our products being sold in China in fiscal
2021, 2020 and 2019, respectively.
In
terms of export sales, our company’s primary market is the United States, with approximately 24.7%, 25.7% and 21.1% of our products
being sold in America in fiscal 2021, 2020 and 2019, respectively. The United States has one of the highest pet ownership rates in the
world. According to National Pet Owner’s Survey (2019-2020) conducted by the American Pet Products Association (APPA), in the United
States, almost 85.0 million households have a pet and over the last 30 years, pet ownership has gone from 56.0% to 68.0% of all households.1
The global pet service market was valued at USD 20,727.0 million in 2020, and it is projected to reach USD 28,561.9 million by
2026, registering a CAGR of 5.4% during the forecast period.2
Pet
owners in the United States have increasingly seen their pets as extended members of the family. Accordingly, spending on pets has increased
steadily over the last decade. Moreover, since pets are four-legged members of the family, spending on pet necessities and accessories
has been resilient even in the face of economic downturns. According to PetPoint, which collects data on animals in shelters, 280,277
dogs were adopted in 2020, which represents a 18.9% decrease from the previous year.3 On average, U.S. households spend
about $500 per year on their pets, or approximately 1% of their total household spending.
We
sell the majority of our products through specialty pet store chain retailers and mass market retailers. Although there are more than
13,000 pet stores in the United States, the vast majority of pet stores are small operations, but a significant proportion of sales come
from the top few specialty retail chains, Petco and Pet Valu. Mass retailers like Target and Wal-Mart also play a key role in pet supply
sales, including in particular staples like pet food. These retailers have courted pet owners with the offer of one-stop-shopping, as
compared with making a special trip to a pet store.
Finally,
pet owners have increasingly turned to internet sites to purchase pet supplies. In addition to selling our products to many of the largest
specialty and mass retailers in the U.S., we are exploring opportunities to drive online sales as well.
Competitive
Strengths
We
believe we have the following competitive strengths. Some of our competitors may have these or other competitive strengths.
●
Advanced technology. We have developed and made use of 202 patents in producing premium pet products.
●
Strong research and development. We have leveraged our cooperation with and investments in Dogness Network Technology Co.,
Ltd (“Dogness Network”), Nanjing Rootaya Intelligence Technology Co., Ltd. (“Nanjing Rootaya”), Linsun Smart
Technology Co., Ltd (“Linsun”) and our own in-house research and development efforts to design high tech pet products for
our customers. Dogness Network, in which we have a 10% ownership interest, develops the smartphone apps that power our connected products,
including our collars, harnesses, feeders, treaters and robots. Nanjing Rootaya, in which we have a 10% ownership interest, has designed
our smart pet toys and innovative water and food bowl. Linsun, in which we have a 13% ownership interest, helped create our smart feeders
and treaters. Our subsidiary Dongguan Jiasheng is responsible for the technology underlying our connected leashes and related accessories.
1
Mordor Intelligence, GLOBAL PET SERVICE MARKET - GROWTH, TRENDS, COVID-19 IMPACT, AND
FORECASTS (2021 - 2026). https://www.mordorintelligence.com/industry-reports/pet-service-market
2
Mordor Intelligence, GLOBAL PET SERVICE MARKET - GROWTH, TRENDS, COVID-19 IMPACT, AND FORECASTS (2021 - 2026). https://www.mordorintelligence.com/industry-reports/pet-service-market
3
PetPoint, PetPoint Report Year-End 2020 https://www.petpoint.com/Portals/Petpoint/pdfs/reportdata/2020/PetPointReport-YTD-2020.pdf
●
Vertically integrated production. We are increasingly manufacturing as much of our products internally and reducing reliance
on third party vendors. This allows us to control costs and ensure quality.
●
Economies of scale. We are pleased to provide products to a variety of customers and to fill large orders for a number of
those customers. These large orders allow us to increase our efficiency, reduce costs and deliver high quality products quickly and to
our customers’ exacting demands.
●
Strong reputation in pet products industry. Our customer list is filled with sophisticated, multinational purchasers of pet
Research
and Development
Our
R&D team has 22 dedicated employees who are focused on product development and design. Quality control has 10 employees and is an
important aspect of the teams’ work and ensuring quality at every stage of the process has been a key driver in maintaining and
developing brand value for our Company.
Beginning
in 2016, we have been researching and testing new, more ecologically friendly materials, which we hope to use in place of PVC in certain
plastic applications.
As
a result of these efforts, we became certified as a National High-Tech Enterprise by the State Intellectual Property Office in March
2015, and we renewed this certification in 2019. This certification entitles us to favorable tax rates of 15%, rather than the unified
rate of 25% we would pay if we were not certified.
Our
research and development expenses were $540,613 in 2021, $1,528,062 in fiscal 2020, and $673,131 in fiscal 2019, representing 2.2%,
8.0%, and 2.6% of our total revenues for 2021, 2020 and 2019, respectively. We expect our R&D expenses to increase, as we continue
to conduct research and development activities, especially seeking to increase the use of environmentally-friendly materials, and develop
more new products to meet customer demands.
Intellectual
Property
We
use a combination of trade secret, copyright, trademark, patent and other rights to protect our intellectual property and our brand.
We have completed registration of 117 patents with the China State Intellectual Property Office. In addition, we have registered 22 patents
in Germany, 26 in Japan, 19 in the United States and 8 in the European Union. As of the date of this report, we have successfully obtained
202 patents (including 117 in China), which includes 30 invention patents, 65 utility patents, and 107 appearance patents.
We
have completed registration of 179 trademarks, with the Trademark Office of the State Administration for Industry & Commerce of the
PRC. In addition, we have registered our key trademark for Dogness in Japan, Australia, Korea, Hong Kong, Taiwan and the United States.
We have registered all of our patents and trademarks under Dongguan Jiasheng. Our trademarks will expire at various dates through November
12, 2030.
Our
key brands and logos are below:
Our
website is located at www.dogness.com.
REGULATIONS
We
are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes
the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and
regulations outside of the PRC include intellectual property, competition, taxation, anti-money laundering and anti-corruption. While
there have been relatively few changes in applicable laws and regulations in recent years, law enforcement and regulatory agencies such
as SAFE have been tightening up their implementation. Some of the practices that were not following governmental procedure or requirements,
which many companies and individual persons had taken before but not been investigated or punished, are now under the close watch of
agencies and even been punished.
Laws
and Regulations in China Regarding Manufacturing, Producing, and Processing
Laws
regulating pet products manufacturing, producing, and processing cover a broad range of subjects, particularly in the area of occupational
safety and health. We must comply with all levels of laws and regulations relating to matters such as safe working conditions, manufacturing
practices, environmental protection and discharging hazard control. Specifically, the major laws that apply to our PRC subsidiaries are
as follows:
●
Company Law (amended in 2014), governing, among other matters, company registration, existence and business operation;
●
Contract Law (1999), governing business practices with all other market participants;
●
Labor Contract Law (amended in 2013), governing the relationship between company as an employer and its employees;
●
Product Quality Law (amended in 2009), governing the relationship between company as a products provider and consumers in the market.
We
believe we are in compliance with these laws and related regulations in all material respects. So far, our business does not belong to
special type of industry that requires operation license from government so that we do not need to get special license or approval for
our business operation. However, unanticipated changes in existing regulatory requirements or adoption of new requirements may force
us to incur more cost to maintain the licenses and failure to do so could materially adversely affect our business, financial condition
and results of operations.
Regulation
on Product Liability
China’s
Product Quality Law was published in 1993 and amended in 2000 and 2009. Under this law, producers and vendors of defective products may
incur liability for losses and injuries caused by such products. There are only three conditions by which producers or vendors can have
immunity from the defective product liability: 1) the defective products never be put into the market; 2) the defects do not exist when
the products are put into the market; 3) the exam techniques and skills are not able to find out the defects when the products be put
into the market. So far, our products quality is in conformity with the national requirements and we have passed the regulatory agency’s
examination and also successfully obtained the certificate of ISO 9001:2015 system.
In
addition to Product Quality Law, there are also other Chinese laws that apply to the product liability. Under the Civil Laws of the PRC,
which became effective on January 1, 1987 and were amended on August 27, 2009, manufacturers or retailers of defective products that
cause property damage or physical injury to any person will be subject to civil liability. The Law on the Protection of the Rights and
Interests of Consumers (as amended in 2009), which was enacted to protect the legitimate rights and interests of end-users and consumers
and to strengthen the supervision and control of the quality of products. Although we are highly confident with our product quality,
some defective product may not be detected in time by us and accidently put into the market. If so, our defective products cause any
personal injuries or damage to assets, our customers have the right to claim compensation from us.
Also,
the PRC Tort Law has been effective from July 1, 2010. Under this law, a customer who suffers injury from a defective product can claim
damages from either the manufacturer or vendor of the defective device. Pursuant to the PRC Tort Law, where a personal injury is caused
by a tort, the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, as well
as death compensation and funeral costs and expenses if it causes the death of the victim. There is no cap on monetary damages the plaintiffs
may seek under the PRC Tort Law.
Regulation
on Foreign Exchange Control
The
principal regulations governing foreign currency exchange in China are the PRC Foreign Exchange Administration Regulations, or the Foreign
Exchange Administration Regulations, most recently amended on August 5, 2008. Under the Foreign Exchange Administration Regulations,
Renminbi is generally freely convertible for payments of current account items, such as trade and service-related foreign exchange transactions,
interest and dividend payments, but not freely convertible for capital account items, such as direct investment, loan or investment in
securities outside China, unless prior approval of State Administration of Foreign Exchange, or the SAFE, or its local office has been
obtained.
The
Circular on Reforming the Management Approach regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprise, or SAFE
Circular 19, which was promulgated by the SAFE on March 30, 2015 and was most recently amended on December 30, 2019, allows foreign-invested
enterprises, or FIEs, to settle their foreign exchange capital at their discretion. The Renminbi converted from the foreign exchange
capital will be kept in a designated account and if a FIE needs to make further payment from such account, it still needs to provide
supporting documents and proceed with the review process with the banks. Furthermore, SAFE Circular19 stipulates that the use of capital
by FIEs shall follow the principles of authenticity and self-use within the business scope of enterprises. The capital of a FIE and capital
in Renminbi obtained by the FIEs from foreign exchange settlement shall not be used for the following purposes: (i) directly or indirectly
used for payments beyond the business scope of the enterprises or payments as prohibited by relevant laws and regulations; (ii) directly
or indirectly used for investment in securities unless otherwise provided by the relevant laws and regulations; (iii) directly or indirectly
used for granting entrust loans in Renminbi (unless permitted by the scope of business), repaying inter-enterprise borrowings (including
advances by the third-party) or repaying the bank loans in Renminbi that have been sub-lent to third parties; or (iv) directly or indirectly
used for expenses related to the purchase of real estate not for self-use (except for the foreign-invested real estate enterprises).
The
Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16,
which was promulgated by the SAFE and became effective on June 9, 2016, provides an integrated standard for conversion of foreign exchange
under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which
applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated
capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC Laws, while such
converted Renminbi shall not be provided as loans to its non-affiliated entities.
The
Circular on Further Promoting Cross-border Trade and Investment Facilitation, which was promulgated on October 23, 2019 by the SAFE and
became effective on the same date, further cancels restrictions on the domestic equity investment by non-investment-oriented foreign-funded
enterprises with their capital funds and provides that non-investment-oriented foreign-funded enterprises are allowed to make domestic
equity investment with their capital funds in accordance with the law on the premise that the existing special administrative measures
(negative list) for foreign investment access are not violated and the projects invested thereby in China are true and compliant.
On
December 30, 2019, the MOFCOM and the SAMR, jointly promulgated the Measures for Information Reporting on Foreign Investment, which became
effective on January 1, 2020. Pursuant to these measures, where a foreign investor carries out investment activities in China directly
or indirectly, the foreign investor or the foreign-invested enterprise shall submit the investment information to the competent commerce
department.
Pursuant
to the Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, or the SAFE Circular
No. 13, became effective on June 1, 2015 and was amended on December 31, 2019, and other laws and regulations relating to foreign exchange,
when setting up a new foreign invested enterprise, the foreign invested enterprise shall register with the bank located at its registered
place after obtaining the business license, and if there is any change in capital or other changes relating to the basic information
of the foreign-invested enterprise, including without limitation any increase in its registered capital or total investment, the foreign
invested enterprise must register such changes with the bank located at its registered place after obtaining the approval from or completing
the filing with competent authorities. Pursuant to the relevant foreign exchange laws and regulations, the above-mentioned foreign exchange
registration with the banks will typically take less than four weeks upon the acceptance of the registration application.
Regulation
on Foreign Exchange Registration of Offshore Investment by PRC Residents
In
October of 2005, SAFE promulgated a Notification known as “Notification 75”, in which SAFE requires PRC residents to register
their direct establishment or indirect control of an offshore entity (referred to in Notice 37 as “special purpose vehicle.”),
where such offshore entity are established for the purpose of overseas financing, provided that PRC residents contribute their legally
owned assets or equity into such entity. In July of 2014, this Notification was replaced by Notification 37, “Notification on Relevant
Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Returning Investment through
Special Purpose Vehicles”, which expanded SAFE oversight scope to include overseas investment registration as well. Meanwhile,
Notification 37 also covers more areas such as PRC residents paying capital contribution with overseas assets or equity. Furthermore,
Notification 37 requires amendment to the registration where any significant changes with respect to the special purpose vehicle capitalization
or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin
off). Our shareholders including natural persons or legal persons/institutes have been in compliance with such registration.
Regulation
on Dividend Distributions
Our
PRC subsidiaries, Dongguan Dogness and Dongguan Jiasheng, are wholly foreign-owned enterprises under the PRC law. The principal regulations
governing the distribution of dividends paid by wholly foreign-owned enterprises include: Corporate Law (1993) as amended in 2005, 2013,
and 2018; The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000; The Wholly Foreign-Owned Enterprise Law Implementation
Regulations (1990), as amended in 2001 and 2014; and the Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
Under
these regulations, wholly foreign-owned and joint venture enterprises in China may pay dividends only out of their accumulated profits,
if any, as determined in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to
set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative
total reserve funds reaches 50% of its registered capital. Our Company’s reserve fund has not yet reached this level. The board
of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare
and bonus funds. These reserve funds, however, may not be distributed as cash dividends.
On
March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council
issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this
law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is
a non-resident enterprise will be subject to a 10% (5% for Hong Kong residents) withholding tax, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate.
M&A
Rules and Regulation on Overseas Listings
On
August 8, 2006, six PRC governmental agencies jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and amended on June 22, 2009. The M&A Rules,
among other things, requires that if an overseas company established or controlled by PRC companies or individuals, or PRC Citizens,
intends to acquire equity interests or assets of any other PRC domestic company affiliated with the PRC Citizens, such acquisition must
be submitted to the MOFCOM for approval. The M&A Rules also require offshore special purpose vehicles formed to pursue overseas listing
of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals to obtain the approval of
the Chinese Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities
on any stock exchange overseas.
The
Anti-Monopoly Law promulgated by the SCNPC on August 30, 2007 and effective on August 1, 2008 requires that transactions which are deemed
concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed. In addition,
on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, or Circular 6, which officially established a security review system for
mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations
on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM
Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review
is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers
and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national
security” concerns. Under the MOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction
when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition
is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by
the NDRC, and MOFCOM under the leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors
from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. On February 7, 2021, the Anti-Monopoly Committee of the State Council promulgated the Anti-monopoly
Guidelines for the Platform Economy Sector, or the Anti-monopoly Guideline, aiming to improve anti-monopoly administration on online
platforms. The Anti-monopoly Guideline, operating as the compliance guidance under the existing PRC anti-monopoly regulatory regime for
platform economy operators, specifically prohibits certain acts of the platform economy operators that may have the effect of eliminating
or limiting market competition, such as concentration of undertakings.
Foreign
Investment Law
On
March 15, 2019, the National People’s Congress, or the NPC, formally adopted the Foreign Investment Law, which became effective
on January 1, 2020 and replaced the trio of laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture
Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with
their implementation rules and ancillary regulations. Meanwhile, the Regulations for the Implementation of the Foreign Investment Law
was promulgated by the State Council on December 26, 2019 and came into effect as of January 1, 2020, which clarified and elaborated
the relevant provisions of the Foreign Investment Law. The organization form, organization and activities of foreign-invested enterprises
shall be governed, among others, by the Company Law of PRC and the Partnership Enterprise Law of PRC. Foreign-invested enterprises established
before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after
the implementation of this Law.
According
to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management
system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment
access shall not be less favorable than that of domestic investors and their investments. The negative list management system means that
the state implements special administrative measures for access of foreign investment in specific fields. Foreign investors shall not
invest in any forbidden fields stipulated in the negative list and shall meet the conditions stipulated in the negative list before investing
in any restricted fields. Foreign investors’ investment, earnings and other legitimate rights and interests within the territory
of China shall be protected in accordance with the law, and all national policies on supporting the development of enterprises shall
equally apply to foreign-invested enterprises.
Pursuant
to the Provisional Administrative Measures on Establishment and Modifications (Filing) for Foreign Investment Enterprises promulgated
by the MOFCOM, on October 8, 2016 and amended on July 30, 2017 and June 29, 2018, respectively, establishment and changes of foreign
investment enterprises which are not subject to the approval under the special entry management measures shall be filed with the relevant
commerce authorities. However, as the PRC Foreign Investment Law has taken effect, the MOFCOM and the State Administration for Market
Regulation, or the SAMR, jointly promulgated the Foreign Investment Information Report Measures, or the Information Report Measures,
on December 19, 2019, which has taken effect since January 1, 2020. According to the Information Report Measures, which repealed the
Provisional Administrative Measures on Establishment and Modifications (Filing) for Foreign Investment Enterprises, foreign investors
or foreign invested enterprises shall report their investment related information to the competent local counterpart of the MOFCOM through
Enterprise Registration System and National Enterprise Credit Information Notification System.
Regulation
on Foreign Debt
A
loan made by a foreign entity as direct or indirect shareholder in a FIE is considered to be foreign debt in China and is regulated by
various laws and regulations, including the Regulation of the People’s Republic of China on Foreign Exchange Administration, the
Interim Provisions on the Management of Foreign Debts, the Statistical Monitoring of Foreign Debts Tentative Provisions, the Detailed
Rules for the Implementation of Provisional Regulations on Statistics and Supervision of External Debt, and the Administrative Measures
for Registration of Foreign Debts. Under these rules and regulations, a shareholder loan in the form of foreign debt made to a PRC entity
does not require the prior approval of SAFE. However, such foreign debt must be registered with and recorded by SAFE or its local branches
within fifteen (15) business days after entering into the foreign debt contract. Pursuant to these rules and regulations, the maximum
amount of the aggregate of (i) the outstanding balance of foreign debts with a term not longer than one year, and (ii) the accumulated
amount of foreign debts with a term longer than one year, of a FIE shall not exceed the difference between its registered total investment
and its registered capital, or Total Investment and Registered Capital Balance.
On
January 12, 2017, the People’s Bank of China, or PBOC, promulgated the Notice of the People’s Bank of China on Matters concerning
the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Circular 9, which sets forth an upper limit for PRC entities,
including FIEs and domestic enterprises, regarding their foreign debts. Pursuant to PBOC Circular 9, the outstanding cross-border financing
of an enterprise (the outstanding balance drawn, here and below) shall be calculated using a risk-weighted approach, or Risk-Weighted
Approach, and shall not exceed the specified upper limit, namely: risk-weighted outstanding cross-border financing ≤ the upper limit
of risk-weighted outstanding cross-border financing. Risk-weighted outstanding cross-border financing = ∑ outstanding amount of RMB
and foreign currency denominated cross- border financing * maturity risk conversion factor * type risk conversion factor +∑ outstanding
foreign currency denominated cross-border financing * exchange rate risk conversion factor. Maturity risk conversion factor shall be
1 for medium- and long-term cross-border financing with a term of more than one year and 1.5 for short-term cross-border financing with
a term of one year or less. Type risk conversion factor shall be 1 for on-balance-sheet financing and 1 for off-balance-sheet financing
(contingent liabilities) for the time being. Exchange rate risk conversion factor shall be 0.5. The PBOC Circular 9 further provides
that the upper limit of risk-weighted outstanding cross-border financing for enterprises, or Net Asset Limits, shall be 200% of its net
assets. The PBOC Circular 9 does not supersede the Interim Provisions on the Management of Foreign Debts, but rather serves as a supplement
to it. PBOC Circular 9 provided for a one-year transitional period, or the Transitional Period, from its promulgation date for FIEs,
during which period FIEs could choose to calculate their maximum amount of foreign debt based on either (i) the Total Investment and
Registered Capital Balance, or (ii) the Risk-Weighted Approach and the Net Asset Limits. Under the PBOC Circular 9, after the Transitional
Period ends on January 11, 2018, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested
enterprises after evaluating the overall implementation of PBOC Circular 9. In addition, according to PBOC Circular 9, a foreign loan
must be filed with SAFE through the online filing system of SAFE after the loan agreement is signed and at least three business days
prior to the borrower withdraws any amount from such foreign loan.
Employment
Laws
In
accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective
in January 2008, as amended subsequently in December 2012, employers must enter into written labor contracts with full-time employees
in order to establish an employment relationship. All employers must pay their employees at least with the local minimum wage standards.
All employers are required to establish a work environment of safety and sanitation, strictly abide by state rules and standards, and
provide employees with appropriate workplace safety training. In addition, employers are obliged to pay contributions to the social insurance
plan and the housing fund plan for employees.
We
have entered into employment agreements with all of our full-time employees. We have contributed to the basic and minimum social insurance
plan. Due to a high employee turnover rate in our industry, however, it is difficult for us to comply fully with the law. Some of our
employees have even request not to participate in the social insurance plan because they do not want us to make deduction on their salaries.
While
we believe we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any
failure to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to
be in violation of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late
fees and fines.
PRC
Enterprise Income Tax Law and Individual Income Tax Law
In
2007 China published Enterprise Income Tax Law (“EIT Law”) and its Implementation Rule, both of which came into effect since
January 1, 2008. Under the EIT Law and its Rule, enterprises are classified as resident enterprises and non-resident enterprises. PRC
resident enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its
“de facto management bodies” located within the PRC is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The Rule defines “de facto management
body” as a managing body that in practice exercises “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise.
On
the other hand, the State Administration of Taxation provides certain specific criteria for determining whether the “de facto management
body” of a PRC-controlled offshore enterprise is located in China. Simply speaking, the criteria is more focused on substantive
rather than format. Pursuant to its Circular 82 of 2009, the criteria to determine “de facto management body” include: (a)
the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC;
(b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major
assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the
PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC.
Furthermore, the SAT published Bulletin 45 in September 2011, which provides more guidance on the implementation of the definition and
provides for procedures and administration details on determining resident status and administration on post-determination matters.
However,
the SAT Circular 82 and Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups rather
than those controlled by PRC individuals or foreign individuals. So far there is no further criteria passed yet and no applicable legal
precedents either, therefore it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign
company controlled by individuals. Under these existing criteria, it is possible that we will be classified as a PRC “resident
enterprise” for PRC enterprise income tax purposes. If so, it would likely result in unfavorable tax consequences to our non-PRC
shareholders and have a material adverse effect on our results of operations and the value of your investment.
Regulations
on Intellectual Property
China
joined WTO in 2001 and signed the treaty of TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights), therefore China’s
IP laws are very much close to TRIPS.
Trademarks
Trademarks
are protected by the PRC Trademark Law adopted in 1982 and lastly amended in 2013 as well as the Implementation Regulation of the PRC
Trademark Law adopted by the State Council in 2002 and amended in 2014. The Trademark Office under the State Administration for Industry
and Commerce (“SAIC”) handles trademark registrations. Trademarks can be registered for a term of ten years and can be repeatedly
extended for another ten-year term at the time of expiry. The PRC Trademark Law has adopted a “first-to-file” principle with
respect to trademark registration. As of the date of this report, we have registered 181 trademarks (including 162 trademarks in China),
all of which are fully owned and in use by us. According to Chinese Trademark Law, if anyone has a dispute the officially registered
trademarks, he can file a petition to the review board of the Trademark Office, requesting a comprehensive review that may result in
the revoking the registered trademarks. So far, we have not received any such kind of petition and we strongly believe there will not
be such petition because our trademarks are firstly used as well as firstly registered by us.
Patents
Inventions,
utility models, and designs with the features of novelty, inventiveness and practical applicability, are three kinds of patent defined
and protected under China’s Patent Law. The State Intellectual Property Office is responsible for examining and approving patent
applications. Once the application is approved, the applicants can have their patent under Chinese legal protection for a long term since
its application date, which is 20 years for invention and ten years for utility models and designs. As of the date of this report, we
have successfully obtained 135 patents (including 87 in China), which includes 15 invention patents, 50 utility patents, and 70 appearance
patents.
C.
Organizational Structure
Below
is a chart representing our current corporate structure:
Our
registered office in the British Virgin Islands is at AMS Trustees Limited, Sea Meadow House, Blackburne Highway, P.O. Box 116, Road
Town, Tortola, British Virgin Islands, telephone +1 (284) 494-3399.
D.
Property, Plants and Equipment
There
is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. The land
use rights to the property on which our facilities are situated are held by the parties from which we lease such property.
At
our facility in Dongguan, our company leases the factory building, office building, guard booth, power room and dormitory from Dongguan
Dongcheng District Tongsha Huanggongkeng Co-op, an unrelated third party. The total leased area spans 10,292 square meters. The lease
commenced May 1, 2009 has been renewed twice; the current expiration date is April 30, 2027. We estimate that the productive capacity
of our main factory is 8,500,000 pieces per year, and our current utilization rate is approximately 97%.
The
registered office of Dogness Intelligent Technology (Dongguan) Co., LTD. is leased from Dongguan Jiasheng and consists of 500 square
meters on the site of our facility in Dongguan.
On
March 14, 2018, Dogness Group purchased an office building of 6,373 square feet for $1.37 million in Dallas, Texas, which serves as the
office, quality control, testing area and drop shipment location for Dogness Group.
On
March 16, 2018, the Company acquired all of the equity of Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”). The Company
paid total consideration of approximately $10.0 million in connection with the acquisition of equity of Meijia. Meijia owns the land
use right to a land parcel of 19,144.54 square meters and a factory and office buildings of an aggregate of 18,912.38 square meters.
Except for holding the land use right and the buildings, Meijia has no substantial business operations, nor has it had any production
or sales activities since its inception. The Company plans to use this land use right and buildings as a production facility. The Company
originally budgeted approximately RMB 110 million ($17.0 million) to develop the facility. The actual costs were adjusted based
on additional work required for waterproofing, sewage pipeline and hazardous waste leakage prevention. As a result, total actual costs
incurred as of June 30, 2021, amounted to RMB 118.5 million ($18.4 million). The Meijia plant started test operations in
August 2019 and started normal production in December 2019 upon passing the final inspection conducted by the local government. The Meijia
plant has reached its designed production capacity in June 2021.
In July 2018, the Company entered a long-term
lease that expires October 14, 2038 for 7,026 square meters of land and 5,000 square meters of buildings in Dongguan city. The Company
plans to use this new property as a warehousing facility, given limited storage capacity at its other facilities. Lease expenses for
this property were approximately $4.5 million, which amount was paid in full on October 9, 2018. The total budget is approximately
RMB 230.8 million ($35.8 million). As of June 30, 2021, the Company had substantially completed this project and transferred most of
the related CIP to fixed assets. As of June 30, 2021, the Company has made total payments of approximately RMB 161.3 million ($25.0 million)
in connection to this project, which resulted in future minimum capital expenditure payments of RMB 69.5 million ($10.8 million) and
the Company recorded approximately $10.7 million unpaid costs in connection to this CIP project in accrued liabilities and other payable.
The
Company’s subsidiary Dogness Culture is also working on a project to decorate a pet themed retail store. Total budget is RMB 2.2
million ($0.3 million). As of June 30, 2021, the Company has spent RMB 1.5 million ($0.2 million). This project has fully completed
by June 30, 2021.
Fixed
assets at our properties consist of office equipment, buildings, structures, ancillary facilities, and equipment for production of metal,
plastic and nylon components of leashes, collars and lanyards, including jacquard machines, injection modeling equipment, die casting
machines, dying machines, and computerized sewing machines.
None
of our property is affected by any environmental issues that may affect our use of the property.
Item
4A. Unresolved Staff Comments
None.
Item
5. Operating and Financial Review and Prospects
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and related notes that appear in this report. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include
those discussed below and elsewhere in this report, particularly in “Risk Factors.”
Overview
of Company
Dogness
(International) Corporation (“Dogness” or the “Company”), is a company limited by shares established under the
laws of the British Virgin Islands (“BVI”) on July 11, 2016 as a holding company. The Company, through its subsidiaries,
is primarily engaged in the design, manufacturing and sales of various types of pet leashes, pet collars, pet harnesses, intelligent
pet products and retractable leashes with products being sold all over the world mainly through distributions by large retailers.
A
reorganization of the legal structure was completed on January 9, 2017. Reorganization involved the incorporation of Dogness, a BVI holding
company; and Dogness Intelligent Technology (Dongguan) Co., Ltd. (“Dongguan Dogness”), a holding company established under
the laws of the People’s Republic of China (“PRC”); and the transfer of HK Dogness, HK Jiasheng and Dongguan Jiasheng
Enterprise Co., Ltd. (“Dongguan Jiasheng”; collectively, the “Transferred Entities”) from the Controlling Shareholder
to Dogness and Dongguan Dogness. Prior to the reorganization, the Transferred Entities’ equity interests were 100% controlled by
our founder and Chief Executive Officer, Mr. Silong Chen (the “Controlling Shareholder”).
On
November 24, 2016, the Controlling Shareholder transferred his 100% ownership interest in Dongguan Jiasheng to Dongguan Dogness, which
is 100% owned by HK Dogness and considered a wholly foreign-owned entity (“WFOE”) in PRC. On January 9, 2017, the Controlling
Shareholder transferred his 100% equity interests in HK Dogness and HK Jiasheng to Dogness. After the reorganization, Dogness ultimately
owns 100% of the equity interests of the entities mentioned above.
Dongguan
Jiasheng Enterprise Co., Ltd. (“Dongguan Jiasheng”) was established on May 15, 2009 under the laws of the PRC, with registered
capital of RMB 10 million (approximately $1.5 million) contributed by individual shareholder Mr. Silong Chen. Dongguan Jiasheng is the
main operating entity and is engaged in the research and development, manufacturing and distribution of various types of gift suspenders,
pet belts ribbon, lace, elastic belt, computer jacquard ribbon and high-grade textile lace.
Since
the Company and its wholly-owned subsidiaries were effectively controlled by the same Controlling Shareholder before and after the reorganization,
they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation
of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions
had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.
In
January 2018, the Company formed a Delaware limited liability company, Dogness Group LLC, with its operation focusing primarily on promoting
the Company’s pet products sales in the United States. In February 2018, Dogness Overseas Ltd, which is wholly owned by the Company,
was established in the British Virgin Islands as a holding company. Dogness Overseas Ltd owns all of the interests in Dogness Group LLC.
On
March 16, 2018 (the “Acquisition Date”), the Company entered into a share purchase agreement to acquire 100% of the equity
interests in Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”) from its original shareholder, Long Kai (Shenzhen) Industrial
Co., Ltd (“Longkai”), for a total cash consideration of approximately $11.0 million (or RMB 71.0 million). After the
acquisition, Mejia became the Company’s wholly-owned subsidiary. Meijia owns the land use right to a land parcel of 19,144.54 square
meters and a factory and office buildings of an aggregate of 18,912.38 square meters. This Acquisition enables the Company to build its
own facility instead of leasing manufacturing facilities and expand its production capacity sustainably to meet increased customer demand.
Total budgeted capital expenditure to bring Meijia manufacturing facility into use was originally estimated to be completed at a cost
of RMB 110 million ($17.0 million). The actual costs have been adjusted based on additional works required for waterproofing, sewage
pipeline and hazardous waste leakage prevention. Meijia plant has reached its designed production capacity by June 2021.
On
July 6, 2018, Dogness Intelligence Technology Co., Ltd. (“Intelligence Guangzhou”) 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
$12.4 million). One of the Company’s subsidiaries, Dongguan Jiasheng, owns 58% of Intelligence Guangzhou, with the remaining 42%
of ownership interest owned by two unrelated entities. As of the date of this report, Dongguan Jiasheng has not made the capital contribution.
Intelligence Guangzhou has had immaterial operation since its inception.
On
February 5, 2019, in order to expand into the Japanese market and expedite the development of new smart pet products, the Company invested
$142,000 for 51% ownership interest in Dogness Japan Co. Ltd. (“Dogness Japan”), with the remaining 49% ownership
interest owned by an unrelated individual. Due to the negative impact of COVID-19 and because no material revenue was generated since
its inception, on November 28, 2020, the Board approved to the sale of the Company’s 51% ownership interest to the remaining shareholder
of Dogness Japan.
Dogness
Pet Culture (Dongguan) Co., Ltd. (“Dogness Culture”) was incorporated on December 14, 2018 with registered capital of RMB
10 million (approximately $1.5 million). The capital was not paid and there were no active business operations. On January 15, 2020,
the Company’s subsidiary, Dongguan Dogness, entered into an agreement with the original shareholder of Dogness Culture, who is
related to Mr. Silong Chen, our Chief Executive Officer, to acquire 51.2% ownership interest of Dogness Culture for a nominal fee. The
remaining equity interest of 48.8% was also transferred to other two third parties for a nominal fee. Dongguan Dogness thereafter contributed
cash consideration of RMB 5.12 million (approximately $0.79 million) on April 16, 2020 along with other two shareholders’ capital
contributions of RMB 4.88 million (approximately $0.76 million). Dogness Culture will mainly focus on developing and expanding pet food
market in China in the near future.
In
recent years, we have invested large amounts of funds, to establish an environmentally friendly ribbon dying process, computer jacquard
department, screen printing department and thermal transfer printing department. The adoption of ISO 9001:2015 international quality
system enables us to be more effective in the various production processes to guarantee product quality, and ensure stable and efficient
production. We also have an in-house testing laboratory and frequently perform tests on all of our products to maintain a high level
of quality in both materials and workmanship.
Our
primary raw materials in production of our products are plastic, leather, nylon, polyester, chemical fiber blended fabric, metal, GPPS
and HIPS, most of which are extracted from crude oil. Thus, our cost of raw material is highly impacted by fluctuations in the price
of oil. Cost of revenues mainly includes costs of raw materials, costs of direct labor, utilities, depreciation expenses and other overhead.
Our
major products include traditional pet products, intelligent pet products, and climbing hooks and others products, such as mouth covers
and pet charms. During the six months ended December 31, 2020, we started providing ribbon dyeing service for external customers, as
well as pet grooming services. Revenues by product and service categories are summarized below:
|
|
For the Years ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Product and service category
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
$
|
14,331,492
|
|
|
|
58.9
|
%
|
|
$
|
13,208,764
|
|
|
|
68.9
|
%
|
|
$
|
23,897,528
|
|
|
|
91.2
|
%
|
Intelligent pet products
|
|
|
7,801,070
|
|
|
|
32.1
|
%
|
|
|
4,328,918
|
|
|
|
22.6
|
%
|
|
|
2,103,523
|
|
|
|
8.0
|
%
|
Climbing hooks and others
|
|
|
1,340,686
|
|
|
|
5.5
|
%
|
|
|
1,633,676
|
|
|
|
8.5
|
%
|
|
|
215,464
|
|
|
|
0.8
|
%
|
Total revenue from product sales
|
|
|
23,473,248
|
|
|
|
96.5
|
%
|
|
|
19,171,358
|
|
|
|
100.0
|
%
|
|
|
26,216,515
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing service
|
|
|
817,145
|
|
|
|
3.4
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Other services
|
|
|
29,728
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue from service
|
|
|
846,873
|
|
|
|
3.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
24,320,121
|
|
|
|
100.0
|
%
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
26,216,515
|
|
|
|
100.0
|
%
|
During
the year ended June 30, 2021, our products were sold in 35 countries. Our major customers include, Anyi trading, Ruisheng, Petgo, Trendspark,
PetSmart, Petco, Pet Value, Walmart, Target, IKEA, SimplyShe, Pets at Home, PETZL, and Petmate. With the fast-growing online shopping,
we also sold our products via popular online shopping sites, including Amazon, Chewy, JD, Tmall and Taobao, and from live streaming sales
platforms hosted by influencers. Export sales accounted for 43.7%, 49.0% and 42.5% of the total sales for the years ended June 30, 2021,
2020 and 2019, respectively, while China domestic sales accounted for 56.3%, 51.0% and 57.5% for the years ended June 30, 2021, 2020
and 2019, respectively. The breakdown of the sales by geographic areas is shown below
|
|
For the year ended
June 30, 2021
|
|
|
For the year ended
June 30, 2020
|
|
|
For the year ended
June 30, 2019
|
|
Geographic location
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to international markets
|
|
$
|
10,627,253
|
|
|
|
43.7
|
%
|
|
$
|
9,399,228
|
|
|
|
49.0
|
%
|
|
$
|
11,134,072
|
|
|
|
42.5
|
%
|
Sales in China domestic market
|
|
|
13,692,868
|
|
|
|
56.3
|
%
|
|
|
9,772,130
|
|
|
|
51.0
|
%
|
|
|
15,082,443
|
|
|
|
57.5
|
%
|
Total
|
|
$
|
24,320,121
|
|
|
|
100.0
|
%
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
26,216,515
|
|
|
|
100.0
|
%
|
For
the year ended June 30, 2021, the Company’s three largest customers accounted for 32.0%, 9.1% and 6.9% of the Company’s total
revenue, respectively. For the year ended June 30, 2020, the Company’s three largest customers accounted for 27.6%, 6.5% and 4.4%
of the Company’s total revenue, respectively. For the year ended June 30, 2019, the Company’s three largest customers accounted
for 28.1%, 13.5% and 5.6% of the Company’s total revenue, respectively.
|
|
For the years ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
% of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
Dongguan Anyi Trading Co., Ltd.
|
|
|
32.0
|
%
|
|
|
27.6
|
%
|
|
|
28.1
|
%
|
Petco
|
|
|
9.1
|
%
|
|
|
6.5
|
%
|
|
|
13.5
|
%
|
Shenzhen Wosibao Technology Co., Ltd
|
|
|
6.9
|
%
|
|
|
-
|
|
|
|
-
|
|
Dogness Network Technology Co., Ltd
|
|
|
5.0
|
%
|
|
|
4.4
|
%
|
|
|
-
|
|
Dongguan Ruisheng Development Co., Ltd.
|
|
|
3.6
|
%
|
|
|
-
|
|
|
|
5.6
|
%
|
Market
outlook
The
Company’s operations will be further affected by the ongoing outbreak of COVID-19 which in March 2020, had been declared as a pandemic
by the World Health Organization. Although the Company resumed its operations in late March 2020 and received and fulfilled increased
customer sales orders in the second half of 2020, and the COVID-19 impact on the Company’s operating results and financial performance
for the six months ended December 31, 2020 seems to be temporary, a resurgence could negatively affect the execution of customer contracts,
the collection of customer payments, disruption of the Company’s supply chain and restriction of the Company’s sales to international
market. The continued uncertainties associated with COVID 19 may cause the Company’s revenue and cash flows to underperform in
the next 12 months. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date the
Company’s interim financial statements are released.
In
addition, based on assessment of current market conditions, economic environment, customer demand and sales trend, we expect that the
on-going trade dispute between China and the United States will continue to have an adverse effect on our business operations. As a result,
our export sales may continue to experience uncertainties in the coming months.
To
mitigate the impact from the COVID-19 and trade dispute, we repositioned our sales strategy to focus more on domestic sales and further
diversify our product offerings to better meet the customers’ needs, such as offering ribbon dyeing service to external customers.
Also, we expand our sales channels from traditional trading to utilize on-line shopping channels to gain access to more potential customers
from domestic and international markets directly, especially to attract the younger generations who are more interested in our smart
pet products. Meantime, we are initiating more cost saving measures to improve production efficiency and profit margin.
Our
Growth Strategy
We
are committed to enhancing profitability and cash flows through the following strategies:
Develop
innovative products and services. We focus on developing and strengthening our brand identity and emphasizing our unique offerings
for customers and promoting our strong value proposition. Through extensive and on-going customer research, we are gaining valuable insights
into the wants and needs of our customers and we are developing solutions and communication strategies to address them. We continually
seek opportunities to strengthen our merchandising capabilities, which allow us to provide a differentiated product assortment, including
our exclusive smart pet specialty products and our proprietary brand offerings, to deliver innovative solutions and value to our customers.
We believe developing innovative products will further differentiate us from our competitors, allow us to forge a strong relationship
with our customers, build loyalty, enhance our market position, increase transaction size and enhance operating margins.
Mergers
and Acquisitions. When capital permits, we intend to capitalize on the challenges that smaller companies are encountering in our
industry by acquiring complementary companies at favorable prices. We believe that acquiring rather than building capacity is an option
that may be more beneficial to us if replacement costs are higher than purchase prices. We continue to look into acquiring smaller pet
product manufacturers in China as part of our expansion plans. Some of the companies we may seek to acquire are suppliers of the raw
materials or components we purchase to manufacture our products to further expand and integrate the industrial chain. If we do acquire
such companies, we will have greater control over our manufacturing cost. Our expansion strategy includes increasing our share in existing
pet specialty products markets, penetrating new markets and achieving operating efficiencies and economies of scale in merchandising,
distribution, information systems, procurement, and marketing, while providing a return on investment to our stockholders.
Supply
Chain Efficiencies and Scale. We intend to streamline our supply chain process and leverage our economies of scale. We seek suppliers
that will strategically partner with us to create long-term shareholder value. We also aim to scale our supply chain to accommodate growth,
cut costs and improve efficiency and drive continuous improvement, mitigate supply chain risks, and develop innovative approaches to
product development.
For
the year ended June 30, 2021, our sales increased by 26.9% as compared to the fiscal year ended June 30, 2020. This indicates
that we have repositioned our sales strategies to cope with the negative impact of US-China trade dispute and COVID-19, as well as the
positive trend of online shopping and customer needs for smart pet products.
From
a long-term perspective, we believe the above-mentioned strategic initiatives will still help our future sales growth. Through continuous
endeavor for product innovation, better management our capital expenditure and leveraging costs, we expect that we could further improve
our sales and product margins to produce profitability and return on investment for our stockholders in the near future.
Results
of Operations
Comparison
of Operation Results for the Years Ended June 30, 2021 and 2020
The
following table summarizes the results of our operations for the years ended June 30, 2021 and 2020, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such periods.
|
|
Year ended
June 30, 2021
|
|
|
Year ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
As %
of
Sales
|
|
|
Amount
|
|
|
As %
of
Sales
|
|
|
Amount
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,320,121
|
|
|
|
100.0
|
%
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
5,148,763
|
|
|
|
26.9
|
%
|
Cost of revenues
|
|
|
15,164,908
|
|
|
|
62.4
|
%
|
|
|
16,779,988
|
|
|
|
87.5
|
%
|
|
|
(1,615,080
|
)
|
|
|
(9.6
|
)%
|
Gross profit
|
|
|
9,155,213
|
|
|
|
37.6
|
%
|
|
|
2,391,370
|
|
|
|
12.5
|
%
|
|
|
6,763,843
|
|
|
|
282.8
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
1,815,771
|
|
|
|
7.5
|
%
|
|
|
2,336,229
|
|
|
|
12.2
|
%
|
|
|
(520,458
|
)
|
|
|
(22.3
|
)%
|
General and administrative expenses
|
|
|
4,941,036
|
|
|
|
20.3
|
%
|
|
|
5,746,812
|
|
|
|
30.0
|
%
|
|
|
(805,776
|
)
|
|
|
(14.0
|
)%
|
R&D expense
|
|
|
540,613
|
|
|
|
2.2
|
%
|
|
|
1,528,062
|
|
|
|
8.0
|
%
|
|
|
(987,449
|
)
|
|
|
(64.6
|
)%
|
Loss from disposal of fixed assets
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1,036,304
|
|
|
|
5.4
|
%
|
|
|
(1,036,304
|
)
|
|
|
(100.0
|
)%
|
Impairment of fixed assets
|
|
|
-
|
|
|
|
-
|
%
|
|
|
281,680
|
|
|
|
1.5
|
%
|
|
|
(281,680
|
)
|
|
|
(100.0
|
)%
|
Impairment of investment in equity investees
|
|
|
-
|
|
|
|
-
|
%
|
|
|
177,750
|
|
|
|
0.9
|
%
|
|
|
(177,750
|
)
|
|
|
(100.0
|
)%
|
Total operating expenses
|
|
|
7,297,420
|
|
|
|
30.0
|
%
|
|
|
11,106,837
|
|
|
|
57.9
|
%
|
|
|
(3,809,417
|
)
|
|
|
(34.3
|
)%
|
(Loss) income from operations
|
|
|
1,857,793
|
|
|
|
7.6
|
%
|
|
|
(8,715,467
|
)
|
|
|
(45.5
|
)%
|
|
|
10,573,260
|
|
|
|
(121.3
|
)%
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(264,408
|
)
|
|
|
(1.1
|
)%
|
|
|
15,560
|
|
|
|
0.1
|
%
|
|
|
(279,968
|
)
|
|
|
(1,799.3
|
)%
|
Foreign exchange (loss) gain
|
|
|
(228,260
|
)
|
|
|
(0.9
|
)%
|
|
|
214,171
|
|
|
|
1.1
|
%
|
|
|
(442,431
|
)
|
|
|
(206.6
|
)%
|
Other income
|
|
|
215,233
|
|
|
|
0.9
|
%
|
|
|
23,937
|
|
|
|
0.1
|
%
|
|
|
191,296
|
|
|
|
799.2
|
%
|
Rental income from related parties
|
|
|
354,968
|
|
|
|
1.5
|
%
|
|
|
89,411
|
|
|
|
0.5
|
%
|
|
|
265,557
|
|
|
|
297.0
|
%
|
Gain from disposition of a subsidiary
|
|
|
5,162
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
5,162
|
|
|
|
-
|
%
|
Total other income
|
|
|
82,695
|
|
|
|
0.3
|
%
|
|
|
343,079
|
|
|
|
1.8
|
%
|
|
|
(260,384
|
)
|
|
|
(75.9
|
)%
|
Income (loss) before income taxes
|
|
|
1,940,488
|
|
|
|
8.0
|
%
|
|
|
(8,372,388
|
)
|
|
|
(43.7
|
)%
|
|
|
10,312,876
|
|
|
|
(123.2
|
)%
|
Provision for income taxes
|
|
|
641,460
|
|
|
|
2.6
|
%
|
|
|
164,537
|
|
|
|
0.9
|
%
|
|
|
476,923
|
|
|
|
289.9
|
%
|
Net income (loss)
|
|
$
|
1,299,028
|
|
|
|
5.3
|
%
|
|
$
|
(8,536,925
|
)
|
|
|
(44.5
|
)%
|
|
$
|
9,835,953
|
|
|
|
(115.2
|
)%
|
Revenues.
Revenues increased by approximately $5.1 million, or 26.9%, to approximately $24.3 million for the fiscal year ended June 30, 2021
from approximately $19.2 million for the fiscal year ended June 30, 2020. The increase in revenue was primarily attributable to the increased
sales of our intelligent pet products which have much higher average selling price than our traditional pet products. The increase was
mainly due to following reasons:
1) We continue to shift our focus and resources
to produce and promote the sales of higher margin intelligent pet products. As a result, our sales volume for intelligent pet products
increased 162.5% for the fiscal year ended June 30, 2021 from the fiscal year ended June 30, 2020 as compared to the same period
last year;
2)
We continue to upgrade our production lines for traditional pet products to improve the productivity and lower the production costs.
As a result, we are able to lower our selling price for traditional pet products, but still maintain desirable profit margins. Our sales
strategy for traditional pet products successfully retained our customers, attracted new customers, and increased awareness for our intelligent
pet products.
3)
To mitigate the impact caused by COVID-19, we expanded our sales channels to more online shopping platforms, such as Amazon, Chewy, JD,
Tmall and Taobao, as well as the live streaming sales platforms hosted by influencers. These ecommerce sales normally have higher profit
margin than traditional sales channels.
Our
average selling price increase in by 28.6% during the year ended June 30, 2021 as compared to the fiscal year ended June 30, 2020. The
increase was largely due to increased sales of our intelligent pet products. Our sales of intelligent pet products account for approximately
32.1 % of the total sales during fiscal year 2021, as compared to approximately 22.6% in fiscal year 2020.
Revenue
by product and service type
The
following table sets forth the breakdown of our revenue by product type for the year ended June 30, 2021 and 2020:
|
|
For the Years ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Product and service category
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Revenue
|
|
|
% of total
Revenue
|
|
|
Variance
|
|
|
Variance
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
14,331,492
|
|
|
|
58.9
|
%
|
|
|
13,208,764
|
|
|
|
68.9
|
%
|
|
|
1,122,728
|
|
|
|
8.5
|
%
|
Intelligent pet products
|
|
|
7,801,070
|
|
|
|
32.1
|
%
|
|
|
4,328,918
|
|
|
|
22.6
|
%
|
|
|
3,472,152
|
|
|
|
80.2
|
%
|
Climbing hooks and others
|
|
|
1,340,686
|
|
|
|
5.5
|
%
|
|
|
1,633,676
|
|
|
|
8.5
|
%
|
|
|
(292,990
|
)
|
|
|
(17.9
|
)%
|
Total revenue from products
|
|
$
|
23,473,248
|
|
|
|
96.5
|
%
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
4,301,890
|
|
|
|
22.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing service
|
|
|
817,145
|
|
|
|
3.4
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
817,145
|
|
|
|
-
|
%
|
Other services
|
|
|
29,728
|
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
29,728
|
|
|
|
-
|
%
|
Total revenue from service
|
|
|
846,873
|
|
|
|
3.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
846,873
|
|
|
|
-
|
%
|
Total
|
|
|
24,320,121
|
|
|
|
100.0
|
%
|
|
|
19,171,358
|
|
|
|
100.0
|
%
|
|
|
5,148,763
|
|
|
|
26.9
|
%
|
|
|
Total Revenue for years
ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average unit price
|
|
|
Price
|
|
Products
|
|
2021
|
|
|
2020
|
|
|
Units sold in 2021
|
|
|
Units sold in 2020
|
|
|
Variance in Units sold
|
|
|
% of units variance
|
|
|
2021
|
|
|
2020
|
|
|
Difference
|
|
Traditional pet products
|
|
|
14,331,492
|
|
|
|
13,208,764
|
|
|
|
12,064,685
|
|
|
|
12,327,626
|
|
|
|
(262,941
|
)
|
|
|
(2.1
|
)%
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
0.1
|
|
Intelligent pet products
|
|
|
7,801,070
|
|
|
|
4,328,918
|
|
|
|
386,467
|
|
|
|
147,225
|
|
|
|
239,242
|
|
|
|
162.5
|
%
|
|
|
20.2
|
|
|
|
29.4
|
|
|
|
(9.2
|
)
|
Climbing hooks and others
|
|
|
1,340,686
|
|
|
|
1,633,676
|
|
|
|
828,070
|
|
|
|
1,113,775
|
|
|
|
(285,705
|
)
|
|
|
(25.7
|
)%
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
0.1
|
|
Total
|
|
$
|
23,473,248
|
|
|
$
|
19,171,358
|
|
|
|
13,279,222
|
|
|
|
13,588,626
|
|
|
|
(309,404
|
)
|
|
|
(2.3
|
)%
|
|
$
|
1.8
|
|
|
$
|
1.4
|
|
|
$
|
0.4
|
|
Traditional
pet products
Revenue
from traditional pet products increased by approximately $1.1 million or 8.5% from approximately $13.2 million in fiscal 2020 to approximately
$14.3 million in fiscal 2021. The increase was mainly due to an increase in average selling price of $0.1 per unit in fiscal 2021 compared
to fiscal 2020, offset by a decrease of 2.1% in sales volume during fiscal 2021 compared to fiscal 2020.
Intelligent
pet products
Revenue
from intelligent pet products increased by approximately $3.5 million or 80.2%, from approximately $4.3 million in fiscal 2020 to approximately
$7.8 million in fiscal 2021. The increase was mainly driven by an increase of 162.5% in sales volume during fiscal 2021 compared to fiscal
2020, and offset by the decreased average selling price of $9.2 per unit in fiscal 2021 compared to fiscal 2020. Among the total revenue
increase, $2.6 million increase was from sales to customers in China domestic market and remaining $0.9 million increase was from sales
to customers in overseas market. The decreased average selling price of $9.2 per unit for our intelligent pet products was mainly because
we were able to lower our selling price but still maintain high profit margin due to our improvement of the manufacturing process resulted
from our continued R&D innovation efforts.
We
launched our intelligent pet products in March 2018, which include App-controlled pet feeders, pet water fountains, and smart pet toys.
Comparing with other products, intelligent pet products typically have higher selling price. 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
significant increase of sales during the year ended June 30, 2021 and are expected the sales of intelligent pet products will continue
to be one of the primary sources of revenue in the near future.
Climbing
hooks
Revenue
from climbing hooks decreased by approximately $0.3 million from approximately $1.6 million in fiscal 2020 to approximately $1.3 million
in fiscal 2021. The decrease was mainly due to a 25.7% decrease in sales volume. The decreased revenue was offset by a slight increase
of the average selling price of $0.1 per unit for fiscal 2021 as compared to fiscal 2020. We expect the sales for the climbing hooks
and gears will continue to increase after the pandemic due to the growth trend of participating the outdoors activities both domestically
and globally.
Sales
to related parties
During
the year ended June 30, 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.
We
sold certain intelligent pet products to Dogness Network and Linsun, and accordingly reported related party sales of $1,207,686 and $909,651,
which accounted for 5.0% and 4.7% of our total revenue for the year ended June 30, 2021 and 2020, respectively.
Cost
of revenue associated with the sales to these two related parties amounted to $663,742 and $633,132 for the years ended June 30, 2021
and 2020, respectively.
Revenue
by Geographic Area
The
following table sets forth the breakdown of our revenue by geographic areas for the year ended June 30, 2021 and 2020:
|
|
For the Years Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Country and Region
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Variance
|
|
|
Variance
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
13,692,868
|
|
|
|
56.3
|
%
|
|
$
|
9,772,130
|
|
|
|
51.0
|
%
|
|
|
3,920,738
|
|
|
|
40.1
|
%
|
United States
|
|
|
6,028,326
|
|
|
|
24.7
|
%
|
|
|
4,918,400
|
|
|
|
25.7
|
%
|
|
|
1,109,926
|
|
|
|
22.6
|
%
|
Europe
|
|
|
1,653,923
|
|
|
|
6.8
|
%
|
|
|
1,699,231
|
|
|
|
8.9
|
%
|
|
|
(45,308
|
)
|
|
|
(2.7
|
)%
|
Japan and other Asian countries and regions
|
|
|
1,302,967
|
|
|
|
5.4
|
%
|
|
|
1,636,362
|
|
|
|
8.5
|
%
|
|
|
(333,395
|
)
|
|
|
(20.4
|
)%
|
Australia
|
|
|
392,985
|
|
|
|
1.6
|
%
|
|
|
564,550
|
|
|
|
2.9
|
%
|
|
|
(171,565
|
)
|
|
|
(30.4
|
)%
|
Canada
|
|
|
1,180,631
|
|
|
|
4.9
|
%
|
|
|
482,057
|
|
|
|
2.5
|
%
|
|
|
698,574
|
|
|
|
144.9
|
%
|
Central and South America
|
|
|
68,421
|
|
|
|
0.3
|
%
|
|
|
98,628
|
|
|
|
0.5
|
%
|
|
|
(30,207
|
)
|
|
|
(30.6
|
)%
|
Total
|
|
$
|
24,320,121
|
|
|
|
100.0
|
%
|
|
$
|
19,171,358
|
|
|
|
100
|
%
|
|
$
|
5,148,763
|
|
|
|
26.9
|
%
|
The
breakdown of sales by product types in international markets is as follows:
International
sales by product type
|
|
For the Years ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
Product and service type
|
|
Revenue
|
|
|
% of total revenue
|
|
|
Revenue
|
|
|
% of total revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
6,742,503
|
|
|
|
63.4
|
%
|
|
|
6,349,328
|
|
|
|
67.5
|
%
|
|
|
393,175
|
|
|
|
6.2
|
%
|
Intelligent pet products
|
|
|
3,173,393
|
|
|
|
29.9
|
%
|
|
|
2,289,677
|
|
|
|
24.4
|
%
|
|
|
883,716
|
|
|
|
38.6
|
%
|
Climbing hook
|
|
|
711,357
|
|
|
|
6.7
|
%
|
|
|
760,223
|
|
|
|
8.1
|
%
|
|
|
(48,866
|
)
|
|
|
(6.4
|
)%
|
Total international sales
|
|
$
|
10,627,253
|
|
|
|
100.0
|
%
|
|
$
|
9,399,228
|
|
|
|
100.0
|
%
|
|
$
|
1,228,025
|
|
|
|
13.1
|
%
|
Our
total sales in international markets increased by approximately $1.2 million or 13.1% from approximately $9.4 million in fiscal 2020
to approximately $10.6 million in fiscal year 2021. We have seen strong recovery in U.S. and Canada consumer demand because of the stimulus
plan. Our sales to U.S. market increased by approximately $1.1 million or 22.6% to approximately $6.0 million for fiscal 2021 from approximately
$4.9 million for the same period last year. Our sales to Canada market increased by approximately $0.7 million or 144.9% to approximately
$1.2 million for fiscal 2021 from approximately $0.5 million for the same period last year. However, due to the ongoing negative impact
of the outbreak and spread of COVID-19 around the world, we still experienced weak market demand and received less sales orders from
other international customers.
In
terms of our international sales by product type and mix, sales of our traditional pet products and intelligent pet products increased
by 6.2% and 38.6%, respectively, in fiscal 2021 as compared to fiscal 2020. However, our sales of climbing hooks decreased by approximately
$48,866, or 6.4%, in fiscal 2021 as compared to fiscal 2020.
In
fiscal 2021, we have started working with large retail chains in the US and Canada for the distribution of smart pet products under our
own brand rather than just serving as an OEM supplier. In addition, we started expanding our sales on online shopping platforms, such
as Amazon and Chewy to access more potential customers in a safely and timely manner. We expect that the revenue to be generated from
these efforts could mitigate, at least in part, offset the decreased OEM sales in the United States and Canada and the mitigate the impact
of the COVID-19. We also expect that the newly developed intelligent pet products will continue become the leading revenue source for
our international sales.
The
breakdown of sales by product types in China’s domestic market is as follows:
Domestic
sales by product type
|
|
For the Years ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Changes
|
|
Product and service type
|
|
Revenue
|
|
|
% of
total
revenue
|
|
|
Revenue
|
|
|
% of
total
revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
7,588,989
|
|
|
|
55.4
|
%
|
|
|
6,859,436
|
|
|
|
70.2
|
%
|
|
|
729,553
|
|
|
|
10.6
|
%
|
Intelligent pet products
|
|
|
4,627,677
|
|
|
|
33.8
|
%
|
|
|
2,039,241
|
|
|
|
20.9
|
%
|
|
|
2,588,436
|
|
|
|
126.9
|
%
|
Climbing hook
|
|
|
629,329
|
|
|
|
4.6
|
%
|
|
|
873,453
|
|
|
|
8.9
|
%
|
|
|
(244,124
|
)
|
|
|
(27.9
|
)%
|
Dyeing services
|
|
|
817,145
|
|
|
|
6.0
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
817,145
|
|
|
|
-
|
|
Other services
|
|
|
29,728
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
29,728
|
|
|
|
-
|
|
Total sales in China domestic market
|
|
$
|
13,692,868
|
|
|
|
100.0
|
%
|
|
$
|
9,772,130
|
|
|
|
100.0
|
%
|
|
$
|
3,920,738
|
|
|
|
40.1
|
%
|
Our
domestic sales increased by approximately $3.9 million or 40.1% from approximately $9.8 million in fiscal 2020 to approximately
$13.7 million in fiscal 2021. The increase was mainly due to increased customer orders of our intelligent pet products.
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 Amazon, Chewy, JD, Tmall and Taobao, and
from live streaming sales platforms hosted by influencers. Therefore, during the year ended June 30, 2021, we increased our marketing
activities and sales efforts in domestic market, especially on those online shopping sites and channels. As a result, our domestic sales
of intelligent pet products increased approximately $2.6 million or 126.9% in fiscal 2021 as compared to the same period of 2020.
On
the other hand, we continue to upgrade our traditional products, our domestic sales of traditional pet products increased approximately
$0.7 million or 10.6% in fiscal 2021 as compared to the last year.
Cost
of revenues
Cost
of revenues decreased by approximately $1.6 million, or 9.6%, from approximately $16.8 million in fiscal 2020 to approximately $15.2
million in fiscal 2021. As a percentage of revenues, the cost of goods sold decreased by approximately 25.1 percentage points to 62.4%
in fiscal 2021 from 87.5% in fiscal 2020. This was mainly because we continue to upgrade our production lines for both traditional and
intelligent pet products to improve the productivity and lower the production costs. As a result, average unit cost associated with the
sales volume for fiscal year 2021 decreased by 12.7% from approximately $1.23 per unit in fiscal 2020 to approximately $1.08 per unit
in fiscal 2021.
Gross
profit
Our
gross profit increased by approximately $6.8 million or 282.8%, to approximately $9.2 million in fiscal 2021 from approximately $2.4
million in fiscal 2020 primarily because we continued to upgrade our production lines for both traditional and intelligent pet products,
which led to the improved productivity and lower the production costs. Overall gross profit margin was 37.6%, an increase of 25.1 percentage
points, for the year ended June 30, 2021 as compared to 12.5% for the year ended June 30, 2020.
Gross
profit by product and service type
The
following table presents the gross profit by product types for the year ended June 30, 2021 and 2020 as follows:
|
|
For the Year ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Product category
|
|
Gross profit
|
|
|
Gross profit %
|
|
|
Gross profit
|
|
|
Gross profit %
|
|
|
Variance in Gross profit
|
|
|
Variance in Gross profit Pct.
Pt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
$
|
4,738,159
|
|
|
|
33.1
|
%
|
|
$
|
1,195,356
|
|
|
|
9.0
|
%
|
|
$
|
3,542,803
|
|
|
|
24.1 pct.
|
|
Intelligent pet products
|
|
|
3,997,768
|
|
|
|
51.2
|
%
|
|
|
723,005
|
|
|
|
16.7
|
%
|
|
|
3,274,763
|
|
|
|
34.5 pct.
|
|
Climbing hook
|
|
|
423,143
|
|
|
|
31.6
|
%
|
|
|
473,009
|
|
|
|
29.0
|
%
|
|
|
(49,866
|
)
|
|
|
2.6pct.
|
|
|
|
|
9,159,070
|
|
|
|
39.0
|
%
|
|
|
2,391,370
|
|
|
|
12.5
|
%
|
|
|
6,767,700
|
|
|
|
26.5pct.
|
|
Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing service
|
|
|
(23,957
|
)
|
|
|
(2.9
|
)%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(23,957
|
)
|
|
|
-
|
|
Other services
|
|
|
20,100
|
|
|
|
67.6
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
20,100
|
|
|
|
-
|
|
Total
|
|
$
|
9,155,213
|
|
|
|
37.6
|
%
|
|
$
|
2,391,370
|
|
|
|
12.5
|
%
|
|
$
|
6,763,843
|
|
|
|
25.1pct.
|
|
Gross
profit for traditional pet products increased by approximately $3.5 million in fiscal year 2021 as compared to fiscal year 2020. Gross
profit margin increased by 24.1 percentage points from 9.0% in fiscal 2020 to 33.1% in fiscal 2021, mainly because we lowered the average
unit cost due to improved manufacturing process and we disposed significant amount of obsoleted traditional pet product inventories in
fiscal 2020.
Gross
profit for intelligent pet products increased by approximately $3.3 million from $0.7 million in fiscal 2020 to $4.0 million in fiscal
2021. Gross profit margin increased by 34.5 percentage point from 16.7% in fiscal 2020 to 51.2% in fiscal 2021, mainly because we lowered
the average unit cost of intelligent pet products due to improved manufacturing process.
Gross
profit for climbing hook decreased by approximately $49,866 from $473,009 in fiscal 2020 to $423,143 in fiscal 2021, mainly driven by
25.7% decrease in sales volume. Overall gross margin for climbing hook increased by 2.6 percentage points from 29% in fiscal 2020 to
31.6% in fiscal 2021.
Gross
profit from dyeing service and pet service were negative $23,957 and $20,100, respectively, and gross margin were (2.9)% and 67.6%, respectively,
for the year ended June 30, 2021.
Expenses
|
|
Years ended June 30,
|
|
|
|
|
|
|
|
|
|
2021
($)
|
|
|
2021
(%)
|
|
|
2020
($)
|
|
|
2020
(%)
|
|
|
Changes
($)
|
|
|
Changes(%)
|
|
Selling expenses
|
|
|
1,815,771
|
|
|
|
24.9
|
%
|
|
|
2,336,229
|
|
|
|
21.0
|
%
|
|
|
(520,458
|
)
|
|
|
(22.3
|
)%
|
General and administrative expenses
|
|
|
4,941,036
|
|
|
|
67.7
|
%
|
|
|
5,746,812
|
|
|
|
51.7
|
%
|
|
|
(805,776
|
)
|
|
|
(14.0
|
)%
|
Research and development expenses
|
|
|
540,613
|
|
|
|
7.4
|
%
|
|
|
1,528,062
|
|
|
|
13.8
|
%
|
|
|
(987,449
|
)
|
|
|
(64.6
|
)%
|
Loss from disposal of fixed assets
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1,036,304
|
|
|
|
9.4
|
%
|
|
|
(1,036,304
|
)
|
|
|
(100.0
|
)%
|
Impairment of fixed assets
|
|
|
-
|
|
|
|
-
|
%
|
|
|
281,680
|
|
|
|
2.5
|
%
|
|
|
(281,680
|
)
|
|
|
(100.0
|
)%
|
Impairment of investment in equity investees
|
|
|
-
|
|
|
|
-
|
%
|
|
|
177,750
|
|
|
|
1.6
|
%
|
|
|
(177,750
|
)
|
|
|
(100.0
|
)%
|
Total operating expenses
|
|
|
7,297,420
|
|
|
|
100
|
%
|
|
|
11,106,837
|
|
|
|
100
|
%
|
|
|
(3,809,417
|
)
|
|
|
(34.3
|
)%
|
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, and shipping and delivery expenses. Selling expenses
decreased by $0.5 million, or 22.3% from approximately $2.3 million in fiscal 2020 to approximately $1.8 million in fiscal 2021. The
decrease in selling expense was primarily due to decreased marketing promotion fess of $0.5 million, and decreased exhibition
fees by approximately $0.1 million. As a percentage of sales, our selling expenses were 7.5% and 12.2% of our total revenues for the
years ended June 30, 2021 and 2020, respectively.
General
and administrative expenses. Our general and administrative expenses primarily include employee salary, welfare and insurance
expenses, depreciation and bad debt expenses as well as consulting expense. General and administrative expenses decreased by approximately
$0.8 million or 14.0% from approximately $5.7 million in fiscal 2020 to approximately $4.9 million in fiscal 2021. The decrease was mainly
due to decreased bad debts of approximately $0.8 million, decreased service fee of approximately $0.5 million, decreased entertainment
expense of $0.2 million, offset by the increased depreciation and amortization expenses of $0.8 million as a result of our Dongguan Jiasheng
and Zhangzhou Meijia facility have been transferred from Construction in Progress to fixed assets. As a percentage of sales, our general
and administrative expenses were 20.3% and 30.0% of our total revenues for the years ended June 30, 2021 and 2020, respectively.
Research
and development expenses. Our research and development expenses decreased by $1.0 million or 64.6% from $1.5 million in fiscal
2020 to $0.5 million in fiscal 2021. As a percentage of sales, our research and development expenses were 2.2% and 8.0% of our total
revenues for the years ended June 30, 2021 and 2020, respectively. The decrease was due to less research activities in fiscal 2021.We
expect R&D expenses to continue to increase, as we continue to expand our research and development activities to increase the use
of environmentally-friendly materials, and develop more new high-tech products to meet customer demands.
Impairment
of fixed assets. During the year ended June 30, 2020, given the Company’s net loss position, the management assessed that
the expected future cash flow generated from certain machinery and equipment used to manufacture low-end pet products would not recover
the carrying value, as a result, we recorded an impairment of $281,680 on these fixed assets as of June 30, 2020. No such impairment
in fiscal 2021.
Disposition
of fixed assets. In connection with the relocation from old factory to new warehouse and manufacturing facilities in Dongguan
Jiasheng as discussed above, we disposed some old fashioned or outdated molding machinery and equipment, which resulted in approximately
$1.0 million loss from disposition of fixed assets in fiscal 2020.
Impairment
of investment in equity investees. During the year ended June 30, 2020, we recorded a full impairment loss of $177,750 for the
equity investment in Nanjing Rootaya. No such impairment in fiscal 2021.
Other income. Other income primarily
included interest income or expenses, foreign exchange gain or loss, rental income from related parties, gain from disposition of
a subsidiary and other income. For the year ended June 30, 2021, the Company had other income of approximately $0.1 million, as compared
to other income of approximately $0.3 million for fiscal 2020. The decrease of other income was mainly attributable to: 1) interest expense
increased $0.3 million in fiscal 2021 as compared to fiscal 2020 due to more loan balance. 2) we had $0.4 million less foreign exchange
gain in fiscal 2021 as compared to fiscal 2020 due to less favorable USD, Euro, and other currency exchange rates against RMB on our
foreign currency denominated account receivables.
Income
tax expense. Income tax expense increased by approximately $0.5 million or 289.9%, from income tax expense approximately $0.2
million in fiscal 2020, to income tax expense approximately $0.6 million in fiscal 2021. The increase was mainly due to increased taxable
income and the accrued surcharge on unpaid income tax.
We had accrued tax liabilities of approximately
$4.4 million and $2.8 million as of June 30, 2021 and 2020, respectively, mostly related to the unpaid income tax and business tax and
accrued surcharge for overdue tax payment in China. According to PRC taxation regulation, if tax has not been fully paid, tax authorities
may impose tax and late payment penalties. During fiscal 2021, we accrued and recorded surcharge for overdue tax payment of $669,650
associated with unpaid income tax liabilities as part of our income tax provision, which have been reflected in the consolidated statements
of comprehensive income (loss). 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
we successfully completed our IPO and are in the process of negotiating a settlement plan agreement. Local tax authorities have not made
a determination as of June 30, 2021. We believe it is likely that we can reach an agreement with the local tax authority to fully settle
our tax liabilities within fiscal 2022 but cannot guarantee such settlement will ultimately occur.
Net
income (loss). Net income was approximately $1.3 million for the years ended June 30, 2021, an increase of $9.8 million from
net loss of $8.5 million in fiscal 2020. The net income was the result of increased sales and gross profit, and decreased operating expenses
as discussed above.
Other comprehensive (loss) income.
Foreign currency translation adjustments amounted to a gain of $4,879,315 and a loss of $1,896,934 for the years ended
June 30, 2021 and 2020, respectively. The balance sheet amounts with the exception of equity at June 30, 2021 were translated at 6.4566
RMB to 1.00 USD as compared to 7.0721 RMB to 1.00 USD at June 30, 2020. The equity accounts were stated at their historical rate. The
average translation rates applied to the income statements accounts for the years ended June 30, 2021 and 2020 were 6.6221 RMB to 1.00
USD and7.0323 RMB to 1.00 USD, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our financial
results reported in the U.S, dollar terms without giving effect to any underlying change in our business or results of operation. The
impact attributable to changes in revenue and expenses due to foreign currency translation are summarized as follows.
|
|
Year ended
June 30, 2021
|
|
|
Year ended
June 30, 2020
|
|
Impact on revenue
|
|
$
|
(628,136
|
)
|
|
$
|
107,856
|
|
Impact on operating expenses
|
|
$
|
(188,476
|
)
|
|
$
|
55,570
|
|
Impact on net income
|
|
$
|
(33,551
|
)
|
|
$
|
(48,028
|
)
|
For
the year ended June 30, 2021, if using the RMB6.4566 to $1.00 (foreign exchange rate as of June 30, 2021), rather than the average exchange
rate for the year ended June 30, 2021, to translate our revenue, operating expense and net income, our reported revenue, operation expense
and net income would be increased by $628,316, $188,476 and $33,551, respectively.
For
the year ended June 30, 2020, if using the RMB7.0721 to $1.00 (foreign exchange rate as of June 30, 2020), rather than the average exchange
rate for the year ended June 30, 2020, to translate our revenue, operating expense and net income, our reported revenue, operation expense
and net income would increase by $107,856, $55,570 and negative $48,028, respectively.
Comparison
of Operation Results for the Years Ended June 30, 2020 and 2019
The
following table summarizes the results of our operations for the years ended June 30, 2020 and 2019, respectively, and provides information
regarding the dollar and percentage increase or (decrease) during such periods.
|
|
Year ended
June 30, 2020
|
|
|
Year ended
June 30, 2019
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
As %
of
Sales
|
|
|
Amount
|
|
|
As %
of
Sales
|
|
|
Amount
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
26,216,515
|
|
|
|
100.0
|
%
|
|
$
|
(7,045,157
|
)
|
|
|
(26.9
|
)%
|
Cost of revenues
|
|
|
16,779,988
|
|
|
|
87.5
|
%
|
|
|
16,786,510
|
|
|
|
64.0
|
%
|
|
|
(6,522
|
)
|
|
|
(0.0
|
)%
|
Gross profit
|
|
|
2,391,370
|
|
|
|
12.5
|
%
|
|
|
9,430,005
|
|
|
|
36.0
|
%
|
|
|
(7,038,635
|
)
|
|
|
(74.6
|
)%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
2,336,229
|
|
|
|
12.2
|
%
|
|
|
2,101,403
|
|
|
|
8.0
|
%
|
|
|
234,826
|
|
|
|
11.2
|
%
|
General and administrative expenses
|
|
|
5,746,812
|
|
|
|
30.0
|
%
|
|
|
6,015,901
|
|
|
|
22.9
|
%
|
|
|
(269,089
|
)
|
|
|
(4.5
|
)%
|
R&D expense
|
|
|
1,528,062
|
|
|
|
8.0
|
%
|
|
|
673,131
|
|
|
|
2.6
|
%
|
|
|
854,931
|
|
|
|
127.0
|
%
|
Loss from disposal of fixed assets
|
|
|
1,036,304
|
|
|
|
5.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1,036,304
|
|
|
|
-
|
|
Impairment of fixed assets
|
|
|
281,680
|
|
|
|
1.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
281,680
|
|
|
|
-
|
|
Impairment of investment in equity investees
|
|
|
177,750
|
|
|
|
0.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
177,750
|
|
|
|
-
|
|
Total operating expenses
|
|
|
11,106,837
|
|
|
|
57.9
|
%
|
|
|
8,790,435
|
|
|
|
33.5
|
%
|
|
|
2,316,402
|
|
|
|
26.4
|
%
|
(Loss) income from operations
|
|
|
(8,715,467
|
)
|
|
|
(45.5
|
)%
|
|
|
639,570
|
|
|
|
2.4
|
%
|
|
|
(9,355,037
|
)
|
|
|
(1462.7
|
)%
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
15,560
|
|
|
|
0.1
|
%
|
|
|
616,878
|
|
|
|
2.4
|
%
|
|
|
(601,318
|
)
|
|
|
(97.5
|
)%
|
Foreign exchange gain
|
|
|
214,171
|
|
|
|
1.1
|
%
|
|
|
503,528
|
|
|
|
1.9
|
%
|
|
|
(289,357
|
)
|
|
|
(57.5
|
)%
|
Other income
|
|
|
113,348
|
|
|
|
0.6
|
%
|
|
|
23,498
|
|
|
|
0.1
|
%
|
|
|
89,850
|
|
|
|
382.4
|
%
|
Total other income
|
|
|
343,079
|
|
|
|
1.8
|
%
|
|
|
1,143,904
|
|
|
|
4.4
|
%
|
|
|
(800,825
|
)
|
|
|
(70.0
|
)%
|
(Loss) income before income taxes
|
|
|
(8,372,388
|
)
|
|
|
(43.7
|
)%
|
|
|
1,783,474
|
|
|
|
6.8
|
%
|
|
|
(10,155,862
|
)
|
|
|
(569.4
|
)%
|
Provision for income taxes
|
|
|
164,537
|
|
|
|
0.9
|
%
|
|
|
380,296
|
|
|
|
1.5
|
%
|
|
|
(215,759
|
)
|
|
|
(56.7
|
)%
|
Net (loss) income
|
|
$
|
(8,536,925
|
)
|
|
|
(44.5
|
)%
|
|
$
|
1,403,178
|
|
|
|
5.4
|
%
|
|
$
|
(9,940,103
|
)
|
|
|
(708.4
|
)%
|
Revenues.
Revenues decreased by approximately $7.0 million, or 26.9%, to approximately $19.2 million for the fiscal year ended June 30,
2020 from approximately $26.2 million for the fiscal year ended June 30, 2019. The decrease in revenue was primarily due to the decrease
in sales volume by 34.0% for the year ended June 30, 2020, offset by an increase in average selling price of approximately $0.1 per unit
or 11% as compared to fiscal 2019.
The
decrease in sales volume was mainly due to following reasons:
(1)
|
During
fiscal year 2020, in order to improve some lower margin traditional products from our current product offering structure, we started
to upgrade our 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)
|
Our
business operation has been negatively impacted by the recent and ongoing outbreak of COVID-19 coronavirus outbreak. From late January
2020 to the middle of February 2020, manufacturing activities were temporarily suspended due to government restrictions. The difficulties
arising from the travel bans, quarantines and transportation inconvenience has led to some delayed fulfillment of the sales orders
in China as well as across border. In addition, some of customers may experience financial distress, delay or default on their orders,
reduce the scale of their business, or suffer disruptions in their business due to the outbreak. As a result, our sales decreased
approximately $5.7 million for the six months ended June 30, 2020 as compared to the same period in fiscal 2019, including approximately
$3.8 million decreased sales from domestic market and approximately $1.9 million decreased sales from overseas market, mainly from
the customers located in Canada, Europe and the United States because of the reduced sales orders under this difficult circumstance.
|
(3)
|
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 fiscal 2020. 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. As a result, the Company’s
export sales to customers located in the United States decreased by 10.9% in fiscal 2020 as compared to fiscal 2019. 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 $0.1 per unit or 11% during fiscal year 2020 as compared to fiscal year 2019 was largely due
to increased sales volume of our intelligent pet products, which were sold at higher average selling prices than our traditional products.
Our sales of intelligent pet products account for approximately 23.0% of the total sales during fiscal year 2020, as compared to approximately
8.0% in fiscal year 2019.
Revenue
by Product Type
The
following table sets forth the breakdown of our revenue by product type for the year ended June 30, 2020 and 2019:
|
|
For the Years ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Product category
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Variance
|
|
|
Variance
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
13,208,764
|
|
|
|
68.9
|
%
|
|
|
23,897,528
|
|
|
|
91.2
|
%
|
|
|
(10,688,764
|
)
|
|
|
(44.7
|
)%
|
Intelligent pet products
|
|
|
4,328,918
|
|
|
|
22.6
|
%
|
|
|
2,103,523
|
|
|
|
8.0
|
%
|
|
|
2,225,395
|
|
|
|
105.8
|
%
|
Climbing hooks
|
|
|
1,633,676
|
|
|
|
8.5
|
%
|
|
|
215,464
|
|
|
|
0.8
|
%
|
|
|
1,418,212
|
|
|
|
658.2
|
%
|
Total
|
|
$
|
19,171,358
|
|
|
|
100.0
|
%
|
|
$
|
26,216,515
|
|
|
|
100.0
|
%
|
|
$
|
(7,045,157
|
)
|
|
|
(26.9
|
)%
|
Product
|
|
Total Revenue for years
ended June 30,
|
|
|
Units sold
|
|
|
Units sold
|
|
|
Variance
in Units
|
|
|
% of
units
|
|
|
Average
unit price
|
|
|
Price
|
|
category
|
|
2020
|
|
|
2019
|
|
|
in 2020
|
|
|
in 2019
|
|
|
sold
|
|
|
variance
|
|
|
2020
|
|
|
2019
|
|
|
Difference
|
|
Traditional pet products
|
|
|
13,208,764
|
|
|
|
23,897,528
|
|
|
|
12,327,626
|
|
|
|
20,421,227
|
|
|
|
(8,093,601
|
)
|
|
|
(39.6
|
)%
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
(0.1
|
)
|
Intelligent pet products
|
|
|
4,328,918
|
|
|
|
2,103,523
|
|
|
|
147,225
|
|
|
|
45,562
|
|
|
|
101,663
|
|
|
|
223.1
|
%
|
|
|
29.4
|
|
|
|
46.2
|
|
|
|
(16.8
|
)
|
Climbing hooks
|
|
|
1,633,676
|
|
|
|
215,464
|
|
|
|
1,113,775
|
|
|
|
137,019
|
|
|
|
976,756
|
|
|
|
712.9
|
%
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
(0.1
|
)
|
Total
|
|
$
|
19,171,358
|
|
|
$
|
26,216,515
|
|
|
|
13,588,626
|
|
|
|
20,603,808
|
|
|
|
(7,015,182
|
)
|
|
|
(34.0
|
)%
|
|
$
|
1.4
|
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
Traditional
pet products
Revenue
from traditional pet products decreased by approximately $10.7 million or 44.7%, from approximately $23.9 million in fiscal 2019 to approximately
$13.2 million in fiscal 2020. The decrease was mainly due to a 39.6% decrease in sales volume during fiscal 2021 compared to fiscal 2020
due to the impact of the COVID-19.
Intelligent
pet products
Revenue
from intelligent pet products increased by approximately $2.2 million or 105.8%, from approximately $2.1 million in fiscal 2019 to approximately
$4.3 million in fiscal 2020. The increase was mainly driven by an 223.1% increase in sales volume during fiscal 2020 compared to fiscal
2019, and offset by the decreased average selling price of $16.8 per unit in fiscal 2020 compared to fiscal 2019. Among the total revenue
increase, $0.8 million increase was from sales to customers in China domestic market and remaining $1.4 million increase was from sales
to customers in overseas market. The decreased average selling price of $16.8 per unit for our intelligent pet products was mainly because
we lowered down our selling price of certain intelligent pet products to promote our sales to targeted customers during the second half
of fiscal 2020 in response to the COVID-19 outbreak and spread.
We
launched our intelligent pet products in March 2018, which include App-controlled pet feeders, pet water fountains, and smart pet toys.
Comparing with other products, intelligent pet products typically have higher selling price. 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
significant increase of sales during the year ended June 30, 2020 and are expected the sales of intelligent pet products will continue
to be one of the primary sources of revenue in the near future.
Climbing
hooks
Revenue
from climbing hooks increased by approximately $1.4 million from approximately $0.2 million in fiscal 2019 to approximately $1.6 million
in fiscal 2020. The increase was mainly driven by a 712.9% increase in sales volume due to the growing demand for outdoor equipment.
The increased revenue was offset by the slight decrease of the average selling price of $0.1 per unit for fiscal 2020 as compared to
fiscal 2019 because we lowered down the selling price to stimulate customer purchase in response to the COVID-19 outbreak and spread.
We expect the sales for the climbing hooks and gears will continue to increase due to the growth trend of participating the outdoors
activities both domestically and globally.
Sales
to related parties
During
the year ended June 30, 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.
We
sold certain intelligent pet products to Dogness Network and Linsun, and accordingly reported related party sales of $909,651 and $ 328,567,
which accounted for 4.7% and 1.2% of our total revenue for the year ended June 30, 2020 and 2019.
Cost
of revenue associated with the sales to these two related parties amounted to $633,132 and $202,606 for the years ended June 30, 2020
and 2019, respectively.
Revenue
by Geographic Area
The
following table sets forth the breakdown of our revenue by geographic areas for the year ended June 30, 2020 and 2019:
|
|
For the Years Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Country and Region
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Revenue
|
|
|
% of
total
Revenue
|
|
|
Variance
|
|
|
Variance
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
9,772,130
|
|
|
|
51.0
|
%
|
|
$
|
15,082,443
|
|
|
|
57.5
|
%
|
|
|
(5,310,313
|
)
|
|
|
(35.2
|
)%
|
United States
|
|
|
4,918,400
|
|
|
|
25.7
|
%
|
|
|
5,522,008
|
|
|
|
21.1
|
%
|
|
|
(603,608
|
)
|
|
|
(10.9
|
)%
|
Europe
|
|
|
1,699,231
|
|
|
|
8.9
|
%
|
|
|
2,510,190
|
|
|
|
9.6
|
%
|
|
|
(810,959
|
)
|
|
|
(32.3
|
)%
|
Japan and other Asian countries and regions
|
|
|
1,636,362
|
|
|
|
8.5
|
%
|
|
|
1,703,102
|
|
|
|
6.5
|
%
|
|
|
(66,740
|
)
|
|
|
(3.9
|
)%
|
Australia
|
|
|
564,550
|
|
|
|
2.9
|
%
|
|
|
216,993
|
|
|
|
0.8
|
%
|
|
|
347,557
|
|
|
|
160.2
|
%
|
Canada
|
|
|
482,057
|
|
|
|
2.5
|
%
|
|
|
950,353
|
|
|
|
3.6
|
%
|
|
|
(468,296
|
)
|
|
|
(49.3
|
)%
|
Central and South America
|
|
|
98,628
|
|
|
|
0.5
|
%
|
|
|
231,426
|
|
|
|
0.9
|
%
|
|
|
(132,798
|
)
|
|
|
(57.4
|
)%
|
Total
|
|
$
|
19,171,358
|
|
|
|
100
|
%
|
|
$
|
26,216,515
|
|
|
|
100
|
%
|
|
$
|
(7,045,157
|
)
|
|
|
(26.9
|
)%
|
The
breakdown of sales by product types in international markets is as follows:
International
sales by product type
|
|
For the Years ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Product category
|
|
Revenue
|
|
|
% of total revenue
|
|
|
Revenue
|
|
|
% of total revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
6,349,328
|
|
|
|
67.6
|
%
|
|
|
10,024,611
|
|
|
|
90.0
|
%
|
|
|
(3,675,283
|
)
|
|
|
(36.7
|
)
|
Intelligent pet products
|
|
|
2,289,677
|
|
|
|
24.4
|
%
|
|
|
893,997
|
|
|
|
8.0
|
%
|
|
|
1,395,680
|
|
|
|
156.1
|
%
|
Climbing hook
|
|
|
760,223
|
|
|
|
8.1
|
%
|
|
|
215,464
|
|
|
|
1.9
|
%
|
|
|
544,759
|
|
|
|
252.8
|
%
|
Total international sales
|
|
$
|
9,399,228
|
|
|
|
100.0
|
%
|
|
$
|
11,134,072
|
|
|
|
100.0
|
%
|
|
$
|
(1,734,844
|
)
|
|
|
(15.6
|
)%
|
Our
total sales in international markets decreased by approximately $1.7 million or 15.6% from approximately $11.1 million in fiscal 2019
to approximately $9.4 million in fiscal year 2020. Due to the ongoing negative impact of the China-US tariff dispute, and the outbreak
and spread of COVID-19 around the world, we received decreased sales orders from customers located in the United States, Europe, Canada,
Japan and other Asian countries and regions. Also, the COVID-19 outbreak and spread led to travel ban, quarantine and restrictions of
transportation and logistics, which also delayed our fulfillment of some of customer sales orders on a timely basis. All these factors
led to our decreased export sales in fiscal year 2020.
In
terms of our international sales by product type and mix, sales of our traditional pet products decreased by 36.7%, respectively, in
fiscal 2020 as compared to fiscal 2019. However, our sale of intelligent pet products increased approximately $1.4 million or 156.1% and our climbing hooks increased by approximately $0.5 million or 252.8%, respectively,
in fiscal 2020 as compared to fiscal 2019.
In
fiscal 2020, 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. In addition, we started expanding our sales on online shopping
platforms, such as Amazon and Chewy to access more potential customers in a safely and timely manner. We expect that the revenue to be
generated from these efforts could mitigate, at least in part, offset the decreased OEM sales in the United States and Canada and the
mitigate the impact of the COVID-19. We also expect that the newly developed intelligent pet products will become the leading revenue
source for our international sales, as we have also seen a clear trend in both our domestic and international market.
The
breakdown of sales by product types in China’s domestic market is as follows:
Domestic
sales by product type
|
|
For the Years ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
Changes
|
|
Product category
|
|
Revenue
|
|
|
% of
total
revenue
|
|
|
Revenue
|
|
|
% of
total
revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
6,859,436
|
|
|
|
70.2
|
%
|
|
|
13,872,917
|
|
|
|
92.0
|
%
|
|
|
(7,013,481
|
)
|
|
|
(50.6
|
)
|
Intelligent pet products
|
|
|
2,039,241
|
|
|
|
20.9
|
%
|
|
|
1,209,526
|
|
|
|
8.0
|
%
|
|
|
829,715
|
|
|
|
68.6
|
%
|
Climbing hook
|
|
|
873,453
|
|
|
|
8.9
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
873,453
|
|
|
|
-
|
%
|
Total sales in China domestic market
|
|
$
|
9,772,130
|
|
|
|
100.0
|
%
|
|
$
|
15,082,443
|
|
|
|
100.0
|
%
|
|
$
|
(5,310,313
|
)
|
|
|
(35.2
|
)%
|
Our
domestic sales decreased approximately $5.3 million or 35.2% from approximately $15.1 million in fiscal 2019 to approximately $9.8 million
in fiscal 2020. The decrease was mainly due to reduced customer orders of our traditional pet products. As a result of our business strategy
shifts 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. In addition, the COVID-19 outbreak and spread in China
led to significant reduced customers’ orders under this difficult circumstance and our delayed fulfillment of sales orders due
to travel ban, quarantine and restrictions of transportation and logistics. As a result, our sales of traditional pet products decreased
approximately $7.0 million, or 50.6% in fiscal 2020 as compared to fiscal 2019. However, our sales of intelligent pet products increased
approximately $0.8 million or 68.6% as compared to fiscal 2019 because we adjusted and lowered down the selling price of certain intelligent
pet products to stimulate customer purchase in response to the COVID-19 impact. Our outdoor sports accessories sales, mainly climbing
hooks, also increased by approximately $0.9 million in China’s domestic market during the year ended June 30, 2020 due to more
popularity of outdoor activities in China.
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 Amazon, Chewy, JD, Tmall and Taobao, and
from live streaming sales platforms hosted by influencers. Therefore, during the year ended June 30, 2020, 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 domestic sales of intelligent pet products in fiscal 2020.
Cost
of revenues
Cost
of revenues was approximately $16.8 million in both fiscal 2020 and 2019. As a percentage of revenues, the cost of goods sold increased
by approximately 23.5 percentage points to 87.5% in fiscal 2020 from 64.0% in fiscal 2019. This was mainly because of: 1) increased costs
associated with our intelligent pet products and increased costs associated with the fulfillment of customized orders for our traditional
pet products. 2) the production facilities in Meijia started operating in Fiscal 2019, which resulted in a significant increase of depreciation
costs as compared to fiscal 2019. 3) In connection with the relocation of our new warehouse and manufacturing facilities under Dongguan
Jiasheng in June 2020, as well as upgrading our product structures, we assessed our obsolete and slow-moving inventory balance and recorded
an one-time inventory reserve of approximately $1.2 million which increased the cost of sales as a percentage of revenue. As a result,
average unit cost associated with the sales volume for fiscal year 2020 increased by 51.6% from approximately $0.81 per unit in fiscal
2019 to approximately $1.23 per unit in fiscal 2020.
Gross
profit
Our
gross profit decreased by approximately $7.0 million or 74.6%, to approximately $2.4 million in fiscal 2020 from approximately $9.4 million
in fiscal 2019 primarily attributable to decreased sales volume of our traditional pet products and increased costs associated with our
intelligent pet products and traditional pet products. In addition, in response to the COVID-19 outbreak and spread, in order to promote
our sales of intelligent pet products and climbing hook products, we lowered down the selling price to stimulate customer purchase. The
change in selling price also reduced our profitability to certain extent. Furthermore, as discussed above, in connection with the relocation
of our new warehouse and manufacturing facilities under Dongguan Jiasheng in June 2020, as well as upgrading our product structures,
we assessed our obsolete and slow-moving inventory balance and recorded an one-time inventory reserve of approximately $1.2 million which
increased the cost of revenues. Our average unit cost associated with the sales volume for fiscal year 2020 increased by 51.6% from approximately
$0.81 per unit in fiscal 2019 to approximately $1.23 per unit in fiscal 2020.
As
a result, overall gross profit margin was 12.5%, a decrease of 23.5 percentage points, as compared to 36.0% in fiscal 2019.
Gross
profit by Product Type
The
following table presents the gross profit by product types for the year ended June 30, 2020 and 2019 as follows:
|
|
For the Year ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Product category
|
|
Gross profit
|
|
|
Gross
profit %
|
|
|
Gross profit
|
|
Gross
profit
%
|
|
|
Variance in
Gross
profit
|
|
|
Variance
in Gross
profit Pct.
Pt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional pet products
|
|
|
1,195,356
|
|
|
|
9.0
|
%
|
|
8,535,227
|
|
|
35.7
|
%
|
|
|
(7,339,871
|
)
|
|
|
(26.7)pct.
|
|
Intelligent pet products
|
|
|
723,005
|
|
|
|
16.7
|
%
|
|
824,572
|
|
|
39.2
|
%
|
|
|
(101,567
|
)
|
|
|
(22.5)pct.
|
|
Climbing hook
|
|
|
473,009
|
|
|
|
29.0
|
%
|
|
70,206
|
|
|
32.6
|
%
|
|
|
402,803
|
|
|
|
(3.6)pct.
|
|
Total
|
|
$
|
2,391,370
|
|
|
|
12.5
|
%
|
|
$9,430,005
|
|
|
36.0
|
%
|
|
$
|
(7,038,635
|
)
|
|
|
(23.5)pct.
|
|
Gross
profit for traditional pet products decreased by $7.3 million in fiscal year 2020 as compared to fiscal year 2019. 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 compared to fiscal 2019. In addition, in connection with the relocation of our new warehouse and manufacturing facilities, as well
as upgrading our product structures as discussed above, we recorded approximately $1.2 million inventory reserve for obsolete and slow-moving
traditional pet products which increased the cost of revenues and reduced our gross profit on these traditional pet products.
Gross
profit for intelligent pet products decreased by $101,567 from $824,572 in fiscal 2019 to $723,005 in fiscal 2020. Gross profit margin
decreased by 22.5 percentage point from 39.2% in fiscal 2019 to 16.7% in fiscal 2020, mainly because we lowered down the selling price
of certain intelligent pet products to stimulate customer purchase in response to the COVID-19 outbreak, as discussed above.
Gross
profit for climbing hook increased by $402,803 from $70,206 in fiscal 2019 to $473,009 in fiscal 2020, mainly driven by an 712.9% increase
in sales volume during fiscal 2020 compared to fiscal 2019, offset by the average unit selling price decreased to $1.5 per unit in fiscal
2020 from $1.6 in fiscal 2019 due to we lowed the selling price to promote the sales. Overall gross margin for climbing hook decreased
by 3.6 percentage points from 32.6% in fiscal 2019 to 29.0% in fiscal 2020.
Expenses
|
|
Years ended June 30,
|
|
|
|
|
|
|
|
|
|
2020
($)
|
|
|
2020
(%)
|
|
|
2019
($)
|
|
|
2019
(%)
|
|
|
Changes
($)
|
|
|
Changes(%)
|
|
Selling expenses
|
|
|
2,336,229
|
|
|
|
21.0
|
|
|
|
2,101,403
|
|
|
|
23.9
|
|
|
|
234,826
|
|
|
|
11.2
|
|
General and administrative expenses
|
|
|
5,746,812
|
|
|
|
51.7
|
|
|
|
6,015,901
|
|
|
|
68.4
|
|
|
|
(269,089
|
)
|
|
|
(4.5
|
)
|
Research and development expenses
|
|
|
1,528,062
|
|
|
|
13.8
|
|
|
|
673,131
|
|
|
|
7.7
|
|
|
|
854,931
|
|
|
|
127.0
|
|
Loss from disposal of fixed assets
|
|
|
1,036,304
|
|
|
|
9.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,036,304
|
|
|
|
-
|
|
Impairment of fixed assets
|
|
|
281,680
|
|
|
|
2.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
281,680
|
|
|
|
-
|
|
Impairment of investment in equity investees
|
|
|
177,750
|
|
|
|
1.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,750
|
|
|
|
-
|
|
Total operating expenses
|
|
|
11,106,837
|
|
|
|
100
|
|
|
|
8,790,435
|
|
|
|
100
|
|
|
|
2,316,402
|
|
|
|
26.4
|
|
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 increased by $0.2 million, or 11.2% from approximately $2.1 million in fiscal 2019 to
approximately $2.3 million in fiscal 2020. The increase in selling expense was primarily due to increased marketing promotion fess of
$354,499, increased Amazon online sales promotion fee of $171,072, as well as the increased social media marketing expenses of $95,093,
offset by the decreased exhibition fees and transportation expense by approximately $0.4 million. Due to the impact of COVID-19 and the
China-US trade dispute, we attended seven trade shows in fiscal 2020 as compared to nine trade shows in fiscal 2019. As a percentage
of sales, our selling expenses were 12.2% and 8.0% of our total revenues for the years ended June 30, 2020 and 2019, respectively.
General
and administrative expenses. Our general and administrative expenses primarily include employee salary, welfare and insurance
expenses, depreciation and bad debt expenses as well as consulting expense. General and administrative expenses decreased by approximately
$0.3 million or 4.5% from approximately $6.0 million in fiscal 2019 to approximately $5.7 million in fiscal 2020. The decrease was mainly
due to decreased consulting and professional fees of approximately $0.7 million, decreased share based compensation of $0.3 million,
decreased salaries and social benefits of $0.3 million, offset by the increased depreciation and amortization expenses of $0.2 million
as a result of our Zhangzhou Meijia facility has started normal production since December 2019 upon passing the final inspection conducted
by the local government and increased bad debt reserve of $0.8 million on uncollectible accounts receivable. As a percentage of sales,
our general and administrative expenses were 30.0% and 22.9% of our total revenues for the years ended June 30, 2020 and 2019, respectively.
Research
and development expenses. Our research and development expenses increased by $0.8 million or 127.0% from $0.7 million in fiscal
2019 to $1.5 million in fiscal 2020. As a percentage of sales, our research and development expenses were 8.0% and 2.6% of our total
revenues for the years ended June 30, 2020 and 2019, respectively. The increase was due to the Company’s continued efforts to develop
cutting edge smart wearable devices for pets, as well as to improve some of the functions and exterior designs of our existing products
in order to meet customer demands. We expect R&D expenses to continue to increase, as we continue to expand our research and development
activities to increase the use of environmentally-friendly materials, and develop more new high-tech products to meet customer demands.
Impairment
of fixed assets. During the year ended June 30, 2020, given the Company’s net loss position, the management assessed that
the expected future cash flow generated from certain machinery and equipment used to manufacture low-end pet products would not recover
the carrying value, as a result, we recorded an impairment of $281,680 on these fixed assets as of June 30, 2020.
Disposition
of fixed assets. In connection with the relocation from old factory to new warehouse and manufacturing facilities in Dongguan
Jiasheng as discussed above, we disposed some old fashioned or outdated molding machinery and equipment, which resulted in approximately
$1.0 million loss from disposition of fixed assets in fiscal 2020.
Impairment
of investment in equity investees. In fiscal 2020, we recorded a full impairment loss of
$177,750 for the equity investment in Nanjing Rootaya. In July 2018, we invested RMB 1.25 million ($177,750) for 10% ownership
interest in Nanjing Rootaya in order to establish cooperative business with this investee to jointly develop and distribute the Company’s
intelligent smart pet products. However, as of June 30, 2020, based on the financial condition
and operating performance of Nanjing Rootaya, it reported significant net loss and working
capital deficit, and is unable to generate positive cash flow in the foreseeable future.
As a result, a full impairment of $177,750 has been applied against this investment.
Other
expense (income). Other expense (income) primarily included interest income or expenses, foreign exchange gain or loss and other
expenses. For the year ended June 30, 2020, the Company had other income of approximately $0.3 million, as compared to other income of
approximately $1.1 million for fiscal 2019. The decrease of other income was mainly attributable to: 1) interest income decreased $0.6
million in fiscal 2020 as compared to fiscal 2019. In fiscal 2019, we had $0.6 million in interest income generated from our short-term
investments when we used the IPO proceeds to purchase interest-bearing wealth management financial products from banks. During fiscal
2020, we used these investments upon maturity as working capital when needed, which reduced the short-term investments balance from $11.1
million as of June 30, 2019 to $3.5 million as of June 30, 2020. 2) we had $0.3 million less foreign exchange gain in fiscal 2020 as
compared to fiscal 2019 due to less favorable USD, Euro, and other currency exchange rates against RMB on our foreign currency denominated
account receivables.
Income
tax expense. Income tax expense decreased by approximately $0.2 million or 56.7%, from income tax expense approximately $0.4
million in fiscal 2019, to income tax expense approximately $0.2 million in fiscal 2020. The decrease was mainly due to decreased taxable
income.
We
had accrued tax liabilities of approximately $2.8 million and $2.9 million as of June 30, 2020 and 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 believes it is likely that the Company can reach an agreement with the local tax authority to fully settle its tax liabilities
within fiscal 2021 but cannot guarantee such settlement will ultimately occur.
Net
(loss) income. Net loss was approximately $8.5 million for the years ended June 30, 2020, a decrease of $9.9 million from net
income of $1.4 million in fiscal 2019. The net loss was the result of decreased sales and gross profit, and increased operating expenses
as discussed above.
Other
comprehensive (loss) income. Foreign currency translation adjustments amounted to a loss of $1,893,665 and $2,009,549 for the
years ended June 30, 2020 and 2019, respectively. The balance sheet amounts with the exception of equity at June 30, 2020 were translated
at 7.0721 RMB to 1.00 USD as compared to 6.8657 RMB to 1.00 USD at June 30, 2019. The equity accounts were stated at their historical
rate. The average translation rates applied to the income statements accounts for the years ended June 30, 2020 and 2019 were 7.0323
RMB to 1.00 USD and 6.8226 RMB to 1.00 USD, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our
financial results reported in the U.S, dollar terms without giving effect to any underlying change in our business or results of operation.
The impact attributable to changes in revenue and expenses due to foreign currency translation are summarized as follows.
|
|
Year ended
June 30, 2020
|
|
|
Year ended
June 30, 2019
|
|
Impact on revenue
|
|
$
|
107,856
|
|
|
$
|
160,947
|
|
Impact on operating expenses
|
|
$
|
55,570
|
|
|
$
|
53,966
|
|
Impact on net income
|
|
$
|
(48,028
|
)
|
|
$
|
8,319
|
|
For
the year ended June 30, 2020, if using the RMB7.0721 to $1.00 (foreign exchange rate as of June 30, 2020), rather than the average exchange
rate for the year ended June 30, 2020, to translate our revenue, operating expense and net income, our reported revenue, operation expense
and net income would increase by $107,856, $55,570 and negative $48,028, respectively.
For
the year ended June 30, 2019, if using the RMB 6.8657 to $1.00 (foreign exchange rate as of June 30, 2019), rather than the average exchange
rate for the year ended June 30, 2019, to translate our revenue, operating expense and net income, our reported revenue, operation expense
and net income would increase by $160,947, $53,966 and $8,319, respectively. The total foreign currency translation adjustments amounted
to a deficit $2,009,549 and a deficit of $1,762,729 for the years ended June 30, 2019 and 2018, respectively.
Liquidity
and Capital Resources
The
following table sets forth summary of our cash flows for the years indicated:
|
|
For the Years Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,752,232
|
|
|
$
|
(2,212,271
|
)
|
|
$
|
(1,268,951
|
)
|
Net cash used in investing activities
|
|
|
(11,245,631
|
)
|
|
|
(2,457,921
|
)
|
|
|
(1,622,638
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,051,571
|
|
|
|
3,041,584
|
|
|
|
(1,648,119
|
)
|
Effect of exchange rate change on cash
|
|
|
110,709
|
|
|
|
345,329
|
|
|
|
4,625
|
|
Net increase (decrease) in cash
|
|
|
3,668,881
|
|
|
|
(1,283,279
|
)
|
|
|
(4,535,083
|
)
|
Cash and restricted cash, beginning of year
|
|
|
1,266,873
|
|
|
|
2,550,152
|
|
|
|
7,085,235
|
|
Cash and restricted cash, end of year
|
|
$
|
4,935,754
|
|
|
$
|
1,266,873
|
|
|
$
|
2,550,152
|
|
Operating
Activities
Net
cash provided by operating activities was approximately $3.7 million in fiscal 2021, including net income of $1.3 million, offset adjusted
for non-cash items for approximately $3.3 million (including depreciation and amortization of $3.1 million, amortization of ROU assets
of $0.4 million, and stock-based compensation of $0.2 million and deferred tax expense negative $0.5 million) and adjustments for changes
in working capital around negative $0.8 million. The adjustments for changes in working capital mainly included increase of $1.2
million in inventories due to increased sales orders, decreased of 0.6 million in accrued expenses and other liabilities and increased
of $0.5 million in accounts receivable, offset by increase of $1.3 million in taxes payable.
Net
cash used in operating activities was approximately $2.2 million in fiscal 2020, including net loss of $8.5 million, offset adjusted
for non-cash items for approximately $6.7 million (including depreciation and amortization of $2.3 million, loss from disposal of fixed
assets of $1.0 million, change in inventory reserve of $1.2 million, changes in bad debt reserve of $0.8 million, amortization of ROU
assets of $0.4 million, impairment of long-term investment in equity investee of $0.2 million, and stock-based compensation of $0.4 million)
and adjustments for changes in working capital around negative $0.4 million. The adjustments for changes in working capital mainly included
decrease in accounts payable of $2.8 million due to decreased purchase and stockpile of raw material inventory to tailor decreased sales
orders, and decrease in accounts receivable of $1.6 million because of the decreased sales in fiscal 2020 affected by the COVID-19 impact
and the U.S –China trade and tariff dispute. In addition, our inventories decreased $1.2 million.
Net
cash used in operating activities was approximately $1.3 million in fiscal 2019, including net income of $1.4 million, adjusted for non-cash
items for approximately $1.9 million offset adjustments for changes in working capital around $4.6 million. The adjustments for changes
in working capital mainly included an increase in prepayment and other assets of $4.4 million because we made a repayment to a landlord
to lease a piece of land on which we plan to build a new warehouse, an increase in inventories of $1.4 million because we increased the
stockpile of finished goods inventories in anticipation to fulfill increased customer orders in the upcoming months, and decreased in
accrued expense and other liabilities of $0.4 million in fiscal 2019.
Investing
Activities
Net
cash used in investing activities was approximately $11.2 million in fiscal 2021, as compared to net cash used in investing activities
of $2.5 million in fiscal 2020, primarily due to purchased approximately $0.8 million machinery and equipment to improve our production
capacity, spent approximately $13.7 million on our construction-in-progress projects for improvement of our manufacturing facilities
and warehouse. We also paid additional capital contributions of approximately $0.2 million to one of our long-term equity investees.
offset by we decreased purchase in short-term investment of $3.3 million
Net
cash used in investing activities was approximately $2.5 million in fiscal 2020, as compared to net cash used in investing activities
of $1.6 million in fiscal 2019, primarily due to purchased approximately $0.8 million machinery and equipment to improve our production
capacity, spent approximately $8.6 million on our construction-in-progress projects for improvement of our manufacturing facilities and
warehouse. We also paid additional capital contributions of approximately $0.3 million to two of our long-term equity investees. On the
other hand, we decreased purchase in short-term investment of $7.2 million when we collected the investment upon maturity of these interest-bearing
wealth management financial products and used such cash to invest on our construction-in-progress projects.
Net
cash used in investing activities was approximately $1.6 million in fiscal 2019, as compared to net cash used in investing activities
of $44.2 million in fiscal 2018, primarily due to decrease in short-term investment $16.3 million when we collected the investment upon
maturity of these interest-bearing wealth management financial products. On the other hand, we purchased approximately $3.1 million machinery
and equipment to improve our production capacity, spent approximately $13.5 million on construction and improvement of our manufacturing
facilities and warehouse, and we also made equity investments of approximately $1.1 million in fiscal 2019 in three enterprises in order
to establish cooperative business with them to jointly develop and sell our intelligent smart pet products.
Financing
Activities
Net
cash provided by financing activities was approximately $11.1 million in fiscal 2021. During fiscal 2021, we had net proceeds from initial
public offering of approximately $6.6 million, we net proceeds from bank loan of approximately $2.4 million and net proceeds from related
party of approximately $1.9 million We also received capital contribution of approximately $0.1 million from non-controlling shareholders
in Dogness Culture.
Net
cash provided by financing activities was approximately $3.0 million in fiscal 2020. During fiscal 2020, we had proceeds from short-term
bank loan were approximately $5.2 million and our repayments of short-term bank loans upon maturity were approximately $2.9 million.
We also received capital contribution of approximately $0.6 million from non-controlling shareholders in Dogness Culture.
Net
cash used in financing activities was approximately $1.6 million in fiscal 2019. During fiscal 2019, we had proceeds from short-term
bank loan of approximately $2.9 million and our repayments of short-term bank loans upon maturity were approximately $4.7 million.
Commitments
and Contractual Obligations
The
following table sets forth our contractual obligations and commercial commitments as of June 30, 2021:
Contractual Obligations
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than 5
years
|
|
Operating lease commitment (1)
|
|
$
|
1,294,863
|
|
|
$
|
171,803
|
|
|
$
|
404,767
|
|
|
$
|
479,848
|
|
|
$
|
238,445
|
|
Repayment of bank loan (2)
|
|
|
8,058,470
|
|
|
|
1,500,862
|
|
|
|
4,758,373
|
|
|
|
832,150
|
|
|
|
967,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital injection obligation (3)
|
|
|
9,867,130
|
|
|
|
-
|
|
|
|
—
|
|
|
|
2,679,770
|
|
|
|
7,187,360
|
|
Capital expenditures on Dongguan Jiasheng (4)
|
|
|
10,803,343
|
|
|
|
7,217,370
|
|
|
|
2,177,108
|
|
|
|
1,408,865
|
|
|
|
-
|
|
Capital expenditures on Dogness Culture (5)
|
|
|
106,718
|
|
|
|
106,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
30,130,524
|
|
|
$
|
8,996,753
|
|
|
$
|
7,340,248
|
|
|
$
|
5,400,633
|
|
|
$
|
8,392,890
|
|
(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.
|
|
|
(2)
|
As
of June 30, 2021, the Company had a loan balance of RMB47,475,942 ($7,354,024) borrowed from
Dongguan Rural Commercial Bank. The loans have terms of eight years with a maturity date
on July 16, 2028 with effective interest rate of 6.55% per annum.
As
of June 30, 2021, the Company had a loan balance of $704,446 borrowed from Cathay Bank. The loan has a term of two years from February
6, 2020 to February 6, 2022 with the U.S. prime rate.
|
(3)
|
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
$12.4 million). One of the Company’s subsidiaries, Dongguan Jiasheng, owns 58% of Intelligence,
which means that Dongguan Jiasheng will need to contribute RMB 46,400,000 (approximately
$7.2 million) of capital to this new entity. As of the date of this report, 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.
The
Company is also obligated to make registered capital contributions to its subsidiary Zhangzhou Meijia Metal Product Ltd. (“Meijia”)
to meet the requirement of State Administration for Industry and Commerce (“SAIC”) of China. As of June 30, 2021, future
registered capital contribution commitments for Meijia was RMB 17.3 million ($2.7 million), respectively. As of the date of this
report, pursuant to the articles of incorporation of Meijia, the Company is obligated to contribute the remaining RMB 17.3 million
($2.7 million) capital investment into Meijia before December 30, 2025 whenever the Company has available funds.
|
|
|
(4)
|
Dongguan Jiasheng is also working on a capital project
which expanded from the original plan of building a warehouse, to build new manufacturing and operating facilities, which include warehouse,
workshops, office building, security gate, employee apartment building, electrical transformer station and exhibition hall, etc.
The total budget is approximately RMB 230.8 million ($35.8 million). As of June 30, 2021, the Company had substantially
completed this project and transferred most of the related CIP to fixed assets. As of June 30, 2021, the Company has made total payments
of approximately RMB 161.3 million ($25.0 million) in connection to this project, which resulted in future minimum capital expenditure
payments of RMB 69.5 million ($10.8 million) and the Company recorded approximately $10.7 million unpaid costs in connection to this
CIP project in accrued liabilities and other payable.
|
(5)
|
Dogness
Culture is also working on a capital project to decorate a pet themed retail store. Total budget is RMB 2.2 million ($0.3
million). As of June 30, 2021, the Company has spent RMB 1.5 million ($0.2 million).
|
In connection with the Company’s construction-in-progress
(“CIP”) projects on Dongguan Jiasheng and Dogness Culture, from July 2021 to October 2021, the Company made
payments of RMB 32.1 million ($5.0 million) on these projects.
As
a result of the subsequent payments for the registered capital injection to meet the SAIC requirement, capital expenditure on the CIP
project and subsequent changes in the loan balance as discussed above, 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 lease commitment
|
|
$
|
1,294,863
|
|
|
$
|
171,803
|
|
|
$
|
404,767
|
|
|
$
|
479,848
|
|
|
$
|
238,445
|
|
Repayment of bank loan
|
|
|
8,193,983
|
|
|
|
1,636,376
|
|
|
|
4,758,373
|
|
|
|
832,150
|
|
|
|
967,084
|
|
Capital injection obligation
|
|
|
9,867,130
|
|
|
|
-
|
|
|
|
—
|
|
|
|
2,679,770
|
|
|
|
7,187,360
|
|
Capital expenditures on Dongguan Jiasheng
|
|
|
5,872,427
|
|
|
|
2,286,454
|
|
|
|
2,177,108
|
|
|
|
1,408,865
|
|
|
|
-
|
|
Capital expenditures on Dogness Culture
|
|
|
58,141
|
|
|
|
58,141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
25,286,544
|
|
|
$
|
4,152,774
|
|
|
$
|
7,340,248
|
|
|
$
|
5,400,633
|
|
|
$
|
8,392,889
|
|
As
reflected in the Company’s consolidated financial statements, the Company had cash balance of approximately $4.9 million as of
June 30, 2021, and the cash provided by operating activities was approximately $3.8 million for the year ended June 30, 2021.
As of June 30, 2021, the Company had future minimum capital expenditure commitment on its construction-in-progress projects of approximately
$7.3 million within the next twelve months and additional $3.6 million for the next five years. In addition, the Company had unpaid tax
liabilities of $4.4 million as of June 30, 2021, which may be required to be settled with local tax authority in the near future. Furthermore,
the ongoing COVID-19 pandemic may continue to negatively impact the Company’s business operations. A resurgence could negatively
affect the Company’s ability to fulfill customer sales orders and collect customer payments timely, or disrupt the Company’s
supply chain. As a result, there is a possibility that the Company’s revenue and cash flows may underperform in the next 12 months.
The
Company currently plans to fund its operations and support its ongoing construction-in-progress projects mainly through cash flow from
its operations, remaining cash from its January 2021 equity financing, July 2021 equity financing, renewal of bank borrowings, borrowing
from related parties and additional equity financing from outside investors, if necessary, to ensure sufficient working capital. However,
no assurance can be given that additional financing, if required, would be available on favorable terms or at all. If the available fund
is not sufficient to meet the required minimum capital expenditures on the CIP projects, the Company may adjust the CIP capital expenditure
budget and slow down the CIP construction to appropriate level.
Based
on the current operating plan, management believes that the above-mentioned measures collectively will provide sufficient liquidity for
the Company to meet its future liquidity and capital requirement for at least 12 months from the date of this filing.
Loan
Facilities
As
of June 30, 2021, and 2020, the details of all our short-term bank loans are as follows:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Bank of Communications of China (“BCC”):
|
|
|
|
|
|
|
|
|
Effective interest rate at 5.655%, due on August 20, 2019 (1)
|
|
$
|
-
|
|
|
$
|
2,545,200
|
|
|
|
|
|
|
|
|
|
|
Industrial and Commercial Bank of China (“ICBC”):
|
|
|
|
|
|
|
|
|
Effective interest rate at 5.655%, due on January 10, 2019 (2)
|
|
|
-
|
|
|
|
1,696,800
|
|
|
|
|
|
|
|
|
|
|
Cathay Bank
|
|
|
|
|
|
|
|
|
Effective interest rate at 4.25%, due on February 6, 2022 (3)
|
|
|
704,446
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
704,446
|
|
|
$
|
5,142,000
|
|
(1)
|
In
August 2019, the Company entered into two loan agreements with BCC Dongguan Branch to borrow total of RMB 18 million ($2.5 million)
as working capital for one year. The loans bear a variable interest rate based on the prime interest rate set by the People’s
Bank of China at the time of borrowing, plus 1.405 basis points. The Company’s subsidiary Meijia pledged its land use right
of approximately $2.1 million and buildings of approximately $8.2 million as collaterals to secure these loans (see Note 6 and Note
7). In addition, Mr. Silong Chen, the CEO of the Company, provided personal guarantee for the loans. The Company fully repaid the
loans in July 2020 upon maturity.
|
|
|
(2)
|
On
August 9, 2019, Dongguan Jiasheng entered into a loan agreement with ICBC to borrow RMB 12 million ($1.7 million) as working capital
for one year. The loan bears a variable interest rate based on the prime interest rate set by the People’s Bank of China at
the time of borrowing, plus 1.345 basis points. Mr. Silong Chen, pledged his personal assets as the collateral to secure this loan.
Related parties, Mr. Junqiang Chen and Ms. Caiyuan He, the relatives of Mr. Silong Chen, and Dongguan Dogness also provided the joint
guarantee to this loan. The Company fully repaid the loan in July 2020 upon maturity.
|
(3)
|
On
February 6, 2020, one of the Company’s U.S. subsidiary Dogness Group, obtained a line of credit from Cathay Bank, pursuant
to which, Dogness Group may borrow a maximum $1.2 million out of this line of credit for two years at the U.S. prime rate. The loan
is guaranteed by the fixed assets of Dogness Group. 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 June 30, 2021, the outstanding balance
was $704,446, which was recorded as current liabilities because Dogness Group plans to repay this loan within one year.
|
Long-term
loan consisted of the following:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Southwestern National Bank
|
|
|
|
|
|
|
|
|
Paycheck Protection Program Loan (PPP) Loan
|
|
$
|
-
|
|
|
$
|
73,300
|
|
Dongguan Rural Commercial Bank
|
|
|
|
|
|
|
|
|
Effective interest rate at 6.15% and 6.55%
|
|
|
7,354,024
|
|
|
|
-
|
|
Total
|
|
|
7,354,024
|
|
|
|
73,300
|
|
Less: current portion of long-term loans
|
|
|
796,416
|
|
|
|
|
|
Long-term loans
|
|
$
|
6,557,608
|
|
|
$
|
73,300
|
|
On
May 11, 2020, Dogness Group, applied for and received funding for a loan totaling $73,300 under the U.S. Small Business Administration
(“SBA”) Paycheck Protection Program (“PPP”), which is part of the Coronavirus Aid, Relief, and Economic Security
Act (“CARES Act”), enacted on March 27, 2020. Under the terms of the SBA PPP loan, up to 100% of the principal and accrued
interest may be forgiven if certain criteria are met and the loan proceeds are used for qualifying expenses such as payroll costs, benefits,
rent, and utilities as described in the CARES Act. The interest rate on this loan is 1% per annum and any portion of the principal and
accrued interest that is not forgiven is required to be repaid by May 11, 2022. In January 2021, Dogness Group received PPP loan forgiveness
notice to waive the principal and accrued interest.
On
July 17, 2020, the Company entered into multiple loan agreements with Dongguan Rural Commercial Bank to borrow an aggregate of RMB50
million ($7.7 million) of loans to support the working capital needs and the construction of the Company’s current CIP projects.
The loans have terms of eight years with a maturity date on July 16, 2028. The loans bear a variable interest rate based on the prime
interest rate set by the People’s Bank of China at the time of borrowing, plus 1.405 basis points. The Company pledged the land
use right of approximately $2.1 million and buildings of approximately $5.7 million from Meijia as collateral to secure total loans of
RMB 30 million ($4.6 million). Mr. Silong Chen, the CEO of the Company, pledged personal property as collateral to secure the remaining
loans of RMB 20 million ($3.1million). Dongguan Dogness, Meijia and Mr. Silong Chen also provided guarantee for the loans. During the
year ended June 30, 2021, the Company repaid RMB 2.5 million ($0.4 million) with an outstanding balance of RMB 47.5 million ($7.4 million)
as of June 30, 2021.
Impact
of COVID-19
The
Company’s business operations are affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19). The COVID-19
outbreak is causing lockdowns, travel restrictions, and closures of businesses. The Company’s business has been negatively impacted
by the COVID-19 coronavirus outbreak to certain extent. Although the Company resumed its normal business operations in late March 2020,
its export sales to international markets were reduced. The Company’s results of operations and financial condition will depend
on future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are
still uncertain and cannot be reasonably estimated at this point of time.
Impact
of Inflation
The
Company’s business operations are affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19). The COVID-19
outbreak is causing lockdowns, travel restrictions, and closures of businesses. The Company’s business has been negatively impacted
by the COVID-19 coronavirus outbreak to certain extent. Although the Company resumed its normal business operations in late March 2020,
the COVID-19 pandemic continues to create volatility in the Company’s business performance.
During
fiscal 2021, the global supply chain was disrupted due to container shortages. Transportation was delayed and U.S. port congestion interrupted
the flow of the Company’s inventory for North America market, which caused delay of shipments and result in lower-than-expected
revenue growth. In addition, the ongoing COVID-19 pandemic has led to a general slow-down in the global economy and reduced the amount
of discretionary income available for consumers to purchase its products. The Company’s results of operations and financial condition
will depend on future developments, including the duration and spread of the outbreak globally, which are still uncertain and cannot
be reasonably estimated at this point of time.
Impact
of Foreign Currency Fluctuations
Although
all our raw material and production cost and expense were denominated in RMB, almost all our revenues were generated under agreements
denominated in U.S. dollars. Export sales represent 44% and 49% of our revenue for the years ended June 30, 2021 and 2020, respectively.
Moreover, for the next few years we expect that the substantial majority of our revenues from international sales will continue to be
denominated in U.S. dollars. Having the substantial portion of our revenues contracts denominated in U.S. dollars while having most of
our raw material and production costs and expenses denominated in RMB exposes us to risk, associated with exchange rate fluctuations
vis-à-vis the U.S. dollar.
A
devaluation of the RMB in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our expenses or payables that
are payable in RMB. Conversely, any appreciation of the RMB in relation to the U.S. dollar has the effect of increasing the U.S. dollar
value of our RMB raw material and productions and expenses, which would have a negative impact on our profit margins. In fiscal 2021,
the value of the RMB appreciated in relation to the U.S. dollar by approximately 8.70%. In fiscal 2020, the value of the RMB depreciated
in relation to the U.S. dollar by approximately 3.01%. Because exchange rates between the U.S. dollar and the RMB fluctuate continuously,
such fluctuations have an impact on our results and period-to-period comparisons of our results.
|
|
RMB
against the USD (%)
|
|
2020
|
|
|
(8.70
|
)%
|
2019
|
|
|
3.01
|
%
|
2018
|
|
|
2.86
|
%
|
We
will continue to monitor exposure to currency fluctuations. We have not engaged in any currency hedging activities in order to reduce
our exposure to currency fluctuations.
Off-balance
Sheet Commitments and Arrangements
There
were no off-balance sheet arrangements for the years ended June 30, 2021 and 2020 that have or that in the opinion of management are
likely to have, a current or future material effect on our financial condition or results of operations.
Critical
Accounting Policies
We
prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S.
GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities,
revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and
assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information,
our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of
estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result
of changes in our estimates.
We
believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us
to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating
our consolidated financial condition and results of operations.
Use
of Estimates
In
preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date
of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the
valuation of accounts receivable, inventories, advances to suppliers, useful lives of property, plant and equipment, intangible assets,
the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition and realization of deferred
tax assets. Actual results could differ from those estimates.
Revenue
recognition
On
July 1, 2018, the Company adopted ASC 606 Revenue from Contracts with Customers, using the modified retrospective approach. ASC 606 establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s
contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer
of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange
for those goods or services recognized as performance obligations are satisfied.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction
price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation.
Revenue
is recognized when obligations under the terms of a contract with the Company’s customers are satisfied. Satisfaction of contract
terms occur with the transfer of title of the Company’s products to the customers. Net sale is measured as the amount of consideration
the Company expects to receive in exchange for transferring the goods to the wholesaler and retailers.
The
amount of consideration the Company expects to receive consists of the sales price adjusted for any incentives if applicable. Such incentives
do not represent a standalone value and are accounted for as a reduction of revenue in accordance with ASC 606. For the years ended June
30, 2021, 2020 and 2019, the Company did not provide any sales incentives to its customers.
Incidental
promotional items that are immaterial in the context of the contract are recognized as expense. Fees charged to customers for shipping
and handling are included in net sales and the related costs incurred by the Company are included in selling expenses. In applying
judgment, the Company considered customer expectations of performance, materiality and the core principles of ASC Topic 606. The Company’s
performance obligations are generally transferred to the customer at a point in time. The Company’s contracts with customers generally
do not include any variable consideration.
The
Company’s revenue is primarily generated from the sales of pet products, including leashes, accessories, collars, harnesses and
intelligent smart pet products, to wholesalers and retailers. Revenue is recognized when the merchandise is delivered, title is transferred
and the Company’s performance obligations to fulfill the customer contracts have been satisfied. Revenue is reported net of all
value added taxes (“VAT”). The Company does not routinely permit customers to return products and historically, customer
returns have been immaterial.
Contract
Assets and Liabilities
Payment
terms are established on the Company’s pre-established credit requirements based upon an evaluation of customers’ credit
quality. Contact assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment
has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order
is placed and when shipment or delivery occurs.
As
of June 30, 2021 and 2020, other than accounts receivable and advances from customers, the Company had no other material contract assets,
contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’ purchase
orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and
administrative expense when incurred.
Disaggregation
of Revenues
The
Company disaggregates its revenue from contracts by product types and geographic areas, as the Company believes it best depicts how the
nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation
of revenues for the years ended June 30, 2021, 2020 and 2019 are disclosed in notes of this consolidation financial statements.
Accounts
Receivable
Accounts
receivable are presented net of allowance for doubtful accounts. The Company usually determines the adequacy of reserves for doubtful
accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables
when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s
best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision
is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and
comprehensive income (loss). Delinquent account balances are written off against the allowance for doubtful accounts after management
has determined that the likelihood of collection is not probable.
Inventories,
net
Inventories
are stated at net realizable value using the weighted average method. Costs include the cost of raw materials, freight, direct labor
and related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a
provision for diminution in the value of inventories.
Net
realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. The Company
evaluates inventories on a quarterly basis for its net realizable value adjustments, and reduces the carrying value of those inventories
that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging
and future demand of each type of inventories.
Leases
The
Company adopted ASU No. 2016-02—Leases (Topic 842) since 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.
Income
Tax
The
Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized
when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial
statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting
the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income
tax are classified as income tax expense in the period incurred. All of the Company’s tax returns of its PRC Subsidiaries
and U.S subsidiary remain open for statutory examination by relevant tax authorities.
Recently
Issued Accounting Pronouncements
The
Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews
new accounting standards that are issued.
In December 2019, the FASB issued ASU No. 2019-12,
“Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify
the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent
application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities,
the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods
within fiscal years beginning after December 15, 2022. The adoption of ASU 2019-12 does not have a material impact on its
consolidated financial statements.
In
January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the
accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and
the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company
beginning January 1, 2021. The Company is currently evaluating the effect of adopting this ASU on the Company’s financial statements.
In
October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other
Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope
of ASC 310-20-35-33. As revised, ASC 310-20-35-33 requires that, for each reporting period, to the extent the amortized cost basis of
an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (i.e., the premium)
should be amortized to the next call date, unless the guidance in ASC 310-20-35-26 is applied to consider estimated prepayments. For
purposes of this guidance, the next call date is the first date when a call option at a specified price becomes exercisable. Once that
date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is
no remaining premium or if there are no further call dates, the entity should reset the effective yield using the payment terms of the
debt security. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years
beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently
evaluating the effect of adopting this ASU on the Company’s financial statements.
Except
for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated
financial statements.
Item
6. Directors, Senior Management and Employees
A.
Directors and Senior Management
Executive
Officers and Directors
The
following table sets forth our executive officers and directors, their ages and the positions held by them:
Name
|
|
Age
|
|
Position
Held
|
Silong
Chen
|
|
39
|
|
Chief
Executive Officer and Director
|
Yunhao
Chen
|
|
44
|
|
Chief
Financial Officer and Director
|
Qingshen
Liu
|
|
47
|
|
Independent
Director
|
Zhiqiang
Shao
|
|
46
|
|
Independent
Director (Audit Committee Chair)
|
Changqing
Shi
|
|
38
|
|
Independent
Director
|
The
business address of all such senior management and directors is Tongsha Industrial Estate, East District, Dongguan, Guangdong, People’s
Republic of China 523217.
Silong
Chen, Chief Executive Officer
Director
since 2017
Mr.
Chen serves as our Chief Executive Officer and Chairman of our Board of Directors. Mr. Chen founded our Chinese subsidiary in 2003 and
has more than 15 years of experience in the pet products industry. Mr. Chen created the brand Dogness in 2008. Since 2017, Mr. Chen has
served as the executive director of the Guangdong Province Economic Research Institute. We have chosen Mr. Chen to serve as a director
because of his expertise and experience in the pet supply industry.
Yunhao
Chen, Chief Financial Officer
Director
since 2019
Dr.
Chen serves as our Chief Financial Officer. Prior to joining our company, Dr. Chen served as the CFO for a US company since 2014, where
she directed and managed the company’s financial reporting and accounting functions. With a Ph.D. in Accounting and an MBA from
the University of Minnesota, and a BE degree from University of International Business and Economics of China, Dr. Chen has also been
active in the academic area. From 2007 to 2014, Dr. Chen has been a faculty member at Florida International University and University
of Miami. From 2011 till present, she has been teaching at Southern Medical University as a Visiting Professor (Healthcare MBA). We have
chosen Dr. Chen as our Chief Financial Officer because of her knowledge and experience with U.S. GAAP and SEC reporting and compliance
requirements. She holds a CPA license and has conducted analyses and research of a large amount of formal filings of SEC registrants,
with focuses on financial disclosure, capital market anomaly, business valuation, internal control and auditing, corporate tax avoidance,
and earnings-returns relation. Dr. Chen also published research results in both accounting and finance journals such as Journal of American
Tax Association, Journal of Information System, and Financial Management. We have chosen Dr. Chen to serve as a director because of her
experience with financial matters and her knowledge of our company’s operations.
Qingshen
Liu
Director
since 2018
Dr.
Liu has been an independent director since 2018. He is an associate professor in the Faculty of Animal Science at South China Agriculture
University. He has many years of experience in teaching, research, and social services and focuses on commercial animal breeding, nutrition,
and biotechnology. Dr. Liu’s vast industry involvement includes senior roles at the Chinese Association of Animal Science and Veterinary
Medicine, the Guangdong Zoological Society, the Guangdong Association of Animal Husbandry and Veterinary Medicine, the Guangdong Pet
Industry Technology Innovation Alliance, the Guangdong Vocational Education Strategic Alliance for the pet industry, and the China Native
Dog Protection Association. He is also a consultant for the China Pet Health Nutrition Association, the Dongguan Pet Industry Association,
and the Guangdong Province Science and Technology Project. He is an editor of Kennel Technology and the Guangdong Journal of Animal and
Veterinary Science. Dr. Qingshen Liu holds a Ph.D in animal nutrition and feed science from South China Agricultural University. We have
appointed Dr. Liu because of his expertise in animal science and knowledge of research, product development and education.
Zhiqiang
Shao
Director
since 2017
Mr.
Shao has been an independent director since 2017. Since May 2015, Mr. Shao has been the Vice Risk Control Officer in Paisheng Technology
Group Co., Ltd, where he is responsible for implementing the company’s corporate risk control strategy. From March 2010 through
April 2015, Mr. Shao was the Financial and Risk Control Director at Dongguan Xiangbang Credit Guarantee Ltd. From November 2006 through
February 2010, Mr. Shao was the Financial and Risk Control Manager at China Zhongkezhi Guarantee Group Co., Ltd, Dongguan Branch. From
July 1996 to October 2006, Mr. Shao worked as the Financial Manager for Huiyang Wanli Plastic Products Co., Ltd/Dongguan Wanjia Toys
Co., Ltd. In July 1996, he graduated from a three-year college in Accounting, Shanghai Lixin Institute of Accounting and Finance (formerly
Shanghai Lixin College of Accounting), and earned his Bachelor in Financial Management from South China Normal University in May 2017.
We believe Mr. Shao’s experience with accounting and risk management make him a qualified member of our Board of Directors.
Changqing
Shi
Director
since 2020
Mr.
Shi has been an independent director since April 2020. Since September 2019, Mr. Shi has been the Deputy General Manager of Dongguan
Newspaper Culture Communication Co., Ltd. From May 2018 through August 2019, he was Executive Dean of Duowei Training Institute. From
April 2017 through April 2018, Mr. Shi was Vice Principal of Guangdong School of Science and Technology. From September 2016 through
March 2017, he was Vice Principal of Dongguan Yuehua School. From May 2014 through August 2016, Mr. Shi was the Chief Counselor of the
Dongguan Youth Leadership Program. Mr. Shi earned his B.A. from Yantai Normal University and is studying for a master’s degree
in cultural industry management from Peking University. We believe Mr. Shi is a qualified member of our Board of Directors due to his
media experience and corporate governance experience, which we are hopeful will benefit Dogness’ efforts to promote its products
and brand and to further Dogness’ efforts to grow as a public company.
Election
of Officers
Our
executive officers are elected by, and serve at the discretion of, our board of directors. There are no familial relationships among
any members of the executive officers.
B.
Employment Agreements
In
accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective
in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees of the Chinese
entity in order to establish an employment relationship.
In
China, all employers must compensate their employees equal to at least the local minimum wage standards. Our employees are all entitled
to receive payment of at least RMB 1,720 per month for full-time workers and RMB 16.4 per hour for part-time employees, with overtime
calculated at 1.5 times normal rate for weekday overtime, 2 times normal rate for weekends and 3 times normal rate for holidays. Our
employment agreements typically begin with a one month trial period.
All
employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide
employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social
insurance plan and the housing fund plan for employees. Accordingly, all of our employees, including management, have executed their
employment agreements. Our employment agreements with our executives provide the amount of each executive officer’s salary and
establish their eligibility to receive a bonus. We believe our labor relationships are good.
Our
employment agreements with our executive officers generally provide for a salary to be paid monthly. The agreements also provide that
executive officers are to work full time for our company and are entitled to all legal holidays as well as other paid leave in accordance
with PRC laws and regulations and our internal work policies. The employment agreements also provide that we will pay for all mandatory
social insurance programs for our executive officers in accordance with PRC regulations. In addition, our employment agreements with
our executive officers prevent them from rendering services for our competitors for so long as they are employed.
Other
than the salary, bonuses, equity grants and necessary social benefits required by the government, which are defined in the employment
agreements, we currently do not provide other benefits to the officers. Our executive officers are not entitled to severance payments
upon the termination of their employment agreement or following a change in control. We are not aware of any arrangement that may at
a subsequent date, result in a change of control of our company.
We
have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance
or change of control benefits to our named executive officers.
Under
Chinese law, we may terminate an employment agreement without penalty by providing the employee thirty days’ prior written notice
or one month’s wages in lieu of notice if the employee is incompetent or remains incompetent after training or adjustment of the
employee’s position in other limited cases. If we wish to terminate an employment agreement in the absence of cause, then we are
obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate
an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions
have resulted in a material adverse effect to us.
Silong
Chen
On
May 28, 2017, we entered a written employment agreement with Mr. Chen. Under the terms of Mr. Chen’s employment agreement, he is
entitled to base compensation of $10,000 per month. Mr. Chen received options to purchase 360,000 Class A Common Shares for a
purchase price of $1.50 per share, which options will vest monthly at a rate of 10,000 per month for the next three years following the
completion of our initial public offering, with the first tranche vesting one month after completion of the offering. On October 31,
2019, Mr. Chen voluntarily waived the remaining unvested 140,000; as a result, Mr. Chen holds a total of 220,000 vested options. Mr.
Chen’s employment agreement has no expiration date but may be terminated immediately for cause or at any time by either party upon
presentation of 30 days’ prior notice in the event he is unable to perform assigned tasks or the parties are unable to agree to
changes to his employment agreement.
Yunhao
Chen
Effective
May 28, 2017, we entered a written employment agreement with Dr. Chen to serve as our Chief Financial Officer. Under the terms of Dr.
Chen’s employment agreement, she was entitled to base compensation of $10,000 per month through December 31, 2017. Beginning in
January 2018, Dr. Chen’s salary increased to $150,000 per year. Effective as of the closing of our initial public offering, Dr.
Chen received options to purchase 120,000 Class A Common Shares for a purchase price of $1.50 per share, which options vested monthly
at a rate of 5,000 per month for the next two years following the completion of the offering, with the first tranche vesting one month
after completion of the offering. Dr. Chen’s employment agreement was for a term of two years initially and renewed in 2019 with
no fixed term and may be terminated immediately for cause or at any time by either party upon presentation of 30 days’ prior notice
in the event she is unable to perform assigned tasks or the parties are unable to agree to changes to her employment agreement.
Director
Compensation
The following section presents information regarding the compensation paid during fiscal 2021, 2020 and 2019 to members of our Board of
Directors who are not also our employees (referred to herein as “Non-Employee Directors”). As of each of June 30, 2021, 2020
and 2019, we had five (5) directors. Other than Qingshen Liu, who received approximately $0, 8,000, and 8,000 for services in each of
2021 and 2020 and 2019 and Changqing Shi, who received approximately 9000 and $5,000 for services in fiscal 2021 and 2020, none of the
Non-Employee Directors received any compensation in fiscal year 2021, 2020, and 2019, and Mr. Silong Chen and Dr. Yunhao Chen did not
receive any compensation other than as employees of our company.
Non-Employee
Directors
We
pay our independent directors an annual cash retainer to be determined from time to time by our board of directors, currently around
$8,000 per year, depending on the committee responsibilities of the director. We may also provide stock option equity-based incentives
to our directors for their service. We also plan to reimburse our directors for any out-of-pocket expenses incurred by them in connection
with their services provided in such capacity. Pursuant to our service agreements with our directors, neither we nor our subsidiaries
will provide benefits to directors upon termination of employment.
C.
Board Practice
Board
of Directors and Board Committees
Our
Board of Directors currently consists of five (5) directors. A majority of our directors (namely, Messers Liu, Shi and Shao) are independent,
as such term is defined by the Nasdaq Global Market.
A
director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest
of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter.
A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors
or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice, it
shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion
in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such
motion.
Mr.
Silong Chen currently holds both the positions of Chief Executive Officer and Chairman of the Board. These two positions have not been
consolidated into one position; Mr. Chen simply holds both positions at this time. We do not have a lead independent director, and we
do not anticipate having a lead independent director because we will encourage our independent directors to freely voice their opinions
on a relatively small company board. We believe this leadership structure is appropriate because we are a relatively small company in
the process of listing on a public exchange. Our Board of Directors plays a key role in our risk oversight. The Board of Directors makes
all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate to have the involvement
and input of all of our directors in risk oversight matters.
Board
Committees
We
have established three standing committees under the board: the audit committee, the compensation committee and the nominating committee.
Each committee has three members, and each member is independent, as such term is defined by the Nasdaq Global Market. The audit committee
is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements
of our company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee
of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all
forms of compensation, and also administers and has authority to make grants under our incentive compensation plans and equity-based
plans (but our board will retain the authority to interpret those plans). The nominating committee of the board of directors is responsible
for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating
directors.
The
members of the audit committee, the compensation committee and the nominating committee are set forth below. All such members qualify
as independent under the rules of the Nasdaq Global Market.
Director
Name
|
|
Audit
Committee
|
|
|
Compensation
Committee
|
|
|
Nominating
Committee
|
|
Zhiqiang
Shao
|
|
|
|
(1)(2)(3)
|
|
|
|
(1)
|
|
|
|
(1)
|
Changqing
Shi
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
(1)(2)
|
Qingshen
Liu
|
|
|
|
(1)
|
|
|
|
(1)(2)
|
|
|
|
(1)
|
(1)
|
Committee
member
|
(2)
|
Committee
chair
|
(3)
|
Audit
committee financial expert
|
Duties
of Directors
Under
British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors
also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances.
See “Description of Share Capital — Differences in Corporate Law” for additional information on our directors’
fiduciary duties under British Virgin Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with
our Memorandum and Articles of Association. We have the right to seek damages if a duty owed by our directors is breached.
The
functions and powers of our board of directors include, among others:
●
appointing officers and determining the term of office of the officers;
●
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
●
exercising the borrowing powers of the company and mortgaging the property of the company;
●
executing checks, promissory notes and other negotiable instruments on behalf of the company; and
●
maintaining or registering a register of mortgages, charges or other encumbrances of the company.
Interested
Transactions
A
director may vote, attend a board meeting or, presuming that the director is an officer and that it has been approved, sign a document
on our behalf with respect to any contract or transaction in which he or she is interested. We require directors to promptly disclose
the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into
or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution
of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company
and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general
notice, it will not be necessary to give special notice relating to any particular transaction.
Compensation
and Borrowing
The
directors may receive such remuneration as our board of directors may determine or change from time to time. The compensation committee
will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise
all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures,
debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or
of any third party.
Qualification
A
majority of our Board of Directors is required to be independent. There are no membership qualifications for directors. Further, there
are no share ownership qualifications for directors unless so fixed by us in a general meeting, and this has not been so fixed as of
the date of this report. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.
Director
Compensation
All
directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have been
duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not
receive any compensation for their services. Non-employee directors will be entitled to receive such remuneration as our board of directors
may determine or change from time to time for serving as directors and may receive incentive option grants from our company. In addition,
each non-employee director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected
to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise
in connection with the discharge of his or her duties as a director.
Limitation
of Director and Officer Liability
Under
British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in
good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise
in comparable circumstances. British Virgin Islands law does not limit the extent to which a company’s memorandum and articles
of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the
British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences
of committing a crime.
Under
our Memorandum and Articles of Association, we may indemnify our directors, officers and liquidators against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal,
administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as
our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with
a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe
their conduct was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief
or rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We
may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal
fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative
or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best
interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful.
The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests
and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient
for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order,
settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in
good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful.
If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified
against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by
the director or officer in connection with the proceedings.
We
may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors
or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify
the directors or officers against the liability as provided in our Memorandum and Articles of Association.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling
our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations
or similar misdemeanors, nor has been a party to any judicial or administrative proceeding during the past five years that resulted in
a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction
or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have
not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.
Code
of Business Conduct and Ethics
We
have adopted a code of business conduct and ethics applicable to our directors, officers and employees in connection with our application
to list on the Nasdaq Global Market. Our Code of Business Conduct and Ethics requires us to comply with applicable laws, regulations
and rules; keep accurate corporate records; avoid conflicts of interest; maintain corporate confidentiality; refrain from insider trading,
corruption, harassment and other inappropriate behavior; and encourage reporting of any known or suspected violations without fear of
reprisal.
D.
Employees
As
of October 27, 2021, we employed a total of 269 full-time and 44 part-time employees. As of June 30, 2021, we employed a total
of 272 full-time and 59 part-time employees. As of June 30, 2020, we employed a total of 197 full-time and 83 part-time employees. As
of June 30, 2019, we employed a total of 225 full-time and 130 part-time employees. Other than as noted in the table, all employees are
full-time employees.
Department
|
|
October 30, 2021
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Senior Management
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
|
|
11
|
|
Human Resources & Administration
|
|
|
9
|
|
|
|
9
|
|
|
|
12
|
|
|
|
25
|
|
Finance
|
|
|
13
|
|
|
|
13
|
|
|
|
11
|
|
|
|
11
|
|
Research & Development
|
|
|
22
|
|
|
|
22
|
|
|
|
17
|
|
|
|
14
|
|
Production & Procurement (full time)
|
|
|
201
|
|
|
|
205
|
|
|
|
126
|
|
|
|
140
|
|
Production & Procurement (part time)
|
|
|
44
|
|
|
|
59
|
|
|
|
83
|
|
|
|
130
|
|
Sales & Marketing
|
|
|
13
|
|
|
|
12
|
|
|
|
19
|
|
|
|
24
|
|
Total
|
|
|
313
|
|
|
|
331
|
|
|
|
280
|
|
|
|
355
|
|
All
but five (5) of our total employees are employed in China. Our employees are not represented by a labor organization or covered by a
collective bargaining agreement. We have not experienced any work stoppages.
We
are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition,
we are required by PRC law to cover employees in China with various types of social insurance and housing funds. In fiscal 2021, we contributed
in aggregate approximately $310,390 to the employee benefit plans and social insurance but did not provide housing funds. In fiscal 2020,
we contributed in aggregate approximately $0.1 to the employee benefit plans and social insurance but did not provide housing funds.
In fiscal 2019, we contributed in aggregate approximately 0.4 million to the employee benefit plans and social insurance but did not
provide housing funds. The effect on our liquidity by the payments for these contributions is immaterial. We believe that we are in material
compliance with the relevant PRC employment laws.
E.
Share Ownership
There
are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by
us in a general meeting, and this has not been so fixed as of the date of this report. There are no other arrangements or understandings
pursuant to which our directors are selected or nominated.
Description
of Share Capital
Dogness
is a British Virgin Islands company limited by shares and our affairs are governed by our Memorandum and Articles of Association, and
the BVI Business Companies Act, 2004. We were registered and filed as No. 1918432. As set forth in article 5 of our Memorandum of Association,
the objects for which our Company is established are unrestricted.
As of the date of this report, we have authorized
100,000,000 Common Shares, of $0.002 par value per share, of which 31,802,934 Common Shares are issued and outstanding. Our Common
Shares consist of (a) 90,931,000 authorized Class A Common shares, of which 22,733,934 Class A Common Shares are issued and outstanding,
(b) 9,069,000 authorized Class B Common Shares, all of which are issued and outstanding.
The
following are summaries of the material provisions of our Memorandum and Articles of Association, insofar as they relate to the material
terms of our Common Shares. The forms of our Memorandum and Articles of Association are filed as exhibits to this report.
Share
and Share Options
Incentive
Securities Pool
We
have established a pool for shares and options for our employees that contain shares and options to purchase our Class A Common Shares
equal to ten percent (10%) of the number of Common Shares (including both Class A and B Common Shares) issued and outstanding at the
conclusion of our initial public offering. Subject to approval by the Compensation Committee of our Board of Directors, we may grant
options in any percentage determined for a particular grant. We may grant the award of options to existing employees, officers and consultants.
We may also grant the award of restricted stock as a hiring incentive to employees, officers and directors and to non-employee directors
on an ongoing basis.
Unless
otherwise provided in the grant, any options granted will vest at a rate of one third (1/3) per year for three (3) years and have a per
share exercise price equal to the fair market value of one of our Common Shares on the date of grant. As of June 30, 2021, we had outstanding
options to purchase an aggregate of 490,000 Class A Common Shares that are exercisable at a purchase price of $1.50 per share, of which
483,341 options were vested. We may grant options under this pool to certain other employees in the future. We have not yet determined
the recipients of any such grants.
Common
Shares
General
All of our outstanding Common Shares are fully paid
and non-assessable. Our Common Shares are issued in registered form and are issued when registered in our register of members. Our shareholders
who are non-residents of the British Virgin Islands may freely hold and vote their Common Shares. Our Memorandum and Articles of Association
do not permit us to issue bearer shares. As of the date of this report, we have (a) 9,069,000 Class B Common shares and (b) 22,733,934
Class A Common Shares issued and outstanding.
Distributions
The
holders of our Class A and Class B Common Shares are entitled to an equal share in such dividends or distributions as may be declared
by our board of directors subject to the BVI Business Companies Act.
Conversion
of Class B Common Shares
Class
B Common Shares may be converted at the request of the shareholder into an equal number of Class A Common Shares at any time. Class A
Common Shares are not convertible into Class B Common Shares. In addition, Class B Common Shares automatically and immediately convert
into the same number of Class A Common Shares upon any direct or indirect sale, transfer, assignment or disposition. In the event Silong
Chen directly or indirectly owns less than 453,450 Class B Common Shares, all remaining Class B Common Shares will automatically be converted
into Class A Common Shares.
Voting
Any
action required or permitted to be taken by the shareholders must be effected at a duly called annual or special meeting of the shareholders
entitled to vote on such action and may be effected by a resolution in writing. At each general meeting, each Class A Holder who is present
in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) will have one vote
for each Class A Common Share which such shareholder holds and each Class B Holder who is present in person or by proxy (or, in the case
of a shareholder being a corporation, by its duly authorized representative) will have three votes for each Class B Common Share which
such shareholder holds.
Listing
Our
Class A Common Shares are listed on the Nasdaq Global Market under the symbol “DOGZ.”
Transfer
agent and registrar
The
transfer agent and registrar for the Class A Common Shares is Transhare Corporation, 2849 Executive Drive, Suite 200 Clearwater, Florida
33762.
Election
of directors
Delaware
law permits cumulative voting for the election of directors only if expressly authorized in the certificate of incorporation. The laws
of the British Virgin Islands, however, do not specifically prohibit or restrict the creation of cumulative voting rights for the election
of our directors. Cumulative voting is not a concept that is accepted as a common practice in the British Virgin Islands, and we have
made no provisions in our Memorandum and Articles of Association to allow cumulative voting for elections of directors.
Meetings
We
must provide written notice of all meetings of shareholders, stating the time, place and, in the case of a special meeting of shareholders,
the purpose or purposes thereof, at least 7 days before the date of the proposed meeting to those persons whose names appear as shareholders
in the register of members on the date of the notice and are entitled to vote at the meeting. Our board of directors shall call a special
meeting upon the written request of shareholders holding at least 30% of our outstanding voting shares. In addition, our board of directors
may call a special meeting of shareholders on its own motion. A meeting of shareholders held in contravention of the requirement to give
notice is valid if shareholders holding at least 90 percent of the total voting rights on all the matters to be considered at the meeting
have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation
to all the shares which that shareholder holds.
Our
company’s management is entrusted to our board of directors, who will make corporate decisions by board resolution. Our directors
are free to meet at such times and in such manner and places within or outside the BVI as the directors determine to be necessary or
desirable. A 3 days’ notice of a meeting of directors must be given. At any meeting of directors, a quorum will be present if half
of the total number of directors is present, unless there are only 2 directors in which case the quorum is 2. If a quorum is not present,
the meeting will be dissolved. If a quorum is present, votes of half of present directors are required to pass a resolution of directors.
As
few as one-third of our outstanding shares may be sufficient to hold a shareholder meeting. Although our Memorandum and Articles of Association
require that holders of at least one-half of our outstanding shares appear in person or by proxy to hold a shareholder meeting, to the
extent we fail to have quorum on this initial meeting date, we will reschedule the meeting for the next week, at which second meeting
the holders of one-third or more of our outstanding shares will constitute a quorum. As mentioned, at the initial date set for any meeting
of shareholders, a quorum will be present if there are shareholders present in person or by proxy representing not less than one-half
of the issued Common Shares entitled to vote on the resolutions to be considered at the meeting. A quorum may comprise a single shareholder
or proxy and then such person may pass a resolution of shareholders and a certificate signed by such person accompanied where such person
be a proxy by a copy of the proxy instrument shall constitute a valid resolution of shareholder. If within thirty minutes from the time
appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved;
in any other case it shall stand adjourned to the next week in the jurisdiction in which the meeting was to have been held at the same
time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within
one hour from the time appointed for the meeting in person or by proxy not less than one-third of the votes of the shares or each class
or series of shares entitle to vote on the matter to be considered by the meeting, those present shall constitute a quorum but otherwise
the meeting shall be dissolved. No business may be transacted at any general meeting unless a quorum is present at the commencement of
business. If present, the chair of our board of directors shall be the chair presiding at any meeting of the shareholders.
A
corporation that is a shareholder shall be deemed for the purpose of our Memorandum and Articles of Association to be present in person
if represented by its duly authorized representative. This duly authorized representative shall be entitled to exercise the same powers
on behalf of the corporation which he represents as that corporation could exercise if it were our individual shareholder.
Protection
of minority shareholders
We
would normally expect British Virgin Islands courts to follow English case law precedents, which permit a minority shareholder to commence
a representative action, or derivative actions in our name, to challenge (1) an act which is ultra vires or illegal, (2) an act
which constitutes a fraud against the minority by parties in control of us, (3) the act complained of constitutes an infringement of
individual rights of shareholders, such as the right to vote and pre-emptive rights and (4) an irregularity in the passing of a resolution
which requires a special or extraordinary majority of the shareholders.
Pre-emptive
rights
There
are no pre-emptive rights applicable to the issue by us of new Common Shares under either British Virgin Islands law or our Memorandum
and Articles of Association.
Transfer
of Common Shares
Subject
to the restrictions in our Memorandum and Articles of Association and applicable securities laws, any of our shareholders may transfer
all or any of his or her Common Shares by written instrument of transfer signed by the transferor and containing the name and address
of the transferee. Our board of directors may resolve by resolution to refuse or delay the registration of the transfer of any Common
Share. If our board of directors resolves to refuse or delay any transfer, it shall specify the reasons for such refusal in the resolution.
Our directors may not resolve or refuse or delay the transfer of a Common Share unless: (a) the person transferring the shares has failed
to pay any amount due in respect of any of those shares; or (b) such refusal or delay is deemed necessary or advisable in our view or
that of our legal counsel in order to avoid violation of, or in order to ensure compliance with, any applicable, corporate, securities
and other laws and regulations.
Liquidation
If
we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay all amounts paid to
us on account of the issue of shares immediately prior to the winding up, the excess shall be distributable pari passu among those
shareholders in proportion to the amount paid up immediately prior to the winding up on the shares held by them, respectively. If we
are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the amounts
paid to us on account of the issue of shares, those assets shall be distributed so that, to the greatest extent possible, the losses
shall be borne by the shareholders in proportion to the amounts paid up immediately prior to the winding up on the shares held by them,
respectively. If we are wound up, the liquidator appointed by us may, in accordance with the BVI Business Companies Act, divide among
our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not)
and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division
shall be carried out as between the shareholders or different classes of shareholders.
Calls
on Common Shares and forfeiture of Common Shares
Our
board of directors may from time to time make calls upon shareholders for any amounts unpaid on their Common Shares in a notice served
to such shareholders at least 14 days prior to the specified time of payment. The Common Shares that have been called upon and remain
unpaid are subject to forfeiture.
Redemption
of Common Shares
Subject
to the provisions of the BVI Business Companies Act, we may issue shares on terms that are subject to redemption, at our option or at
the option of the holders, on such terms and in such manner as may be determined by our Memorandum and Articles of Association and subject
to any applicable requirements imposed from time to time by, the BVI Business Companies Act, the SEC, the Nasdaq Global Market, or by
any recognized stock exchange on which our securities are listed.
Modifications
of rights
All
or any of the special rights attached to any class of shares may, subject to the provisions of the BVI Business Companies Act, be amended
only pursuant to a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of the holders
of the shares of that class.
Changes
in the number of shares we are authorized to issue and those in issue
We
may from time to time by resolution of our board of directors:
●
amend our Memorandum of Association to increase or decrease the maximum number of shares we are authorized to issue;
●
subject to our Memorandum, divide our authorized and issued shares into a larger number of shares; and
●
subject to our Memorandum, combine our authorized and issued shares into a smaller number of shares.
Untraceable
shareholders
We
are entitled to sell any shares of a shareholder who is untraceable, provided that:
●
all checks or warrants in respect of dividends of these shares, not being less than three in number, for any sums payable in cash to
the holder of such shares have remained uncashed for a period of twelve years prior to the publication of the notice and during the three
months referred to in the third bullet point below;
●
we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to these shares
by death, bankruptcy or operation of law; and
●
we have caused a notice to be published in newspapers in the manner stipulated by our Memorandum and Articles of Association, giving
notice of our intention to sell these shares, and a period of three months has elapsed since such notice.
●
The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder
for an amount equal to the net proceeds.
Inspection
of books and records
Under
British Virgin Islands Law, holders of our Common Shares are entitled, upon giving written notice to us, to inspect (i) our Memorandum
and Articles of Association, (ii) the register of members, (iii) the register of directors and (iv) minutes of meetings and resolutions
of members, and to make copies and take extracts from the documents and records. However, our directors can refuse access if they are
satisfied that to allow such access would be contrary to our interests.
Rights
of non-resident or foreign shareholders
There
are no limitations imposed by our Memorandum and Articles of Association on the rights of non-resident or foreign shareholders to hold
or exercise voting rights on our shares. In addition, there are no provisions in our Memorandum and Articles of Association governing
the ownership threshold above which shareholder ownership must be disclosed.
Issuance
of additional Common Shares
Our
Memorandum and Articles of Association authorizes our board of directors to issue additional Common Shares from authorized but unissued
shares, to the extent available, from time to time as our board of directors shall determine.
Differences
in corporate law
The
BVI Business Companies Act and the laws of the British Virgin Islands affecting British Virgin Islands companies like us and our shareholders
differ from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the material differences between
the provisions of the laws of the British Virgin Islands applicable to us and the laws applicable to companies incorporated in the United
States and their shareholders.
Mergers
and similar arrangements
Under
the laws of the British Virgin Islands, two or more companies may merge or consolidate in accordance with Section 170 of the BVI Business
Companies Act. A merger means the merging of two or more constituent companies into one of the constituent companies and a consolidation
means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent
company must approve a written plan of merger or consolidation, which must be authorized by a resolution of shareholders.
While
a director may vote on the plan of merger or consolidation even if he has a financial interest in the plan, the interested director must
disclose the interest to all other directors of the company promptly upon becoming aware of the fact that he is interested in a transaction
entered into or to be entered into by the company.
A
transaction entered into by our company in respect of which a director is interested (including a merger or consolidation) is voidable
by us unless the director’s interest was (a) disclosed to the board prior to the transaction or (b) the transaction is (i) between
the director and the company and (ii) the transaction is in the ordinary course of the company’s business and on usual terms and
conditions. Notwithstanding the above, a transaction entered into by the company is not voidable if the material facts of the interest
are known to the shareholders and they approve or ratify it or the company received fair value for the transaction.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as
a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation
irrespective of whether they are entitled to vote at the meeting to approve the plan of merger or consolidation.
The
shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive
debt obligations or other securities of the surviving or consolidated company, other assets, or a combination thereof. Further, some
or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may
receive a different kind of asset. As such, not all the shares of a class or series must receive the same kind of consideration.
After
the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of
merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the British Virgin Islands.
A
shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder
was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) or
a consolidation. A shareholder properly exercising his dissent rights is entitled to a cash payment equal to the fair value of his shares.
A
shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders
on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved
by the shareholders, the company must give notice of this fact to each shareholder within 20 days who gave written objection. These shareholders
then have 20 days to give to the company their written election in the form specified by the BVI Business Companies Act to dissent from
the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.
Upon
giving notice of his election to dissent, a shareholder ceases to have any shareholder rights except the right to be paid the fair value
of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding his dissent.
Within
seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the
company must make a written offer to each dissenting shareholder to purchase his shares at a specified price per share that the company
determines to be the fair value of the shares. The company and the shareholder then have 30 days to agree upon the price. If the company
and a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall, within 20 days immediately
following the expiration of the 30-day period, each designate an appraiser and these two appraisers shall designate a third appraiser.
These three appraisers shall fix the fair value of the shares as of the close of business on the day prior to the shareholders’
approval of the transaction without taking into account any change in value as a result of the transaction.
Shareholders’
suits
There
are both statutory and common law remedies available to our shareholders as a matter of British Virgin Islands law. These are summarized
below:
Prejudiced
members
A
shareholder who considers that the affairs of the company have been, are being, or are likely to be, conducted in a manner that is, or
any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him in
that capacity, can apply to the court under Section 184I of the BVI Business Companies Act, inter alia, for an order that his shares
be acquired, that he be provided compensation, that the Court regulate the future conduct of the company, or that any decision of the
company which contravenes the BVI Business Companies Act or our Memorandum and Articles of Association be set aside.
Derivative
actions
Section
184C of the BVI Business Companies Act provides that a shareholder of a company may, with the leave of the Court, bring an action in
the name of the company to redress any wrong done to it.
Just
and equitable winding up
In
addition to the statutory remedies outlined above, shareholders can also petition for the winding up of a company on the grounds that
it is just and equitable for the court to so order. Save in exceptional circumstances, this remedy is only available where the company
has been operated as a quasi partnership and trust and confidence between the partners has broken down.
Indemnification
of directors and executive officers and limitation of liability
British
Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers
and directors, except to the extent any provision providing indemnification may be held by the British Virgin Islands courts to be contrary
to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under
our Memorandum and Articles of Association, we indemnify against all expenses, including legal fees, and against all judgments, fines
and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings for any
person who:
●
is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was our director; or
●
is or was, at our request, serving as a director or officer of, or in any other capacity is or was acting for, another body corporate
or a partnership, joint venture, trust or other enterprise.
These
indemnities only apply if the person acted honestly and in good faith with a view to our best interests and, in the case of criminal
proceedings, the person had no reasonable cause to believe that his conduct was unlawful. This standard of conduct is generally the same
as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling
us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Anti-takeover
provisions in our Memorandum and Articles of Association
Some
provisions of our Memorandum and Articles of Association may discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including provisions that provide for a staggered board of directors and prevent shareholders
from taking an action by written consent in lieu of a meeting. However, under British Virgin Islands law, our directors may only exercise
the rights and powers granted to them under our Memorandum and Articles of Association, as amended and restated from time to time, as
they believe in good faith to be in the best interests of our company.
Directors’
fiduciary duties
Under
Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty
has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care
that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and
disclose to shareholders, all material information reasonably available regarding a transaction that is material to the company. The
duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must
not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best
interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder
and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis,
in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption
may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by
a director, a director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.
Under
British Virgin Islands law, our directors owe the company certain statutory and fiduciary duties including, among others, a duty to act
honestly, in good faith, for a proper purpose and with a view to what the directors believe to be in the best interests of the company.
Our directors are also required, when exercising powers or performing duties as a director, to exercise the care, diligence and skill
that a reasonable director would exercise in comparable circumstances, taking into account without limitation, the nature of the company,
the nature of the decision and the position of the director and the nature of the responsibilities undertaken. In the exercise of their
powers, our directors must ensure neither they nor the company acts in a manner which contravenes the BVI Business Companies Act or our
Memorandum and Articles of Association, as amended and re-stated from time to time. A shareholder has the right to seek damages for breaches
of duties owed to us by our directors.
Shareholder
action by written consent
Under
the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to
its certificate of incorporation. British Virgin Islands law provides that shareholders may approve corporate matters by way of a written
resolution without a meeting signed by or on behalf of shareholders sufficient to constitute the requisite majority of shareholders who
would have been entitled to vote on such matter at a general meeting; provided that if the consent is less than unanimous, notice must
be given to all non-consenting shareholders. Our Memorandum and Articles of Association permit shareholders to act by written consent.
Shareholder
proposals
Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided
it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other
person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin
Islands law and our Memorandum and Articles of Association allow our shareholders holding not less than 30% of the votes of the outstanding
voting shares to requisition a shareholders’ meeting. We are not obliged by law to call shareholders’ annual general meetings,
but our Memorandum and Articles of Association do permit the directors to call such a meeting. The location of any shareholders’
meeting can be determined by the board of directors and can be held anywhere in the world.
Cumulative
voting
Under
the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate
of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders
on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. As permitted under British Virgin
Islands law, our Memorandum and Articles of Association do not provide for cumulative voting. As a result, our shareholders are not afforded
any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal
of directors
Under
the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval
of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our Memorandum
and Articles of Association, directors can be removed from office, with cause, by a resolution of shareholders or by a resolution of
directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the
director.
Transactions
with interested shareholders
The
Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the
corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited
from engaging in certain business combinations with an “interested shareholder” for three years following the date that such
person becomes an interested shareholder. An interested shareholder generally is a person or group who or which owns or owned 15% or
more of the target’s outstanding voting shares within the past three years. This has the effect of limiting the ability of a potential
acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if,
among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either
the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential
acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
British Virgin Islands law has no comparable statute.
Dissolution;
winding up
Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under the BVI Business Companies Act and our Memorandum and Articles of Association, we may appoint a voluntary liquidator by a resolution
of the shareholders or by resolution of directors.
Variation
of rights of shares
Under
the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of such class, unless the certificate of incorporation provides otherwise. Under our Memorandum and Articles of Association, if
at any time our shares are divided into different classes of shares, the rights attached to any class may only be varied, whether or
not our company is in liquidation, with the consent in writing of or by a resolution passed at a meeting by the holders of not less than
50 percent of the issued shares in that class.
Amendment
of governing documents
Under
the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands
law, our Memorandum and Articles of Association may be amended by a resolution of shareholders and, subject to certain exceptions, by
a resolution of directors. Any amendment is effective from the date it is registered at the Registry of Corporate Affairs in the British
Virgin Islands.
Item
7. Major Shareholders and Related Party Transactions
A.
Major Shareholders
The
following table sets forth information with respect to beneficial ownership of our Common Shares as of October 27, 2021 by:
|
●
|
Each
person who is known by us to beneficially own 5% or more of our outstanding Common Shares;
|
|
●
|
Each
of our directors and named executive officers; and
|
|
●
|
All
directors and named executive officers as a group.
|
The
number and percentage of Common Shares beneficially owned are based on 31,802,934 Common Shares outstanding as of October 27, 2021. Information
with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our Common Shares.
Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment
power with respect to securities. In computing the number of Common Shares beneficially owned by a person listed below and the percentage
ownership of such person, Common Shares underlying options, warrants or convertible securities held by each such person that are exercisable
or convertible within 60 days of October 27, 2021 are deemed outstanding, but are not deemed outstanding for computing the percentage
ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property
laws, all persons listed have sole voting and investment power for all Common Shares shown as beneficially owned by them. Unless otherwise
indicated in the footnotes, the address for each principal shareholder is in the care of our Company at Tongsha Industrial Estate, East
District, Dongguan, Guangdong, People’s Republic of China 523217. As of the date of the report, we have approximately 9 shareholders
of record. This does not include shareholders who hold their shares in “street name”. A majority of our Common Shares are
held outside the United States, and none of our directors is located in the United States.
|
|
Shares
Beneficially Owned (1)
|
|
|
Percentage of
Voting
|
|
|
|
Number
|
|
|
Percent
|
|
|
Power (2)
|
|
Named
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Silong
Chen(3)
|
|
|
9,289,000
|
|
|
|
29.0
|
%
|
|
|
55.1
|
%
|
Zhiqiang
Shao
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
Changqing
Shi
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
Qingshen
Liu
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
Yunhao
Chen(4)
|
|
|
120,000
|
|
|
|
*
|
|
|
|
*
|
|
5%
or Greater Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine
victory holding company Limited(3)
|
|
|
9,069,000
|
|
|
|
28.6
|
%
|
|
|
54.5
|
%
|
*
Less than 1%
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the
Common Shares. All shares represent Class A and Class B Common Shares and granted options to the extent such options will vest within
60 days after October 27, 2021.
(2)
Class A Common Shares have one vote per share. Class B Common Shares have three votes per share.
(3)
Consists of 9,069,000 Class B Common Shares held by Fine victory holding company Limited, of which Silong Chen may be deemed to have
voting and dispositive power and vested options to purchase 220,000 Class A Common Shares. Due to his ownership of all outstanding Class
B Common Shares (which have three votes per share rather than one vote like Class A Common Shares), Mr. Silong Chen has substantial control
over Dogness.
(4)
Consists of vested options to purchase 120,000 Class A Common Shares.
B.
Related party transactions
In
addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we
describe transactions since July 1, 2019, to which we have been a participant, in which the amount involved in the transactions is material
to us or the related party.
(1)
|
Due
from related party
|
As
of June 30, 2021 and 2020, due from related parties consist of the following:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Linsun
|
|
$
|
32,118
|
|
|
$
|
-
|
|
Dogness Network
|
|
|
410
|
|
|
|
-
|
|
|
|
$
|
32,528
|
|
|
$
|
-
|
|
(2)
|
Accounts
receivable from related parties
|
As
of June 30, 2021 and 2020 accounts receivable balances due from related parties were as follows:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts receivable - related parties:
|
|
|
|
|
|
|
-Dogness
Network
|
|
$
|
515,193
|
|
|
$
|
559,465
|
|
Total
|
|
$
|
515,193
|
|
|
$
|
559,465
|
|
As of June 30, 2021, total accounts receivable from
these two related parties amounted to $515,193, among which $404,504 has been collected as of the date of this report.
(3)
|
Due
to a related party
|
|
|
As
of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Mr.
Silong Chen
|
|
$
|
2,001,940
|
|
|
$
|
25,462
|
|
Mr.
Silong Chen periodically provides working capital loans to support the Company’s operations when needed. Such advance was non-interest
bearing and due on demand.
(4)
|
Accounts
payable to related parties
|
Accounts
payables to related parties consisted of the following
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts payable - related parties:
|
|
|
|
|
|
|
-Linsun
|
|
$
|
350,199
|
|
|
$
|
301,555
|
|
-Dogness Network
|
|
|
-
|
|
|
|
3,660
|
|
Total
|
|
$
|
350,199
|
|
|
$
|
305,215
|
|
|
(5)
|
Sales
to related parties
|
Revenue
from related parties consisted of the following:
|
|
For the years ended June 30,
|
|
Name
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Linsun
|
|
$
|
-
|
|
|
$
|
72,987
|
|
|
$
|
185,126
|
|
Dogness Network
|
|
|
1,207,686
|
|
|
|
836,664
|
|
|
|
143,441
|
|
Total
|
|
$
|
1,207,686
|
|
|
$
|
909,651
|
|
|
$
|
328,567
|
|
Cost
of revenue associated with the sales to these two related parties amounted to $663,742, $633,132 and 202,606 for the years ended June
30, 2021, 2020 and 2019, respectively.
|
(6)
|
Purchase
from related parties
|
During the year ended June 30, 2021, the Company
purchased certain pet product components and parts, such as smart pet water and food feeding devices from Linsun. For the year ended
June 30, 2020, the Company also purchased from Dogness Network. Total purchases from Linsun and Dogness Network amounted to $3,015,442
and $2,191,458 for the years ended June 30, 2021 and 2020, respectively.
During
the year ended June 30, 2020, the Company also purchased a total of $205,328 pet shampoo from Guangdong Dogness Biotechnology Co., Ltd.,
an entity related to one of the Company’s shareholders.
|
(7)
|
Lease
arrangement with related party
|
On
January 2, 2020, Dongguan Jiasheng signed a lease agreement with Linsun, which enabled Linsun to lease part of Dongguan Jiasheng’s
new production facilities of approximately 8,460 square meters for ten years. Annual lease payment from Linsun amounted to approximately
$250,000 and is subject to 15% increase every three years. For the year ended June 30, 2021, the Company recorded rent income of $300,511
and $89,411 as other income through leasing the manufacturing facilities to Linsun.
On
August 1, 2020, Dongguan Jiasheng signed a lease agreement with Dogness Network, which enabled Dogness Network to lease part of Dongguan
Jiasheng’s new production facilities of approximately 580 square meters for ten years. Annual lease payment from Dogness Network
amounted to approximately $36,000 and is subject to 15% increase every three years. For the year ended June 30, 2021 and 2020, the Company
recorded rent income of $52,796 and $Nil as other income through leasing the manufacturing facilities to Dogness Network.
On
August 1, 2020, Dongguan Jiasheng signed a lease agreement with Gongdong Dogness, which enabled Gongdong Dogness to lease part of Dongguan
Jiasheng’s new production facilities of approximately 50 square meters for ten years. Annual lease payment from Gongdong Dogness
amounted to $1,812. For the year ended June 30, 2021 and 2020, the Company recorded rent income of $1,661 and $Nil as other income through
leasing the manufacturing facilities to Gongdong Dogness.
|
(8)
|
Loan
guarantee provided by related parties
|
In
connection with the Company’s bank borrowings, Mr. Silong Chen pledged his personal assets as collateral and signed guarantee agreements
to provide guarantee to the Company’s short-term bank loans. Related parties, Mr. Junqiang Chen and Ms. Caiyuan He, the relatives
of Mr. Silong Chen, also jointly provided guarantee to the Company’s borrowings from ICBC bank.
Future
Related Party Transactions
The
Corporate Governance Committee of our Board of Directors must approve all related party transactions. All related party transactions
will be made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. Related
party transactions that we have previously entered into were not approved by independent directors, as we had no independent directors
at that time.
C.
Interests of experts and counsel
Not
applicable for annual reports on Form 20-F.
Item
8. Financial Information
A.
Consolidated Statements and Other Financial Information
Please
refer to Item 18.
Legal
and Administrative Proceedings
We
are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material
legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividend
Policy
We
have not declared or paid any cash dividends in the last two years. We anticipate that we will retain any earnings to support operations
and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future.
Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on
a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the
Board of Directors may deem relevant.
Under
British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total
assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before
and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course
of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred
taxes as shown on our books of account, and our capital.
If
we determine to pay dividends on any of our Common Shares in the future, as a holding company, we will be dependent on receipt of funds
from our Hong Kong subsidiaries, HK Jiasheng and HK Dogness. Current PRC regulations permit the PRC Subsidiaries to pay dividends to
HK Dogness only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations.
In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund
a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further
set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined
at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered
capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable
as cash dividends except in the event of liquidation.
In
addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our
PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements
between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
Under
existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade
and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration
of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions,
without prior approval of SAFE, cash generated from operations in China may be used to pay dividends to our company. The PRC Subsidiaries
may go to a licensed bank to remit their after-tax profits out of China. Nevertheless, the bank will require the PRC Subsidiaries to
produce the following documents for verification before they may transfer the dividends to an overseas bank account of their parent company,
HK Dogness, or indirect parent, Dogness: (1) tax payment statement and tax return; (2) auditor’s report issued by a Chinese certified
public accounting firm confirming the availability of profits and dividends for distribution in the current year; (3) the Board minutes
authorizing the distribution of dividends to its shareholders; (4) the foreign exchange registration certificate issued by SAFE; (5)
the capital verification report issued by a Chinese certified public accounting firm; (6) if the declared dividends will be distributed
out of accumulated profits earned in prior years, the PRC Subsidiaries must appoint a Chinese certified public accounting firm to issue
an auditors’ report to the bank to certify the PRC Subsidiaries’ financial position during the years from which the profits
arose; and (7) other information as required by SAFE.
B.
Significant Changes
We
have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual
report.
Item
9. The Offer and Listing
A.
Offer and listing details
We
completed our initial public offering on December 18, 2017. Our Class A Common Shares trade under the trading symbol “DOGZ”
on the NASDAQ Global Market.
As
of October 27, 2021, there were approximately 9 holders of record of our Class A Common Shares. This excludes our Class A Common Shares
owned by shareholders holding Class A Common Shares under nominee security position listings. On October 27, 2021, the last sales price
of our Class A Common Shares as reported on the NASDAQ Global Market was 3.89 per common share.
B.
Plan of distribution
Not
applicable for annual reports on Form 20-F.
C.
Markets
Our
Class A Common Shares are listed on the Nasdaq Global Market under the symbol “DOGZ.”
D.
Selling shareholders
Not
applicable for annual reports on Form 20-F.
E.
Dilution
Not
applicable for annual reports on Form 20-F.
F.
Expenses of the issue
Not
applicable for annual reports on Form 20-F.
Item
10. Additional Information
A.
Share capital
Not
applicable for annual reports on Form 20-F.
B.
Memorandum and articles of association
The
information required by this item is incorporated by reference to the material headed “Description of Share Capital” in our
Registration Statement on Form F-1, File no. 333-220547, filed with the SEC on September 20, 2017, as amended.
C.
Material contracts
On
July 15, 2021, the Company and certain institutional investors entered into a securities purchase agreement in connection with an offering,
pursuant to which the Company agreed to sell to investors an aggregate of 2,178,120 Class A Common Shares. The common share purchase
price was $1.82 per share. After payment of expenses, the Company received approximately $3.4 million in net proceeds from the sale of
the common shares. Additionally, the Company also issued warrants to purchase 174,249 common shares to the placement agent exercisable
at $1.82 per share.
On
January 15, 2021, the Company and certain institutional investors entered into a securities purchase agreement in connection with an
offering (the “Offering”), pursuant to which the Company agreed to sell to investors an aggregate of 3,455,130 Class A Common
Shares and investor warrants to initially purchase an aggregate of 1,727,565 Class A Common Shares. The common share purchase price was
$2.15 per Class A Common Share; and the investor warrants are initially exercisable at $2.70 per share. The aggregate gross proceeds
from the sale of the Class A Common Shares, before deducting fees to the Placement Agent and other estimated offering expenses payable
by the Company was approximately $7.4 million. This amount did not include any proceeds from warrant exercises.
D.
Exchange controls
See
“Item 4. Information on the Company—B. Business Overview—Regulations—Regulation on Foreign Exchange Control
Regulation
of Dividend Distribution
See
“Item 4. Information on the Company—B. Business Overview—Regulations—Regulation on Dividend Distributions
E.
Taxation
The
following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax consequences related to an investment in
our Class A Common Shares. It is directed to U.S. Holders (as defined below) of our Class A Common Shares and is based upon laws and
relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. This description does not
deal with all possible tax consequences relating to an investment in our Class A Common Shares, such as the tax consequences under state,
local and other tax laws.
The
following brief description applies only to U.S. Holders (defined below) that hold Class A Common Shares as capital assets and that have
the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the
date of this report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this report, as well as
judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to
change, which change could apply retroactively and could affect the tax consequences described below.
The
brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial
owner of shares and you are, for U.S. federal income tax purposes,
●
an individual who is a citizen or resident of the United States;
●
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United
States, any state thereof or the District of Columbia;
●
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
●
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons
for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person.
WE
URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS
CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES
OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
Generally
Dogness
is a tax-exempt company incorporated in the British Virgin Islands. HK Dogness and HK Jiasheng are subject to Hong Kong profits tax rates.
Dongguan Dogness and Dongguan Jiasheng are governed by PRC laws.
Our
company pays PRC enterprise income taxes, value added taxes and business taxes in China for revenues from Dongguan Dogness and Dongguan
Jiasheng. The Business Tax has been incorporated into VAT since May 1st of 2016. British Virgin Islands tax laws apply to Dogness.
People’s
Republic of China Enterprise Taxation
The
following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which
will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”
PRC
enterprise income tax is calculated based on taxable income determined under PRC accounting principles. The Enterprise Income Tax Law
(the “EIT Law”), effective as of January 1, 2008, enterprises pay a unified income tax rate of 25% and unified tax deduction
standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises. Under the EIT Law, an enterprise
established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will
normally be subject to the enterprise income tax at the rate of 25% on its global income. If the PRC tax authorities subsequently determine
that we, HK Jiasheng, HK Dogness or any future non-PRC subsidiary should be classified as a PRC resident enterprise, then such entity’s
global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments from HK Jiasheng or HK
Dogness to us may be subject to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If Dogness, HK Jiasheng
or HK Dogness is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends
paid by its Chinese subsidiaries to such entity. In practice, the tax authorities typically impose the withholding tax rate of 10% rate,
as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance
is provided by relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate
organizational changes to minimize the corresponding tax impact.
According
to the Sino-U.S. Tax Treaty which was effective on January 1, 1987 and aimed to avoid double taxation disadvantage, income that is incurred
in one nation should be taxed by that nation and credited by the other nation, but for the dividend that is generated in China and distributed
to foreigner in other nations, a rate 10% tax will be charged.
Our
company will have to withhold that tax when we are distributing dividends to our foreign investors. If we do not fulfill this duty, we
will receive a fine up to five times of the amount we are supposed to pay as tax or other administrative penalties from government. The
worst case could be criminal charge of tax evasion to responsible persons. The criminal penalty for this offense depends on the tax amount
the offender evaded, and the maximum penalty will be 3 – 7 years imprisonment plus fine.
PRC
Value Added Tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and its implementing rules, issued in December 1993, all entities and individuals
that are engaged in the businesses of sales of goods, provision of repair and placement services and importation of goods into China
are generally subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross
sales proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in
the production of goods or provisions of services that have generated the gross sales proceeds.
PRC
Business Tax
Companies
in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20%
on revenue generated from providing services and revenue generated from the transfer of intangibles. However, since May 1, 2016, the
Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some
business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. In general, this newly
implemented policy is intended to relieve many companies from heavy taxes under currently slowing down economy. In the case of our Chinese
subsidiaries, Dongguan Dogness and Dongguan Jiasheng, even though the VAT rate is 17%, with the deductibles the company may get in the
business process, it will bear less burden than previous Business Tax.
British
Virgin Islands Taxation
Under
the BVI Business Companies Act as currently in effect, a holder of Common Shares who is not a resident of the British Virgin Islands
is exempt from British Virgin Islands income tax on dividends paid with respect to the Common Shares and all holders of Common Shares
are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The
British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Business
Companies Act.
There
are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under
the BVI Business Companies Act. In addition, shares of companies incorporated or re-registered under the BVI Business Companies Act are
not subject to transfer taxes, stamp duties or similar charges.
There
is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and
the British Virgin Islands.
United
States Federal Income Taxation
The
following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
●
banks;
●
financial institutions;
●
insurance companies;
●
regulated investment companies;
●
real estate investment trusts;
●
broker-dealers;
●
traders that elect to mark-to-market;
●
U.S. expatriates;
●
tax-exempt entities;
●
persons liable for alternative minimum tax;
●
persons holding our Common Shares as part of a straddle, hedging, conversion or integrated transaction;
●
persons that actually or constructively own 10% or more of our voting shares;
●
persons who acquired our Common Shares pursuant to the exercise of any employee share option or otherwise as consideration; or
●
persons holding our Common Shares through partnerships or other pass-through entities.
Prospective
purchasers are urged to consult their own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances
as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Common Shares.
Taxation
of Dividends and Other Distributions on our Common Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to
the Common Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend
income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not
be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable
to qualified dividend income, provided that (1) the Common Shares are readily tradable on an established securities market in the United
States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange
of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which
the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue
Service authority, Common Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market
in the United States if they are listed on the Nasdaq Global Market. You are urged to consult your tax advisors regarding the availability
of the lower rate for dividends paid with respect to our Common Shares, including the effects of any change in law after the date of
this report.
Dividends
will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income
(as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will
be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable
to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.
For this purpose, dividends distributed by us with respect to our Common Shares will constitute “passive category income”
but could, in the case of certain U.S. Holders, constitute “general category income.”
To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), it will be treated first as a tax-free return of your tax basis in your Class A Common Shares, and to the extent
the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings
and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a
dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described
above.
Taxation
of Dispositions of Common Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other
taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis
(in U.S. dollars) in the Class A Common Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder,
including an individual U.S. Holder, who has held the Class A Common Shares for more than one year, you will be eligible for (a) reduced
tax rates of 0% (for individuals in the 10% or 15% tax brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket)
or (c) 15% for all other individuals. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize
will generally be treated as United States source income or loss for foreign tax credit limitation purposes.
Passive
Foreign Investment Company
Based
on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes for our current taxable year ending June 30, 2017. Our actual PFIC status for the current
taxable year ending June 30, 2017 will not be determinable until the close of such taxable year and, accordingly, there is no guarantee
that we will not be a PFIC for the current taxable year. Because PFIC status is a factual determination for each taxable year which cannot
be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
●
at least 75% of its gross income is passive income; or
●
at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”).
We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation
in which we own, directly or indirectly, at least 25% (by value) of the stock.
We
must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from no to yes. In
particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of
our Common Shares, our PFIC status will depend in large part on the market price of our Common Shares. Accordingly, fluctuations in the
market price of the Common Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty
in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised
in our initial public offering. If we are a PFIC for any year during which you hold Common Shares, we will continue to be treated as
a PFIC for all succeeding years during which you hold Common Shares. However, if we cease to be a PFIC, you may avoid some of the adverse
effects of the PFIC regime by making a “deemed sale” election with respect to the Common Shares.
If
we are a PFIC for any taxable year during which you hold Common Shares, you will be subject to special tax rules with respect to any
“excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of
the Common Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable
year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the Common Shares will be treated as an excess distribution. Under these special tax rules:
the
excess distribution or gain will be allocated ratably over your holding period for the Common Shares;
●
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will
be treated as ordinary income, and
●
the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by
any net operating losses for such years, and gains (but not losses) realized on the sale of the Common Shares cannot be treated as capital,
even if you hold the Common Shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect
out of the tax treatment discussed above. If you make a mark-to-market election for the Common Shares, you will include in income each
year an amount equal to the excess, if any, of the fair market value of the Common Shares as of the close of your taxable year over your
adjusted basis in such Common Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the Common Shares
over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market
gains on the Common Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election,
as well as gain on the actual sale or other disposition of the Common Shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the Common Shares, as well as to any loss realized on the actual
sale or disposition of the Common Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such Common Shares. Your basis in the Common Shares will be adjusted to reflect any such income or loss amounts. If you
make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions
by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation
of Dividends and Other Distributions on our Common Shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market
(as defined in applicable U.S. Treasury regulations), including the Nasdaq Global Market. If the Class A Common Shares are regularly
traded on the Nasdaq Global Market and if you are a holder of Class A Common Shares, the mark-to-market election would be available to
you were we to be or become a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of
the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally
include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the
taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information
regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide
the information that would enable you to make a qualified electing fund election. If you hold Common Shares in any year in which we are
a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Common Shares and
any gain realized on the disposition of the Common Shares.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Class A Common Shares and
the elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our Common Shares and proceeds from the sale, exchange or redemption of our Common Shares may be subject to
information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification
on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish
their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult
their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund
with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
Under
the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to
Common Shares, subject to certain exceptions (including an exception for Common Shares held in accounts maintained by certain financial
institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their
tax return for each year in which they hold Common Shares. U.S. Holders are urged to consult their tax advisors regarding the application
of the U.S. information reporting and backup withholding rules.
F.
Dividends and paying agents
Not
applicable for annual reports on Form 20-F.
G.
Statement by experts
Not
applicable for annual reports on Form 20-F.
H.
Documents on display
We
are subject to the information requirements of the Exchange Act. In accordance with these requirements, the Company files reports and
other information with the SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site at http://www.sec.gov that contains reports and other information regarding registrants that file electronically
with the SEC.
I.
Subsidiary Information
Not
applicable.
Item
11. Quantitative and Qualitative Disclosures About Market Risk
Interest
Rate Risk
Our
exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with original maturities of less than
a year and long-term held-to-maturity securities with maturities of greater than a year. Investments in both fixed rate and floating
rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may
suffer losses in principal if we have to sell securities that have declined in market value due to changes in interest rates. We have
not been, and do not expect to be, exposed to material interest rate risks, and therefore have not used any derivative financial instruments
to manage our interest risk exposure.
In
the year ended June 30, 2021, we had approximately $7.4 million in outstanding bank loans, with weighted average annual interest rates
of 6.24% and approximately $0.7 million in outstanding bank line of credit with interest rate of 4.25%. As of June 30, 2021, if
interest rates increased/decreased by 1 percentage point, with all other variables having remained constant, and assuming the amount
of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit/loss attributable to equity owners
of our company would have been approximately RMB 0.6 million ($0.09 million) lower/higher, respectively, mainly as a result of interest
expense on our bank loans.
In
the year ended June 30, 2020, we had approximately RMB30 million in outstanding bank loans, with weighted average annual interest rates
of 5.4% and USD900K in outstanding bank line of credit with interest rate of 4.25%. As of June 30, 2020, if interest rates increased/decreased
by 1 percentage point, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the
end of the year was outstanding for the entire year, profit/loss attributable to equity owners of our company would have been approximately
RMB 0.4 million ($0.005 million) lower/higher, respectively, mainly as a result of interest expense on our bank loans.
In
the year ended June 30, 2019, we had approximately $2.9 million in outstanding bank loans, with interest rates of 5.873%. As of June
30, 2019, if interest rates increased/decreased by 1 percentage point, with all other variables having remained constant, and assuming
the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners
of our company would have been approximately RMB 0.2 million ($29,140) lower/higher, respectively, mainly as a result of interest expense
on our bank loans.
The
Company had short-term investments of $549,895 as of June 30, 2021. The Company had short-term investments of $3,551,968 as of June 30,
2020. The Company had short-term investments of $11,073,200 as of June 30, 2019. The Company recorded interest income of $48,058,
$243,661, and $536,345 for the years ended June 30, 2021, 2020 and 2019, respectively. We had no long-term held-to-maturity investments
as of June 30, 2021, 2020 or 2019.
Foreign
Exchange Risk
Our
functional currency is the RMB, and our financial statements are presented in U.S. dollars. The RMB depreciated by 2.86% in 2019, depreciated
by 3.01% in 2020, and appreciated by 8.70% in 2021. The change in the value of the RMB relative to the U.S. dollar may affect
our financial results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of
operation. The negative impact attributable to changes in revenue and expenses due to foreign currency translation are summarized as
follows.
|
|
Year ended
June 30, 2021
|
|
|
Year ended
June 30, 2020
|
|
Impact on revenue
|
|
$
|
(628,136
|
)
|
|
$
|
107,856
|
|
Impact on operating expenses
|
|
$
|
(188,476
|
)
|
|
$
|
55,570
|
|
Impact on net income
|
|
$
|
(33,551
|
)
|
|
$
|
(48,028
|
)
|
Currently,
our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars. Our exposure to foreign exchange risk will primarily
relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollars may materially
affect our earnings and financial position, and the value of, and any dividends payable on, our Common Shares in U.S. dollars in the
future. See “Risk Factors — Risks Related to Doing Business in China — Fluctuations in exchange rates could adversely
affect our business and the value of our securities.”
Commodity
Risk
As
a developer and manufacturer of products composed largely of plastic, nylon and metal, our Company is exposed to the risk of an increase
in the price of raw materials. We historically have been able to pass on price increases to customers by virtue of pricing terms that
vary with changes in commodity prices, but we have not entered into any contract to hedge any specific commodity risk. Moreover, our
Company does not purchase or trade on commodity instruments or positions; instead, it purchases commodities for use.
Item
12. Description of Securities Other than Equity Securities
With
the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4,
this Item 12 is not applicable, as the Company does not have any American Depositary Shares.