NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE
1 - BASIS OF PREPARATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial reporting and the rules and regulations of
the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and
footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.
In the opinion of management, the consolidated
balance sheet as of September 30, 2017 which has been derived from audited financial statements and these unaudited condensed
consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results
for the periods presented. The results for the three months ended September 30, 2017 are not necessarily indicative of the results
to be expected for the entire fiscal year ending June 30, 2018 or for any future period.
These
unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s
Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year
ended June 30, 2017.
NOTE
2 - ORGANIZATION AND BUSINESS BACKGROUND
Rito
Group Corp. (the “Company”) was incorporated on March 24, 2015 under the laws of the state of Nevada.
The
Company, through its subsidiaries, mainly engages in trading of retail goods such as cookware, jewelry and watches, and numerous
other products.
Details
of the Company’s subsidiaries:
|
Company
name
|
|
Place/date
of incorporation
|
|
Particulars
of issued capital
|
|
Principal
activities
|
|
|
|
|
|
|
|
|
1.
|
Sino
Union International Limited (“Sino Union”)
|
|
Anguilla
January
3, 2014
|
|
84,500
shares of ordinary share of US$1 each
|
|
Investment
holding
|
|
|
|
|
|
|
|
|
2.
|
Rito
International Enterprise Company Limited (“Rito International”)
|
|
Hong
Kong
August
12, 2014
|
|
630,001
shares of ordinary share of HK$1 each
|
|
Trading
of retail goods
|
Rito
Group Corp. and its subsidiaries are hereinafter referred to as the “Company”.
NOTE
3 - GOING CONCERN UNCERTAINTIES
The
accompanying financial statements have been prepared using the going concern basis of accounting, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
As
of September 30, 2017, the Company suffered an accumulated deficit of $1,853,057 and continuously incurred a net operating loss
of $213,936 for the three months ended September 30, 2017. The continuation of the Company as a going concern through June 30,
2018 is dependent upon improving the profitability and the continuing financial support from its stockholders. Management believes
the existing shareholders or external financing will provide the additional cash to meet the Company’s obligations as they
become due.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
These
and other factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies
as described in this note and elsewhere in the accompanying consolidated financial statements and notes.
The
accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”).
The
condensed consolidated financial statements include the accounts of Rito Group Corp. and its subsidiaries. All significant inter-company
balances and transactions within the Company have been eliminated upon consolidation.
In
preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results
may differ from these estimates.
●
|
Cash
and cash equivalents
|
Cash
and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions
and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
Plant
and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated
on the straight-line basis over the following expected useful lives from the date on which they become fully operational:
Categories
|
|
Estimated
useful life
|
|
Residual
value
|
Leasehold
improvement
|
|
Over
the shorter of estimated useful life or term of lease
|
|
-
|
Expenditures
for maintenance and repairs are expensed as incurred. The gain or loss on the disposal of plant and equipment is the difference
between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statement of operations.
Accounts
receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for
doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically
evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments
in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
accordance with the Accounting Standard Codification (“ASC”) Topic 605
“Revenue Recognition”
, the
Company recognizes revenue when the following four criteria are met: (1) delivery has occurred or services rendered; (2) persuasive
evidence of an arrangement exists; (3) selling price is fixed or determinable; and (4) collectability is reasonably assured.
Revenue is measured at the fair value of the
consideration received or receivable, net of discounts and taxes applicable to the revenue. Revenue from trading of retail goods
is recognized when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the
risks and rewards of ownership transferred to and accepted by the customer when the products are collected by the customer
at the Company’s office. Revenue is recorded net of sales discounts, returns, allowances, and other adjustments that are
based upon management’s best estimates and historical experience and are provided for in the same period as the related
revenues are recorded. Based on limited operating history, management estimates that there were no sales return for the period
reported.
The
Company derives its revenue from sales of goods to individuals. Generally, the Company recognizes revenue when products are sold
and accepted by the customers and there are no continuing obligations to the customer.
Cost
of revenue includes the purchase cost of retail goods for re-sale to the customers.
The
provision of income taxes is determined in accordance with the provisions of ASC Topic 740,
“Income Taxes”
(“ASC Topic 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 periods 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
Topic 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC Topic 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.
The
Company did not have any unrecognized tax positions or benefits and there was no effect on the financial conditions or results
of operations for the three months ended September 30, 2017. The Company conducts major businesses in Hong Kong and is subject
to tax in this jurisdiction. As a result of its business activities, the Company will file tax returns that are subject to examination
by the foreign tax authority.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company calculates net loss per share in accordance with ASC Topic 260
“Earnings per share”
. Basic loss per
share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted
loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional
common shares were dilutive.
●
|
Foreign
currencies translation
|
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 operations.
The
reporting currency of the Company and its subsidiary in Anguilla is United States Dollars (“US$”). The Company’s
subsidiary in Hong Kong maintains its books and record in Hong Kong Dollars (“HK$”), which is functional currency
as being the primary currency of the economic environment in which the entity operates.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated
into US$, in accordance with ASC Topic 830-30,
“Translation of Financial Statement”
, using the exchange rate
on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses
resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other
comprehensive income within the statement of stockholders’ equity.
Translation
of amounts from the local currencies of the Company into US$ has been made at the following exchange rates for the respective
periods:
|
|
As
of and for the
three
months ended
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Period-end
/ average HK$ : US$1 exchange rate
|
|
|
7.75
|
|
|
|
7.75
|
|
Parties,
which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly,
to control the other party or exercise significant influence over the other party in making financial and operating decisions.
Companies are also considered to be related if they are subject to common control or common significant influence.
●
|
Fair
value of financial instruments
|
The carrying value of the Company’s financial
instruments: cash and cash equivalents, accounts receivable, deposits and other receivables, accounts payable, other payables and
accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments.
The
Company follows the guidance of the ASC Topic 820-10,
“Fair Value Measurements and Disclosures”
(“ASC
Topic 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC Topic 820-10 establishes
a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
Level
1
: Observable inputs such as quoted prices in active markets;
|
|
|
|
Level
2
: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
Level
3
: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its
own assumptions
|
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.
●
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption
of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
NOTE
5 - STOCKHOLDERS’ EQUITY
For
the three months ended September 30, 2017, the Company issued an aggregated of 40,000 shares of its common stock at $1.5 per share
for aggregate gross proceeds of $60,000.
As of September 30, 2017, and June 30,
2017, the Company has a total of 54,774,284 and 54,625,956 shares, respectively of its common stock issued and outstanding.
There are no shares of preferred stock issued and outstanding.
NOTE
6 - CONVERTIBLE NOTES PAYABLE
During
August 2015 to April 2016, the Company issued a number of convertible promissory notes (collectively the “Convertible Notes”)
to investors in an aggregated principal amount of $888,410. The Convertible Notes bear interest at a rate of 8% per annum with
a maturity of two years, due in 2017 and 2018. The principal and accrued interest are payable in a lump sum at the maturity. The
notes are convertible into shares of the Company’s common stock at a conversion price ranged from $0.15 to $0.25 per share
at the note holders’ sole and exclusive option.
For the three months ended September 30, 2017,
the Company issued an aggregate of 108,328 shares of its common stock to various investors in conversion of outstanding convertible
notes payable in aggregated principal and accrued interest of $25,000 and $2,082 respectively. The conversion price is
$0.25 per share.
For the three months ended September 30, 2017
and 2016, the interest expense of $801 and $18,802, respectively are recognized in the condensed consolidated statements
of operations. The Company does not pay interest to convertible notes holders during the three months ended September 30, 2017.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE
7 - PLANT AND EQUIPMENT
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
June
30, 2017
|
|
|
|
|
|
|
(audited)
|
|
Leasehold
improvement
|
|
$
|
64,504
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,504
|
|
|
|
-
|
|
Less:
Accumulated depreciation
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
64,504
|
|
|
$
|
-
|
|
Depreciation
expense, classified as operating expenses, was $Nil for the three months ended June 30, 2017 because the leasehold improvement
is not yet complete and hence no depreciation.
NOTE
8 - LONG-TERM BANK LOANS
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
June
30, 2017
|
|
|
|
|
|
|
(audited)
|
|
Bank
loan from financial institution in Hong Kong
|
|
|
|
|
|
|
|
|
The
Hongkong and Shanghai Banking Corporation Limited
|
|
$
|
43,531
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,531
|
|
|
|
-
|
|
Less:
Current portion
|
|
|
(7,505
|
)
|
|
|
-
|
|
Long-term
portion
|
|
$
|
36,026
|
|
|
$
|
-
|
|
In
July 2017, the Company obtained a loan in the principal amount of HKD349,000 (approximately $45,032) from The Hongkong and Shanghai
Banking Corporation Limited, a financial institution in Hongkong which bears interest at the base lending rate less 0.7% flat
rate per month with 60 monthly installments of HKD8,260 (approximately $1,066) each and will mature in July 2022.
NOTE
9 - INCOME TAXES
For
the three months ended September 30, 2017 and 2016, the local (United States) and foreign components of loss before income taxes
were comprised of the following:
|
|
For
the three months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
|
|
|
–
Local
|
|
$
|
(19,667
|
)
|
|
$
|
(26,344
|
)
|
–
Foreign, representing
|
|
|
|
|
|
|
|
|
Anguilla
|
|
|
(1,100
|
)
|
|
|
(1,055
|
)
|
Hong
Kong
|
|
|
(193,169
|
)
|
|
|
(238,089
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(213,936
|
)
|
|
|
(265,488
|
)
|
Provision
for income taxes consisted of the following:
|
|
|
For
the three months ended
September 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
–
Local
|
|
$
|
-
|
|
|
$
|
-
|
|
–
Foreign (Hong Kong)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
–
Local
|
|
|
-
|
|
|
|
-
|
|
–
Foreign (Hong Kong)
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 rates. The Company has subsidiaries that operate in various countries: United States, Anguilla and
Hong Kong that are subject to taxes in the jurisdictions in which they operate, as follows:
United
States of America
The
Company is registered in the State of Nevada and is subject to the tax laws of the United States of America. As of September 30,
2017, the operations in the United States of America incurred $190,705 of cumulative net operating losses which can be carried
forward to offset future taxable income. The net operating loss carryforwards begin to expire in 2036, if unutilized. The Company
has provided for a full valuation allowance of $66,746 against the deferred tax assets on the expected future tax benefits from
the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized
in the future.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Anguilla
Under
the current laws of the Anguilla, Sino Union is registered as an international business company which is governed by the International
Business Companies Act of Anguilla and there is no income tax charged in Anguilla.
Hong
Kong
Rito
International is subject to Hong Kong Profits Tax, which is charged at the statutory income tax rate of 16.5% on its assessable
income. For the three months ended September 30, 2017, no provision for income tax is required due to operating loss incurred.
As of September 30, 2017, Rito International incurred $1,547,632 of cumulative net operating losses which can be carried forward
to offset future taxable income at no expiration. The Company has provided for a full valuation allowance against the deferred
tax assets of $255,359 on the expected future tax benefits from the net operating loss carryforwards as the management believes
it is more likely than not that these assets will not be realized in the future.
The
following table sets forth the significant components of the aggregate deferred tax assets of the Company as of September 30,
2017 and September 30, 2016:
|
|
As of
|
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
|
|
|
(audited)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
|
|
– United States of America
|
|
$
|
66,746
|
|
|
$
|
59,863
|
|
– Hong Kong
|
|
|
255,359
|
|
|
|
223,487
|
|
|
|
|
322,105
|
|
|
|
283,350
|
|
Less: valuation allowance
|
|
|
(322,105
|
)
|
|
|
(283,350
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management
believes that it is more likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly,
the Company provided for a full valuation allowance against its deferred tax assets of $322,105 as of September 30, 2017. During
the three months ended September 30, 2017, the valuation allowance increased by $132,726, primarily relating to net operating
loss carryforwards from the various tax regime.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE
10 - RELATED PARTY TRANSACTIONS
|
|
For
the three months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Professional
fee paid to:
|
|
|
|
|
|
|
|
|
-
Related party A
|
|
$
|
3,605
|
|
|
$
|
4,510
|
|
-
Related party B
|
|
|
4,000
|
|
|
|
703
|
|
-
Related party C
|
|
|
430
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Website
design and maintenance fee paid to:
|
|
|
|
|
|
|
|
|
-
Related party D
|
|
|
588
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,623
|
|
|
$
|
5,801
|
|
Related
party A, B, C and D are the fellow subsidiaries of a corporate shareholder of the Company.
The
related party transactions are generally transacted in an arm-length basis at the current market value in the normal course of
business.
NOTE
11 - CONCENTRATIONS OF RISKS
(a)
Major customers
For the three months ended September 30, 2017,
there was one customer who accounted for 10% or more of the Company’s revenues. This customer accounted for 92% of the Company’s
revenue amounting to $8,043, with $8,043 account receivable balance at period-end.
For
the three months ended September 30, 2016, there was one customer who accounted for 100% of the Company’s revenues with
accounts receivable balance of $14,315 at period-end.
RITO
GROUP CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
(b)
Major vendors
For
the three months ended September 30, 2017, there was one vendor who accounted for 10% or more of the Company’s cost of revenues
with no accounts payable balance at period-end.
For
the three months ended September 30, 2016, there was one vendor who accounted for 100% of the Company’s cost of revenues
with no accounts payable balance at period-end.
(c)
Credit risk
Financial
instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration
of credit risk in its accounts receivables is substantially mitigated by its ongoing credit evaluation process and relatively
short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other
information.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
The
Company leases an office premises in Hong Kong under a non-cancellable operating lease that expire on December 2018, with an aggregate
fixed monthly rent of approximately $1,548.
The
aggregate lease expense for the three months ended September 30, 2017 and 2016 were $4,645 and $3,871, respectively.
As
of September 30, 2017, the Company has the aggregate future minimum rental payments due under a non-cancellable operating lease
in the next two years, as follows:
Period ending
September 30:
|
|
|
|
|
2018
|
|
$
|
4,645
|
|
2019
|
|
|
18,581
|
|
|
|
|
|
|
|
|
$
|
23,226
|
|
NOTE
13 - SUBSEQUENT EVENTS
In
accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events
or transactions that occurred after September 30, 2017 up through the date the Company presented this condensed consolidated financial
statement.
During
the period, the Company did not have any material recognizable subsequent event.