The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS
Ionix Technology,
Inc. (the “Company” or “Ionix”), formerly known as Cambridge Projects Inc., is a Nevada corporation that
was formed on March 11, 2011. By and through its wholly owned subsidiaries and an entity controlled through VIE agreements
in China, the Company sells the high-end intelligent electronic equipment, which includes the portable power banks for electronic
devices, LCM and LCD screens and provides IT and solution-oriented services in China.
Acquisition
On December 27, 2018, the Company entered into a Share
Purchase Agreement (the “Purchase Agreement”) with Jialin Liang and Xuemei Jiang, each of whom are shareholders (the
“Shareholders”) of Changchun Fangguan Electronics Technology Co., Ltd. (“Fangguan Electronics”). Pursuant
to the terms of the Purchase Agreement, the Shareholders, who together own 95.14% of the ownership rights in Fangguan Electronics,
agreed to execute and deliver the Business Operation Agreement, the Equity Interest Pledge Agreement, the Equity Interest Purchase
Agreement, the Exclusive Technical Support Service Agreement (the “Services Agreement”) and the Power of Attorney,
all together dated December 27, 2018 are referred to the “VIE Agreements”, to the Company in exchange for the issuance
of an aggregate of 15,000,000 shares of the Company’s common stock, par value $.0001 per share, thereby causing Fangguan
Electronics to become the Company’s variable interest entity. Together with VIE agreements, the Shareholders also agreed
to convert shareholder loan of RMB 30 million (approximately $4.4 million) to capital and make cash contribution of RMB 9.7 million
(approximately $1.4 million) to capital. The entirety of the transaction will hereafter be referred to as the “Transaction”.
As a result of the Transaction, the Company is able to exert effective control over Fangguan Electronics and receive 100% of the
net profits or net losses derived from the business operations of Fangguan Electronics. Fangguan Electronics manufactures and sells
Liquid Crystal Module (" LCM") and LCD screens in China based in Changchun City, Jilin Province, People’s Republic
of China. (See Note 4).
The Transaction was accounted for as a business combination
using the acquisition method of accounting. The assets, liabilities and the operations of Fangguan Electronics subsequent to the
Transaction date were included in the Company’s consolidated financial statements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The Company had an accumulated deficit of $626,226 as
of December 31, 2020. The Company incurred loss from operation and did not generate sufficient cash flow from its operating activities
for the six months ended December 31, 2020. These factors, among others, raise substantial doubt about the Company’s ability
to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company plans to rely on the proceeds from loans
from both unrelated and related parties to provide the resources necessary to fund the development of the business plan and operations. The
Company is also pursuing other revenue streams which could include strategic acquisitions or possible joint ventures of other business
segments. However, no assurance can be given that the Company will be successful in raising additional capital.
NOTE 3 – BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States for interim financial information
and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated
financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the financial position as of December 31, 2020 and
the results of operations and cash flows for the periods ended December 31, 2020 and 2019. The financial data and other information
disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three
and six months ended December 31, 2020 are not necessarily indicative of the results to be expected for the entire year ending
June 30, 2021 or for any subsequent periods. The balance sheet at June 30, 2020 has been derived from the audited consolidated
financial statements at that date.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States have
been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. These unaudited consolidated
financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the
year ended June 30, 2020 as included in our Annual Report on Form 10-K as filed with the SEC on September 28, 2020.
Basis of consolidation
The consolidated financial statements include the accounts
of Ionix, its wholly owned subsidiaries and an entity which the Company controls 95.14% and receives 100% of net income or net
loss through VIE agreements. All significant inter-company balances and transactions have been eliminated upon consolidation.
Noncontrolling Interests
The Company follows FASB ASC Topic 810,
“Consolidation,” governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other
things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability,
that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions
rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated
to NCIs even when such allocation might result in a deficit balance.
The net income (loss) attributed to NCIs
was separately designated in the accompanying statements of comprehensive income (loss). Losses attributable to NCIs in a subsidiary
may exceed an NCI’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed to those interests.
NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance. The Primary
beneficiary receives 100% of the income and losses of the VIE as disclosed in Note 4, therefore no income or loss is allocated
to NCI.
Use of Estimates
The Company’s consolidated financial statements
have been prepared in accordance with US GAAP and this requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring the use of
management estimates include, but are not limited to, the allowance for doubtful accounts receivable and advance to suppliers,
the valuation of inventory, provision for staff benefit, recognition and measurement of deferred income taxes and valuation allowance
for deferred tax assets. Although these estimates are based on management’s knowledge of current events and actions management
may undertake in the future, actual results may ultimately differ from those estimates and such differences may be material to
our consolidated financial statements.
Cash and cash equivalents
Cash consists of cash on hand and cash in bank. Cash
equivalents represent investment securities that are short-term, have high credit quality and are highly liquid. Cash equivalents
are carried at fair market value and consist primarily of money market funds.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount
and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from shipment. Credit is extended
based on evaluation of a customer's financial condition, the customer’s credit-worthiness and their payment history. Accounts
receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over
a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically evaluates
individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of
the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses
resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid
according to payment terms, the appropriate actions may be taken to exhaust all means of collection, including seeking legal resolution
in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its
customers. As of December 31, 2020 and June 30, 2020, the Company has accounts receivable balance from non-related party of $3,350,910
and $3,273,141, net of allowance for doubtful accounts of $151,121 and $139,609, respectively. No bad debt expense was recorded
during the three and six months ended December 31, 2020 and 2019.
Inventories
Inventories consist of raw materials, working-in-process
and finished goods. Inventories are valued at the lower of cost or net realizable value. We determine cost on the basis of the
weighted average method. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete
are written down or written off. Although we believe that the assumptions we use to estimate inventory write-downs are reasonable,
future changes in these assumptions could provide a significantly different result.
Advances to suppliers
Advances to suppliers represent prepayments for merchandise,
which were purchased but had not been received. The balance of the advances to suppliers is reduced and reclassified to inventories
when the raw materials are received and pass quality inspection.
Property, plant and equipment
Property, plant and equipment are recorded at cost less
accumulated depreciation and any impairment. The cost of an asset comprises its purchase price and any directly attributable costs
of bringing the asset to its present working condition and location for its intended use. Repairs and maintenance costs are normally
expensed as incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost
of the asset.
When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the statement of comprehensive
income (loss) in the reporting period of disposition.
Depreciation is calculated on a straight-line basis over
the estimated useful life of the assets after taking into account their respective estimated residual value. The estimated useful
life of the assets is as follows:
Buildings
|
|
10 – 20 years
|
Machinery and equipment
|
|
5 – 10 years
|
Office equipment
|
|
3 – 5 years
|
Automobiles
|
|
5 years
|
Intangible assets
Land use right is recorded as cost less accumulated amortization.
Land use rights represent the prepayments for the use of the parcels of land in the PRC where the Company’s production facilities
are located, and are charged to expense over their respective lease periods of 50 years. According to the laws of the PRC, the
government owns all of the land in the PRC. Company or individuals are authorized to use the land only through land use rights
granted by the PRC government for a certain period (usually 50 years).
Purchased intangible assets are recognized and measured
at fair value upon acquisition. Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated
amortization and any accumulated impairment losses. Amortization for intangible assets with finite useful lives is provided on
a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried
at cost less any subsequent accumulated impairment losses. The estimated useful lives of the intangible assets are as follows:
Land use right
|
|
50 years
|
Computer software
|
|
2-5 years
|
Gains or losses arising from derecognition of the intangible
asset are measured at the difference between the net disposal proceeds and the carrying amount of the assets and are recognized
in the statement of comprehensive income (loss) when the asset is disposed.
Impairment of long-lived assets
In accordance with the provisions of ASC Topic 360, “Impairment
or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its
estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the
assets.
Revenue recognition
The Company adopted the new accounting standard, ASC
606, Revenue from Contracts with Customers, and all the related amendments (new revenue standard) to all contracts using the modified
retrospective method beginning on July 1, 2018. The adoption did not result in an adjustment to the retained earnings as of June
30, 2018. The comparative information was not restated and continued to be reported under the accounting standards in effect for
those periods. The adoption of the new revenue standard has no impact on either reported sales to customers or net earnings.
The Company estimates return based on historical results,
taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.
Revenues are recognized when control of the promised
goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive
in exchange for those goods or services. The Company applies the following five steps in order to determine the appropriate amount
of revenue to be recognized as it fulfills its obligations under each of its agreements:
|
·
|
identify the contract with a customer;
|
|
·
|
identify the performance obligations in the contract;
|
|
·
|
determine the transaction price;
|
|
·
|
allocate the transaction price to performance obligations in the contract; and
|
|
·
|
recognize revenue as the performance obligation is satisfied.
|
Under these criteria, for revenues from sale of products,
the Company generally recognizes revenue when its products are delivered to customers in accordance with the written sales terms.
The control of the products is transferred to the customer upon receipt of goods by the customer. For service revenue, the Company
recognizes revenue when services are performed and accepted by customers.
The following tables disaggregate our revenue by major
source for the three and six months ended December 31, 2020 and 2019, respectively:
|
|
For the Six Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Sales of LCM and LCD screens - Non-related parties
|
|
$
|
5,939,602
|
|
|
$
|
12,030,911
|
|
Sales of LCM and LCD screens - Related parties
|
|
|
-
|
|
|
|
644,392
|
|
Sales of portable power banks
|
|
|
-
|
|
|
|
1,538,094
|
|
Service contracts
|
|
|
1,746
|
|
|
|
619,901
|
|
Total
|
|
$
|
5,941,348
|
|
|
$
|
14,833,298
|
|
|
|
For the Three Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Sales of LCM and LCD screens - Non-related parties
|
|
$
|
2,982,577
|
|
|
$
|
5,864,945
|
|
Sales of LCM and LCD screens - Related parties
|
|
|
-
|
|
|
|
330,435
|
|
Sales of portable power banks
|
|
|
-
|
|
|
|
910,391
|
|
Service contracts
|
|
|
306
|
|
|
|
227,197
|
|
Total
|
|
$
|
2,982,883
|
|
|
$
|
7,332,968
|
|
All the operating entities of the Company are domiciled
in the PRC. All the Company’s revenues are derived in the PRC during the three and six months ended December 31, 2020 and
2019.
Cost of revenues
Cost of revenues includes cost of raw materials purchased,
inbound freight cost, cost of direct labor, depreciation expense and other overhead. Write-down of inventory for lower of cost
or net realizable value adjustments is also recorded in cost of revenues.
Related parties and transactions
The Company identifies related parties, and accounts
for, discloses related party transactions in accordance with ASC 850, "Related Party Disclosures" and other relevant
ASC standards.
Parties, which can be a corporation or individual, are
considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operational decisions. Companies are also considered to be related if they
are subject to common control or common significant influence.
Transactions between related parties commonly occurring
in the normal course of business are considered to be related party transactions. Transactions between related parties are also
considered to be related party transactions even though they may not be given accounting recognition. While ASC does not provide
accounting or measurement guidance for such transactions, it requires their disclosure nonetheless.
Income taxes
Income taxes are determined in accordance with the provisions
of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
ASC 740 prescribes a comprehensive model for how companies
should recognize, measure, present, and discloses in their financial statements uncertain tax positions taken or expected to be
taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely
than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently
be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement
with the tax authority assuming full knowledge of the position and relevant facts.
As of December 31, 2020 and June 30, 2020, the Company
did not have any significant unrecognized uncertain tax positions.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change
in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from
investments from owners and distributions to owners. Comprehensive income (loss) for the periods presented includes net income
(loss), change in unrealized gains (losses) on marketable securities classified as available-for-sale (net of tax), foreign currency
translation adjustments, and share of change in other comprehensive income of equity investments one quarter in arrears.
Leases
In February 2016, the FASB established Topic 842, Leases,
by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on balance sheet and disclose
key information about the leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires
a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.
The new standard is effective for us on July 1, 2019,
with early adoption permitted. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative
period presented in the financial statements as its date of initial application. The Company adopted the new standard on July 1,
2019 and use the effective date as our date of initial application. Consequently, financial information is not provided for the
dates and periods before July 1, 2019. The new standard provides a number of optional expedients in transition. The Company elected
the package of practical expedients which permits us not to reassess under the new standard our prior conclusions about lease identification,
lease classification and initial direct costs.
The new standard has no material effect on our consolidated
financial statements as the Company does not have a lease with a term longer than 12 months as of December 31, 2020 (See Note 6).
Earnings (losses) per share
Basic earnings (losses) per share is computed by dividing
net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (losses) per
share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential
common shares consist of incremental shares issuable upon exercise of stock options and warrants and conversion of convertible
debt. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share or increase a net income
per share.
During the six months ended December 31, 2020 and 2019,
the Company had outstanding convertible notes and warrants which represent 1,096,705 and 720,382 shares of commons stock respectively.
These shares of common stock were excluded from the computation of diluted earnings per share since their effect would have been
antidilutive.
During the three months ended December 31, 2020 and 2019,
the Company had outstanding convertible notes and warrants which represent 11,675,729 and 720,382 shares of commons stock respectively.
These shares of common stock were excluded from the computation of diluted earnings per share since their effect would have been
antidilutive.
Foreign currencies translation
The reporting currency of the Company is the United States
Dollar (“US$”). The Company’s subsidiaries in the People’s Republic of China (“PRC”) maintain
their books and records in their local currency, the Renminbi Yuan (“RMB”), which is the functional currency as being
the primary currency of the economic environment in which these entities operate.
In general, for consolidation purposes, assets and liabilities
of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation
of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average
rates prevailing during the period. Stockholders’ equity is translated at historical rates. The gains and losses resulting
from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive
income within the statements of stockholders’ equity.
Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the
statements of comprehensive income (loss).
The exchange rates used to translate amounts in RMB into
U.S. Dollars for the purposes of preparing the consolidated financial statements are as follows:
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.5402
|
|
|
|
7.0795
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Items in statements of comprehensive income (loss) and cash flows
|
|
|
6.8099
|
|
|
|
6.9255
|
|
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments:
cash and cash equivalents, accounts receivable, inventory, prepayments and other receivables, accounts payable, income tax payable,
other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments.
The Company also follows the guidance of the ASC Topic
820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and
liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs
used in measuring fair value as follows:
Level 1: Inputs are based upon unadjusted quoted prices
for identical instruments traded in active markets;
Level 2: Inputs are based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these
models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and
Level 3: Inputs are generally unobservable and typically
reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair
values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.
Fair value estimates are made at a specific point in
time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The Company has the derivative liabilities measured at
fair value on a recurring basis which are valued at level 3 measurement (See Note 14).
Convertible Instruments
The Company evaluates and accounts for conversion options
embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
Applicable GAAP requires companies to bifurcate conversion
options from their host instruments and account for them as free standing derivative financial instruments according to certain
criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument
are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that
embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes
in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument
would be considered a derivative instrument.
The Company accounts for convertible instruments (when
it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The
Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption.
The Company accounts for the conversion of convertible
debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives
are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference
recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
Common Stock Purchase Warrants
The Company classifies as equity any contracts that require
physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own
shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC
815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our
control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
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.
Fair Value Measurement. In August 2018, the FASB issued
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under the guidance,
public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for
Level 3 fair value measurements. The guidance is effective for all entities for Calendar years beginning after December 15, 2019
and for interim periods within those Calendar years, but entities are permitted to early adopt either the entire standard or only
the provisions that eliminate or modify the requirements. The Company is currently in the process of evaluating the impact of the
adoption of this guidance 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. The guidance is effective for public entities for Calendar years beginning
after December 15, 2020 and interim periods within those Calendar years and all other entities for Calendar years beginning after
December 15, 2021 and interim periods within those Calendar years, with early adoption permitted. The Company is currently evaluating
the effect of adopting this ASU on the Company’s consolidated financial statements.
Risk factor
Due to the outbreak of the Coronavirus Disease 2019 (COVID-19)
in the PRC, the Company’s operational and financial performance, has been affected by the epidemic during the six months
ended December 31, 2020. The Company has been keeping continuous attention on the situation of the COVID-19, assessing and reacting
actively to its impacts on the financial position and operating results of the Company as below:
|
·
|
During PRC national economic shutdown that was imposed to limit the spread of COVID-19 from early
February to mid-March of 2020, our financial condition and results of operations were adversely affected. Since the restarting
of our operation near the end of March 2020, our financial performances had been recovering slowly but continuously. However, COVID-19
resurgence which occurred in October 2020 had caused one and off traffic restrictions and lockdowns and prolonged the economic
contraction nationwide and disrupted our business operation.
|
|
·
|
During the outbreak of COVID-19 in China, the Chinese government responded with the package of
support including tax-cut and financial assistance, we keep our continuous attention on the situation of the COVID-19, assess and
react actively to its impacts on our future operating results or near-and-long-term financial condition. Up to the date of this
report, the assessment is still in progress.
|
|
·
|
Since we restored our operation near the end of March 2020, even COVID-19 resurgence occurred in
October 2020, we are of the view that COVID-19 would be under control in near future. We assessed that 1) COVID-19-related impacts
on our cost of capital or access to capital and funding sources and our sources or uses of cash have been insignificant; 2) There
is no material uncertainty about our ongoing ability to meet the covenants of our credit agreements; 3) No material liquidity deficiency
has been identified and we do not expect to disclose or incur any material COVID-19-related contingencies;4) COVID-19-related impacts
on the assets on our balance sheet or our ability to timely account for those assets have been insignificant; and 5) The possibilities
for COVID-19 to trigger any material impairments, increases in allowances for credit losses, restructuring charges, other expenses,
or changes in accounting judgments that have had or are reasonably likely to have a material impact on our financial statements
are low. Looking forward, we keep our continuous attention on the situation of the COVID-19, assess and react actively to its impacts
on issues mentioned above.
|
|
·
|
During PRC national economic shutdown that was imposed to limit the spread of COVID-19 from early
February to mid-March of 2020, COVID-19-related circumstances such as remote work arrangements adversely affected our ability to
maintain operations. Since the lifting of the national shutdown order near the end of March 2020, our operations including financial
reporting systems, internal control over financial reporting and disclosure controls and procedures have already resumed. Currently
we keep our continuous attention on the situation of the COVID-19, assess and react actively to its impacts on our future business
continuity plans or whether material resource constraints in implementing these plans. Up to the date of this report, the assessment
is still in progress.
|
|
·
|
During
PRC national economic shutdown that was imposed to limit the spread of COVID-19 from early February to mid-March of 2020, the
demands for our products or services were severely affected. Since the restarting of our operation near the end of March 2020,
the demands had been rebounding slowly but continuously. However, COVID-19 resurgence which occurred in October 2020 had caused
one and off traffic restrictions and lockdowns and put numerous business negotiations and sales contracts signing on hold. Notwithstanding
the difficulty at the present, we are capable to take the blows on the product demands and are optimistic about an eventual recovery
in demand to pre-pandemic levels.
|
|
·
|
During PRC national economic shutdown that was imposed to limit the spread of
COVID-19 from early February to mid-March of 2020, our supply chain or the methods used to distribute our products or
services were severely affected. Since the lift of the national shutdown order near the end of March 2020, all of our supply
chains or the methods had returned to normal gradually. However, COVID-19 resurgence which occurred in October 2020 had
caused one and off traffic restrictions and lockdowns then inevitably made the adverse impacts on our supply chains. And
COVID-19 highlights the need to transform our current supply chain models. We shall take the actions to respond to business
disruption and supply chain challenges from the global spread of COVID-19 and looks ahead to the longer-term solution of
digital supply networks.
|
NOTE 4 - VARIABLE INTEREST ENTITY
The VIE contractual arrangements
On December 27, 2018, the Company entered into VIE agreements
with two shareholders of Fangguan Electronics to control 95.14% of the ownership rights and receive 100% of the net profit or net
losses derived from the business operations of Fangguan Electronics. In exchange for VIE agreements and additional capital contribution,
the Company issued 15 million shares of common stock to two shareholders of Fangguan Electronics. (See Note 1).
The transaction was accounted for as a business combination
using the acquisition method of accounting. The assets, liabilities and the operations of Fangguan Electronics subsequent to the
acquisition date were included in the Company’s consolidated financial statements.
Through power of attorney, equity interest purchase agreement,
and equity interest pledge agreement, 95.14% of the voting rights of Fangguan Electronics’ shareholders have been transferred
to the Company so that the Company has effective control over Fangguan Electronics and have the power to direct the activities
of Fangguan Electronics that most significantly impact its economic performance.
Through business operation agreement with the shareholders
of VIE, the Company shall direct the business operations of Fangguan Electronics, including, but not limited to, adopting corporate
policy regarding daily operations, financial management, and employment, and appointment of directors and senior officers.
Through the exclusive technical support service agreement
with the shareholders of VIE, the Company shall provide VIE with necessary technical support and assistance as the exclusive provider.
And at the request of the Company, VIE shall pay the performance fee, the depreciation and the service fee to the Company. The
performance fee shall be equivalent to 5% of the total revenue of VIE in any Calendar year. The depreciation amount on equipment
shall be determined by accounting rules of China. The Company has the right to set and revise annually this service fee unilaterally
with reference to the performance of VIE.
The service fee that the Company is entitled to earn
shall be the total business incomes of the whole year minus performance fee and equipment depreciation. This agreement allows the
Company to collect 100% of the net profits of the VIE. Except for technical support, the Company did not provide, nor does it intend
to provide, any financial or other support either explicitly or implicitly during the periods presented to its variable interest
entity.
If facts and circumstances change such that the conclusion
to consolidate the VIE has changed, the Company shall disclose the primary factors that caused the change and the effect on the
Company’s financial statements in the periods when the change occurs.
There are no restrictions on the consolidated VIE’s
assets and on the settlement of its liabilities and all carrying amounts of VIE’s assets and liabilities are consolidated
with the Company’s financial statements. In addition, the net income of Fangguan Electronics after Fangguan Electronics became
the VIE of the Company is free of restrictions for payment of dividends to the shareholders of the Company.
Assets of Fangguan Electronics that are collateralized
or pledged are not restricted to settle its own obligations. The creditors of Fangguan Electronics do not have recourse to the
primary beneficiary’s general credit.
Risks associated with the VIE structure
The Company believes that the contractual arrangements
with its VIE and respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. However,
uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal
structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
|
·
|
revoke the business and operating licenses of the Company’s PRC subsidiary and its VIE;
|
|
·
|
discontinue or restrict the operations of any related-party transactions between the Company’s
PRC subsidiary and its VIE;
|
|
·
|
limit the Company’s business expansion in China by way of entering into contractual arrangements;
|
|
·
|
impose fines or other requirements with which the Company’s PRC subsidiary and its VIE may
not be able to comply;
|
|
·
|
require the Company or the Company’s PRC subsidiary and its VIE to restructure the relevant
ownership structure or operations; or
|
|
·
|
restrict or prohibit the Company’s use of the proceeds from public offering to finance the
Company’s business and operations in China.
|
The Company’s ability to conduct its business through
its VIE may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the
Company may not be able to consolidate its VIE in its consolidated financial statements as it may lose the ability to exert effective
control over its VIE and its respective shareholders and it may lose the ability to receive economic benefits from its VIE. The
Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiary
and its VIE. There has been no change in facts and circumstances to consolidate the VIE. The following financial statement amounts
and balances of its VIE were included in the accompanying consolidated financial statements after elimination of intercompany transactions
and balances:
|
|
Balance as of
December 31,
2020
|
|
|
Balance as of
June 30, 2020
|
|
Cash and cash equivalents
|
|
$
|
855,616
|
|
|
$
|
1,266,426
|
|
Notes receivable
|
|
|
35,320
|
|
|
|
125,798
|
|
Accounts receivable - non-related parties
|
|
|
3,189,072
|
|
|
|
3,069,629
|
|
Inventory
|
|
|
3,017,700
|
|
|
|
2,639,839
|
|
Advances to suppliers - non-related parties
|
|
|
625,484
|
|
|
|
530,670
|
|
Prepaid expenses and other current assets
|
|
|
81,424
|
|
|
|
58,103
|
|
Total Current Assets
|
|
|
7,804,616
|
|
|
|
7,690,465
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
6,996,421
|
|
|
|
6,568,874
|
|
Intangible assets, net
|
|
|
1,508,762
|
|
|
|
1,424,404
|
|
Deferred tax assets
|
|
|
47,778
|
|
|
|
20,743
|
|
Total Assets
|
|
$
|
16,357,577
|
|
|
$
|
15,704,486
|
|
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
$
|
1,681,906
|
|
|
$
|
2,034,735
|
|
Accounts payable
|
|
|
2,455,750
|
|
|
|
2,637,792
|
|
Advance from customers
|
|
|
30,967
|
|
|
|
27,501
|
|
Due to related parties
|
|
|
1,981,879
|
|
|
|
1,407,145
|
|
Accrued expenses and other current liabilities
|
|
|
4,923
|
|
|
|
61,856
|
|
Total Current Liabilities
|
|
|
6,155,425
|
|
|
|
6,169,029
|
|
Total Liabilities
|
|
$
|
6,155,425
|
|
|
$
|
6,169,029
|
|
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost (determined
using the weighted average cost) or net realizable value. Inventories consist of the following:
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
Raw materials
|
|
$
|
633,073
|
|
|
$
|
666,981
|
|
Work-in-process
|
|
|
960,245
|
|
|
|
500,331
|
|
Finished goods
|
|
|
1,972,130
|
|
|
|
2,096,538
|
|
Total Inventories
|
|
$
|
3,565,448
|
|
|
$
|
3,263,850
|
|
The Company recorded no inventory markdown for the three
and six months ended December 31, 2020 and 2019.
NOTE 6 - OPERATING LEASE
For the six months ended December 31, 2020, the Company
had two real estate operating leases for office, warehouses and manufacturing facilities under the terms of one year.
Lisite Science Technology (Shenzhen) Co., Ltd ("Lisite
Science") leases office and warehouse space from Shenzhen Keenest Technology Co., Ltd. (“Keenest”), a related
party, with annual rent of approximately $1,500 (RMB10,000) for one year until July 20, 2020. On July 20, 2020, Lisite Science
further extended the lease with Keenest for one more year until July 20, 2021 with annual rent of approximately $1,500 (RMB10,000).
(See Note 11).
Shenzhen Baileqi Electronic Technology Co., Ltd. ("Baileqi
Electronic") leases office and warehouse space from Shenzhen Baileqi Science and Technology Co., Ltd. (“Shenzhen Baileqi
S&T”), a related party, with monthly rent of approximately $2,500 (RMB17,525) and the lease period is from June 1, 2019
to May 31, 2020. On June 5, 2020, Baileqi Electronic further extended the lease with Shenzhen Baileqi S&T for one more year
until May 31, 2021 with monthly rent of approximately $2,500 (RMB17,525). (See Note 11).
The Company made an accounting policy election not to
recognize lease assets and liabilities for the leases listed above as all lease terms are 12 months or shorter.
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment were
as follows:
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
5,011,200
|
|
|
$
|
4,601,685
|
|
Machinery and equipment
|
|
|
3,222,821
|
|
|
|
2,822,686
|
|
Office equipment
|
|
|
73,665
|
|
|
|
67,091
|
|
Automobiles
|
|
|
106,999
|
|
|
|
98,848
|
|
Subtotal
|
|
|
8,414,685
|
|
|
|
7,590,310
|
|
Less: Accumulated depreciation
|
|
|
(1,413,533
|
)
|
|
|
(1,016,373
|
)
|
Property, plant and equipment, net
|
|
$
|
7,001,152
|
|
|
$
|
6,573,937
|
|
Depreciation expense related to property, plant and equipment
was $300,941 and $384,408 for the six months ended December 31, 2020 and 2019, respectively.
Depreciation expense related to property, plant and equipment
was $135,731 and $183,340 for the three months ended December 31, 2020 and 2019, respectively.
As of December 31, 2020 and June 30, 2020, buildings
were pledged as collateral for bank loans (See Note 9).
NOTE 8 – INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Land use right
|
|
$
|
1,561,400
|
|
|
$
|
1,442,456
|
|
Computer software
|
|
|
29,539
|
|
|
|
25,039
|
|
Subtotal
|
|
|
1,590,939
|
|
|
|
1,467,495
|
|
Less: Accumulated amortization
|
|
|
(82,177
|
)
|
|
|
(43,091
|
)
|
Intangible assets, net
|
|
$
|
1,508,762
|
|
|
$
|
1,424,404
|
|
Amortization expense related to intangible assets was
$34,126 and $14,672 for the six months ended December 31, 2020 and 2019, respectively.
Amortization expense related to intangible assets was
$26,810 and $7,426 for the three months ended December 31, 2020 and 2019, respectively.
Fangguan Electronics acquired the land use right from
the local government in August 2012 which expires on August 15, 2062. As of December 31, 2020 and June 30, 2020, land use right
was pledged as collateral for bank loans (See Note 9).
NOTE 9 – SHORT-TERM BANK LOAN
The Company’s short-term bank loans consist of
the following:
|
|
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
Loan payable to Industrial Bank, due November 2020
|
|
(1)
|
|
$
|
-
|
|
|
$
|
1,836,288
|
|
Loan payable to Industrial Bank, due May 2021
|
|
(2)
|
|
|
167,080
|
|
|
|
154,353
|
|
Loan payable to Industrial Bank, due June 2021
|
|
(2)
|
|
|
47,730
|
|
|
|
44,094
|
|
Loan payable to Industrial Bank, due August 2021
|
|
(3)
|
|
|
549,692
|
|
|
|
-
|
|
Loan payable to Industrial Bank, due March 2021
|
|
(3)
|
|
|
458,702
|
|
|
|
-
|
|
Loan payable to Industrial Bank, due June 2021
|
|
(4)
|
|
|
458,702
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
1,681,906
|
|
|
$
|
2,034,735
|
|
|
(1)
|
On November 19, 2019, Fangguan Electronics entered into a short-term loan agreement with Industrial
Bank to borrow approximately US$2.6 million (RMB 18 million) for a year until November 18, 2020 with annual interest rate of 5.22%.
The borrowing was collateralized by the Company’s buildings and land use right. In addition, the borrowing was guaranteed
by the Company’s shareholder and CEO of Fangguan Electronics, Mr. Jialin Liang, and his wife Ms. Dongjiao Su. On May 20,
2020, Fangguan Electronics partially repaid this bank loan of approximately US$706,000 (RMB5,000,000). On August 28, 2020 and September
21, 2020, Fangguan Electronics further partially repaid this bank loan of approximately US$441,000 (RMB3,000,000) and US$734,000
(RMB5,000,000) respectively. On November 18, 2020, Fangguan Electronics repaid the remaining balance in full of this bank loan
of approximately US$764,500 (RMB5,000,000).
|
|
(2)
|
During May and Jun 2020, Fangguan Electronics issued two one-year commercial acceptance bills with
amounts of approximately US$167,000 (RMB1,092,743) and US$48,000 (RMB312,161) and maturity dates at May 21, 2021 and June 11, 2021
respectively. On May 22, 2020 and June 16, 2020, the two commercial acceptance bills were discounted with Industrial Bank at an
interest rate of 3.85% and the balance of the two commercial acceptance bills converted to bank loans with Industrial Bank based
on a mutual agreement from both parties. This loan was also secured by the same collateral as the above RMB18 million loan under
the same bank.
|
|
(3)
|
During August 2020, Fangguan Electronics issued a one-year commercial acceptance bill with amount
of approximately US$550,000 (RMB3,595,096) and maturity date at August 6, 2021. During September 2020, Fangguan Electronics issued
a six-month commercial acceptance bill with amount of approximately US$459,000 (RMB3,000,000) and maturity date at March 9, 2021.
On August 11, 2020 and September 10, 2020, the two commercial acceptance bills were discounted with Industrial Bank at an interest
rate of 3.80% and the balance of the two commercial acceptance bills converted to bank loans with Industrial Bank based on a mutual
agreement from both parties. This loan was also secured by the same collateral as the above RMB18 million loan under the same bank.
|
|
(4)
|
During December 2020, Fangguan Electronics issued a six-month commercial acceptance bill with amount of approximately US$459,000
(RMB3,000,000) and maturity date at June 4, 2021. On December 7, 2020, the commercial acceptance bill was discounted with Industrial
Bank at an interest rate of 3.85% and the balance of the commercial acceptance bill converted to bank loan with Industrial Bank
based on a mutual agreement from both parties. This loan was also secured by the same collateral as the above RMB18 million loan
under the same bank.
|
NOTE 10 - STOCKHOLDERS' EQUITY
Stock Issued for Conversion of Convertible Debt
During the six months ended December 31, 2020, the
Company issued a total of 9,470,630 shares of common stock for the conversion of debt in the principal amount of $273,200
together with all accrued and unpaid interest, according to the conditions of the convertible notes. All these conversions
resulted in a total loss on extinguishment of debt of $256,639 for the six months ended December 31, 2020. The remaining
principal balance due under convertible notes after these conversions and other debt settlements (See Note 14) is zero.
Stock Issued for Exercise of Warrants
On December 21, 2020, the Company issued a total of 1,500,000
shares of common stock to FirstFire Global Opportunities Fund, LLC for the exercise of warrants in full, according to the conditions
of the convertible note dated as September 11, 2019. The exercise of warrants resulted in a loss of $67,028 for the six months
ended December 31, 2020. (See Note 14)
Stock Issued for Private Placement
In December 2020, the Company issued a total of 28,869,999
shares of common stock to nine individual subscribers for an aggregate purchase price of $433,000 at $0.015 per share, according
to the conditions of the subscription agreements signed between the Company and subscribers.
Stock Issued as Commitment Shares for Promissory Note
On December 21, 2020, the Company issued a self-amortization
promissory note to Labrys Fund, L.P in the aggregate principal amount of $300,000. The promissory note is due on or before December
21, 2021 and bears an interest rate of five percent (5%) per annum. The note is not convertible unless in default, as defined in
the agreement. The Company agreed to reserve 7,052,239 shares of its common stock for issuance if any debt is converted.
On December 31, 2020, the Company issued 447,762 shares
of common stock (the “First Commitment Shares”) and 1,119,402 shares of common stock (the “Second Commitment
Shares”) related to the promissory note as a commitment fee. The Second Commitment Shares must be returned to the Company’s
treasury if the promissory note is fully repaid and satisfied on or prior to the maturity date. The Company recorded the First
Commitment Shares as debt discount valued at $68,060 based on the quoted market price at issue date and amortized over the term
of the promissory note. The Company recorded the Second Commitment Shares at par for the six months ended December 31, 2020. (See
Note 15)
NOTE 11 - RELATED PARTY TRANSACTIONS AND BALANCES
Purchase from related party
During the six months ended December 31, 2019, the Company
purchased $1,464,537 and $37,495 from Keenest and Shenzhen Baileqi S&T which were owned by the Company’s stockholders
who own approximately 1.4% and 0.8% respectively of the Company’s outstanding common stock. The amount of $1,464,537 and
$37,495 were included in the cost of revenue for the six months ended December 31, 2019.
During the three months ended December 31, 2019, the
Company purchased $880,773 and $0 from Keenest and Shenzhen Baileqi S&T which were owned by the Company’s stockholders
who own approximately 1.4% and 0.8% respectively of the Company’s outstanding common stock. The amounts of $880,773 and $0
were included in the cost of revenue for the three months ended December 31, 2019.
Advances to suppliers - related parties
Lisite Science made advances of $429,264 and $357,577
to Keenest for future purchases as of December 31, 2020 and June 30, 2020, respectively.
Sales to related party
During the six months ended December 31, 2020 and 2019,
Baileqi Electronic sold materials of $0 and $644,392 respectively to Shenzhen Baileqi S&T.
During the three months ended December 31, 2020 and 2019,
Baileqi Electronic sold materials of $0 and $330,435 respectively to Shenzhen Baileqi S&T.
Lease from related party
Lisite Science leases office and warehouse space from
Keenest, a related party, with annual rent of approximately $1,500 (RMB10,000) for one year until July 20, 2020. On July 20, 2020,
Lisite Science further extended the lease with Keenest for one more year until July 20, 2021 with annual rent of approximately
$1,500 (RMB10,000). (See Note 6).
Baileqi Electronic leases office and warehouse space
from Shenzhen Baileqi S&T, a related party, with monthly rent of approximately $2,500 (RMB17,525) and the lease period is from
June 1, 2019 to May 31, 2020. On June 5, 2020, Baileqi Electronic further extended the lease with Shenzhen Baileqi S&T for
one more year until May 31, 2021 with monthly rent of approximately $2,500 (RMB17,525). (See Note 6).
Due to related parties
Due to related parties represents certain advances to
the Company or its subsidiaries by related parties. The amounts are non-interest bearing, unsecured and due on demand.
|
|
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Ben Wong
|
|
(1)
|
|
$
|
143,792
|
|
|
$
|
143,792
|
|
Yubao Liu
|
|
(2)
|
|
|
333,628
|
|
|
|
102,938
|
|
Xin Sui
|
|
(3)
|
|
|
2,016
|
|
|
|
2,016
|
|
Baozhen Deng
|
|
(4)
|
|
|
(488
|
)
|
|
|
9,437
|
|
Jialin Liang
|
|
(5)(10)
|
|
|
1,434,495
|
|
|
|
901,460
|
|
Xuemei Jiang
|
|
(6)(9)
|
|
|
547,384
|
|
|
|
505,685
|
|
Shikui Zhang
|
|
(7)
|
|
|
45,854
|
|
|
|
28,528
|
|
Changyong Yang
|
|
(8)
|
|
|
29,246
|
|
|
|
23,063
|
|
|
|
|
|
$
|
2,535,927
|
|
|
$
|
1,716,919
|
|
(1) Ben Wong was the controlling shareholder of Shinning
Glory until April 20, 2017, which holds majority shares in Ionix Technology, Inc.
(2) Yubao Liu is the controlling shareholder of Shinning
Glory since April 20, 2017, which holds majority shares in Ionix Technology, Inc.
(3) Xin Sui is a member of the board of directors of
Welly Surplus.
(4) Baozhen Deng is a stockholder of the Company, who
owns approximately 0.8% of the Company’s outstanding common stock, and the owner of Shenzhen Baileqi S&T.
(5) Jialin Liang is a stockholder of the Company and
the president, CEO, and director of Fangguan Electronics.
(6) Xuemei Jiang is a stockholder of the Company and
the vice president and director of Fangguan Electronics.
(7) Shikui Zhang is a stockholder of the Company and
serves as the legal representative and general manager of Shizhe New Energy since May 2019.
(8) Changyong Yang is a stockholder of the Company, who
owns approximately 1.4% of the Company’s outstanding common stock, and the owner of Keenest.
(9) The liability was assumed from the acquisition of
Fangguan Electronics.
(10) The Company assumed liability of approximately $5.8
million (RMB39,581,883) from Jialin Liang during the acquisition of Fangguan Electronics. During the year ended June 30, 2019,
approximately $4.4 million (RMB30,000,000) liability assumed was forgiven and converted to capital.
During the six months ended December 31, 2020, Yubao
Liu advanced $503,475 to Well Best after netting off the refund paid to him. In addition, Yubao Liu agreed to decrease his advances
to Well Best of $272,785 (RMB1,784,069) to pay off the loan receivables due from Shenzhen Baileqi S&T to Baileqi Electronic
on behalf of Shenzhen Baileqi S&T.
During the six months ended December 31, 2020, Baileqi
Electronic refunded $9,925 to Baozhen Deng. Shikui Zhang advanced approximately $14,000 to Shizhe New Energy. Changyong Yang, a
stockholder of the Company, advanced approximately $4,000 to Lisite Science.
On September 23, 2020, Jialin Liang entered into a short-term
loan agreement with Bank of Communications to borrow an individual loan of approximately US$441,000 (RMB 3 million) for one year
with annual interest rate of 3.85%. The borrowing was guaranteed by Fangguan Electronics. Pursuant to the loan agreement, the proceed
from the bank loan could only be used in the operation of Fangguan Electronics. On September 23, 2020, Jialin Liang advanced all
of the proceeds from this bank loan to Fangguan Electronics.
During the six months ended December 31, 2019, Yubao
Liu was refunded of $9,028 by Welly Surplus after netting off his advances to Well Best. Baileqi Electronic refunded $5,303 to
Baozhu Deng, a relative of the stockholder Baozhen Deng, and Baozhen Deng advanced $2,810 to Baileqi Electronic. Shizhe New Energy
refunded $625 and $1,869 to Liang Zhang and Zijian Yang respectively, who were the officers of Shizhe New Energy at the time. Shikui
Zhang advanced $16,548 to Shizhe New Energy.
NOTE 12 – CONCENTRATION
Major customers
Customers who accounted for 10% or more of the Company’s
revenues (goods sold and services) and its outstanding balance of accounts receivable are presented as follows:
|
|
For the Six Months Ended
December 31, 2020
|
|
|
As of December 31, 2020
|
|
|
|
Revenue
|
|
|
Percentage of
total revenue
|
|
|
Accounts
receivable
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
1,053,587
|
|
|
|
18
|
%
|
|
$
|
276,004
|
|
|
|
8
|
%
|
Customer B
|
|
|
867,393
|
|
|
|
15
|
%
|
|
|
29,501
|
|
|
|
1
|
%
|
Total
|
|
$
|
1,920,980
|
|
|
|
33
|
%
|
|
$
|
305,505
|
|
|
|
9
|
%
|
|
|
For the Six Months Ended
December 31, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Revenue
|
|
|
Percentage of
total revenue
|
|
|
Accounts
receivable
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
1,732,012
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
1,732,012
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
For the Three Months Ended
December 31, 2020
|
|
|
As of December 31, 2020
|
|
|
|
Revenue
|
|
|
Percentage of
total revenue
|
|
|
Accounts
receivable
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
419,600
|
|
|
|
14
|
%
|
|
$
|
276,004
|
|
|
|
8
|
%
|
Customer B
|
|
|
580,436
|
|
|
|
19
|
%
|
|
|
29,501
|
|
|
|
1
|
%
|
Customer C
|
|
|
312,594
|
|
|
|
10
|
%
|
|
|
144,581
|
|
|
|
4
|
%
|
Total
|
|
$
|
1,312,630
|
|
|
|
43
|
%
|
|
$
|
450,086
|
|
|
|
13
|
%
|
|
|
For the Three Months Ended
December 31, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Revenue
|
|
|
Percentage of
total revenue
|
|
|
Accounts
receivable
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
871,138
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Customer B
|
|
|
773,138
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer C
|
|
|
851,841
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
2,496,117
|
|
|
|
35
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Primarily all customers are located in the PRC.
Major suppliers
The suppliers who accounted for 10% or more of the Company’s
total purchases (materials and services) and its outstanding balance of accounts payable are presented as follows:
|
|
For the Six Months Ended
December 31, 2020
|
|
|
As of December 31, 2020
|
|
|
|
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage of
total accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A
|
|
$
|
743,919
|
|
|
|
15
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Supplier B
|
|
|
524,926
|
|
|
|
10
|
%
|
|
|
293,821
|
|
|
|
12
|
%
|
Total
|
|
$
|
1,268,845
|
|
|
|
25
|
%
|
|
$
|
293,821
|
|
|
|
12
|
%
|
|
|
For the Six Months Ended
December 31, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage of
total accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A - related party
|
|
$
|
1,464,537
|
|
|
|
13
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Supplier B
|
|
|
2,168,109
|
|
|
|
19
|
%
|
|
|
126,261
|
|
|
|
4
|
%
|
Total
|
|
$
|
3,632,646
|
|
|
|
32
|
%
|
|
$
|
126,261
|
|
|
|
4
|
%
|
|
|
For the Three Months Ended
December 31, 2020
|
|
|
As of December 31, 2020
|
|
|
|
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage of
total accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A
|
|
$
|
448,321
|
|
|
|
17
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
448,321
|
|
|
|
17
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
For the Three Months Ended
December 31, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage of
total accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A - related party
|
|
$
|
880,773
|
|
|
|
15
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Supplier B
|
|
|
1,056,219
|
|
|
|
17
|
%
|
|
|
126,261
|
|
|
|
4
|
%
|
Total
|
|
$
|
1,936,992
|
|
|
|
32
|
%
|
|
$
|
126,261
|
|
|
|
4
|
%
|
All suppliers of the Company are located in the PRC.
NOTE 13 - INCOME TAXES
The effective tax rate in the periods presented is the
result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rate. The Company operates
in United States of America, Hong Kong and the PRC that are subject to taxes in the jurisdictions in which they operate.
United States of America
The Company is registered in the State of Nevada and
is subject to the tax laws of United States of America and subject to the corporate tax rate of 21% on its taxable income.
For the three and six months ended December 31, 2020
and 2019, the Company did not generate income in United States of America and no provision for income tax was made. Under normal
circumstances, the Internal Revenue Service is authorized to audit income tax returns during a three-year period after the returns
are filed. In unusual circumstances, the period may be longer. Tax returns for the years ended June 30, 2016 and after
were still open to audit as of December 31, 2020.
Hong Kong
The Company’s subsidiaries, Well Best and Welly
Surplus, are registered in Hong Kong and subject to income tax rate of 16.5%. For the three and six months ended December 31, 2020
and 2019, there is no assessable income chargeable to profit tax in Hong Kong.
The PRC
The Company’s subsidiaries in China are subject
to a unified income tax rate of 25%. Fangguan Electronics was certified as high-tech enterprises for three calendar years from
2016 to 2019 and is taxed at a unified income tax rate of 15%. Fangguan Electronics has renewed the high-tech enterprise certificate
which granted it the tax rate of 15% for the three whole calendar years of 2019 to 2021.
The reconciliation of income tax expense (benefit) at
the U.S. statutory rate of 21% to the Company's effective tax rate is as follows:
|
|
For the Six Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Tax (benefit) at U.S. statutory rate
|
|
$
|
(191,925
|
)
|
|
$
|
215,961
|
|
Tax rate difference between foreign operations and U.S.
|
|
|
19,747
|
|
|
|
(105,068
|
)
|
Change in valuation allowance
|
|
|
106,869
|
|
|
|
76,612
|
|
Permanent difference
|
|
|
39,805
|
|
|
|
(6,056
|
)
|
Effective tax (benefit)
|
|
$
|
(25,504
|
)
|
|
$
|
181,449
|
|
The provisions for income taxes (benefits) are summarized
as follows:
|
|
For the Six Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current
|
|
$
|
(1,182
|
)
|
|
$
|
152,570
|
|
Deferred
|
|
|
(24,322
|
)
|
|
|
28,879
|
|
Total
|
|
$
|
(25,504
|
)
|
|
$
|
181,449
|
|
As of December 31, 2020, the Company has approximately
$3,044,000 net operating loss carryforwards available in the U.S., Hong Kong and China to reduce future taxable income which will
begin to expire from 2035. It is more likely than not that the deferred tax assets resulted from net operating loss carryforward
cannot be utilized in the future because there will not be significant future earnings from the entities which generated the net
operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets resulted from net operating
loss carryforward as of December 31, 2020.
On December 22, 2017, the “Tax Cuts and Jobs Act”
(“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S. corporate tax rate
decreased from 34% to 21%. Accordingly, the Company has re-measured its deferred tax assets on net operating loss carry forwards
in the U.S at the lower enacted cooperated tax rate of 21%. However, this re-measurement has no effect on the Company’s income
tax expenses as the Company has provided a 100% valuation allowance on its deferred tax assets previously.
Additionally, the 2017 Tax Act implemented a modified
territorial tax system and imposing a tax on previously untaxed accumulated earnings and profits (“E&P”) of foreign
subsidiaries (the “Toll Charge”). The Toll Charge is based in part on the amount of E&P held in cash and other
specific assets as of December 31, 2017. The Toll Charge can be paid over an eight-year period, starting in 2018, and will not
accrue interest. The 2017 Tax Act also imposed a global intangible low-taxed income tax (“GILTI”), which is a new tax
on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125%
for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits.
The Company has determined that this one-time Toll Charge
has no effect on the Company’s income tax expenses as the Company has no undistributed foreign earnings at either of the
two testing dates of November 2, 2017 and December 31, 2017.
For purposes of the inclusion of GILTI, the Company determined
that the Company did not have tax liabilities resulting from GILTI for the three and six months ended December 31, 2020 and 2019
due to net operating loss carryforwards available in the U.S. Therefore, there was no accrual of GILTI liability as of December
31, 2020 and June 30, 2020.
The extent of the Company’s operations involves
dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final
taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution
of disputes arising from federal, state and international tax audits. The Company recognizes potential liabilities and records
tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether,
and the extent to which, additional taxes will be due.
NOTE 14 - CONVERTIBLE DEBT
Convertible notes
Convertible notes payable balance was zero as of December
31, 2020.
As of June 30, 2020, convertible notes payable consists
of:
|
|
|
|
Note Balance
|
|
|
Debt discount
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Up Lending Group Ltd
|
|
(1)
|
|
$
|
39,000
|
|
|
$
|
(1,953
|
)
|
|
$
|
37,047
|
|
Firstfire Global Opportunities Fund LLC
|
|
(2)
|
|
|
165,000
|
|
|
|
(32,909
|
)
|
|
|
132,091
|
|
Power Up Lending Group Ltd
|
|
(3)
|
|
|
53,000
|
|
|
|
(13,995
|
)
|
|
|
39,005
|
|
Crown Bridge Partners
|
|
(4)
|
|
|
51,384
|
|
|
|
(15,095
|
)
|
|
|
36,289
|
|
Morningview Financial LLC
|
|
(5)
|
|
|
165,000
|
|
|
|
(64,416
|
)
|
|
|
100,584
|
|
BHP Capital NY
|
|
(6)
|
|
|
91,789
|
|
|
|
-
|
|
|
|
91,789
|
|
Labrys Fund, LP
|
|
(7)
|
|
|
146,850
|
|
|
|
(69,265
|
)
|
|
|
77,585
|
|
Total
|
|
|
|
$
|
712,023
|
|
|
$
|
(197,633
|
)
|
|
$
|
514,390
|
|
|
(1)
|
On July 25, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending
Group Ltd to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in the
aggregate principal amount of $103,000 and received $94,840 in cash on August 1, 2019 after deducting legal fees and other costs.
The convertible note bears interest rate at 6% per annum and due on July 25, 2020. The convertible note can be converted into shares
of the Company’s common stock at 65% of the average of the two lowest trading prices during the fifteen trading day prior
to the conversion date.
|
During the six months ended December 31, 2020,
Power Up Lending Group Ltd elected to convert $39,000 of the principal amount together with $4,916 of accrued and unpaid interest
of the convertible notes into 264,970 shares of the Company’s common stock. The conversion resulted in a loss on extinguishment
of debt of $32,778. (See Note 10)
The remaining principal balance due under
this convertible note after all conversions is zero as of December 31, 2020.
|
(2)
|
On September 11, 2019, the Company entered into a Securities Purchase Agreement with Firstfire
Global Opportunities Fund LLC to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of
the Company, in the aggregate principal amount of $165,000 and received $143,500 in cash on September 18, 2019 after deducting
an original issue discount in the amount of $15,000 (the “OID”), legal fees and other costs. The convertible note bears
interest rate at 5% per annum and payable in one year. Conversion price shall be equal to the lower of (i) $2.00 or (ii) 75% multiplied
by the lowest traded price of the common stock during the twenty consecutive trading day period immediately preceding the date
of the respective conversion.
|
During the six months ended December 31, 2020, Firstfire Global Opportunities Fund LLC elected to convert $68,850 of the principal
amount of the convertible notes into 4,125,000 shares of the Company’s common stock. The conversion resulted in a loss on
extinguishment of debt of $67,512 (See Note 10).
After the foregoing conversions, on November
12, 2020, the Company paid Firstfire Global Opportunities Fund LLC, the holder of the Company’s convertible debt an aggregate
of $130,500 in order to terminate their convertible note dated September 11, 2019, including all accrued and unpaid interest. The
payment was made by Yubao Liu on behalf of the Company and the note holder confirmed this full settlement on November 13, 2020.
The debt settlement resulted in a gain on extinguishment of debt of $94,928.
The remaining principal balance due under
this convertible note after all conversions and settlement is zero as of December 31, 2020.
|
(3)
|
On November 4, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending
Group Ltd to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in the
aggregate principal amount of $53,000 and received $47,350 in cash on November 12, 2019 after deducting legal fees and other costs.
The convertible note bears interest rate at 6% per annum and due on November 4, 2020. The convertible note can be converted into
shares of the Company’s common stock at 65% of the average of the two lowest trading prices during the fifteen trading day
prior to the conversion date.
|
On September 16, 2020, the Company entered
into a Note Settlement Agreement with Power Up Lending Group Ltd., the holder of the Company’s convertible debt. The Note
Settlement Agreement terminated their convertible note dated November 4, 2019, including all accrued and unpaid interest, after
the Company paid an aggregate of $75,000 on September 16, 2020. The debt settlement resulted in a gain on extinguishment of debt
of $15,346.
|
(4)
|
On November 12, 2019, the Company entered into a Securities Purchase Agreement with Crown Bridge
Partners, LLC to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in
the aggregate principal amount sum up to $165,000 with a purchase price sum up to $156,750. During November 2019, First Tranche
of the agreement was executed in the principal amount of $55,000 and the Company received $50,750 in cash on November 15, 2019
after deducting an OID in the amount of $2,750, legal fees and other costs. The convertible note bears interest rate at 5% per
annum and due on November 12, 2020. The convertible note can be converted into shares of the Company’s common stock at 75%
multiplied by the lowest traded price of the common stock during the twenty consecutive trading day period immediately preceding
the date of the respective conversion.
|
On October 16, 2020, the Company issued a
total of 500,000 shares of common stock to Crown Bridge Partners, LLC for the conversion of debt in the principal amount of $3,500
according to the conditions of the convertible note dated as November 12, 2019. The conversion resulted in a loss on extinguishment
of debt of $22,424. (See Note 10)
After the foregoing conversions, on December
7, 2020, the Company paid Crown Bridge Partners, LLC, the holder of the Company’s convertible debt an aggregate of $82,500
in order to terminate their convertible note dated November 12, 2019, including all accrued and unpaid interest. Among the total,
payment of $60,000 was made by Yubao Liu on behalf of the Company while the remaining payment of $22,500 was made directly by the
Company. The note holder confirmed this full settlement on December 10, 2020. The debt settlement resulted in a gain on extinguishment
of debt of $206,377.
The remaining principal balance due under
this convertible note after all conversions and settlement is zero as of December 31, 2020.
|
(5)
|
On November 20, 2019, the Company entered into a Securities Purchase Agreement with Morningview
Financial, LLC to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in
the aggregate principal amount of $165,000 and received $153,250 in cash on November 22, 2019 after deducting an OID in the amount
of $8,250, legal fees and other costs. The convertible note bears interest rate at 5% per annum and due on November 20, 2020. Conversion
price shall be equal to the lower of (i) $2.00 or (ii) 75% multiplied by the lowest traded price of the common stock during the
twenty consecutive trading day period immediately preceding the date of the respective conversion.
|
On September 24, 2020, Morningview Financial,
LLC elected to convert $15,000 of the principal amount of the convertible notes into 568,182 shares of the Company’s common
stock. The conversion resulted in a loss on extinguishment of debt of $5,907. (See Note 10)
After the foregoing conversions, on November
12, 2020, the Company paid Morningview Financial, LLC, the holder of the Company’s convertible debt an aggregate of $175,000
in order to terminate their convertible note dated November 20, 2019, including all accrued and unpaid interest. The payment was
made by Yubao Liu on behalf of the Company and the note holder confirmed this full settlement on November 14, 2020. The debt settlement
resulted in a gain on extinguishment of debt of $209,604.
The remaining principal balance due under
this convertible note after all conversions and settlement is zero as of December 31, 2020.
|
(6)
|
On December 3, 2019, the Company entered into a Securities Purchase Agreement with BHP Capital
NY, Inc to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in the aggregate
principal amount of $102,900 and received $95,500 in cash on December 13, 2019 after deducting and OID in the amount of $4,900,
legal fees and other costs. The convertible note bears interest rate at 5% per annum and due on December 3, 2020. The convertible
note can be converted into shares of the Company’s common stock at 75% of the average of the two lowest trading prices during
the fifteen trading day prior to the conversion date.
|
On April 14, 2020, the Company entered into
an Amendment to Securities Purchase Agreement with BHP Capital NY, Inc dated on December 3, 2019. The Company agreed to pay off
this note holder in 6 installments of $23,186.79 each, with an aggregate amount of $139,121 (including principal of $137,114 and
interest of $2,007). The repayment resulted in a loss on extinguishment of debt of $4,703, which was included in other income and
expense in the consolidated statement of comprehensive income (loss) for the year ended June 30, 2020.
In May and June 2020, the Company paid two
installments totaling $46,373 (including principal of $45,325 and interest of $1,048) and note payable balance decreased to $91,789
as of June 30, 2020. During the period from July to September 2020, the Company continued to pay 4 installments of an aggregate
amount of $92,748 (including principal of $91,789 and interest of $959).
As of the date of this report, the Company
has made total six installments payment of an aggregate amount of $139,121 (including principal of $137,114 and interest of $2,007).
The note payable balance decreased to zero as of December 31, 2020.
|
(7)
|
On January 10, 2020, the Company entered into a convertible promissory note with Labrys Fund, LP
to issue and sell, upon the terms and conditions set forth in the agreement a convertible note of the Company, in the aggregate
principal amount of $146,850 and received $137,000 in cash on January 13, 2020 after deducting an OID in the amount of $7,350,
legal fees and other costs. The note is due on January 10, 2021 and bears interest at 5% per annum. The conversion price shall
be equal to 75% multiplied by the lesser of the lowest closing bid price or lowest traded price of the Common Stock during the
twenty (20) consecutive trading day period immediately preceding the date of the respective conversion.
|
During the six months ended December 31, 2020,
Labrys Fund, LP elected to convert $146,850 of the principal amount together with all accrued and unpaid interest of the convertible
notes into 4,012,478 shares of the Company’s common stock. The conversion resulted in a loss on extinguishment of debt of
$128,018. The remaining principal balance due under this convertible note after all conversions is zero as of December 31, 2020.
(See Note 10)
All convertible notes aforementioned
For the six months ended December 31, 2020 and 2019,
the Company recorded the amortization of debt discount of $138,399 and 181,336 for the convertible notes issued, which were included
in other income and expense in the consolidated statement of comprehensive income (loss).
For the three months ended December 31, 2020 and 2019,
the Company recorded the amortization of debt discount of $24,185 and 160,023 for the convertible notes issued, which were included
in other income and expense in the consolidated statement of comprehensive income (loss).
Derivative liability
Upon issuing of the convertible notes, the Company determined
that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes
a derivative which has been bifurcated from the note and accounted for as a derivative liability, with a corresponding discount
recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded immediately
to interest expense at inception.
The derivative liability in connection with the conversion
feature of the convertible debt is the only financial liability measured at fair value on a recurring basis.
The change of derivative liabilities is as follows:
Balance at July 1, 2020
|
|
$
|
276,266
|
|
Converted
|
|
|
(357,868
|
)
|
Debt settlement
|
|
|
(566,030
|
)
|
Change in fair value recognized in operations
|
|
|
647,632
|
|
Balance at December 31, 2020
|
|
$
|
-
|
|
The estimated fair value of the derivative instruments
was valued using the Black-Scholes option pricing model during the six months ended December 31, 2020, using the following assumptions:
Estimated dividends
|
|
None
|
Expected volatility
|
|
78.55% to 253.30%
|
Risk free interest rate
|
|
0.61% to 0.93%
|
Expected term
|
|
0 to 6 months
|
Warrants
In connection with the issuance of the $165,000 convertible
promissory note on September 11, 2019, FirstFire Global Opportunities Fund, LLC is entitled, upon the terms and subject to the
limitations on exercise and the conditions set forth in the agreement, at any time on or after the date of issuance hereof to purchase
from the Company up to 68,750 shares of common stock. Exercise price shall be $2.40, and the warrants can be exercised within 5
years which is before September 11, 2024.
On December 21, 2020, the Company issued a total of 1,500,000
shares of common stock to FirstFire Global Opportunities Fund, LLC for the exercise of warrants in full. The exercise of warrants
resulted in a loss of $67,028 for the six months ended December 31, 2020. After this exercise, FirstFire Global Opportunities Fund,
LLC is not entitled to any warrant to purchase shares. (See Note 10)
In connection with the issuance of the $55,000 convertible
promissory note on November 12, 2019, Crown Bridge Partners, LLC is entitled, upon the terms and subject to the limitations on
exercise and the conditions set forth in the agreement, at any time on or after the date of issuance hereof to purchase from the
Company up to 22,916 shares of common stock. Exercise price shall be $2.80, and the warrants can be exercised within 5 years which
is before November 12, 2024.
In December 2020, the Company paid a total of $82,500
to fully settle the convertible note dated November 12, 2019 with Crown Bridge Partners, LLC, including all accrued and unpaid
interest and unexercised warrants. After this settlement, Crown Bridge Partners, LLC is not entitled to any warrant to purchase
shares.
In connection with the issuance of the $165,000 convertible
promissory note on November 20, 2019, Morningview Financial LLC is entitled, upon the terms and subject to the limitations on exercise
and the conditions set forth in the agreement, at any time on or after the date of issuance hereof to purchase from the Company
up to 68,750 shares of common stock. Exercise price shall be $2.80, and the warrants can be exercised within 5 years which is before
November 20, 2024.
In November 2020, the Company paid a total of $175,000
to fully settle the convertible note dated November 20, 2019 with Morningview Financial LLC, including all accrued and unpaid interest
and unexercised warrants. After this settlement, Morningview Financial LLC is not entitled to any warrant to purchase shares.
In connection with the issuance of the $146,850 convertible
promissory note on January 10, 2020, Labrys Fund, LP is entitled, upon the terms and subject to the limitations on exercise and
the conditions set forth in the agreement, at any time on or after the date of issuance hereof to purchase from the Company up
to 68,750 shares of common stock. Exercise price shall be $2.80, and the warrants can be exercised within 5 years which is before
January 10, 2025.
The estimated fair value of the warrants was valued using
the Black-Scholes option pricing model at grant date, using the following assumptions:
Estimated dividends
|
|
None
|
Expected volatility
|
|
56.23% to 71.08%
|
Risk free interest rate
|
|
1.73% to 1.92%
|
Expected term
|
|
5 years
|
Since the warrants can be exercised at $2.4 or $2.8 and
are not liabilities, the face value of convertible notes was allocated between convertible note and warrant based on the fair values
of the conversion feature and warrants. Accordingly, $147,492 was allocated to warrants and recorded in additional paid in capital
account during the year ended June 30, 2020.
The details of the outstanding warrants are as follows:
|
|
Number of
shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining
Contractual Term
(years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2020
|
|
|
229,166
|
|
|
$
|
2.68
|
|
|
|
4.2 to 4.53
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised or settled
|
|
|
(160,416
|
)
|
|
|
2.63
|
|
|
|
4.05 to 4.16
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2020
|
|
|
68,750
|
|
|
$
|
2.80
|
|
|
|
4.03
|
|
NOTE 15 – PROMISSORY NOTE
On December 21, 2020, the Company issued a self-amortization
promissory note to Labrys Fund, L.P in the aggregate principal amount of $300,000. The promissory note is due on or before December
21, 2021 and bears an interest rate of five percent (5%) per annum. The note is not convertible unless in default, as defined in
the agreement. The Company agreed to reserve 7,052,239 shares of its common stock for issuance if any debt is converted. The Company
executed and closed the transaction on December 31, 2020 and received $253,500 in cash after deducting an OID in the amount of
$30,000, legal fees of $3,000 and other costs of $13,500. The self-amortization promissory note has an amortization schedule of
$35,000 payment at each month end beginning April 23, 2021 through December 21, 2021.
In connection with the issuance of promissory note, on
December 31, 2020, the Company issued 447,762 shares of common stock (the “First Commitment Shares”) and 1,119,402
shares of common stock (the “Second Commitment Shares”) related to the promissory note as a commitment fee. The Second
Commitment Shares must be returned to the Company’s treasury if the promissory note is fully repaid and satisfied on or prior
to the maturity date. The Company recorded the First Commitment Shares as debt discount valued at $68,060 based on the quoted market
price at issue date and amortized over the term of the promissory note. The Company recorded the Second Commitment Shares at par
for the six months ended December 31, 2020. (See Note 10)
For the three and six months ended December 31, 2020,
the Company recorded the amortization of debt discount of $1,274 for the self-amortization promissory note issued, which was included
in other income and expense in the consolidated statement of comprehensive income (loss).
NOTE 16 – SEGMENT INFORMATION
The Company’s business is classified by management
into three reportable business segments (smart energy, photoelectric display and service contracts) supported by a corporate group
which conducts activities that are non-segment specific. The smart energy reportable segment derives revenue from the sales of
portable power banks that is intended to be utilized as a power source for electronic devices such as the iphone, ipad, mp3/mp4
players, PSP gaming systems, and cameras. The photoelectric display reportable segment derives revenue from the sales of LCM and
LCD screens manufactured for small devices such as video capable baby monitors, electronic devices such as tablets and cell phones,
and for use in televisions or computer monitors. The service contracts reportable segment derives revenue from providing IT and
solution-oriented services. Unallocated items comprise mainly corporate expenses and corporate assets.
Although all of the Company’s revenue is generated
from Mainland China, the Company is organizationally structured along business segments. The accounting policies of each operating
segments are same and are described in Note 3, “Summary of Significant Accounting Policies”.
The following tables provide the business segment information
for the three and six months ended December 31, 2020 and 2019.
|
|
For the Six Months Ended December 31, 2020
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
5,939,602
|
|
|
$
|
1,746
|
|
|
$
|
-
|
|
|
$
|
5,941,348
|
|
Cost of Revenues
|
|
|
-
|
|
|
|
5,259,262
|
|
|
|
10,182
|
|
|
|
-
|
|
|
|
5,269,444
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
680,340
|
|
|
|
(8,436
|
)
|
|
|
-
|
|
|
|
671,904
|
|
Operating expenses
|
|
|
5,532
|
|
|
|
773,259
|
|
|
|
17,748
|
|
|
|
138,602
|
|
|
|
935,141
|
|
Loss from operations
|
|
|
(5,532
|
)
|
|
|
(92,919
|
)
|
|
|
(26,184
|
)
|
|
|
(138,602
|
)
|
|
|
(263,237
|
)
|
Net loss
|
|
$
|
(5,372
|
)
|
|
$
|
(120,254
|
)
|
|
$
|
(26,183
|
)
|
|
$
|
(736,615
|
)
|
|
$
|
(888,424
|
)
|
|
|
For the Six Months Ended December 31, 2019
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,538,094
|
|
|
$
|
12,675,303
|
|
|
$
|
619,901
|
|
|
$
|
-
|
|
|
$
|
14,833,298
|
|
Cost of Revenues
|
|
|
1,464,537
|
|
|
|
10,529,594
|
|
|
|
349,545
|
|
|
|
-
|
|
|
|
12,343,676
|
|
Gross profit
|
|
|
73,557
|
|
|
|
2,145,709
|
|
|
|
270,356
|
|
|
|
-
|
|
|
|
2,489,622
|
|
Operating expenses
|
|
|
6,134
|
|
|
|
1,113,559
|
|
|
|
17,217
|
|
|
|
248,566
|
|
|
|
1,385,476
|
|
Income (loss) from operations
|
|
|
67,423
|
|
|
|
1,032,150
|
|
|
|
253,139
|
|
|
|
(248,566
|
)
|
|
|
1,104,146
|
|
Net income (loss)
|
|
$
|
59,568
|
|
|
$
|
863,135
|
|
|
$
|
230,065
|
|
|
$
|
(305,834
|
)
|
|
$
|
846,934
|
|
|
|
For the Three Months Ended December 31, 2020
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
2,982,577
|
|
|
$
|
306
|
|
|
$
|
-
|
|
|
$
|
2,982,883
|
|
Cost of Revenues
|
|
|
-
|
|
|
|
2,587,857
|
|
|
|
198
|
|
|
|
-
|
|
|
|
2,588,055
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
394,720
|
|
|
|
108
|
|
|
|
-
|
|
|
|
394,828
|
|
Operating expenses
|
|
|
2,847
|
|
|
|
420,982
|
|
|
|
8,123
|
|
|
|
48,501
|
|
|
|
480,453
|
|
Loss from operations
|
|
|
(2,847
|
)
|
|
|
(26,262
|
)
|
|
|
(8,015
|
)
|
|
|
(48,501
|
)
|
|
|
(85,625
|
)
|
Net loss
|
|
$
|
(2,688
|
)
|
|
$
|
(31,770
|
)
|
|
$
|
(8,015
|
)
|
|
$
|
(313,645
|
)
|
|
$
|
(356,118
|
)
|
|
|
For the Three Months Ended December 31, 2019
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
910,391
|
|
|
$
|
6,195,380
|
|
|
$
|
227,197
|
|
|
$
|
-
|
|
|
$
|
7,332,968
|
|
Cost of Revenues
|
|
|
880,773
|
|
|
|
5,172,690
|
|
|
|
217,109
|
|
|
|
-
|
|
|
|
6,270,572
|
|
Gross profit
|
|
|
29,618
|
|
|
|
1,022,690
|
|
|
|
10,088
|
|
|
|
-
|
|
|
|
1,062,396
|
|
Operating expenses
|
|
|
2,022
|
|
|
|
595,065
|
|
|
|
5,736
|
|
|
|
178,402
|
|
|
|
781,225
|
|
Income (loss) from operations
|
|
|
27,596
|
|
|
|
427,625
|
|
|
|
4,352
|
|
|
|
(178,402
|
)
|
|
|
281,171
|
|
Net income (loss)
|
|
$
|
21,727
|
|
|
$
|
338,659
|
|
|
$
|
3,958
|
|
|
$
|
(228,686
|
)
|
|
$
|
135,658
|
|
NOTE 17 - SUBSEQUENT EVENTS
Stock Issued for Private Placement
On January 13, 2021, the Company issued a total of 7,000,000
shares of common stock to one individual subscriber for purchase price of $105,000 at $0.015 per share, according to the conditions
of the subscription agreement signed by both parties.
New Consulting Agreement
On February 1, 2021, the Company entered into a consulting
agreement with Mr. George Adamson, a well-known lithium battery expert in the United States, and Mr. Steve Bellamy, a senior
financial advisor (collectively, the “Consultants”) for the purpose of improving the core competitiveness and brand
image of the Company. The Consultants have been engaged to assist the Company to establish a corporate head office in Las Vegas,
Nevada, which would function in manufacturing, assembly and R&D. The Consultants will each earn 96,000 restricted stock of
the Company with 48,000 on August 1, 2021 and 48,000 on February 1, 2022.
Establishment of A New Subsidiary
On February 7, 2021, the Board of Directors of the Company
approved and ratified the incorporation of Shijirun (Yixing) Technology, Ltd. (“Shijirun”), a limited liability company
formed under the laws of the Peoples Republic of China (PRC) on February 7, 2021. Well Best, a wholly owned subsidiary of the Company,
is the sole shareholder of Shijirun. As a result, Shijirun is an indirect, wholly-owned subsidiary of the Company. Shijirun will
head up the Company’s advance into the new energy industry focusing on developing and producing high-end intelligent new
energy equipment from Yixing City, Jiangsu Province, China.
END NOTES TO FINANCIAL STATEMENTS