Dogness(DOGZ) - 2023 Q4 - Annual Report

Company Incorporation and Capital Structure - Dogness was incorporated on July 11, 2016, with a share capital of US$200,000 divided into 100,000,000 Common Shares of par value US$0.002 each[269] - Mr. Silong Chen sold 5,931,000 Common Shares for $18,843,000, retaining a 60.46% equity interest in the company[270] Acquisitions and Subsidiaries - Dogness acquired 100% equity interests in Zhangzhou Meijia Metal Product Co., Ltd for $11.1 million (RMB 71.0 million) to expand production capacity[278] - Dogness Intelligence Technology Co., Ltd was incorporated with a registered capital of RMB 80 million (approximately $11.0 million) for smart pet product research and manufacturing[279] - Dogness Pet Culture (Dongguan) Co., Ltd was incorporated with a registered capital of RMB 10 million (approximately $1.5 million) but was liquidated in 2023[280] - Dogness Japan Co. Ltd was incorporated in 2019 with a $142,000 investment for 51% ownership, but the stake was sold in 2020 due to lack of revenue[281] Smart Pet Ecosystem and Product Development - Dogness focuses on connected pet care, integrating smart technology into pets' lives through the "Smart Pet Ecosystem"[285] - The Dogness mobile app allows pet owners to remotely interact with their pets using smart products connected via Wi-Fi or cellular service[286] - Dogness Smart CAM Feeder holds 6.5 pounds of dry food and includes a built-in camera with night vision for monitoring pets' eating habits[288] - Dogness Smart Fountain Mini and Smart Fountain Plus offer 1L and 3.2L capacities respectively, featuring a three-stage filtering system for clean water[291] - Dogness launched the C6 GPS Tracker "Discover" with 4G compatibility, allowing pet owners to track pets' locations, set virtual fences, and monitor activity levels[293] - The company's pet care products include two shampoo lines: One on One Service (for consumer purchasers) and Professional Bathing & Spa (for professional groomers), with seven breed-tailored shampoo products[295] - Dogness produces between 500 and 600 traditional collars, harnesses, and leashes across seven series, using materials like leather, nylon, and Teflon-coated fabrics[296] - The company's retractable leashes feature accessories such as LED lights, convenience boxes, and Bluetooth speakers to enhance the pet walking experience[297] - Dogness plans to launch new products, including indoor pet toilets and air purifiers, as part of its upcoming product lineup[300] - The company is developing pet health and wellness products, including supplements and nutrition products, in consultation with veterinarians and pharmacists[301] Market Focus and Revenue Breakdown - Dogness' primary market is mainland China, with 36.0%, 46.3%, and 56.3% of products sold in China in fiscal 2023, 2022, and 2021, respectively[303] - Total revenue for the year ended June 30, 2023 was $17,584,454, a decrease of 35.1% compared to $27,095,197 in 2022[376] - Export sales accounted for 64.0% of total sales in 2023, up from 53.7% in 2022 and 43.7% in 2021[377] - Traditional pet products contributed 47.2% of total revenue in 2023, up from 42.2% in 2022, while intelligent pet products decreased to 42.1% from 49.8%[376] - The company's four largest customers accounted for 15.4%, 11.6%, 8.8%, and 5.3% of total revenue in 2023[378] - Sales in the China domestic market decreased to 36.0% of total revenue in 2023 from 46.3% in 2022[377] - Revenue from Mainland China decreased by $6.2 million (49.6%) to $6.3 million, accounting for 36.0% of total revenue in fiscal 2023[396] - Revenue from the United States decreased by $1.8 million (22.0%) to $6.2 million, accounting for 35.4% of total revenue in fiscal 2023[396] - Sales to related parties accounted for 9.7% of total revenue in fiscal 2023, totaling $1.7 million[394] - Total international sales decreased by $3.3 million (22.6%) to $11.3 million in fiscal 2023, driven by a soft global economy post-pandemic[398] - Domestic sales decreased by $6.2 million (49.6%) to $6.3 million in fiscal 2023, with traditional pet products and intelligent pet products sales declining by 50.6% and 53.1%, respectively[401][402] Financial Performance and Expenses - Gross profit decreased by $6.5 million (63.9%) to $3.7 million in fiscal 2023, with gross margin dropping from 37.4% to 20.8%[386] - Net loss of $7.5 million in fiscal 2023 compared to net income of $3.0 million in fiscal 2022, a decrease of $10.5 million (347.3%)[386] - Revenue from intelligent pet products decreased by $6.1 million (45.1%) to $7.4 million, driven by lower sales volume and a $10.8 decrease in average selling price[391] - Revenue from traditional pet products decreased by $3.1 million (27.4%) to $8.3 million, mainly due to a $0.3 decrease in average selling price[390] - Dyeing services revenue decreased to $0 in fiscal 2023 from $342,561 in fiscal 2022, a 100.0% decrease[393] - Climbing hooks and others revenue remained consistent at approximately $1.8 million in both fiscal 2023 and 2022[392] - Gross profit for intelligent pet products decreased by $4.1 million, with gross profit margin dropping by 19.4 percentage points to 24.4% in fiscal 2023[406][407] - General and administrative expenses increased by $3.1 million (45.4%) to $9.8 million in fiscal 2023, primarily due to higher rental expenses and professional consultant fees[410] - Research and development expenses remained consistent at $0.9 million in fiscal 2023, with expectations for increased spending on environmentally-friendly materials and new high-tech products[411] - Foreign currency translation adjustments resulted in a loss of $6.2 million in fiscal 2023, impacting revenue, operating expenses, and net loss due to RMB depreciation[415][416] - Net cash used in operating activities was $8.9 million in fiscal 2023, including a net loss of $7.5 million and adjustments for non-cash items of $5.3 million[460] - Net cash used in investing activities was $1.5 million in fiscal 2023, primarily due to $1.5 million spent on construction projects for manufacturing facilities and warehouse improvements[464] - Net cash provided by financing activities was $20.9 million in fiscal 2022, mainly from $19.1 million in net proceeds from private placements and $4.6 million from the exercise of warrants and options[466] Research and Development - The company's R&D expenses were $931,078 in fiscal 2023, representing 5.3% of total revenues, with a focus on environmentally-friendly materials and new product development[311] - Dogness holds 201 patents globally, including 135 in China, 19 in Germany, 27 in Japan, and 20 in the United States, as of September 25, 2023[312] - The company has registered 181 trademarks, including 162 in China, all fully owned and in use[353] - The company has successfully obtained 135 patents, including 87 in China, comprising 15 invention patents, 50 utility patents, and 70 design patents[354] Production and Manufacturing - The company's vertically integrated production allows it to control costs and ensure quality, with manufacturing operations in Dongguan and Zhangzhou, China[302] - The company's main factory in Dongguan has a productive capacity of 8,500,000 pieces per year with a current utilization rate of approximately 65%[358] - The company acquired Zhangzhou Meijia Metal Product Co., Ltd for $10.0 million, which owns land use rights to 19,144.54 square meters and buildings totaling 18,912.38 square meters[360] - The Meijia plant reached its designed production capacity in June 2021 after total actual costs of RMB 118.5 million ($18.4 million) were incurred[360] - The company entered a long-term lease for 7,026 square meters of land and 5,000 square meters of buildings in Dongguan, with total payments of approximately RMB 261.7 million ($36.1 million) as of June 30, 2023[362] - The company purchased an office building of 6,373 square feet in Dallas, Texas, for $1.37 million in March 2018[359] - The company's subsidiary Dogness Culture completed a pet-themed retail store decoration project with a total budget of RMB 2.2 million ($0.3 million)[363] - The company's fixed assets include office equipment, buildings, and production equipment for metal, plastic, and nylon components[363] - The company's acquisition of Meijia enables it to build its own facility and expand production capacity sustainably to meet increased customer demand[370] Foreign Investment and Regulatory Compliance - Foreign-invested enterprises (FIEs) can settle foreign exchange capital at their discretion, with Renminbi kept in a designated account and requiring supporting documents for further payments[324] - Renminbi converted from foreign exchange capital cannot be used for securities investment, entrust loans, or real estate purchases not for self-use, except for foreign-invested real estate enterprises[324] - Non-investment-oriented foreign-funded enterprises are allowed to make domestic equity investments with capital funds, provided they comply with the negative list and investment projects are true and compliant[326] - Foreign investors or FIEs must submit investment information to the competent commerce department when carrying out investment activities in China[327] - FIEs must register changes in capital or basic information with banks within four weeks after approval or filing with competent authorities[328] - Mainland China residents must register offshore entities established for overseas financing, with amendments required for significant changes in capitalization or structure[330] - Wholly foreign-owned enterprises in China must set aside at least 10% of after-tax profits annually to general reserves until cumulative reserves reach 50% of registered capital[332] - Dividends payable by FIEs to foreign investors are subject to a 10% withholding tax, or 5% for Hong Kong residents, unless a tax treaty provides a lower rate[333] - Overseas special purpose vehicles controlled by mainland China entities must obtain CSRC approval before listing on overseas stock exchanges[335] - Foreign debt registration with SAFE is required within 15 business days after entering into a foreign debt contract, with limits based on total investment and registered capital balance[341] Strategic Initiatives and Future Plans - The company is focusing on developing new customers and markets, as well as a new generation of intelligent pet products to mitigate weak sales[380] - The company plans to acquire smaller pet product manufacturers in China to expand and integrate the industrial chain[383] - The company aims to streamline its supply chain process and leverage economies of scale to cut costs and improve efficiency[384] - The company is implementing cost-saving measures to improve production efficiency and profit margins[380] - The company's operations are negatively affected by the ongoing trade dispute between China and the United States[380] Historical Financial Performance - Revenue increased by $2.8 million (11.4%) to $27.1 million in fiscal 2022, driven by higher sales of intelligent pet products[420] - Intelligent pet products sales increased by $5.7 million (73.0%) to $13.5 million, with a 14.1% increase in sales volume and a $10.4 increase in average selling price[426] - Traditional pet products revenue decreased by $2.9 million (20.2%) to $11.4 million, with a 10.4% decrease in sales volume and a $0.1 decrease in average selling price[425] - Climbing hooks and others revenue increased by $0.4 million (31.4%) to $1.8 million, with a 25.7% increase in sales volume and a $0.1 increase in average selling price[428] - Dyeing services revenue decreased by $0.5 million (58.1%) to $0.3 million in fiscal 2022[423] - Sales to related parties accounted for 8.2% ($2.2 million) of total revenue in fiscal 2022, up from 5.0% ($1.2 million) in fiscal 2021[431] - Gross profit increased by $0.98 million (10.7%) to $10.1 million, with gross margin slightly decreasing from 37.6% to 37.4%[419] - R&D expenses increased by $0.38 million (69.7%) to $0.92 million, reflecting increased investment in new product development[419] - Net income increased by $1.7 million (132.2%) to $3.0 million, despite a significant increase in income tax expense[419] - The company expanded sales channels to online platforms and live streaming, contributing to higher profit margins[421] - Total international sales increased by $3.9 million (36.8%) from $10.6 million in fiscal 2021 to $14.5 million in fiscal 2022, driven by strong demand in the U.S., Japan, and other Asian countries[434] - U.S. sales grew by $2.0 million (32.4%) to $8.0 million in fiscal 2022, while Japan and other Asian markets saw a $1.7 million (131.0%) increase to $3.0 million[434] - Sales of intelligent pet products surged by $4.4 million (137.5%) in fiscal 2022, while traditional pet products declined by $0.6 million (8.2%)[436] - Domestic sales in China decreased by $1.1 million (8.3%) to $12.6 million in fiscal 2022, primarily due to a $2.3 million (30.9%) drop in traditional pet products[438] - Intelligent pet products in China grew by $1.3 million (28.7%) in fiscal 2022, reflecting increased demand for smart pet products among younger consumers[439] - Gross profit increased by $1.0 million (10.7%) to $10.1 million in fiscal 2022, with intelligent pet products contributing $1.9 million in gross profit growth[443][446] - Research and development expenses rose by $0.4 million (69.7%) to $0.9 million in fiscal 2022, reflecting increased investment in product innovation[448] - Selling expenses increased by $0.3 million (14.4%) to $2.1 million in fiscal 2022, driven by higher Amazon online sales promotion fees[448] - Total operating expenses grew by $2.8 million (37.9%) to $10.1 million in fiscal 2022, with general and administrative expenses accounting for $1.8 million of the increase[448] - General and administrative expenses increased by $1.8 million (36.5%) from $4.9 million in fiscal 2021 to $6.7 million in fiscal 2022, primarily due to increased professional consultant fees, decoration and maintenance fees, and depreciation expenses[449] - Research and development expenses increased by $0.4 million (69.7%) from $0.5 million in fiscal 2021 to $0.9 million in fiscal 2022, representing 3.4% of total revenues in fiscal 2022[450] - The company disposed of outdated machinery and equipment, resulting in a $0.3 million loss from the disposition of fixed assets in fiscal 2022[450] - Other income increased by $0.1 million to $0.2 million in fiscal 2022, mainly due to a $0.5 million increase in foreign exchange gain[451] - Income tax benefit was $2.8 million in fiscal 2022, compared to an income tax expense of $0.6 million in fiscal 2021, primarily due to the reversal of $3.0 million in accrued tax liabilities[451] - Net income increased by $1.7 million to $3.0 million in fiscal 2022, driven by increased income tax benefit offset by higher operating expenses[454] - Foreign currency translation adjustments resulted in a loss of $3.2 million in fiscal 2022, compared to a gain of $4.9 million in fiscal 2021[455]