INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of unaudited these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
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. Mr. Silong Chen, the Chairman of the Board and Chief Executive Officer ("CEO") of the Company is the controlling shareholder (the "Controlling Shareholder") of the Company by virtue of his ownership of 9,069,000 Class B common shares, which carry three votes per share and, in the aggregate have more than half of the voting power of all common shares .
A Reorganization of the legal structure was completed on January 9, 2017. The Reorganization involved the incorporation of Dogness, a BVI holding company; and Dogness Intelligence 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 Dogness (Hong Kong) Pet's Products Co., Limited ("HK Dogness"), Jiasheng Enterprise (Hong Kong) Co., Limited ("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 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 % equity interests of the entities mentioned above.
Since the Company and its wholly-owned subsidiaries are 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.
On December 18, 2017, the Company completed its initial public offering ("IPO") of 10,913,631 Class A common shares at a public offering price of $5.00 per share. The gross proceeds were approximately $54.6 million before deducting the placement agent's commissions and other offering expenses, resulting in net proceeds of approximately $50.2 million. In connection with the offering, the Company's Class A common shares began trading on the NASDAQ Global Market on December 20, 2017 under the symbol "DOGZ."
In January 2018, the Company formed a Delaware limited liability company, Dogness Group LLC ("Dogness Group"), with its operation focusing primarily on pet 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. Dogness Overseas owns all of the interests in Dogness Group.
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 RMB 71 million ($11.1 million) (the "Acquisition"). After the acquisition, Mejia became the Company's wholly-owned subsidiary.
On July 6, 2018, Dogness Intelligence Technology Co., Ltd. ("Intelligence Guangzhou") was incorporated under the laws of PRC in Guangzhou City of Guangdong Province in China with a total registered capital of RMB 80 million (approximately $12.6 million). One of the Company's subsidiaries, Dongguan Jiasheng, owns 58 % of Intelligence Guangzhou, with the remaining 42 % ownership interest owned by two unrelated entities. Intelligence Guangzhou had immaterial operation since its inception and will conduct research and manufacturing of the Company's fast-growing intelligent pet products in the future.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (continued)
Dogness Pet Culture (Dongguan) Co., Ltd. ("Dogness Culture") was incorporated on December 14, 2018 with registered capital of RMB 10 million (approximately $1.6 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, the Chief Executive Officer, by which Dongguan Dogness acquired 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 $0.80 million) on April 16, 2020 along with other two shareholders' capital contributions of RMB 4.88 million (approximately $0.77 million). Dogness Culture mainly focuses on developing and expanding pet food market and pet related service in China.
As reflected in the Company's consolidated financial statements, the Company had cash balance of approximately $7.0 million as of December 31, 2021, and the cash provided by operating activities was approximately $3.8 million for the six months ended December 31, 2021. As of December 31, 2021, the Company had future minimum capital expenditure payable on its construction-in-progress projects of approximately $4.4 million within the next twelve months and additional $1.9 million for the next five years. In addition, the Company had unpaid tax liabilities of $5.0 million as of December 31, 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 construction projects mainly through cash flow from its operations, remaining cash from its January 2021 equity financing, July 2021 equity financing, February 2022 equity financing (see Note 18), 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.
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 the consolidated financial statements are released.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2021 and 2020 are not necessarily indicative of the results that may be expected for the full year. The information included in this interim report should be read in conjunction with the financial statements and notes thereto included in the Company's annual financial statements in form 20-F for the fiscal year ended June 30, 2021 as filed with the SEC on October 29, 2021.
The Company's consolidated financial statements reflect the operating results of the following entities:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of December 31, 2021, noncontrolling interests represent 42.0 % and 48.8 % noncontrolling shareholders' interests in Intelligence Guangzhou and Dogness Culture, respectively. The noncontrolling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Noncontrolling interests in the operating results of the Company are presented on the face of the unaudited consolidated statements of comprehensive income (loss) as an allocation of the total income or loss between noncontrolling interest holders and the shareholders of the Company.
In preparing the unaudited 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, and realization of deferred tax assets. Actual results could differ from those estimates.
The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains most of its bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
The Company's short-term investments consist of wealth management financial products purchased from PRC banks with maturities within one month to twelve months. The banks invest the Company's funds in certain financial instruments including money market funds, bonds or mutual funds, with rates of return on these investments ranging from 1.75 % to 3.95 % per annum. The carrying values of the Company's short-term investments approximate fair value because of their short-term maturities. The interest earned is recognized in the unaudited consolidated statements of comprehensive income (loss) over the contractual term of these investments.
The Company had short-term investments of $54,915 and $549,895 as of December 31, 2021 and June 30, 2021, respectively. The Company recorded interest income of $679 and $34,789 for the six months ended December 31, 2021 and 2020, respectively.
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 unaudited consolidated statements of 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. Allowance for uncollectible balances amounted to $26,611 and $26,272 as of December 31, 2021 and June 30, 2021, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Prepayment primarily consists of advances to suppliers for purchasing of raw materials that have not been received, and prepayment to a landlord for lease of a piece of land in order to build a warehouse in the near future. These advances are interest free, unsecured and short-term in nature and are reviewed periodically to determine whether their carrying value has become impaired.
Property, Plant and Equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The straight-line depreciation method is used to compute depreciation over the estimated useful lives of the assets, as follows:
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments that substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the unaudited consolidated statements of other comprehensive income (loss) in other income or expenses.
Construction-in-progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction-in-progress is not depreciated. Upon completion and ready for intended use, construction-in-progress is reclassified to the appropriate category within property, plant and equipment.
Interest expense on outstanding debt is capitalized during the period of significant capital asset construction. Capitalized interest on construction-in-progress is included within property, plant and equipment and is amortized over the life of the related assets.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible assets consist primarily of a customized software system purchased from a third-party vendor, used for accounting and production management and land use rights. Under PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as "ownership."
Intangible assets are stated at cost less accumulated amortization. Customized software systems are amortized using the straight-line method over the estimated useful economic life of 10 years. Land use rights are amortization using the straight-line method over the estimated useful life of 50 years, which is determined in connection with the term of the land use rights.
Long-term Investments in Equity Investees
On July 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 321 "Investments-Equity Securities" ("ASC 321"). In accordance with ASC 321, equity securities over which the Company has no significant influence (generally less than a 20 % ownership interest) with readily determinable fair values are accounted for at fair value based on quoted market prices. Equity securities without readily determinable fair values are accounted for either at fair value or using the measurement alternative. Under the measurement alternative, the equity investments are measured at cost, less any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the Company.
Nanjing Rootaya Intelligence Technology Co., Ltd. ("Nanjing Rootaya") is an entity incorporated on March 25, 2015 in the PRC and is primarily engaged in development of smart pet products. In July 2018, the Company entered into an equity investment agreement with Nanjing Rootaya to invest RMB 1.25 million ($196,125 ) for 10 % of the ownership interest in Nanjing Rootaya, with the remaining 90 % of the ownership interest owned by three unrelated shareholders.
Dogness Network Technology Co., Ltd ("Dogness Network") is an entity incorporated on November 17, 2017 in the PRC and is engaged in the development and sales of smart pet products. In November 2018, the Company entered into an equity investment agreement with Dogness Network to invest RMB 8.0 million ($1,255,200 ) for 10 % of the ownership interest in Dogness Network, with the remaining 90 % of the ownership interest owned by an unrelated shareholder.
Linsun Smart Technology Co., Ltd ("Linsun") is an entity incorporated on January 25, 2018 in the PRC and is engaged in development and sales of smart pet products. In November 2018, the Company entered into an equity investment agreement with Linsun to invest RMB 3.0 million ($470,700 ) for 13 % of the ownership interest in Linsun, with the remaining 87 % of the ownership interest owned by three unrelated shareholders.
The purpose of entering into these equity investment agreements with Nanjing Rootaya, Dogness Network and Linsun was to establish cooperative business with these investees to jointly develop and distribute the Company's intelligent smart pet products. The Company accounts for the above-mentioned investments using the measurement alternative in accordance with ASC 321.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-term Investments in Equity Investees (continued)
The Company records the cost method investments at historical cost and subsequently records any dividends received from the net accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded as reductions in the cost of the investments. Investment in equity investees is evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Due to the fact that Nanjing Rootaya reported significant net loss and working capital deficit, and is unable to generate positive cash flow in the foreseeable future. A full impairment loss has been applied against this investment in fiscal 2020. For the Company's investments in Dogness Network and Linsun, no material impairment indicator was noted because their operation results indicated net income and cash inflows.
As of December 31, 2021 and June 30, 2021, the Company's long-term investments in equity investees amounted to $1,725,900 and $1,703,900 , respectively.
Fair Value of Financial Instruments
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Unless otherwise disclosed, the fair value of the Company's financial instruments including cash, short-term investments, accounts receivable, inventories, prepayments and other current assets, accounts payable, advance from customers, taxes payable, accrued expenses and other current liabilities, current portion of lease liabilities, and short-term bank loans approximate their fair values because of the short-term nature of these instruments. The Company's long-term investments are accounted for using the measurement alternative in accordance with ASC 321, which also approximate their recorded values.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company reviews long-lived assets, including definitive-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition below are the asset's carrying value, then the asset is deemed to be impaired and written down to its fair value. No impairment was recorded for the six months ended December 31, 2021 and 2020.
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 on the consolidated balance sheets. The standard did not materially impact our consolidated net earnings and cash flows.
Rental revenues are recognized as earned in accordance with the terms of the respective lease agreement on a straight-line basis. Promotional discounts are recognized as a reduction to rental income over the promotional period. Late charges, administrative fees and other fees are recognized as income when earned. Management reviews the tenant's payment history and financial condition periodically in determining, in its judgment, whether any accrued rental income and unbilled rent receivable balances applicable to each specific property is collectable.
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.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 six months ended December 31, 2021 and 2020, 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 cost of goods sold. 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 pet products, to wholesalers and retailers. 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.
The Company also generates revenue by providing ribbon dyeing service and pet grooming services to customers. The Company utilizes its manufacturing capability and color dyeing technology to provide dyeing solutions to customers and apply dyes or pigments on ribbons made of textile materials such as fibers, yarns and fabrics to achieve customer desired color fastness and quality. The Company recognizes revenue at the point when dyeing solutions and related services are rendered, products after dyeing are delivered and accepted by the customers. The revenue from pet grooming services is recognized when the services are rendered.
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 December 31, 2021 and June 30, 2021, 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.
The Company disaggregates its revenue from contracts by product and service 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 six months ended December 31, 2021 and 2020 are disclosed in Note 16 of this unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development expenses include costs directly attributable to the conduct of research and development projects, including the cost of salaries and other employee benefits, testing expenses, consumable equipment and consulting fees. All costs associated with research and development are expensed as incurred.
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Income taxes are accounted for using the asset and liability approach. Under this approach, income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred income taxes assets and liabilities 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. As of December 31, 2021, the Company had income tax payable of approximately $5.0 million, primarily related to the unpaid income tax in China. Based on statutory surcharge for overdue tax payment, the Company recorded surcharge of $136,892 as part of the income tax provision as reflected in the consolidated statements of comprehensive income for the six months ended December 31, 2021. The Company expects to settle the income tax liabilities in fiscal 2022 when the 2021 annual income tax return is assessed by the local tax authority. As of December 31, 2021, all of the Company's tax returns of its PRC Subsidiaries, Hong Kong subsidiaries, and U.S subsidiary remain open for statutory examination by relevant tax authorities.
Since significant amount of the Company's products are exported to the U.S. and Europe, the Company is eligible for VAT refunds when the Company completes all the required tax filing procedures. All of the VAT returns of the Company have been and remain subject to examination by the tax authorities for five years from the date of filing.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company computes earnings per share ("EPS") in accordance with ASC 260, "Earnings per Share" ("ASC 260"). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
The Company follows the provisions of ASC 718, "Compensation - Stock Compensation," which establishes the accounting for employee share-based awards. For employee share-based awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense with graded vesting on a straight-line basis over the requisite service period for the entire award.
The Company's principal country of operations is the PRC. The financial position and results of the operations of HK Dogness, HK Jiasheng, Dongguan Dogness, Dongguan Jiasheng, Meijia, Intelligence Guangzhou and Dogness Culture are determined using 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 Company's financial statements are reported using U.S. Dollars. 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 unaudited 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 (loss) included in unaudited consolidated statements of changes in equity. Gains and losses from foreign currency transactions are included in the unaudited consolidated statement of comprehensive income (loss).
The following table outlines the currency exchange rates that were used in creating the unaudited consolidated financial statements:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders' equity but are excluded from net income. Other comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company not using the U.S. dollar as its functional currency.
In accordance with ASC 230, "Statement of Cash Flows," cash flows from the Company's operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on the reported revenues, net income and cash flows.
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 adoption of ASU 2019-12 does not have a material impact on its consolidated 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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
For the six months ended December 31, 2021 and 2020, the Company recorded a bad debt recovery of $Nil and $15,358 , respectively. Allowance for doubtful accounts amounted to $26,611 and $26,272 as of December 31, 2021 and June 30, 2021, respectively.
Allowance for doubtful accounts movement is as follows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Inventories consisted of the following:
Inventory includes raw materials, work in progress and finished goods. Finished goods include direct material costs, direct labor costs and manufacturing overhead.
During the six months ended December 31, 2020, the Company disposed approximately $0.7 million obsolete and damaged inventory. For the six months ended December 31, 2021, the Company had no inventory markdown.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment stated at cost less accumulated depreciation consisted of the following:
No impairment was recorded for the six months ended December 30, 2021 and 2020, respectively.
Depreciation expense was $1,805,202 and $1,239,397 for the six months ended December 31, 2021 and 2020, respectively. In connection with the $7.1 million long-term bank loans borrowed from Dongguan Rural Commercial Bank, the Company's subsidiary Meijia pledged its fixed assets of approximately $5.6 million as the collateral to secure the loans. In addition, in connection with the Company's $0.7 million loan from Cathay Bank, the Company's U.S. subsidiary Dogness Group pledged its fixed assets as collateral to secure the borrowing (see Note 9).
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET (continued)
(1) The Company's CIP primarily consisted of the following:
The Company's subsidiary Dongguan Jiasheng had a capital project 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 RMB263.5 million ($41.3 million). As of December 31, 2021, the Company had substantially completed this project and transferred all of the related CIP to fixed assets. As of December 31, 2021, the Company has made total payments of approximately RMB 223.4 million ($35.1 million) in connection to this project, which resulted in future minimum capital expenditure payments of RMB 40.1 million ($6.2 million).
As of December 31, 2021, future minimum capital expenditures on the Company's construction-in-progress projects are estimated as follows:
The Company plans to fund unpaid amount of these CIP projects through working capital generated from operations, bank borrowings, borrowing from related parties, the proceeds received from July 2021 equity financing, February 2022 equity financing as well as other future potential capital raising activities.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INTANGIBLE ASSETS, NET
Net intangible assets consisted of the following:
Estimated future amortization expense is as follows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has several operating leases for manufacturing facilities and offices. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Rent expense for the six months ended December 31, 2021 and 2020 was $ 239,559 and $233,857 , respectively.
Effective July 1, 2019, the Company adopted the new lease accounting standard using a modified retrospective transition method which allowed the Company not to recast comparative periods presented in its consolidated financial statements. In addition, the Company elected the package of practical expedients, which allowed the Company to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company combines the lease and non-lease components in determining the ROU assets and related lease obligation. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities as disclosed below and had no impact on accumulated deficit as of July 1, 2019. ROU assets and related lease obligations are recognized at commencement date based on the present value of remaining lease payments over the lease term.
Supplemental balance sheet information related to operating leases was as follows:
The weighted average remaining lease terms was 14.17 years as of December 31, 2021.
The following is a schedule of maturities of lease liabilities as of December 31, 2021:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Short-term loans consisted of the following:
On February 6, 2020, one of the Company's U.S. subsidiaries, Dogness Group, obtained a line of credit from Cathay Bank, pursuant to which Dogness Group has the availability to 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.
Long-term loan consisted of the following:
Interest expenses for the above-mentioned loans amounted to $246,055 and $158,269 for the six months ended December 31, 2021 and 2020, respectively.
The Company capitalized interest of $91,126 and $51,425 related to certain CIP projects expenditures for the six months ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, the Company's short-term and long-term loans totaled approximately $7.8 million. The repayment schedule for the Company's bank loans are as follows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(a) Corporate Income Taxes ("CIT")
Dogness is incorporated in the BVI as an offshore holding company and is not subject to tax on income or capital gain under the laws of BVI.
Under Hong Kong tax laws, subsidiaries in Hong Kong are subject to statutory income tax rate at 16.5 % if revenue is generated in Hong Kong and there are no withholding taxes in Hong Kong on remittance of dividends.
The following table reconciles the statutory rate to the Company's effective tax:
For the six months ended
The provision for income tax consists of the following:
For the six months ended
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred tax assets as of December 31, 2021 and June 30, 2021 consist of the following:
The Company's taxes payable consists of the following:
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company may be involved in various legal proceedings, claims and other disputes arising from the commercial operations, projects, employees and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although the Company can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on the Company, the Company believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided or covered by insurance, will not have a material adverse effect on the Company's consolidated financial position or results of operations or liquidity.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
Dogness Intelligence Technology Co., Ltd.
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 ($12.6 million). The Company's subsidiary, Dongguan Jiasheng, is required to contribute RMB 46.4 million ($7.3 million) as paid-in capital in exchange for 58 % ownership interest in Intelligence Guangzhou. As of December 31, 2021 and as of the date of this filing, Dongguan Jiasheng has not made the capital contribution. Pursuant to the article of incorporation, the Company is required to complete the capital contribution before May 22, 2038.
Zhangzhou Meijia Metal Product Ltd.
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.
In December 2020, Dongguan Jiasheng amended its Article of Incorporation to increase its registered capital from RMB 50.0 million ($7.8 million) to RMB 55.0 million ($8.6 million). As of June 30, 2021, RMB 55.0 million ($8.6 million) capital contribution has been made.
As disclosed in Note 3 above, the Company is required to invest RMB 8.0 million (approximately $1.3 million) in exchange for 10 % ownership interest in Dogness Network. As of June 30, 2021, RMB 8.0 million (approximately $1.3 million) to Dogness Network has been made.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS
The relationship of related parties is summarized as follow:
Due from related parties consist of mainly rent receivables with the balance as of the following:
As of December 31, 2021 and June 30, 2021, due to related parties consist of the following:
Mr. Silong Chen periodically provides working capital loans to support the Company's operations when needed. Such advances are non-interest bearing and due on demand.
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 long-term bank loans. (See Note 9).
Revenue from related parties consisted of the following:
For the six months ended
Cost of revenue associated with the sales to these two related parties amounted to $728,572 and $285,258 for the six months ended December 31, 2021 and 2020, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS (continued)
Accounts receivable from a related party consisted of the following:
Accounts payables to related parties consisted of the following:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dogness was established under the laws of BVI on July 11, 2016. The original authorized number of common shares was 15,000,000 shares with par value of $0.002 each. On April 26, 2017, Shareholders of the Company held a meeting (the "Meeting") and approved the following resolutions: (i) increase the authorized number of common shares to 100,000,000 shares with par value of $0.002 each, of which 15,000,000 were issued and outstanding; and (ii) reclassify the currently issued and outstanding common shares into two classes, Class A common shares and Class B common shares, which have equal economic rights but unequal voting rights, pursuant to which Class A common shares receive one vote each and Class B common shares receive three votes each.
On December 18, 2017, the Company completed its initial public offering ("IPO") of 10,913,631 Class A common shares at a public offering price of $5.00 per share. The gross proceeds were approximately $54.6 million before deducting placement agent's commission and other offering expenses, resulting in net proceeds of approximately $50.2 million. In connection with the offering, the Company's Class A common shares began trading on the NASDAQ Global Market on December 20, 2017 under the symbol "DOGZ."
In connection with and upon closing of the IPO on December 18, 2017, the Company agreed to issue 500,000 warrants to the underwriters and to register herein warrants to purchase up to a total of up to 500,000 Class A common shares (equal to 5 % of the aggregate number of Class A common shares sold in the IPO).
On January 20, 2021, the Company closed a securities purchase agreement with certain institutional investors for the sale of 3,455,130 Class A common shares in a registered offering at the price of $2.15 per common share. After the payment of expenses, the Company received approximately $6.6 million in net proceeds from the sale of the common shares.
In addition, warrants carry a term of three years to purchase an aggregate of 1,727,565 common shares for $2.70 per share were issued to the investors and warrants to purchase an aggregate of 276,410 common shares for $2.70 per share were issued as commission to the placement agent in the offering. If fully exercised, the Company would receive aggregate gross proceeds from the warrants of approximately $5.4 million. These warrants were recorded at their fair value on the date of grant as a component of shareholders' equity. 1,587,259 warrants were excised during six months ended December 31, 2021.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Common Shares Issued For Service
As of December 31, 2021, the Company had an aggregate of 33,468,561 common shares outstanding, consisting of 24,399,561 Class A and 9,069,000 Class B common shares; respectively. As of June 30, 2021, the Company had an aggregate of 29,624,814 common shares outstanding, consisting of 20,555,814 Class A and 9,069,000 Class B common shares; respectively.
The Company's subsidiaries located in mainland China are required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC ("PRC GAAP"). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC regulations until the reserve is equal to 50% of the entity's registered capital . Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The Company allocated $Nil and $2,685 to statutory reserves during the six months ended December 31, 2021 and 2020 in accordance with PRC regulations, respectively. The restricted amounts as determined by the PRC statutory laws totaled both was $291,443 as of December 31, 2021 and June 30, 2021, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted net income (loss) per share:
For the six months ended
On November 10, 2017, the Company signed a consulting agreement to engage TJ Capital Management, L.P. ("TJ Capital") to provide strategic consulting services to the Company in matters relating to investor relations, capital markets and shareholder value creation strategy.
On May 23, 2019, the Company signed a service termination agreement with TJ Capital to terminate the consulting agreement previously entered on November 10, 2017. As a result, the options granted under the original service agreement were also cancelled. No share-based compensation expenses were accrued up to the date of the termination of this agreement, because TJ Capital had not provided the services.
On May 28, 2017, the Company signed an employment agreement with Dr. Yunhao Chen, the Chief Financial Officer of the Company. As the part of the compensation, the Company agreed to grant Ms. Chen options to purchase up to 120,000 Class A common shares, at an exercise price of $1.50 per share. The grant was effective at the IPO date and the options vest at a rate of 5,000 per month, beginning one month following completion of the IPO.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 2017, the Company signed an employment agreement with Mr. Silong Chen, the Chief Executive Officer of the Company. As the part of the compensation, the Company agrees to grant Mr. Chen options to purchase up to 360,000 Class A common shares, at an exercise price of $1.50 per share. The grant was effective at the IPO date and the options vest at a rate of 10,000 per month, beginning one month following completion of the IPO. On October 31, 2019, Mr. Silong Chen voluntarily waived the remaining unvested 140,000 options.
The following table summarized the Company's share option activity:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Company's chief operating decision maker in order to allocate resources and assess performance of the segment.
Revenue by products and services
The summary of total revenues by product and service categories for the six months ended December 31, 2021 and 2020 was as follows:
For the six months ended
Geographic information about the revenues, which are classified based on customers, is set out as follows:
For the six months ended
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONCENTRATONS AND CREDIT RISK
A majority of the Company's expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries' assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People's Bank of China ("PBOC"). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As of December 31, 2021, three customers aggregately accounted for 44.0 % of the Company's total accounts receivable, with related party customer, Dogness Network accounted for 16.1 %, and two third party customers accounted for 15.7 % and 12.1 % of the Company's total accounts receivable, respectively. As of June 30, 2021, three customers aggregately accounted for 45.2 % of the Company's total accounts receivable, with related party customer, Dogness Network accounted for 17.7 %, and two third party customers accounted for 14.5 % and 13.0 % of the Company's total accounts receivable, respectively.
As of December 31, 2021 two suppliers aggregately accounted for 60.1 % of the Company's total accounts payable, with related party supplier, Linsun accounted for 50.0 % and one third party supplier accounted for 10.1 % of the Company's total accounts payable. As of June 30, 2021, one related party supplier, Linsun, accounted for 29.2 % of the Company's total account payable.
For the six months ended December 31, 2021, sales to the customers outside of China accounted for 53.1 % and 47.5 % of the Company's total revenue, respectively. For the six months ended December 31,2021, four customers accounted for 22.1 %, 6.6 % ,5.1 % and 5.0 % of the Company's total revenue, respectively. For the six months ended December 31,2020, three customers accounted for 31.4 %, 12.4 % and 6.3 % of the Company's total revenue, respectively.
For the six months ended December 31, 2021, one related party suppliers accounted for 38.8 % of the Company's total raw materials purchases. For the six months ended December 31, 2020, two suppliers accounted for 26.1 % of the Company's total raw materials purchases, with related party supplier Linsun and a third-party supplier accounted for 15.6 % and 10.5 % of the Company's total raw material purchases, respectively.
Pursuant to the consulting agreement signed between TJ Capital and the Company on July 30, 2019, TJ Capital opted to exercise 30,000 share options on a cashless basis. On January 10, 2022, the Company issued 24,382 common shares to TJ Capital.
Pursuant to the employment agreement with Dr. Yunhao Chen, the Chief Financial Officer of the Company on May 28, 2017, Dr. Yunhao Chen opted to exercise 120,000 shares at the exercise price of $1.50 on February 1, 2022.
58,700 warrants in connection with January 2021 equity financing were exercised to purchase 58,700 common shares at $2.70 per share in January 2022.
On February 24, 2022, the Company closed a registered direct offering of 1,966,251 Class A common shares at a price of $2.88 per share with certain institutional investors for total gross proceeds of $5.66 million. The proceeds from this offering will be used for general corporate and working capital purposes.
Dogness (International) Corporation published this content on 26 May 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 May 2022 21:47:12 UTC.