20-F: Boqii Holding Faces Steep Revenue Decline and Internal Control Weakness Amid Strategic Shift

Boqii Holding Limited reported a significant 33.9% drop in net revenues for the fiscal year ended March 31, 2025, alongside persistent net losses and an identified material weakness in its financial reporting controls.

Summary

• Net revenues decreased by 33.9% to RMB 468.9 million (US$64.6 million) for the fiscal year ended March 31, 2025, down from RMB 709.4 million in the prior year.
• Product sales, the primary revenue source, declined by 36.6% to RMB 431.3 million (US$59.4 million) in FY2025.
• Gross Merchandise Volume (GMV) saw a substantial decrease to RMB 1,002.5 million (US$138.2 million) in FY2025 from RMB 1,591.8 million in FY2024.
• Despite revenue decline, the company's net loss narrowed by 15.0% to RMB 58.6 million (US$8.1 million) in FY2025, compared to RMB 68.9 million in FY2024.
• Overall gross margin increased to 21.5% in FY2025 from 19.8% in FY2024, primarily due to an increase in higher-margin online marketing and information services revenue.
• Cash and cash equivalents significantly decreased to RMB 38.7 million (US$5.3 million) as of March 31, 2025, from RMB 72.7 million in the prior year.
• A material weakness in internal control over financial reporting was identified for FY2025, specifically related to period-end logistics expenses cut-off and accruals, and vendor rebate accruals.
• The company completed a private placement in February 2025, raising US$2.4 million through the issuance of 2,000,000 ADSs.
• Shareholders approved a 160-for-1 reverse stock split and the termination of the ADS program, with Class A ordinary shares commencing direct trading on NYSE American on July 11, 2025.

Sentiment

Score: 3

Explanation: The company's financial performance shows a significant decline in revenue and GMV, coupled with persistent net losses and a notable decrease in cash reserves. The identified material weakness in internal controls and the auditor's concerns over payment substance are serious red flags. While there are strategic shifts towards profitability and some growth in higher-margin services, the overall picture indicates substantial operational and financial challenges, leading to a negative sentiment.

Positives

• Net loss decreased by 15.0% year-over-year, indicating some progress in cost management despite revenue challenges.
• Overall gross margin improved to 21.5% in FY2025, driven by an increase in higher-margin online marketing and information services revenue.
• Online marketing and information services revenue increased by 28.7% in FY2025, showing growth in a higher-margin segment.
• The company maintains a positive working capital of RMB 176.5 million (US$24.3 million) as of March 31, 2025.
• Strategic acquisitions, such as Xingmu for pet healthcare and investment in PetDog for professional training, aim to diversify offerings and expand the pet ecosystem.
• Continued investment in technology and data capabilities, including big data analytics, AI for recommendations, and an ERP system, supports operational efficiency and user experience.
• Successful completion of a private placement in February 2025 raised US$2.4 million, providing additional capital.
• Transitioned to direct trading of Class A ordinary shares on NYSE American, potentially simplifying the capital structure for investors.

Negatives

• Total net revenues decreased significantly by 33.9% from RMB 709.4 million in FY2024 to RMB 468.9 million (US$64.6 million) in FY2025.
• Gross Merchandise Volume (GMV) declined substantially from RMB 1,591.8 million in FY2024 to RMB 1,002.5 million (US$138.2 million) in FY2025.
• The company continues to incur net losses, reporting RMB 58.6 million (US$8.1 million) in FY2025.
• Cash and cash equivalents decreased significantly to RMB 38.7 million (US$5.3 million) as of March 31, 2025, from RMB 72.7 million in the prior year, raising liquidity concerns.
• Working capital, while positive, has decreased from RMB 206.2 million in FY2024 to RMB 176.5 million (US$24.3 million) in FY2025.
• Identified a material weakness in internal control over financial reporting for FY2025, indicating deficiencies in financial closing policies and procedures.
• The former independent auditor (PwC) was dismissed due to concerns over the substance of approximately US$6 million in payments, which is a significant red flag regarding financial transparency and governance.
• Employee layoffs contributed to decreased sales and marketing expenses and general and administrative expenses, which may impact future operational capacity or morale.
• The company has a limited operating history across its various business initiatives, making future growth difficult to evaluate.
• Working capital constraints have historically limited, and may continue to limit, the ability to grow revenues, especially with emerging brands.

Risks

• Substantial uncertainties exist regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the Variable Interest Entity (VIE) structure, which could affect the enforceability of contractual arrangements and significantly impact financial condition.
• The PRC government may intervene or influence operations at any time, or exert more control over overseas offerings and foreign investment in China-based issuers, potentially limiting the ability to offer securities or causing their value to decline.
• PRC laws and regulations regarding data security and cybersecurity are evolving and could have a material impact on business operations, potentially leading to fines, business suspension, or license revocation.
• Any failure or perceived failure to comply with Anti-monopoly Guidelines for Internet Platforms and other anti-monopoly laws and regulations may result in governmental investigations, enforcement actions, litigation, or claims.
• Trading in securities will be prohibited under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB determines it is unable to inspect or investigate completely the registered public accounting firm for two consecutive years, potentially leading to delisting from U.S. exchanges.
• The company has a history of net losses and may continue to incur losses in the future, with no assurance of achieving profitability.
• Significant working capital requirements and historical working capital deficits could materially and adversely affect business, liquidity, and financial condition.
• Reliance on third-party e-commerce platforms exposes the company to risks such as higher commissions, negative publicity, service outages, or termination of cooperation.
• Failure to maintain product quality and safety, or significant merchandise returns or refunds, could harm reputation and financial results.
• The company does not carry product liability insurance, exposing it to potential substantial costs and liabilities from product liability claims.
• Disruption to IT systems, including reliance on third-party cloud services and servers, could materially affect platform performance and service delivery.
• The dual-class share structure with different voting rights limits the ability of Class A ordinary shareholders to influence corporate matters and could discourage change of control transactions.
• The company relies on dividends and other distributions from its PRC subsidiaries, which are subject to various restrictions under PRC laws and regulations, potentially limiting cash transfers to the holding company.
• None of the lease agreements for leased properties have been registered with relevant PRC government authorities, and some properties are for industrial use, potentially exposing the company to fines or requiring alternative leases.
• Failure to make adequate contributions to various employee benefit plans and withhold individual income tax as required by PRC regulations may subject the company to penalties.

Future Outlook

The company plans to continue diversifying its product offerings, optimizing its product mix for profitability, and further promoting private label products to achieve higher gross margins. It aims to expand and engage its user base through rich content, intelligent recommendations, and social functions, leveraging a content-driven approach to drive sales. The company will also explore new cost-effective sales and marketing channels and continue to invest in enhancing its technology systems for scalability and flexibility. It expects to cease qualifying as an emerging growth company on March 31, 2026, which will lead to increased compliance costs.

Management Comments

• Our business strategy is to focus more on increasing profitability instead of volume of sales.
• The increase in gross margin was primarily attributed to the increase in service revenues, which traditionally carry higher gross margins.
• We are gradually making strategic adjustments to our product mix by reducing sales of certain products with high fulfillment expenses, such as the branded ones, to improve our net profit margin, and have offered private label products at discount to promote brand awareness and cultivate customer loyalty.
• Our management believes that there is only a remote possibility that VIEs' accumulated earnings would exceed fees paid to PRC subsidiaries, leading to non-deductible transfers and higher tax burdens.
• Our management has concluded that our internal control over financial reporting is not effective as of March 31, 2025.
• We are in the process of implementing a number of measures to address this material weakness identified.

Industry Context

The company operates within China's pet industry, which is described as relatively new, evolving, and unproven, influenced by factors such as consumption upgrades, demographic shifts (e.g., no-kid families, aging population), and the development of the online retail market. Chinese pet parents are noted as generally more price-sensitive and less brand-loyal compared to their U.S. counterparts, often preferring general e-commerce platforms. The industry is highly competitive, with competition from various online and physical retail channels. The company aims to differentiate itself through brand awareness, a transformative retail model, content-driven marketing, diverse product offerings, smart recommendations, personalized customer service, and reliable fulfillment.

Management Changes

Corporate Governance

Legal Proceedings

• Not party to any material legal or administrative proceedings pending or threatened as of the report date.
• Fined RMB100,000 by Shanghai Internet Information Office in December 2021 for publishing and transmitting illegal information on Boqii Pet APP.
• Fined RMB5,000 by Shanghai Pudong New Area Market Supervision Administration in May 2023 for failure to stop sending commercial information to consumers upon unsubscribe request.
• Former auditor (PwC) raised concerns over the substance of approximately US$6 million in payments between September 2023 and April 2024, leading to their dismissal. This matter was a 'reportable event' and implies potential for future investigations or scrutiny.

Related Party Transactions

• Advance payment of RMB 5.5 million in January 2023 and RMB 14.4 million in June 2024 to Superb Origin International Limited (a shareholder) for product purchases.
• Loan agreement with Wuhan Chunzhijin (an equity investee) for an interest-free loan of up to RMB10 million, with RMB3.4 million converted into equity interest in March 2023.
• Debt waiver agreement in September 2023 with Chong Li (100% equity owner of Superb Origin) for RMB75.28 million of borrowings payable, offset by the company waiving US$11.25 million of outstanding investment amount payable by Superb Origin.
• Loan for Yoken Series A-1 Warrant provided by investors to Chengdu Chongaita Information Technology Co., Ltd. (a wholly owned PRC subsidiary of Yoken).

Stakeholder Impact

• Shareholders face significant risks due to substantial revenue and GMV decline, persistent net losses, decreasing cash reserves, and the identified material weakness in internal controls. The auditor's dismissal over payment substance and the ongoing HFCAA delisting risk further heighten investment uncertainty and potential for share price volatility.
• Employees have been impacted by layoffs, contributing to reduced sales and marketing and general and administrative expenses, which could affect morale and job security.
• Customers may experience changes in product availability or pricing as the company shifts its business strategy to focus on profitability over sales volume, though efforts are being made to enhance customer experience and product offerings.
• Suppliers and brand partners may face increased bargaining pressure from the company as it seeks to improve cost efficiency and gross margins.
• Creditors may view the decreasing cash and working capital, despite being positive, as a potential concern regarding the company's short-term liquidity and ability to meet obligations.

Next Steps

• Continue to enhance accounting policies and financial closing procedures to address the identified material weakness.
• Enhance segregation of responsibilities in financial decision-making processes to improve governance standards.
• Fulfill filing procedures with the CSRC for any future offshore offerings as required by new PRC regulations.
• Manage the transition of Class A ordinary shares trading directly on NYSE American following the reverse stock split and ADS termination.
• Continue to diversify product offerings and promote private label products to improve profitability.
• Expand and engage the user base through content offerings and social interactions.
• Explore and leverage new cost-effective sales and marketing channels.

Key Dates

Recommendation

The company's core business is contracting significantly, as evidenced by a steep 33.9% decline in net revenues and a substantial drop in GMV. While net losses have narrowed, the company continues to operate unprofitably, and its cash reserves are rapidly depleting. The disclosure of a material weakness in internal controls over financial reporting, coupled with the highly concerning dismissal of the former auditor due to issues regarding the 'substance of payments' totaling approximately US$6 million, indicates severe governance and financial transparency deficiencies. Furthermore, the ongoing risk of delisting from U.S. exchanges under the HFCAA due to PCAOB inspection limitations on Chinese auditors presents an existential threat to the stock's tradability for U.S. investors. The dual-class share structure also limits the influence of public shareholders. These compounding negative factors suggest a high probability of further share price deterioration and significant investment risk.

Keywords

Pet E-commerce, China, Online Retail, Pet Products, SEC Filing, Financial Results, VIE Structure, Corporate Governance, Risk Factors, Reverse Stock Split, NYSE American, Private Label, Supply Chain, Cybersecurity, PCAOB, HFCAA