The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
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, 2019
(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.
NOTE 2 – 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, 2019 and
the results of operations and cash flows for the periods ended December 31, 2019 and 2018. 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, 2019 are not necessarily indicative of the results to be expected for the entire year ending
June 30, 2020 or for any subsequent periods. The balance sheet at June 30, 2019 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, 2019 as included in our Annual Report on Form 10-K as filed with the SEC on September 30, 2019.
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.
Certain amounts have been reclassified to conform with current year presentation.
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.
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.
For service revenue, the Company recognizes revenue when services are performed and accepted by customers.
The following table disaggregates our revenue by major
source for the three and six months ended December 31, 2019 and 2018, respectively:
|
|
For the Six Months Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales of LCM and LCD screens - Non-related parties
|
|
$
|
12,030,911
|
|
|
$
|
2,873,152
|
|
Sales of LCM and LCD screens - Related parties
|
|
|
644,392
|
|
|
|
115,897
|
|
Sales of portable power banks
|
|
|
1,538,094
|
|
|
|
1,831,387
|
|
Service contracts
|
|
|
619,901
|
|
|
|
126,199
|
|
Total
|
|
$
|
14,833,298
|
|
|
$
|
4,946,635
|
|
|
|
For the Three Months Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales of LCM and LCD screens - Non-related parties
|
|
$
|
5,864,945
|
|
|
$
|
1,136,995
|
|
Sales of LCM and LCD screens - Related parties
|
|
|
330,435
|
|
|
|
22,059
|
|
Sales of portable power banks
|
|
|
910,391
|
|
|
|
1,092,494
|
|
Service contracts
|
|
|
227,197
|
|
|
|
126,199
|
|
Total
|
|
$
|
7,332,968
|
|
|
$
|
2,377,747
|
|
All the operating entities of the Company are domiciled
in the PRC. Accordingly, all the Company’s revenues are derived in the PRC during the three and six months ended December
31, 2019 and 2018. As of December 31, 2019 and June 30, 2019, all of the non-current assets were located in the PRC.
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 a material effect on our financial
statements. The most significant effects are related to the recognition of new ROU assets and lease liabilities on our balance
sheet for our real estate operating leases. The Company has entered into an office lease arrangement in China with a lease term
longer than 12 months under which we are the lessee. (See Note 5)
Earnings Per Share
Basic net income per share is computed by dividing net
income by the weighted-average number of common shares outstanding during the period. Diluted net income 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 three and six months ended December 31, 2019,
the Company had outstanding convertible notes and warrants which represent 720,382 shares of commons stock. 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.
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, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items, except for equity accounts
|
|
|
6.9762
|
|
|
|
6.8747
|
|
|
|
Six months ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Items in statements of comprehensive income (loss) and cash flows
|
|
|
6.9255
|
|
|
|
6.7756
|
|
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 12).
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
From time to time, new accounting pronouncements are
issues by the Financial Accounting Standards Board or other standard bodies that may have an impact on the Company’s accounting
and reporting. The Company believes that any recently issued accounting pronouncements and other authoritative guidance for which
the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not
be material to its financial position, results of operations, and cash flows when implemented.
NOTE 3 – VARIABLE INTEREST ENTITY
On December 27, 2018, the Company entered into VIE agreements
with two shareholders of Changchun Fangguan Electronics Technology Co., Ltd. (PRC) (“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.
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.
Following unaudited pro forma combined statement of operations
are based upon the historical financial statements of the Company and Fangguan Electronics for the three and six months ended December
31, 2018 and are presented as if the acquisition had occurred at the beginning of the period.
|
|
For the Six Months Ended December 31, 2018
|
|
|
|
Fangguan
Electronics
|
|
|
Ionix
Technology
|
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,595,179
|
|
|
$
|
4,946,635
|
|
|
$
|
(1,579,654
|
)
|
|
$
|
10,962,160
|
|
Cost of revenues
|
|
|
6,493,654
|
|
|
|
4,346,635
|
|
|
|
(1,153,818
|
)
|
|
|
9,686,471
|
|
Gross profit
|
|
|
1,101,525
|
|
|
|
600,000
|
|
|
|
(425,836
|
)
|
|
|
1,275,689
|
|
Operating expenses
|
|
|
910,754
|
|
|
|
293,765
|
|
|
|
-
|
|
|
|
1,204,519
|
|
Income (loss) from operations
|
|
|
190,771
|
|
|
|
306,235
|
|
|
|
(425,836
|
)
|
|
|
71,170
|
|
Other income
|
|
|
5,070
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,070
|
|
Income tax provision
|
|
|
29,478
|
|
|
|
122,228
|
|
|
|
-
|
|
|
|
151,706
|
|
Net income (loss)
|
|
$
|
166,363
|
|
|
$
|
184,007
|
|
|
$
|
(425,836
|
)
|
|
$
|
(75,466
|
)
|
|
|
For the Three Months Ended December 31, 2018
|
|
|
|
Fangguan
Electronics
|
|
|
Ionix
Technology
|
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,917,667
|
|
|
$
|
2,377,747
|
|
|
$
|
(637,394
|
)
|
|
$
|
6,658,020
|
|
Cost of revenues
|
|
|
4,210,109
|
|
|
|
2,066,912
|
|
|
|
(390,412
|
)
|
|
|
5,886,609
|
|
Gross profit
|
|
|
707,558
|
|
|
|
310,835
|
|
|
|
(246,982
|
)
|
|
|
771,411
|
|
Operating expenses
|
|
|
489,413
|
|
|
|
232,179
|
|
|
|
-
|
|
|
|
721,592
|
|
Income (loss) from operations
|
|
|
218,145
|
|
|
|
78,656
|
|
|
|
(246,982
|
)
|
|
|
49,819
|
|
Other expense
|
|
|
(35,064
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(35,064
|
)
|
Income tax provision
|
|
|
27,564
|
|
|
|
71,802
|
|
|
|
-
|
|
|
|
99,366
|
|
Net income (loss)
|
|
$
|
155,517
|
|
|
$
|
6,854
|
|
|
$
|
(246,982
|
)
|
|
$
|
(84,611
|
)
|
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. 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, 2019
|
|
|
Balance as of
June 30, 2019
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,268,467
|
|
|
$
|
361,849
|
|
Notes receivable
|
|
|
23,546
|
|
|
|
120,182
|
|
Accounts receivable - non-related parties
|
|
|
4,742,477
|
|
|
|
3,402,986
|
|
Inventory
|
|
|
2,382,281
|
|
|
|
2,916,515
|
|
Advances to suppliers - non-related parties
|
|
|
75,090
|
|
|
|
106,146
|
|
Prepaid expenses and other current assets
|
|
|
58,731
|
|
|
|
63,756
|
|
Total Current Assets
|
|
|
8,550,592
|
|
|
|
6,971,434
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
7,200,946
|
|
|
|
7,506,849
|
|
Intangible assets, net
|
|
|
1,460,062
|
|
|
|
1,496,399
|
|
Deferred tax assets
|
|
|
24,901
|
|
|
|
54,361
|
|
Total Assets
|
|
$
|
17,236,501
|
|
|
$
|
16,029,043
|
|
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
$
|
2,580,201
|
|
|
$
|
2,618,296
|
|
Accounts payable
|
|
|
3,336,192
|
|
|
|
2,637,039
|
|
Advance from customers
|
|
|
39,658
|
|
|
|
32,372
|
|
Due to related parties
|
|
|
1,427,981
|
|
|
|
1,449,064
|
|
Accrued expenses and other current liabilities
|
|
|
151,421
|
|
|
|
148,287
|
|
Total Current Liabilities
|
|
|
7,535,453
|
|
|
|
6,885,058
|
|
Total Liabilities
|
|
$
|
7,535,453
|
|
|
$
|
6,885,058
|
|
NOTE 4 - 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, 2019
|
|
|
June 30, 2019
|
|
Raw materials
|
|
$
|
641,107
|
|
|
$
|
471,189
|
|
Work-in-process
|
|
|
439,915
|
|
|
|
1,719,426
|
|
Finished goods
|
|
|
1,928,161
|
|
|
|
1,188,531
|
|
Total Inventories
|
|
$
|
3,009,183
|
|
|
$
|
3,379,146
|
|
The Company recorded no inventory markdown for the three
and six months ended December 31, 2019 and 2018.
NOTE 5 - OPERATING LEASE
For the six months ended December 31, 2019, the Company
had three real estate operating leases for office, warehouses, manufacturing facilities and two boat operating leases under the
terms from four months to three years.
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. (See Note 9)
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. (See Note 9)
Dalian Shizhe New Energy Technology Co.,
Ltd. (“Shizhe New Energy”) leases a boat from a non-related party with monthly rent of approximately $7,200 (RMB50,000)
for one year from March 1, 2019 to February 28, 2020. On July 1, 2019, Shizhe New Energy leased another boat from the same non-related
party with monthly rent of approximately $7,200 (RMB50,000) for four months from July 10, 2019 to November 10, 2019.
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.
On November 1, 2019, the Company leased
an office space located in Dalian, China as its principal executive office under non-cancelable operating lease agreement for three
years, which expires through October 31, 2022. The monthly rent is approximately $715 (RMB5,000). The Company adopted the new standard
to recognize lease asset and liability for this lease after examining the criteria established.
For the six months ended December 31, 2019,
the Company made $92,434 of fixed cash payments related to operating leases. Non-cash activities involving ROU assets obtained
in exchange for lease liabilities were $19,711 for the six months ended December 31, 2019, including the impact of adopting the
new leases standard.
As of December 31, 2019, the Company recognized
additional operating lease liabilities of $19,810, among which $3,254 is classified as current portion and $16,556 is classified
as non-current portion, and Right-of-use assets of $22,676 based on the present value of the remaining minimum rental payments
under the current leasing standards for existing operating leases.
|
|
December 31, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Operating lease Right-of-use assets
|
|
$
|
22,676
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,254
|
|
|
$
|
-
|
|
Long-term debt
|
|
|
16,556
|
|
|
|
-
|
|
Total operating lease liabilities
|
|
$
|
19,810
|
|
|
$
|
-
|
|
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT,
NET
The components of property, plant and equipment
were as follows:
|
|
December 31, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
4,669,825
|
|
|
$
|
4,661,535
|
|
Machinery and equipment
|
|
|
3,100,077
|
|
|
|
3,036,339
|
|
Office equipment
|
|
|
64,440
|
|
|
|
60,052
|
|
Automobiles
|
|
|
100,311
|
|
|
|
101,793
|
|
Subtotal
|
|
|
7,934,653
|
|
|
|
7,859,719
|
|
Less: Accumulated depreciation
|
|
|
(727,586
|
)
|
|
|
(351,082
|
)
|
Property, plant and equipment, net
|
|
$
|
7,207,067
|
|
|
$
|
7,508,637
|
|
Depreciation expense related to property,
plant and equipment was $183,340 and $384,408 for the three and six months ended December 31, 2019.
As of December 31, 2019, buildings were
pledged as collateral for bank loans (See Note 8).
NOTE 7 – INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
|
|
December 31, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Land use right
|
|
$
|
1,463,815
|
|
|
$
|
1,485,428
|
|
Computer software
|
|
|
25,410
|
|
|
|
25,785
|
|
Subtotal
|
|
|
1,489,225
|
|
|
|
1,511,213
|
|
Less: Accumulated amortization
|
|
|
(29,163
|
)
|
|
|
(14,814
|
)
|
Intangible assets, net
|
|
$
|
1,460,062
|
|
|
$
|
1,496,399
|
|
Amortization expense related to intangible
assets was $7,426 and $14,672 for the three and six months ended December 31, 2019.
Fangguan Electronics acquired the land
use right from the local government in August 2012 which expires on August 15, 2062. As of December 31, 2019, land use right was
pledged as collateral for bank loans (See Note 8).
NOTE 8 – SHORT-TERM BANK LOAN
On November 12, 2018, 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
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. The loan was renewed for one year from November 19, 2019 to November 18, 2020.
NOTE 9 - 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 1.7% and 1.3% respectively of the Company’s outstanding common stock as of December 31,
2019. 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 six months ended December 31,
2018, the Company’s subsidiaries, Lisite Science and Baileqi Electronic, purchased $1,610,058 and $517,262 from Keenest and
Shenzhen Baileqi S&T which were owned by the Company’s stockholders who own approximately 1.7% and 1.3% respectively of
the Company’s outstanding common stock as of December 31, 2018. The amount of $1,610,058 and $454,049 were included in the
cost of revenue for the six months ended December 31, 2018.
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 1.7% and 1.3% respectively of the Company’s outstanding common stock as of December 31,
2019. The amounts of $880,773 and $0 were included in the cost of revenue for the three months ended December 31, 2019.
During the three months ended December
31, 2018, Lisite Science and Baileqi Electronic purchased $933,679 and $66,757 from Keenest and Shenzhen Baileqi S&T which
were owned by the Company’s stockholders who own approximately 1.7% and 1.3% respectively of the Company’s outstanding
common stock as of December 31, 2018. The amount of $933,679 and $114,023 were included in the cost of revenue for the three months
ended December 31, 2018.
During the three and six months ended December
31, 2018, the Company’s subsidiary, Changchun Fangguan Photoelectric Display Technology Co. Ltd ("Fangguan Photoelectric"),
purchased $706,462 and $1,498,744 from Fangguan Electronics before Fangguan Electronics became a variable interest entity of the
Company on December 27, 2018 (See Note 3). The president of Fangguan Electronics was the president and a member of the board of
directors of Fangguan Photoelectric before he resigned and left Fangguan Photoelectric in October 2018. The amount of $366,646
and $1,130,052 were included in the cost of revenue for the three and six months ended December 31, 2018.
Advances to suppliers - related parties
Lisite Science made advances of $146,157
and $269,498 to Keenest for future purchases as of December 31, 2019 and June 30, 2019, respectively.
Sales to related party and accounts
receivable from related party
During the six months ended December 31,
2019 and 2018, Baileqi Electronic sold materials of $644,392 and $93,838 respectively to Shenzhen Baileqi S&T. During the three
months ended December 31, 2019 and 2018, Baileqi Electronic sold materials of $330,435 and $0 respectively to Shenzhen Baileqi
S&T. The trade-related balance receivable from Shenzhen Baileqi S&T was $346,495 and $340,026 as of December 31, 2019 and
June 30, 2019, respectively.
During the three and six months ended December
31, 2018, Fangguan Photoelectric sold products of $22,059 to Fangguan Electronics before Fangguan Electronics became a variable
interest entity of the Company on December 27, 2018 (See Note 3).
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.
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.
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, 2019
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Ben Wong
|
|
(1)
|
|
|
$
|
143,792
|
|
|
$
|
143,792
|
|
Yubao Liu
|
|
(2)
|
|
|
|
489,741
|
|
|
|
498,769
|
|
Xin Sui
|
|
(3)
|
|
|
|
2,016
|
|
|
|
2,016
|
|
Baozhen Deng
|
|
(4)
|
|
|
|
6,710
|
|
|
|
3,900
|
|
Baozhu Deng
|
|
(5)
|
|
|
|
-
|
|
|
|
5,303
|
|
Jialin Liang
|
|
(6)
|
|
|
|
914,808
|
|
|
|
928,314
|
|
Xuemei Jiang
|
|
(7)
|
|
|
|
513,173
|
|
|
|
520,750
|
|
Liang Zhang
|
|
(8)
|
|
|
|
-
|
|
|
|
625
|
|
Zijian Yang
|
|
(9)
|
|
|
|
-
|
|
|
|
1,869
|
|
Shikui Zhang
|
|
(10)
|
|
|
|
16,548
|
|
|
|
-
|
|
|
|
|
|
|
$
|
2,086,788
|
|
|
$
|
2,105,338
|
|
(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 1.3% of the Company’s outstanding common stock, and the owner of Shenzhen Baileqi S&T.
(5) Baozhu Deng is a relative of Baozhen
Deng, a stockholder of the Company.
(6) Jialin Liang is the president, CEO,
and director of Fangguan Electronics.
(7) Xuemei Jiang is the vice president
and director of Fangguan Electronics.
(8) Liang Zhang is the legal representative
of Shizhe New Energy until May 2019.
(9) Zijian Yang is the supervisor of Shizhe
New Energy.
(10) Shikui Zhang serves as the legal representative
and general manager of Shizhe New Energy since May 2019.
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 and Baozhen Deng advanced $2,810 to Baileqi Electronic. Shizhe New Energy refunded $625 and $1,869 to Liang
Zhang and Zijian Yang respectively. Shikui Zhang advanced $16,548 to Shizhe New Energy.
During the six months ended December 31,
2018, Yubao Liu advanced $248,298 to Well Best. Baileqi Electronic borrowed $2,914 from Baozhu Deng. In addition, Baozhen Deng
refunded $7,591 to Baileqi Electronic. Liang Zhang and Zijian Yang advanced $5,887 and $5,139 to Shizhe New Energy, respectively.
NOTE 10 – 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, 2019
|
|
|
As of December 31, 2019
|
|
|
|
|
Revenue
|
|
|
|
Percentage of
revenue
|
|
|
|
Accounts
receivable
|
|
|
|
Percentage of
accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
1,732,012
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
1,732,012
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
|
For the Six Months Ended
December 31, 2018
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Revenue
|
|
|
|
Percentage of
total revenue
|
|
|
|
Accounts
receivable
|
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
1,472,404
|
|
|
|
30
|
%
|
|
$
|
417,851
|
|
|
|
12
|
%
|
Customer B
|
|
|
1,917,298
|
|
|
|
39
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
3,389,702
|
|
|
|
69
|
%
|
|
$
|
417,851
|
|
|
|
12
|
%
|
|
|
|
For the Three Months Ended
December 31, 2019
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Revenue
|
|
|
|
Percentage of
revenue
|
|
|
|
Accounts
receivable
|
|
|
|
Percentage of
accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
871,138
|
|
|
|
12
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Customer B
|
|
|
773,138
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer C
|
|
|
851,841
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
2,496,117
|
|
|
|
35
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
|
For the Three Months Ended
December 31, 2018
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Revenue
|
|
|
|
Percentage of
total revenue
|
|
|
|
Accounts
receivable
|
|
|
|
Percentage of
total accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
733,511
|
|
|
|
31
|
%
|
|
$
|
417,851
|
|
|
|
12
|
%
|
Customer B
|
|
|
358,983
|
|
|
|
15
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer C
|
|
|
888,875
|
|
|
|
37
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
1,981,369
|
|
|
|
83
|
%
|
|
$
|
417,851
|
|
|
|
12
|
%
|
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, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Total
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 Six Months Ended
December 31, 2018
|
|
|
As of December 31, 2018
|
|
|
|
Total
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage
of
total
accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A - related party
|
|
$
|
1,610,058
|
|
|
|
36
|
%
|
|
$
|
55,829
|
|
|
|
1
|
%
|
Supplier B - related party
|
|
|
517,262
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Supplier C - related party
|
|
|
1,498,744
|
|
|
|
33
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Supplier D
|
|
|
785,316
|
|
|
|
17
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
4,411,380
|
|
|
|
97
|
%
|
|
$
|
55,829
|
|
|
|
1
|
%
|
|
|
For the Three Months Ended
December 31, 2019
|
|
|
As of December 31, 2019
|
|
|
|
Total
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
|
%
|
|
|
For the Three Months Ended
December 31, 2018
|
|
|
As of December 31, 2018
|
|
|
|
Total
Purchase
|
|
|
Percentage of
total purchase
|
|
|
Accounts
payable
|
|
|
Percentage
of
total
accounts
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier A - related party
|
|
$
|
933,679
|
|
|
|
47
|
%
|
|
$
|
55,829
|
|
|
|
1
|
%
|
Supplier B - related party
|
|
|
706,462
|
|
|
|
36
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Supplier C
|
|
|
248,609
|
|
|
|
13
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total
|
|
$
|
1,888,750
|
|
|
|
96
|
%
|
|
$
|
55,829
|
|
|
|
1
|
%
|
All suppliers of the Company are located
in the PRC.
NOTE 11 - 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.
For the three and six months ended December 31, 2019 and 2018,
there is no assessable income chargeable to profit tax in United States of America. 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, 2019.
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, 2019 and 2018, 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 years from
November 2016 to November 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 -2021.
The reconciliation of income tax expense
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rate
|
|
$
|
215,961
|
|
|
$
|
64,310
|
|
Tax rate difference between foreign operations and U.S.
|
|
|
(105,068
|
)
|
|
|
25,739
|
|
Change in valuation allowance
|
|
|
76,612
|
|
|
|
30,442
|
|
Permanent difference
|
|
|
(6,056
|
)
|
|
|
1,737
|
|
Effective tax
|
|
$
|
181,449
|
|
|
$
|
122,228
|
|
The provisions for income taxes are summarized
as follows:
|
|
For the Six Months Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
152,570
|
|
|
$
|
137,112
|
|
Deferred
|
|
|
28,879
|
|
|
|
(14,884
|
)
|
Total
|
|
$
|
181,449
|
|
|
$
|
122,228
|
|
As of December 31, 2019, the Company has
approximately $1,316,000 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 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.
The Company has not provided deferred taxes
on unremitted earnings attributable to international companies that have been reinvested indefinitely. Because of the availability
of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable if such earnings
were not indefinitely reinvested. In accordance with ASC Topic 740, interest associated with unrecognized tax benefits is classified
as income tax and penalties are classified in selling, general and administrative expenses in the statements of comprehensive income
(loss).
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 12 - CONVERTIBLE DEBT
Convertible notes
As of December 31, 2019, convertible notes
payable consists of:
|
|
|
|
|
Note Balance
|
|
|
Debt discount
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Up Lending Group Ltd
|
|
(1)
|
|
|
$
|
103,000
|
|
|
$
|
(42,702
|
)
|
|
$
|
60,298
|
|
Firstfire Global Opportunities Fund LLC
|
|
(2)
|
|
|
|
165,000
|
|
|
|
(114,959
|
)
|
|
|
50,041
|
|
Power Up Lending Group Ltd
|
|
(3)
|
|
|
|
53,000
|
|
|
|
(34,077
|
)
|
|
|
18,923
|
|
Crown Bridge Partners
|
|
(4)
|
|
|
|
55,000
|
|
|
|
(37,956
|
)
|
|
|
17,044
|
|
Morningview Financial LLC
|
|
(5)
|
|
|
|
165,000
|
|
|
|
(146,466
|
)
|
|
|
18,534
|
|
BHP Capital NY
|
|
(6)
|
|
|
|
102,900
|
|
|
|
(83,575
|
)
|
|
|
19,325
|
|
Total
|
|
|
|
|
$
|
643,900
|
|
|
$
|
(459,735
|
)
|
|
$
|
184,165
|
|
|
(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.
|
|
(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.
|
|
(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.
|
|
(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.
|
|
(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.
|
|
(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.
|
For the three and six months ended
December 31, 2019, the Company recorded the amortization of debt discount of $160,023 and $181,336 for the convertible notes
issued, which were included in other income and expenses 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:
Issued during the six months ended December 31, 2019
|
|
$
|
477,726
|
|
Change in fair value recognized in operations
|
|
|
(131,452
|
)
|
Balance at December 31, 2019
|
|
$
|
346,274
|
|
The estimated fair value of the derivative
instruments was valued using the Black-Scholes option pricing model at issuance date and December 31, 2019, using the following
assumptions:
Estimated dividends
|
None
|
Expected volatility
|
55.87% to 71.21%
|
Risk free interest rate
|
1.72% to 2.08%
|
Expected term
|
6 to 12 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.
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 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.
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 70.55%
|
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 convertible debt and warrants. Accordingly, $104,635 was allocated to
warrants and recorded in additional paid in capital account during the six months ended December 31, 2019.
The details of the outstanding warrants
are as follows:
|
|
Number of
shares
|
|
|
Weighted
Average Exercise
Price
|
|
|
Remaining
Contractual Term
(years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
160,416
|
|
|
|
2.63
|
|
|
|
5
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
160,416
|
|
|
$
|
2.63
|
|
|
|
4.5
|
|
NOTE 13 – 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 2, “Summary of Significant Accounting Policies.”
The following tables provide the business
segment information for the three and six months ended December 31, 2019 and 2018.
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
6,134
|
|
|
|
606,708
|
|
|
|
17,217
|
|
|
|
248,566
|
|
|
|
878,625
|
|
Research and development expense
|
|
|
-
|
|
|
|
506,851
|
|
|
|
-
|
|
|
|
-
|
|
|
|
506,851
|
|
Total 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
|
16
|
|
|
|
(68,545
|
)
|
|
|
16
|
|
|
|
(188,720
|
)
|
|
|
(257,233
|
)
|
Subsidy income
|
|
|
-
|
|
|
|
50,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,018
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,452
|
|
|
|
131,452
|
|
Total other income (expense)
|
|
|
16
|
|
|
|
(18,527
|
)
|
|
|
16
|
|
|
|
(57,268
|
)
|
|
|
(75,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
67,439
|
|
|
|
1,013,623
|
|
|
|
253,155
|
|
|
|
(305,834
|
)
|
|
|
1,028,383
|
|
Income tax provision
|
|
|
7,871
|
|
|
|
150,488
|
|
|
|
23,090
|
|
|
|
-
|
|
|
|
181,449
|
|
Net income (loss)
|
|
$
|
59,568
|
|
|
$
|
863,135
|
|
|
$
|
230,065
|
|
|
$
|
(305,834
|
)
|
|
$
|
846,934
|
|
|
|
For the Six Months Ended December 31, 2018
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,831,387
|
|
|
$
|
2,989,049
|
|
|
$
|
126,199
|
|
|
$
|
-
|
|
|
$
|
4,946,635
|
|
Cost of Revenues
|
|
|
1,630,188
|
|
|
|
2,605,795
|
|
|
|
110,652
|
|
|
|
-
|
|
|
|
4,346,635
|
|
Gross profit
|
|
|
201,199
|
|
|
|
383,254
|
|
|
|
15,547
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
8,846
|
|
|
|
87,555
|
|
|
|
12,867
|
|
|
|
184,497
|
|
|
|
293,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
192,353
|
|
|
|
295,699
|
|
|
|
2,680
|
|
|
|
(184,497
|
)
|
|
|
306,235
|
|
Income tax provision
|
|
|
48,273
|
|
|
|
73,687
|
|
|
|
268
|
|
|
|
-
|
|
|
|
122,228
|
|
Net income (loss)
|
|
$
|
144,080
|
|
|
$
|
222,012
|
|
|
$
|
2,412
|
|
|
$
|
(184,497
|
)
|
|
$
|
184,007
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
2,022
|
|
|
|
311,037
|
|
|
|
5,736
|
|
|
|
178,402
|
|
|
|
497,197
|
|
Research and development expense
|
|
|
-
|
|
|
|
284,028
|
|
|
|
-
|
|
|
|
-
|
|
|
|
284,028
|
|
Total 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
|
10
|
|
|
|
(34,549
|
)
|
|
|
16
|
|
|
|
(165,847
|
)
|
|
|
(200,370
|
)
|
Subsidy income
|
|
|
-
|
|
|
|
7,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,231
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115,563
|
|
|
|
115,563
|
|
Total other income (expense)
|
|
|
10
|
|
|
|
(27,318
|
)
|
|
|
16
|
|
|
|
(50,284
|
)
|
|
|
(77,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
27,606
|
|
|
|
400,307
|
|
|
|
4,368
|
|
|
|
(228,686
|
)
|
|
|
203,595
|
|
Income tax provision
|
|
|
5,879
|
|
|
|
61,648
|
|
|
|
410
|
|
|
|
-
|
|
|
|
67,937
|
|
Net income (loss)
|
|
$
|
21,727
|
|
|
$
|
338,659
|
|
|
$
|
3,958
|
|
|
$
|
(228,686
|
)
|
|
$
|
135,658
|
|
|
|
For the Three Months Ended December 31, 2018
|
|
|
|
Smart
energy
|
|
|
Photoelectric
display
|
|
|
Service
contracts
|
|
|
Unallocated
items
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,092,494
|
|
|
$
|
1,159,054
|
|
|
$
|
126,199
|
|
|
$
|
-
|
|
|
$
|
2,377,747
|
|
Cost of Revenues
|
|
|
945,707
|
|
|
|
1,010,553
|
|
|
|
110,652
|
|
|
|
-
|
|
|
|
2,066,912
|
|
Gross profit
|
|
|
146,787
|
|
|
|
148,501
|
|
|
|
15,547
|
|
|
|
-
|
|
|
|
310,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,691
|
|
|
|
45,812
|
|
|
|
12,867
|
|
|
|
169,809
|
|
|
|
232,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
143,096
|
|
|
|
102,689
|
|
|
|
2,680
|
|
|
|
(169,809
|
)
|
|
|
78,656
|
|
Income tax provision
|
|
|
43,310
|
|
|
|
28,224
|
|
|
|
268
|
|
|
|
-
|
|
|
|
71,802
|
|
Net income (loss)
|
|
$
|
99,786
|
|
|
$
|
74,465
|
|
|
$
|
2,412
|
|
|
$
|
(169,809
|
)
|
|
$
|
6,854
|
|
NOTE 14 - SUBSEQUENT EVENTS
The Company has evaluated the existence
of significant events subsequent to the balance sheet date through the date the financial statements were issued and has determined
that the following subsequent events or transactions which would require recognition or disclosure in the financial statements.
Stock Issued for Services
The Company engaged Maxim Group LLC as
its financial advisor to assist the Company in articulating its growth strategy to the investment community and up-list its securities
to a National Securities Exchange. On February 10, 2020, the Company issued 150,000 shares of common stock to Maxim Group LLC as a part of its compensation, which were valued at $262,500 based on the quoted market price at issuance.
Stock Issued for Conversion of Convertible Debt
On January 31, 2020, the Company issued
a total of 12,775 shares of common stock to Power Up Lending Group Ltd for the conversion of debt in the principal amount of $12,000
according to the conditions of the convertible note dated as July 25, 2019. The remaining principal balance due under this convertible
note after this conversion is $91,000.
New Issuance of Convertible Debt
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.
In connection with the issuance of this
convertible note, 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.