Exhibit 99.1
DOGNESS (INTERNATIONAL) CORPORATION
INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
DOGNESS (INTERNATIONAL) CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | $ | ||||||
Restricted cash | ||||||||
Short-term investments | ||||||||
Accounts receivable from third-party customers, net | ||||||||
Accounts receivable from a related party | ||||||||
Inventories, net | ||||||||
Due from related parties | ||||||||
Prepayments and other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment, net | ||||||||
Right-of-use lease assets, net | ||||||||
Intangible assets, net | ||||||||
Long-term investments in equity investees | ||||||||
Deferred tax assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term bank loans | $ | |||||||
Current portion of long term bank loans | ||||||||
Accounts payable | ||||||||
Accounts payable – related parties | ||||||||
Due to related parties | ||||||||
Advances from customers | ||||||||
Taxes payable | ||||||||
Accrued expenses and other current liabilities | ||||||||
Operating lease liabilities, current | ||||||||
Total current liabilities | ||||||||
Long term bank loans | ||||||||
Operating lease liabilities, non-current | ||||||||
TOTAL LIABILITIES | $ | $ | ||||||
Commitments | ||||||||
EQUITY | ||||||||
Common shares, $ | par value, shares authorized, and issued and outstanding as of December 31, 2021 and June 30, 2021, respectively||||||||
Class A Common shares | ||||||||
Class B Common shares | ||||||||
Additional paid-in capital | ||||||||
Statutory reserve | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive gain (loss) | ( | ) | ||||||
Total Dogness (International) Corporation shareholders’ equity | ||||||||
Noncontrolling interest | ||||||||
Total equity | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2 |
DOGNESS (INTERNATIONAL) CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For The Six Months Ended December 31, | ||||||||
2021 | 2020 | |||||||
Revenues - third party customers | $ | $ | ||||||
Revenues – related parties | ||||||||
Total Revenues | ||||||||
Cost of revenues – third party customers | ( | ) | ( | ) | ||||
Cost of revenues – related parties | ( | ) | ( | ) | ||||
Total cost of revenues | ( | ) | ( | ) | ||||
Gross Profit | ||||||||
Operating expenses: | ||||||||
Selling expenses | ||||||||
General and administrative expenses | ||||||||
Research and development expenses | ||||||||
Total operating expenses | ||||||||
Income (loss) from operations | ||||||||
Other expenses: | ||||||||
Interest expense, net | ( | ) | ( | ) | ||||
Foreign exchange transaction gain (loss) | ( | ) | ( | ) | ||||
Other income (expenses), net | ||||||||
Rental income from related parties, net | ||||||||
Gain from disposition of a subsidiary | ||||||||
Total other expense, net | ( | ) | ( | ) | ||||
Income before income taxes | ||||||||
Provision for income taxes | ||||||||
Net income | ||||||||
Less: net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
Net income attributable to Dogness (International) Corporation | ||||||||
Other comprehensive income: | ||||||||
Foreign currency translation gain | ||||||||
Comprehensive income | ||||||||
Less: comprehensive loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
Comprehensive income attributable to Dogness (International) Corporation | $ | $ | ||||||
Earnings Per share | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
Weighted Average Shares Outstanding | ||||||||
Basic | ||||||||
Diluted |
The accompanying notes are an integral part of unaudited these consolidated financial statements.
F-3 |
DOGNESS (INTERNATIONAL) CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020
(Unaudited)
Common Shares | Additional Paid in | Statutory | Retained | Accumulated Other Comprehensive | Non- controlling | |||||||||||||||||||||||||||
Shares | Amount | Capital | Reserves | Earnings | Loss | interest | Total | |||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
Net income (loss) for the period | - | ( | ) | |||||||||||||||||||||||||||||
Options granted for services | - | |||||||||||||||||||||||||||||||
Capital contribution made by noncontrolling shareholders | - | |||||||||||||||||||||||||||||||
Disposition of a subsidiary | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Statutory reserve | - | ( | ) | |||||||||||||||||||||||||||||
Foreign currency translation gain | - | |||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
Net income (loss) for the period | - | ( | ) | |||||||||||||||||||||||||||||
Issuance shares for Private placement | ||||||||||||||||||||||||||||||||
Exercise of warrants | ||||||||||||||||||||||||||||||||
Options granted for services | - | |||||||||||||||||||||||||||||||
Share option exercised | ( | ) | ||||||||||||||||||||||||||||||
Foreign currency translation gain | - | |||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-4 |
DOGNESS (INTERNATIONAL) CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | ||||||||
Share-based compensation for services | ||||||||
(Gain) loss from disposition of fixed assets | ( | ) | ||||||
Gain from disposition of a subsidiary | ( | ) | ||||||
Change in inventory reserve | ( | ) | ||||||
Change in bad debt allowance | ( | ) | ||||||
Deferred tax benefit | ( | ) | ||||||
Unrealized foreign exchange loss | ||||||||
Amortization of the Right-of-use assets | ||||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ( | ) | ||||
Accounts receivable-related parties | ( | ) | ||||||
Inventories | ( | ) | ||||||
Prepayments and other current assets | ||||||||
Prepayments and other current assets-related party | ( | ) | ||||||
Accounts payables | ( | ) | ||||||
Accounts payables-related party | ( | ) | ||||||
Accrued expenses and other current liabilities | ( | ) | ||||||
Advance from customers | ||||||||
Operating lease liabilities | ( | ) | ( | ) | ||||
Taxes payable | ||||||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
Cash flows from investing activities: | ||||||||
Cash paid for purchase of property, plant and equipment and accrued liability related to CIP | ( | ) | ( | ) | ||||
Proceeds from disposition of fixed assets | ||||||||
Long-term investments in equity investees | ( | ) | ||||||
Proceeds upon maturity of short-term investments | ||||||||
Proceeds from disposition of a subsidiary | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Capital contribution made by noncontrolling shareholders | ||||||||
Net Proceeds from Exercise of warrants | ||||||||
Net Proceeds from private placement | ||||||||
Proceeds from short-term bank loans | ||||||||
Proceeds from long-term bank loans | ||||||||
Repayment of short-term bank loans | ( | ) | ( | ) | ||||
Repayment of long-term bank loans | ( | ) | ( | ) | ||||
Proceeds from (repayment of) related party loans | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash and restricted cash | ||||||||
Net increase in cash and restricted cash | ||||||||
Cash and restricted cash, beginning of period | ||||||||
Cash and restricted cash, end of period | $ | $ | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid for income tax | $ | $ | ||||||
Cash paid for interest | $ | $ | ||||||
Non-Cash Investing Activities | ||||||||
Right-of-assets obtained in exchange for operating lease obligations | $ | $ | ||||||
Transfer from construction-in-progress to fixed assets | $ | $ | ||||||
Additions to construction-in-progress through accounts payable | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-5 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
Reorganization
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
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
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 % 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 million ($ 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
F-6 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS (continued)
On
February 5, 2019, Dogness Japan Co. Ltd. (“Dogness Japan”) was incorporated in Japan. The Company invested $
Dogness
Pet Culture (Dongguan) Co., Ltd. (“Dogness Culture”) was incorporated on
NOTE 2 – LIQUIDITY
As
reflected in the Company’s consolidated financial statements, the Company had cash balance of approximately $
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:
Name of Entity | Date of Incorporation | Place of Incorporation | % of Ownership | Principal Activities | ||||||||
Dogness (International) Corporation (“Dogness” or the “Company”) | Parent, | % | ||||||||||
Dogness (Hongkong) Pet’s Products Co., Limited (“HK Dogness”) | % | |||||||||||
Jiasheng Enterprise (Hong Kong) Co., Limited (“HK Jiasheng”) | % | |||||||||||
Dogness Intelligence Technology (Dongguan) Co., Ltd. (“Dongguan Dogness”) | % | |||||||||||
Dongguan Jiasheng Enterprise Co., Ltd. (“Dongguan Jiasheng”) | % | |||||||||||
Zhangzhou Meijia Metal Product Co., Ltd (“Meijia”) | % | |||||||||||
Dogness Overseas Ltd (“Dogness Overseas”) | % | |||||||||||
Dogness Group LLC (“Dogness Group”) | % | |||||||||||
Dogness Intelligence Technology Co., Ltd. (“Intelligence Guangzhou”) | % | |||||||||||
Dogness Pet Culture (Dongguan) Co. Ltd. (“Dogness Culture”) | % |
F-7 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Noncontrolling interests
As
of December 31, 2021, noncontrolling interests represent
Use of Estimates
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.
Cash
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.
Short-term Investments
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
The
Company had short-term investments of $
Accounts Receivable, net
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 $
F-8 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Prepayment
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:
Useful life | ||
Buildings | ||
Leasehold improvement | ||
Machinery equipment | ||
Transportation vehicles | ||
Office equipment and furniture |
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 (“CIP”)
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.
F-9 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets, net
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
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
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
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
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
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.
F-10 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $
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:
● | Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
● | Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. | |
● | Level 3 - inputs to the valuation methodology are unobservable. |
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.
F-11 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived assets impairment
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.
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 on the consolidated balance sheets. The standard did not materially impact our consolidated net earnings and cash flows.
Rental income
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.
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.
F-12 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition (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.
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 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.
Disaggregation of Revenues
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.
F-13 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development costs
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.
Income Taxes
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.
Value added tax (“VAT”)
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.
F-14 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Foreign Currency Translation
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:
Six months ended December 31, 2021 | Six months ended December 31, 2020 | June 30, 2021 | ||||||||||||||||||
Period End spot rate | US$1= | US$1=RMB | US$1=JPY | US$1=RMB
| US$1=JPY | |||||||||||||||
Average rate | US$1= | US$1=RMB | US$1=JPY | US$1=RMB
| US$1=JPY |
F-15 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive income (loss)
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.
Statement of Cash Flows
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.
Reclassifications
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.
Recent 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 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
F-16 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
|
As of December 31, 2021 | As of June 30, 2021 | ||||||
Accounts receivable from third-party customers | $ | $ | ||||||
Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
Total accounts receivable from third-party customers, net | ||||||||
Add: accounts receivable - related parties | ||||||||
Total accounts receivable, net | $ | $ |
For
the six months ended December 31, 2021 and 2020, the Company recorded a bad debt recovery of $ and $
Approximately
RMB
In
connection with the Company’s long-term investments in equity investees as disclosed in Note 3, the Company sold certain intelligence
pet products to related parties Dogness Technology and Dogness Network. As of December 31, 2021. The outstanding accounts
receivable from Dogness Technology and Dogness Network amounted to $
Allowance for doubtful accounts movement is as follows:
As of December 31, 2021 | As of June 30, 2021 | |||||||
Beginning balance | $ | $ | ||||||
Additions | ||||||||
Recovery | ||||||||
Write-off | ||||||||
Foreign currency translation adjustments | ||||||||
Ending balance | $ | $ |
F-17 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – INVENTORIES, NET
Inventories consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Raw materials | $ | $ | ||||||
Work in process | ||||||||
Finished goods | ||||||||
Less: inventory allowance | ( | ) | ( | ) | ||||
Inventory, net | $ | $ |
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 $
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment stated at cost less accumulated depreciation consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Buildings | $ | $ | ||||||
Machinery and equipment | ||||||||
Office equipment and furniture | ||||||||
Automobiles | ||||||||
Leasehold improvements | ||||||||
Construction-in-progress (“CIP”) (1) | ||||||||
Total | ||||||||
Less: Accumulated depreciation | ( | ) | ( | ) | ||||
Impairment of fixed assets | ( | ) | ( | ) | ||||
Property, plant and equipment, net | $ | $ |
Depreciation
expense was $
F-18 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 RMB
The
Company’s subsidiary Dogness Culture was also working on a project to decorate a pet themed retail store. Total cost is
RMB
As of December 31, 2021, future minimum capital expenditures on the Company’s construction-in-progress projects are estimated as follows:
Capital expenditure commitment on Dongguan Jiasheng | Capital expenditure commitment on pet store under Dogness Culture | Total | ||||||||||
2022 | $ | $ | $ | |||||||||
2023 | ||||||||||||
2024 | ||||||||||||
2025 | ||||||||||||
Total | $ | $ | $ |
Subsequently,
from January 2022 to April 2022, the Company made payment of RMB
Capital expenditure commitment on Dongguan Jiasheng | Capital expenditure commitment on pet store under Dogness Culture | Total | ||||||||||
2022 | $ | $ | $ | |||||||||
2023 | ||||||||||||
2024 | ||||||||||||
2025 | ||||||||||||
Total | $ | $ | $ |
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.
F-19 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – INTANGIBLE ASSETS, NET
Net intangible assets consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Software | $ | $ | ||||||
Land use right | ||||||||
Less: accumulated amortization | ( | ) | ( | ) | ||||
Intangible assets, net | $ | $ |
Amortization
expense was $
Estimated future amortization expense is as follows:
Twelve months ending December 31, | Amortization expense | |||
2022 | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
Thereafter | ||||
Total | $ |
F-20 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – LEASES
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 $
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:
December 31, 2021 | June 30, 2021 | |||||||
Right-of-use assets, net | $ | $ | ||||||
Operating lease liabilities - current | $ | $ | ||||||
Operating lease liabilities - non-current | ||||||||
Total operating lease liabilities | $ | $ |
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:
Twelve months ending December 31, | ||||
2022 | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
Total future minimum lease payments | ||||
Less: imputed interest | ||||
Total | $ |
F-21 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – BANK LOANS
Short-term loans consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Cathay Bank | ||||||||
Effective interest rate at | $ | $ | ||||||
Total | $ | $ |
(1) |
As
of December 31, 2021, the outstanding balance was $ |
Long-term loan consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Dongguan Rural Commercial Bank | ||||||||
Effective interest rate at | ||||||||
Less: current portion of long-term loans | ( | ) | ( | ) | ||||
Long-term loans | $ | $ |
On
July 17, 2020, the Company entered into multiple loan agreements with Dongguan Rural Commercial Bank to borrow an aggregate of RMB
Interest
expenses for the above-mentioned loans amounted to $
The
Company capitalized interest of $
As
of December 31, 2021, the Company’s short-term and long-term loans totaled approximately $
Twelve months ending December 31, | Repayment | |||
2022 | $ | |||
2023 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
2028 | ||||
Total | $ |
F-22 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – TAXES
(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
EIT
is typically governed by the local tax authority in China. Each local tax authority at times may grant tax holidays to local enterprises
as a way to encourage entrepreneurship and stimulate the local economy. The corporate income taxes for the six months ended December
31, 2021 and 2020 were reported at a reduced rate of
The following table reconciles the statutory rate to the Company’s effective tax:
For the six months ended December 31, | ||||||||
2021 | 2020 | |||||||
Income tax expense computed based on PRC statutory rate | $ | $ | ||||||
Effect of rate differential for Hong Kong and other outside PRC entities | ( | ) | ( | ) | ||||
Effect of PRC preferential tax rate | ( | ) | ( | ) | ||||
Change in valuation allowance | ( | ) | ||||||
Surcharge on unpaid income tax | ||||||||
Permanent difference | ( | ) | ||||||
Total income tax provisions | $ | $ |
The provision for income tax consists of the following:
For the six months ended December 31, | ||||||||
2021 | 2020 | |||||||
Current income tax provision | $ | $ | ||||||
Deferred income tax benefit | ( | ) | ||||||
Total income tax expense | $ | $ |
F-23 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – TAXES (continued)
The components of deferred tax assets as of December 31, 2021 and June 30, 2021 consist of the following:
December 31, 2021 | June 30, 2021 | |||||||
Deferred tax assets: | ||||||||
Net operating losses | $ | $ | ||||||
Assets impairment reserve | ||||||||
Depreciation and others | ( | ) | ||||||
Valuation allowance | ( | ) | ( | ) | ||||
Deferred tax assets, net | $ | $ |
(b) Taxes Payable
The Company’s taxes payable consists of the following:
December 31, 2021 | June 30, 2021 | |||||||
Corporate income tax payable | $ | $ | ||||||
Other tax payable | ||||||||
Total taxes payable | $ | $ |
As
of December 31, 2021 and June 30, 2021, the Company had accrued tax liabilities of approximately $
NOTE 11 – COMMITMENTS AND CONTINGENCIES
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.
F-24 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – COMMITMENTS AND CONTINGENCIES (continued)
Capital Investment Obligation
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
Zhangzhou Meijia Metal Product Ltd.
Meijia
was incorporated under the laws of the People’s Republic of China with a total registered capital of RMB
As
of the date of this report, pursuant to the articles of incorporation of Meijia, the Company is obligated to contribute the remaining
RMB
Dongguan Jiasheng Enterprise Ltd.
In
December 2020, Dongguan Jiasheng amended its Article of Incorporation to increase its registered capital from RMB
Dogness Network
As
disclosed in Note 3 above, the Company is required to invest RMB
Capital Expenditure Commitment
In
connection with the Company’s construction projects on Dogness Culture and Dongguan Jiasheng, from January 2022 to
March 2022, the Company made payments of RMB
F-25 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – RELATED PARTY TRANSACTIONS
The relationship of related parties is summarized as follow:
Name of Related Party | Relationship to the Company | |
Silong Chen | ||
Junqiang Chen | ||
Linsun Smart Technology Co., Ltd (“Linsun”) | ||
Dogness Network Technology Co., Ltd (“Dogness Network”) | ||
Dogness Technology Co., Ltd (“Dogness Technology”) |
(1) | Due from related party |
Due from related parties consist of mainly rent receivables with the balance as of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Linsun | $ | $ | ||||||
Dogness Network | ||||||||
Total | $ | $ |
(2) | Due to related parties |
As of December 31, 2021 and June 30, 2021, due to related parties consist of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Mr. Silong Chen | $ | $ | ||||||
Total | $ | $ |
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.
(3) | 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 long-term bank loans. (See Note 9).
(4) | Sales to related parties |
Revenue from related parties consisted of the following:
For the six months ended December 31, |
||||||||
Name | 2021 | 2020 | ||||||
Dogness Technology | $ | $ | ||||||
Dogness Network | ||||||||
Total | $ | $ |
Cost
of revenue associated with the sales to these two related parties amounted to $
F-26 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – RELATED PARTY TRANSACTIONS (continued)
(5) | Accounts receivable from a related party |
Accounts receivable from a related party consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Accounts receivable - related party: | ||||||||
Dogness Network | $ | $ | ||||||
Dogness Technology | ||||||||
Total | $ | $ |
As
of December 31, 2021, total accounts receivable from related parties amounted to $
(6) | Accounts payable to related parties |
Accounts payables to related parties consisted of the following:
As of December 31, | As of June 30, | |||||||
2021 | 2021 | |||||||
Accounts payable - related parties: | ||||||||
Linsun | $ | $ | ||||||
Total | $ | $ |
(7) | Purchase from related parties |
During
the six months ended December 31, 2021 and 2020, the Company purchased certain pet product components and parts, such as smart pet water
and food feeding devices, from Linsun. Total purchases from Linsun amounted to $
(8) | Lease arrangement with related parties |
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
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
On
August 1, 2020, Dongguan Jiasheng signed a lease agreement with Dogness Technology, which enabled Dogness Technology to
lease part of Dongguan Jiasheng’s new production facilities of approximately
F-27 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – EQUITY
Common Shares
Dogness was established under the laws of BVI on July 11, 2016. The original authorized number of common shares was shares with par value of $ 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 shares with par value of $ each, of which 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.
Initial Public Offering
On
December 18, 2017, the Company completed its initial public offering (“IPO”) of
Public Offering Warrants
In
connection with and upon closing of the IPO on December 18, 2017, the Company agreed to issue
These
warrants carry a term of
Equity Financing
January 2021 equity financing
On
January 20, 2021, the Company closed a securities purchase agreement with certain institutional investors for the sale of
In
addition, warrants carry a term of three years to purchase an aggregate of
July 2021 equity financing
On
July 19, 2021, the Company closed a securities purchase agreement with certain institutional investors for the sale of Class A common shares in a registered offering
at the price of $per common share. After payment of expenses,
the Company received approximately $
F-28 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 – EQUITY (continued)
Common Shares Issued For Service
On
April 15, 2021, the Company signed a consulting agreement with Real Miracle Investments Limited (“Real Miracle’) to provide
strategic business and marketing consulting services to the Company for nine months from April 15, 2021. As the consideration for the
service, Real Miracle is entitled to receive of the Company’s Class A common
shares within ten days upon signing the agreement. On April 28, 2021, these shares were issued to Real Miracle. These shares were
measured at $
As of December 31, 2021, the Company had an aggregate of common shares outstanding, consisting of Class A and Class B common shares; respectively. As of June 30, 2021, the Company had an aggregate of common shares outstanding, consisting of Class A and Class B common shares; respectively.
As
of December 31, 2021,
Statutory Reserve
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”).
F-29 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended December 31, 2021 and 2020, the effect of potential common shares from the unexercised options was dilutive since the exercise prices for the options were lower than the average market price. As a result, a total of and unexercised options were included in the computation of diluted earnings per share for the six months ended December 31, 2021 and 2020, respectively.
For the six months ended December 31, | ||||||||
2021 | 2020 | |||||||
Net income attributable to the Company | $ | $ | ||||||
Weighted average number of common shares outstanding - Basic | ||||||||
Dilutive securities -unexercised warrants and options | ||||||||
Weighted average number of common shares outstanding - diluted | ||||||||
Earnings per share - Basic | $ | $ | ||||||
Earnings per share – Diluted | $ | $ |
NOTE 15 – OPTIONS
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.
As the part of the agreement, TJ Capital was granted options to purchase of the Company’s Class A common shares. The options are exercisable at a purchase price of $per share with no restriction for sale, among which options shares were to vest months after the Company’s IPO date, shares were to vest months after the IPO date, and shares were to vest months after the IPO date.
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
July 30, 2019, the Company negotiated and signed a new Corporate and Executive Service Agreement with TJ Capital to provide strategic
consulting services to the Company relating to services such as investor relations, capital markets and shareholder value creation strategy.
The consulting service period is for two years, unless sooner terminated by either party or extended by the agreement of both parties.
Pursuant to the agreement, as the compensation for the services, TJ Capital will be granted options to purchase of the Company’s Class A common shares.
The options are exercisable at a purchase price of $per share, and the options shall be deemed to
be fully paid at a rate of options per month, commencing on August 1, 2019.
The options may be exercised at any time following vesting for cash or on a cashless basis. The aggregated fair value of the options
granted to TJ Capital was $
Pursuant to the consulting agreement signed between TJ Capital and the Company, TJ Capital opted to exercise share options on a cashless basis. On February 18, 2021, the Company issued common shares to TJ Capital. During the six months ended December 31, 2021, TJ Capital further opted to exercise and share options on a cashless basis, respectively. On November 4, 2021 and December 1, 2021, the Company issued and common shares to TJ Capital, respectively.
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 Class A common shares, at an exercise price of $ per share. The grant was effective at the IPO date and the options vest at a rate of per month, beginning one month following completion of the IPO.
F-30 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 – OPTIONS (continued)
The
aggregate fair value of the options granted to Dr. Yunhao Chen, the CFO, was $
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 Class A common shares, at an exercise price of $ per share. The grant was effective at the IPO date and the options vest at a rate of per month, beginning one month following completion of the IPO. On October 31, 2019, Mr. Silong Chen voluntarily waived the remaining unvested options.
The
aggregate fair value of the options granted to Mr. Silong Chen was $
The Company recorded $ and $ share-based compensation expense for the six months ended December 31, 2021 and 2020, respectively.
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Life in Years | ||||||||||
Outstanding June 30, 2020 | $ | |||||||||||
Exercisable, June 30, 2020 | $ | |||||||||||
Granted | - | |||||||||||
Cancelled | - | |||||||||||
Exercised | ( | ) | - | |||||||||
Outstanding June 30, 2021 | $ | |||||||||||
Exercisable, June 30, 2021 | $ | |||||||||||
Granted | - | |||||||||||
Granted | ||||||||||||
Cancelled | ||||||||||||
Exercised | ( | ) | - | |||||||||
Outstanding December 31, 2021 | $ | |||||||||||
Exercisable, December 31, 2021 | $ |
F-31 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 16 – SEGMENT
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.
The
management of the Company concludes that it has only
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 December 31, | ||||||||
2021 | 2020 | |||||||
Product sales: | ||||||||
Traditional pet products | $ | $ | ||||||
Intelligent pet products | ||||||||
Climbing hooks and others | ||||||||
Total revenue from product sales | ||||||||
Service: | ||||||||
Dyeing services | ||||||||
Other services | ||||||||
Total revenue from service | ||||||||
Total revenue | $ | $ |
Revenue by geographic area
Geographic information about the revenues, which are classified based on customers, is set out as follows:
For the six months ended December 31, | ||||||||
2021 | 2020 | |||||||
Geographic location | ||||||||
Sales in China domestic market | $ | $ | ||||||
Sales to international markets | ||||||||
Total | $ | $ |
F-32 |
DOGNESS (INTERNATIONAL) CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and June 30, 2021, $
As
of December 31, 2021, three customers aggregately accounted for
As
of December 31, 2021 two suppliers aggregately accounted for
For
the six months ended December 31, 2021, sales to the customers outside of China accounted for
For
the six months ended December 31, 2021, one related party suppliers accounted for
NOTE 18 – SUBSEQUENT EVENTS
Exercise of share options
Pursuant to the consulting agreement signed between TJ Capital and the Company on July 30, 2019, TJ Capital opted to exercise share options on a cashless basis. On January 10, 2022, the Company issued 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 shares at the exercise price of $ on February 1, 2022.
Exercise of warrants
warrants in connection with January 2021 equity
financing were exercised to purchase
Equity financing
On
February 24, 2022, the Company closed a registered direct offering of
F-33 |