Our Class A Common Shares
are listed on the Nasdaq Capital Market under the symbol “LLIT.” On September 29, 2020, the closing price of our Class
A Common Shares was $0.429 per share.
This Prospectus Supplement No. 1 is being filed
to include the information set forth in the Report of Foreign Private Issuer on Form 6-K filed on September 30, 2020, which is
set forth below. This Prospectus Supplement No. 1 should be read in conjunction with the Prospectus dated June 8, 2020, which is
to be delivered with this prospectus supplement. This Prospectus Supplement No. 1 is not complete without, and may not be delivered
or utilized except in conjunction with, the Prospectus, including any amendments or supplements thereto.
The date of this Prospectus Supplement No. 1
is September 30, 2020
Recent
Business Developments
[1]
COVID-19
The
ongoing coronavirus pandemic first identified in China has spread throughout the world and may have a material adverse effect
on our business. All of our operating subsidiaries are located in China, and substantially all of our employees and all of our
customers and suppliers are located in China. From January to February 2020, our service revenue plunged, as the number of patient
users decreased sharply; and our revenue from the sale of products also dropped, because our distributors and sales personnel
were trapped at home and our contract manufacturers shut down production during this period. As of the date hereof, we have resumed
operations but at below normal levels. Medical check-up centers and hospitals in China that we have business relationships with
have gradually resumed operations since March 2020, including the medical check-up centers in Wuhan that focus on physical examinations.
The
coronavirus pandemic has a limited adverse impact on our operating results for the first six months of 2020, compared to that
for the same period of 2019, but may materially adversely impact our results of operations for the fiscal year ending December
31, 2020, depending on COVID-19’s future developments and actions taken to contain it. Our total revenue increased by 40%
from $242,213 for the six months ended June 30, 2019 to $339,175 for the six months ended June 30, 2020, mainly due to an increase
of $171,694 in product sales, partially offset by a decrease in service revenue from the provision of OSAS diagnostic services
of $74,732, as COVID-19 caused patient users to decrease in the hospitals and medicals centers we cooperate with.
[2]
Management Changes
On
April 1, 2020, Mr. Ping Chen resigned from his positions as Chief Executive Officer and director of the Company. Mr. Chen’s
resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies
or practices. On the same date, Mr. Zhitao He was appointed as Chief Executive Officer of the Company. Mr. He has served as chairman
of the board of directors of the Company since October 2016. On the same date, the Company’s Interim Chief Financial Officer,
Ms. Yingmei Yang, was appointed as a director to fill the vacancy created by Mr. Chen’s resignation.
On
April 24, 2020, Mr. Xiaogang Tong resigned from his positions as an independent director and member of each committee of the Board
of Directors of the Company. Mr. Tong’s resignation was not a result of any disagreement with the Company on any matter
relating to the Company’s operations, policies or practices. On the same date, the Board of Directors of the Company appointed
Mr. Fuya Zheng as a director, member of each of Audit Committee, Compensation Committee and Nominating Committee and Chair of
Audit Committee of the Company.
On
August 12, 2020, Mr. Zhitao He resigned from his positions as Chief Executive Officer and director of the Company. Mr. He’s
resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies
or practices. On August 25, 2020, Mr. Bin Lin was appointed as Chief Executive Officer, a director and Chairman of the Company.
[3]
Disposition of BDL
On
August 13, 2020, Lianluo Connection entered into a Share Transfer Agreement (the “Agreement”) with China Mine United
Investment Group Co., Ltd. (“China Mine”), pursuant to which Lianluo Connection transfers its 100% equity interests
in its wholly-owned PRC subsidiary BDL to China Mine for cash consideration of RMB 0. In exchange for all of the equity interests
in BDL, China Mine agrees to assume all liabilities of BDL.
Results
of Operations
Overview
Our
Company’s business is largely divided into two divisions: (i) sale of medical products such as CPR instruments; (ii) mobile
medicine, primarily providing wearable sleep respiratory solution for OSAS.
For
the six months ended June 30, 2020 and 2019, our total revenues amounted to $339,175 and $242,213, respectively. For the first
half year of 2020, the revenue of CPR increased mainly due to an order from one of our major customers. The revenue of OSAS diagnostic
services decreased due to the spread of COVID-19, as patient users in the hospitals and physical examination centers we cooperate
with decreased.
We
continued to redirect our operations from unprofitable sales of medical products to mobile medicine that focuses on marketing
and expanding OSAS diagnosis services in hospitals and physical examination centers. We believe these changes are crucial to improve
our competitive advantages in the industry in the future. By reducing our reliance on our less profitable medical devices distribution
business, we are able to leverage our resources to develop smart health products and services, which we see as a positive development
and focus for the future of our Company. Our long-term goal is to gradually decrease our products sale business and focus instead
on developing a mobile health operation platform.
We
have continued to establish relationships with pilot hospitals to deliver our wearable solutions and products for OSAS, driving
the market growth in the hospitals in the regions where the pilot hospitals are located, which helped to push forward our strategic
market expansion for public hospitals. So far, wearable diagnosis and analysis systems for OSAS have been successfully delivered
to major hospitals throughout China. We aim to intensify usage of our system in those hospitals and other institutions where we
have already successfully launched. Our target is to gradually promote our business from sleep centers, respiratory departments,
and Ear/Nose/Throat (E.N.T.) departments to other hospital departments with strong demand for sleep monitoring including those
accommodating patients seeking care (inpatient and outpatient) for key chronic diseases, such as hypertension, heart disease,
diabetes and strokes.
We
have also targeted the private physical examination centers market. Our wearable OSAS diagnosis and analysis system has been successively
launched in Ciming Aoya Hospital and Sonqao Health Checkup Institution. The number of customers for sleep diagnostic services
has been stable and we are making efforts to improve the market acceptance of our products and services.
In
addition, we are exploring the feasibility of cooperating with commercial health insurance companies in the development of sleep
respiratory solutions. In the long run, we expect to work with insurance companies to launch health insurance program providing
OSAS diagnosis and analysis for their covered customers. We will continue to focus on sleep health with our OSAS solution system,
aiming to become a leading domestic product and service provider in this market.
Six
Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
We
believe that historical period-to-period comparisons of operating results should not be relied upon as indicative of future performance.
|
(In U.S. dollars)
|
|
For Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
339,175
|
|
|
$
|
242,213
|
|
|
Costs of revenue
|
|
|
(580,572
|
)
|
|
|
(418,227
|
)
|
|
Gross loss
|
|
|
(241,397
|
)
|
|
|
(176,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(43,725
|
)
|
|
|
(556,213
|
)
|
|
General and administrative expenses
|
|
|
(1,200,494
|
)
|
|
|
(1,753,718
|
)
|
|
Provision for doubtful accounts
|
|
|
(28,963
|
)
|
|
|
(43,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,514,579
|
)
|
|
|
(2,529,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses
|
|
|
(570
|
)
|
|
|
(7,911
|
)
|
|
Other income
|
|
|
-
|
|
|
|
21,682
|
|
|
Other expense
|
|
|
(24,021
|
)
|
|
|
(18,044
|
)
|
|
Unrealized gain (loss) on securities
|
|
|
143,478
|
|
|
|
(678,304
|
)
|
|
Change in fair value of warrants liability
|
|
|
(300,304
|
)
|
|
|
(99,820
|
)
|
|
Loss before provision for income tax
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
Revenues
Our
total revenue increased by 40% from $242,213 for the six months ended June 30, 2019 to $339,175 for the six months ended June
30, 2020, mainly due to the increase of $171,694 in revenue from product sales, partially offset by the decrease in service revenue
from the provision of OSAS diagnostic services of $74,732. In the first half of 2020, our revenue from sale of medical equipment
and provision of technical services in relation to OSAS was $312,966 and $26,209, respectively, compared to $141,272 and $100,941
for the same period last year. The revenue of CPR increased mainly due to an order from one of our major customers. The revenue
of OSAS diagnostic services decreased due to the spread of COVID-19, as patient users in the hospitals and physical examination
centers we cooperate with decreased.
Costs
of Revenue
Cost
of revenues primarily includes costs of our finished goods, parts for assembly, wages, handling charges, depreciation on our productive
plant and equipment, and other expenses associated with the distribution of product. Our costs of revenue increased by 39% from
$418,227 for the six months ended June 30, 2019 to $580,572 for the six months ended June 30, 2020. The increase in cost of revenues
was generally in line with the increase of revenues.
Gross
Loss
Our
gross loss was $176,014, or 73% of our total revenue for the six months ended June 30, 2019 while our gross loss is $241,397,
or 71% of our total revenue in the same period of 2020. We incurred significant amounts of relatively fixed costs of revenues,
in particular depreciation of our long-lived assets related to our product and service revenues in 2020 and 2019,
resulting in a high gross loss both in dollar terms and percentage terms.
Selling
Expenses
Our
selling expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and customer support
functions, and costs associated with advertising and other marketing activities, and depreciation expenses related to equipment
used for sales and marketing activities.
Our
selling expenses decreased by 92% from $556,213 for the six months ended June 30, 2019 to $43,725 for the six months ended June
30, 2020. The decrease in selling expenses was mainly due to dismissal of sales personnel and reducing participation in medical
device exhibitions due to COVID-19.
General
and Administrative Expenses
General
and administrative expenses primarily consist of salaries and benefits and related costs for our administrative personnel and
management, stock-based compensation and expenses associated with registration of patent and intellectual
property rights in China, fees and expenses of our outside advisers, including legal, audit and patent registration expenses,
other expenses associated with our administrative offices, and the depreciation of equipment used for administrative purposes.
Our
general and administration expenses decreased by 32% from $1,753,718 for the six months ended June 30, 2019 to $1,200,494 for
the six months ended June 30, 2020. The decrease was mainly due to the reduction of headcount in 2020 and resulting in
reduced expenses, which decreased from $1,044,919 in the six months ended June 30, 2019 to $635,643 in the same period of
2020. In addition, the company's rent and property expenses also decreased from $188,558 for the six months ended June 30,
2019 to $55,144 for the same period of 2020 after termination of some lease agreements.
Provision
for Doubtful Accounts
Our
provision for doubtful accounts decreased by 34% from the amount of $43,873 for the six months ended June 30, 2019 to $28,963
for the six months ended June 30, 2020. A reserve for doubtful accounts on our receivable, if required, is based on a combination
of historical experience, aging analysis, and an evaluation of the collectability of specific accounts. Management considers that
receivables over 1 year to be past due. Accounts receivable balances are charged off against the reserve after all means of collection
have been exhausted and the potential for recovery is considered remote.
Operating
Loss
As
a result of the foregoing, we incurred an operating loss of $1,514,579 in the six months ended June 30, 2020, compared to an operating
loss of $2,529,818 in the same period of 2019, representing a decrease of 40%.
Unrealized
Gain (Loss) on Securities
Equity
investments with readily determinable fair values are measured at fair value. We had an unrealized gain of $143,478 for the
six months ended June 30, 2020, due to the rise of the share price of our marketable investments, compared to an unrealized
loss of $678,304 as a result of the fall of the share price of those investments in the same period of 2019.
Change
in Fair Value of Warrants Liability
For
the six months ended June 30, 2019, the loss related to changes in the fair value of warrants liability was $99,820, compared
to a loss of $300,304 for the six months ended June 30, 2020, relating to the warrants issued to our major shareholder, Hangzhou
Lianluo Interactive Information Technology Co., Ltd. (“HLI”) in 2016. The warrants, together with restricted common
shares, were issued pursuant to a securities purchase agreement with HLI in August 2016.
Taxation
We
incurred operating losses in the six months ended June 30, 2020 and 2019, and thus, had no income tax expenses.
Net
Loss and Net Loss Attributable to Lianluo Smart Limited
As
a result of the foregoing, we had net loss and net loss attributable to the Company of $1,695,996 for the six months ended June
30, 2020, compared to $3,312,215 in the same period of 2019.
Liquidity
and Capital Resources
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business.
We
have suffered a net loss of $1.70 million and used $1.66 million of cash in operation activities for the six months ended June
30, 2020. This condition has raised substantial doubt about our ability to continue as a going concern. The ability to continue
as a going concern is dependent upon our profit generating operations in the future and/or obtaining the necessary financing to
meet our obligations and repay our liabilities arising from normal business operations when they become due.
Our
principal sources of liquidity have been proceeds from issuances of equity securities and loans from related parties. We had a
working capital of $4.64 million as of June 30, 2020. In February and March 2020, we obtained approximately $7.2 million from
equity financings, net of placement agent’s commissions and other expenses. Considering the equity financings and our cost
cutting activities, we believe that our current cash and cash equivalents and our anticipated cash flows from operations will
be sufficient to meet our anticipated working capital requirements for the next 12 months.
On
January 30, 2020, the World Health Organization (“WHO”) declared a public health emergency of international concern,
because of a new strain of coronavirus surfacing in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international
community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid
increase in exposure globally. Our service was suspended due to restrictions and hospital closures except for essential services
in February 2020 and recovered gradually since March 2020 as hospitals gradually resumed business. The outbreak of COVID-19 and
the business downturn since 2019 have had an adverse effect on our operations. The full impact of the COVID-19 outbreak continues
to evolve as of the date of this report. Other factors that will affect our ability to continue operations such as the market
demand for our products and services and our ability to service the needs of our customers with a reduced workforce.
These
consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should we be unable to continue as going concern.
As
of June 30, 2020, we had $6.40 million in cash and cash equivalents. As of December 31, 2019, we had $0.02 million in cash and
cash equivalents.
The
following table presents a summary of our cash flows and beginning and ending cash balances for the six months ended June 30,
2020 and 2019:
|
(In U.S. dollars)
|
|
For Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,662,688
|
)
|
|
$
|
(1,042,599
|
)
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(68,698
|
)
|
|
Net cash provided by financing activities
|
|
|
8,035,146
|
|
|
|
818,500
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
1,196
|
|
|
|
(130,964
|
)
|
|
Net increase in cash and cash equivalents
|
|
|
6,373,654
|
|
|
|
(423,761
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,834
|
|
|
|
477,309
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,396,488
|
|
|
$
|
53,548
|
|
Cash
Flows from Operating Activities
Net
cash used in operating activities was $1,662,688 for the six months ended June 30, 2020, as compared to $1,042,599 for the
same period in 2019. The reason for this increase in cash outflows is mainly due to an increase in accrued expenses
and other current liabilities.
Cash
Flows from Investing Activities
Net
cash used in investing activities for the six months ended June 30, 2020 was nil, compared to $68,698 for the same period of 2019.
The cash used in investing activities in the six months ended June 30, 2019 was mainly attributable to the loans of $85,000 to
a related party, Digital Grid (Hong Kong) Technology Co. Ltd
(“Digital Grid”).
Cash
Flows from Financing Activities
Net
cash provided by financing activities for the six months ended June 30, 2020 was $8,035,146, which was a result of obtaining approximately
$7.2 million from equity financings and short-term loans of $0.84 million from Mr. Ping Chen. Net cash provided by financing activities
for the six months ended June 30, 2019 was $818,500, which was a result of obtaining short-term loans of $728,500 from HLI and
$90,000 from a related party, Digital Grid for twelve months.
Off-Balance
Sheet Commitments and Arrangements
We
have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity
or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do
not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or research and development services with us.
Exhibit 99.2
LIANLUO
SMART LIMITED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In
U.S. dollars, except for shares data)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,396,488
|
|
|
$
|
22,834
|
|
|
Accounts receivable, net
|
|
|
92,236
|
|
|
|
61,779
|
|
|
Other receivables and prepayments, net
|
|
|
23,923
|
|
|
|
18,867
|
|
|
Advance to suppliers
|
|
|
7,619
|
|
|
|
7,727
|
|
|
Inventories, net
|
|
|
812,920
|
|
|
|
1,085,016
|
|
|
Other taxes receivable
|
|
|
290,651
|
|
|
|
337,412
|
|
|
Marketable equity securities
|
|
|
286,957
|
|
|
|
143,478
|
|
|
Total Current Assets
|
|
|
7,910,794
|
|
|
|
1,677,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
272,332
|
|
|
|
656,840
|
|
|
Total assets
|
|
$
|
8,183,126
|
|
|
$
|
2,333,953
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
196,334
|
|
|
$
|
226,215
|
|
|
Advances from customers
|
|
|
138,157
|
|
|
|
267,365
|
|
|
Accrued expenses and other current liabilities (including rental payable to a related party of $74,776 and $75,834 at June, 30, 2020 and December 31, 2019, respectively)
|
|
|
904,861
|
|
|
|
1,530,473
|
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
|
- Short-term borrowings and interest payable
|
|
|
2,029,203
|
|
|
|
1,208,331
|
|
|
Warranty obligation
|
|
|
717
|
|
|
|
728
|
|
|
Total Current Liabilities
|
|
|
3,269,272
|
|
|
|
3,233,112
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
|
Warrants liability
|
|
|
689,934
|
|
|
|
389,630
|
|
|
Total Liabilities
|
|
$
|
3,959,206
|
|
|
$
|
3,622,742
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
Common stock – Class A, par value $0.002731: 37,888,889 shares authorized as of June 30, 2020 and June 30, 2019; 17,685,475 and 6,695,475 shares issued and outstanding as of June 30, 2020 and June 30, 2019
|
|
$
|
48,299
|
|
|
$
|
18,285
|
|
|
Common stock – Class B, par value $0.002731: 12,111,111 shares authorized as of June 30, 2020 and June 30, 2019; 11,111,111 shares issued and outstanding as of June 30, 2020 and June 30, 2019
|
|
|
30,345
|
|
|
|
30,345
|
|
|
Additional paid in capital
|
|
|
47,995,773
|
|
|
|
40,833,249
|
|
|
Accumulated deficit
|
|
|
(46,303,194
|
)
|
|
|
(44,607,198
|
)
|
|
Accumulated other comprehensive income
|
|
|
2,452,697
|
|
|
|
2,436,530
|
|
|
Total shareholders’ (deficit) equity
|
|
|
4,223,920
|
|
|
|
(1,288,789
|
)
|
|
Total liabilities and shareholders’ (deficit) equity
|
|
$
|
8,183,126
|
|
|
$
|
2,333,953
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(In
U.S. dollars, except for shares data)
|
|
|
For Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
339,175
|
|
|
|
242,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
(580,572
|
)
|
|
|
(418,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(241,397
|
)
|
|
|
(176,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(43,725
|
)
|
|
|
(556,213
|
)
|
|
General and administrative expenses
|
|
|
(1,200,494
|
)
|
|
|
(1,753,718
|
)
|
|
Provision for doubtful accounts
|
|
|
(28,963
|
)
|
|
|
(43,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,514,579
|
)
|
|
|
(2,529,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses
|
|
|
(570
|
)
|
|
|
(7,911
|
)
|
|
Other income
|
|
|
|
|
|
|
21,682
|
|
|
Other expense
|
|
|
(24,021
|
)
|
|
|
(18,044
|
)
|
|
Unrealized loss on securities
|
|
|
143,478
|
|
|
|
(678,304
|
)
|
|
Change in fair value of warrants liability
|
|
|
(300,304
|
)
|
|
|
(99,820
|
)
|
|
Loss before provision for income tax
|
|
|
(1,695,996
|
)
|
|
|
(3,312,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Lianluo Smart Limited
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
16,167
|
|
|
|
(123,451
|
)
|
|
Comprehensive loss
|
|
$
|
(1,679,829
|
)
|
|
$
|
(3,435,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
25,410,047
|
|
|
|
17,806,586
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(In
U.S. dollars, except for shares data)
|
Six Months Ended June 30, 2020
|
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
Balance as of January 1, 2020
|
|
|
17,806,586
|
|
|
$
|
48,630
|
|
|
$
|
40,833,249
|
|
|
$
|
(44,607,198
|
)
|
|
$
|
2,436,530
|
|
|
$
|
(1,288,789
|
)
|
|
Issuance of shares
|
|
|
10,990,000
|
|
|
|
30,014
|
|
|
|
7,162,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,192,538
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,167
|
|
|
|
16,167
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,695,996
|
)
|
|
|
-
|
|
|
|
(1,695,996
|
)
|
|
Balance as of June 30, 2020
|
|
|
28,796,586
|
|
|
$
|
78,644
|
|
|
$
|
47,995,773
|
|
|
$
|
(46,303,194
|
)
|
|
$
|
2,452,697
|
|
|
$
|
4,223,920
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
Balance as of January 1, 2019
|
|
|
17,806,586
|
|
|
$
|
48,630
|
|
|
$
|
40,620,772
|
|
|
$
|
(40,156,204
|
)
|
|
$
|
2,603,422
|
|
|
$
|
3,116,620
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
69,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,177
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(123,451
|
)
|
|
|
(123,451
|
)
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,312,215
|
)
|
|
|
-
|
|
|
|
(3,312,215
|
)
|
|
Balance as of June 30, 2019
|
|
|
17,806,586
|
|
|
$
|
48,630
|
|
|
$
|
40,689,949
|
|
|
$
|
(43,468,419
|
)
|
|
$
|
2,479,971
|
|
|
$
|
(249,869
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
U.S. dollars)
|
|
|
For Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
69,177
|
|
|
Depreciation and amortization
|
|
|
377,731
|
|
|
|
414,224
|
|
|
(Gain) Loss on disposal of equipment
|
|
|
-
|
|
|
|
(15,247
|
)
|
|
Provision for doubtful accounts
|
|
|
28,963
|
|
|
|
43,873
|
|
|
Change in warranty obligation
|
|
|
-
|
|
|
|
(3,881
|
)
|
|
Provision for inventory obsolescence
|
|
|
-
|
|
|
|
114
|
|
|
Change in fair value of warrants liability
|
|
|
300,304
|
|
|
|
99,820
|
|
|
Unrealized loss on securities
|
|
|
(143,478
|
)
|
|
|
678,304
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable
|
|
|
(59,579
|
)
|
|
|
42,873
|
|
|
Decrease in advances to suppliers
|
|
|
108
|
|
|
|
4,721
|
|
|
Decrease in other receivables and prepayments, net - third parties
|
|
|
(4,897
|
)
|
|
|
184,296
|
|
|
Increase in interest receivables - related party
|
|
|
-
|
|
|
|
(1,023
|
)
|
|
Decrease (Increase) in inventories
|
|
|
272,095
|
|
|
|
231,644
|
|
|
Increase in operating lease right-of-use assets, net
|
|
|
-
|
|
|
|
(59,260
|
)
|
|
Decrease (Increase) in other taxes receivable
|
|
|
46,762
|
|
|
|
21,642
|
|
|
Increase in accounts payable
|
|
|
(29,881
|
)
|
|
|
27,010
|
|
|
Increase in interest payable – related party
|
|
|
-
|
|
|
|
8,908
|
|
|
Increase in operating lease liabilities, current
|
|
|
-
|
|
|
|
44,268
|
|
|
Increase (Decrease) in advances from customers
|
|
|
(129,208
|
)
|
|
|
65,999
|
|
|
Increase (Decrease) in accrued expenses and other current liabilities
|
|
|
(625,612
|
)
|
|
|
412,154
|
|
|
Net cash used in operating activities
|
|
|
(1,662,688
|
)
|
|
|
(1,042,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of equipment
|
|
|
-
|
|
|
|
16,302
|
|
|
Loan to a related party
|
|
|
-
|
|
|
|
(85,000
|
)
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(68,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Loans from related parties
|
|
|
842,609
|
|
|
|
818,500
|
|
|
Net proceeds from issuance of common stock
|
|
|
7,192,537
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,035,146
|
|
|
|
818,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
1,196
|
|
|
|
(130,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,373,654
|
|
|
|
(423,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,834
|
|
|
|
477,309
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,396,488
|
|
|
$
|
53,548
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Offset short-term borrowings - related party against loans to a related party (including accrued interests)
|
|
|
89,006
|
|
|
|
86,023
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Lianluo
Smart Limited (“Lianluo Smart” or the “Company”) (previously known as “Dehaier Medical Systems Limited”)
was incorporated as an international business company under the International Business Companies Act, 1984, in the British Virgin
Islands on July 22, 2003. On November 21, 2016, the Company changed its name from Dehaier Medical Systems Limited to Lianluo Smart
Limited, and its NASDAQ stock ticker from DHRM to LLIT.
Lianluo
Smart distributed and provided after-sale services for medical equipment in China mainly through its wholly-owned subsidiary,
Beijing Dehaier Medical Technology Co., Limited (“BDL”).
On
February 1, 2016, Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd. (“LCL”) was formed in
Beijing, the PRC, for the business development in the portable health device market.
During
the late 2015, BDL intended to discontinue part of its product lines among the traditional medical device business, which has
been approved by the Board of Resolution on February 22, 2016.
As
of June 30, 2020, Lianluo Smart owns 100% of LCL and LCL owns 100% of BDL. As of August 13, 2020, LCL sold BDL to China Mine United
Investment Group Co., Ltd. for cash consideration of RMB0.
Lianluo
Smart, through its subsidiaries, distributes branded, proprietary medical equipment, such as sleep apnea machines and CPR instruments.
Standard product registration, product certification and quality management system have been established; ISO13485 industry standard
has also already been passed. Starting from fiscal 2018, the Company has been providing examination service to hospitals and medical
centers through its developed medical wearable device. Doctors could refer to examination results provided by such device in making
diagnosis regarding Obstructive Sleep Apnea Syndrome (“OSAS”).
“Lianluo
Smart” or the “Company” collectively refer to Lianluo Smart, a BVI registered company, and its subsidiaries,
BDL and LCL as of the date hereof.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).
In
the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting
of only normal recurring adjustments, necessary for a fair statement of its financial position, results of operations and comprehensive
loss, cash flows and changes in shareholders’ equity for the interim periods. The financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019. The unaudited
condensed consolidated balance sheet at December 31, 2019 was derived from the audited annual financial statements, but does not
contain all of the footnote disclosures from the annual financial statements.
The
interim results for the six months ended June 30, 2020 are not necessarily indicative of the results expected for the full fiscal
year.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business.
The
Company has suffered recurring losses from operations, this condition has raised substantial doubt about the Company’s ability
to continue as a going concern. The company recorded a working capital of $4.64 million as of June 30, 2020. In February and March
2020, the Company obtained approximately $7.2 million equity financing. Considering equity financing and the cost cutting activities,
the Company believes that the current cash and cash equivalents and the anticipated cash flows from operations will be sufficient
to meet the anticipated working capital requirements and expenditures for the next 12 months. However, the ability to continue
as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary
financing to meet its obligations and repay its liabilities arising from normal business operations when they become due.
The
Company’s principal sources of liquidity have been proceeds from issuances of equity securities and loans from related parties. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be
on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain
undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the
case of equity financing.
These
consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should the Company be unable to continue as going concern.
Basis
of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of Lianluo Smart and its wholly-owned subsidiaries
(collectively, the “Company”). All inter-company transactions and balances are eliminated in consolidation. The results
of subsidiaries are recorded in the unaudited condensed consolidated statements of operations and comprehensive loss.
A
subsidiary is an entity in which (i) the Company directly or indirectly controls more than 50% of the voting power; or (ii) the
Company has the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes
at the meeting of the board of directors or to govern the financial and operating policies of the investee pursuant to a statute
or under an agreement among the shareholders or equity holders.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP 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 dates of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during
the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant accounting estimates reflected
in the Company’s consolidated financial statements include revenue recognition, reserve for doubtful accounts, valuation
of inventories, impairment testing of long term assets, warranty obligation, warrants liability, stock-based compensation, useful
lives of intangible assets and property and equipment, realization of deferred tax assets and the discount rate used to determine
the present value of lease payments. Actual results could differ from those estimates.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
Leases
where substantially all the rewards and risk of assets remain with the leasing company are accounted for as operating leases.
Payments made under operating leases are charged to the consolidated statement of operations on a straight-line basis over the
shorter of the lease term or estimated economic life of the leased property. The majority of the Company’s leases were short
term (less than 12 months) and the Company elected the practical expedient not to record right of use of assets for short term
leases.
Equity
Securities
The
Company’s equity securities represent equity investments in Guardion Health Sciences, Inc. (“GHSI”) made in
November 2017. The Company holds less than 5% of the GHSI’s total shares. The equity securities were accounted for as non-marketable
securities in 2018 on the balance sheets and as marketable securities in 2019 when GHSI went public in April 5, 2019.
As
of June 30, 2020, the investment was accounted at fair value with changes recorded through earnings.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
Fair
Value of Financial Instruments
ASC
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
|
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
measurement.
The
carrying amounts reported in the consolidated financial statements for current assets and current liabilities approximate fair
value due to the short-term nature of these financial instruments.
Investments
in listed equity securities were re-measured on a recurring basis, and are categorized within Level 1 under the fair value hierarchy.
The
fair value of warrants was determined using the Black Scholes Model, with Level 3 inputs. Investments in a privately held company
for which the Company elected to record using the measurement alternative were re-measured on a non-recurring basis, and are categorized
within Level 3 under the fair value hierarchy.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
The
following represents the revenues by categories, all derived from China:
|
|
|
For the six months ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Categories
|
|
|
|
|
|
|
|
Product sales
|
|
|
|
|
|
|
|
Medical Devices
|
|
$
|
295,726
|
|
|
$
|
59,722
|
|
|
Mobile Medicine (sleep apnea diagnostic products)
|
|
|
17,240
|
|
|
|
81,550
|
|
|
OSAS service (analysis and detection)
|
|
|
26,209
|
|
|
|
100,941
|
|
|
Total revenues
|
|
$
|
339,175
|
|
|
$
|
242,213
|
|
|
4.
|
ACCOUNTS
RECEIVABLE, NET
|
Accounts
receivable as of June 30, 2020 and December 31, 2019 consist of the following:
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Accounts receivable
|
|
$
|
157,082
|
|
|
$
|
98,195
|
|
|
Less: reserve for doubtful accounts
|
|
|
(64,846
|
)
|
|
|
(36,416
|
)
|
|
Accounts receivable, net
|
|
$
|
92,236
|
|
|
$
|
61,779
|
|
During
the six months ended June 30, 2020 and 2019, bad debts were $29,122 and $4,509 respectively.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
|
5.
|
OTHER
RECEIVABLES AND PREPAYMENTS, NET
|
Other
receivables and prepayments as of June 30, 2020 and December 31, 2019 consist of the following:
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Rental deposits
|
|
$
|
12,499
|
|
|
$
|
36,846
|
|
|
Prepaid expenses
|
|
|
58,714
|
|
|
|
29,939
|
|
|
Advances to employees
|
|
|
77
|
|
|
|
78
|
|
|
|
|
|
71,290
|
|
|
|
66,863
|
|
|
Less: reserve for doubtful accounts
|
|
|
(47,367
|
)
|
|
|
(47,996
|
)
|
|
Other receivables and prepayments, net
|
|
$
|
23,923
|
|
|
$
|
18,867
|
|
During
the six months ended June 30, 2020 and 2019, bad debts on other receivables and prepayments were deficit $159 and $39,364
respectively.
Inventories
as of June 30, 2020 and December 31, 2019 consist of the following:
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
23,353
|
|
|
$
|
25,985
|
|
|
Work in progress
|
|
|
768
|
|
|
|
779
|
|
|
Finished goods
|
|
|
791,162
|
|
|
|
1,060,615
|
|
|
Total inventories
|
|
$
|
815,283
|
|
|
$
|
1,087,379
|
|
|
Less: inventory impairment loss
|
|
|
(2,363
|
)
|
|
|
(2,363
|
)
|
|
Inventories, net
|
|
|
812,920
|
|
|
|
1,085,016
|
|
During
the six months ended June 30, 2020 and 2019, write-downs of inventories to lower of cost or net realizable value was $0 and $114,
respectively, which were charged as cost of revenues.
|
7.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment as of June 30, 2020 and December 31, 2019 consist of the following:
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Plant and machinery
|
|
$
|
1,888,430
|
|
|
$
|
1,915,160
|
|
|
Automobiles
|
|
|
135,450
|
|
|
|
137,367
|
|
|
Office and computer equipment
|
|
|
22,372
|
|
|
|
22,689
|
|
|
Total property and equipment
|
|
|
2,046,252
|
|
|
|
2,075,216
|
|
|
Less: Accumulated depreciation
|
|
|
(1,773,920
|
)
|
|
|
(1,418,376
|
)
|
|
Property and equipment, net
|
|
$
|
272,332
|
|
|
$
|
656,840
|
|
Depreciation
were $377,731 and $414,224 for the six months ended June 30, 2020 and 2019, respectively. The Company did not record any impairment
on its property and equipment for the six months ended June 30, 2020 and 2019.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The
lease commitments are for office premises which are classified as operating leases. These non-cancelable leases have lease terms
expiring through November 2020.
Lease
expense for the six months ended June 30, 2020 and 2019 was $45,298 and $177,464 respectively. The lease commitment is $17,753
with a contract maturity date at March 19, 2021. All of Company’s leases were short term (less than 12 months) and the Company
elected the practical expedient not to record right of use of assets related to short term leases.
Employment
Contracts
Under
the PRC labor law, all employees have signed employment contracts with the Company. Management employees have employment contracts
with terms up to three years and non-management employees have either a three-year employment contract renewable on an annual
basis or non-fixed term employment contract.
Contingency
The
Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in
the normal course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s
financial statements at June 30, 2020.
Litigation
From
time to time, the Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise
from time to time that may harm our business. Other than the legal proceeding set forth below, the Company is currently not aware
of any such legal proceedings or claims that the Company believe will have an adverse effect on our business, financial condition
or operating results.
In
2019, Beijing Dehaier and Lianluo Connection terminated employment of over 50 employees due to business restructuring. As of December
31, 2019, 34 of these laid-off employees filed complaints with Beijing Changping District Employment Dispute Arbitration Commission
and Beijing Shijingshan District Employment Dispute Arbitration Commission, claiming that Beijing Dehaier and Lianluo Connection
failed to pay them, among others, certain salaries, overtime fees and compensations. As of December 31, 2019, the Arbitration
Commissions issued arbitral awards with respect to 30 of the 34 employees; Beijing Dehaier and Lianluo Connection had paid off
23 of the 30 employees who had applied for enforcement of the arbitral awards and intend to pay the additional seven employees
an aggregate of approximately RMB 310,000 (approximately $44,423) according to entered arbitral awards. As regards the total expenses
pertaining to this lay-off, the Company recorded liabilities of RMB979,716 (approximately $140,393) in employment termination
compensations and RMB2.99 million (approximately $428,467) in unpaid salaries in 2019, of which the Company had paid off RMB3,346,453
(approximately $475,866) as of June 30, 2020.
In 2020, Beijing Dehaier and Lianluo Connection
have terminated the employment of additional 25 employees due to the business downturn. Most of these former employees filed complaints
with Beijing Changping District Employment Dispute Arbitration Commission and Beijing Shijingshan District Employment Dispute Arbitration
Commission, respectively, claiming that Beijing Dehaier and Lianluo Connection failed to pay them, among others, certain salaries,
overtime fees and compensations upon terminations. As of June 30, 2020, Beijing Dehaier and Lianluo Connection have entered into
settlement agreements with 15 of these former employees and settled disputes through negotiations with the rest of these employees.
The total settlement amount for the 25 employees was RMB3,332,405 (approximately $473,868) and about RMB1,493,225 (approximately
$212,337) has been paid off.
On May 9, 2019, Tianjin Wuqing Bohai Printing
Co., Ltd., or Wuqing Bohai, filed an arbitration application with Beijing Arbitration Commission against Beijing Dehaier, claiming
that Beijing Dehaier failed to pay for goods in accordance with purchase contracts entered into with Wuqing Bohai in 2017 and 2018
and requested Beijing Dehaier to pay Wuqing Bohai an amount of RMB119,770 (approximately $17,450), plus RMB10,000 (approximately
$1,457) to cover the expenses of keeping goods that Beijing Dehaier failed to accept. On June 5, 2019, Beijing Dehaier
submitted an answer to compliant, noting that it had not received some of the goods under the contracts and Wuqing Bohai failed
to provide invoices for some of the goods allegedly received by Beijing Dehaier. Beijing Dehaier submitted that it should only
be responsible for the purchase value of RMB48,450 (approximately $7,059). On March 6, 2020, the Beijing Arbitration Commission
entered an award, ordering that Beijing Dehaier pay Wuqing Bohai the disputed amount of RMB119,770 (approximately $17,203) and
an arbitration fee of RMB10,443 (approximately $1,500) by March 24, 2020 and dismissed other claims of Wuqing Bohai. In May 2020,
Beijing Dehaier paid off the disputed amount and the arbitration fee under the case.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
The
following is a reconciliation of the basic and diluted loss per share computation for the six months ended June 30, 2020 and 2019:
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company’s common shareholders
|
|
$
|
(1,695,996
|
)
|
|
$
|
(3,312,215
|
)
|
|
Weighted average shares outstanding – Basic and diluted
|
|
|
25,410,047
|
|
|
|
17,806,586
|
|
|
Loss per share – Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.19
|
)
|
For
the six months ended June 30, 2020 and 2019, all the outstanding warrants and options were anti-dilutive.
|
10.
|
RELATED
PARTY TRANSACTIONS AND BALANCES
|
In
addition to the transactions and balances disclosed elsewhere in these financial statements, the Company had the following material
related party transactions:
|
(1)
|
On
July 1, 2018, the Company leased office premises from Hangzhou Lianluo Interactive Information Technology Co., Ltd. (“HLI”),
our major shareholder, for a period of 1 year, with an annual rental of $84,447 (RMB580,788). Rental payments charged as expenses
in the six months ended June 30, 2020 and 2019 were $0 and $39,091 respectively. As of June 30, 2020 and December 31, 2019,
the Company reported an outstanding rental payable of $74,776 and $75,834 to HLI.
|
|
(2)
|
On
February 3 and April 18, 2019, Digital Grid (Hong Kong) Technology Co. Ltd (“Digital Grid”), one of HLI’s
subsidiaries, borrowed from the Company loans of principal amounts of $60,000 and $25,000 for a term of 12 months.
|
On
May 20, 2019 the Company borrowed $90,000 from Digital Grid for a term of 12 months.
As
of June 30, 2019, the Company owed a net principal of $4,345 to Digital Grid.
From
November to December 2019, the Company borrowed $28,000 from Digital Grid, for a term of 12 months.
As
of June 30, 2020, the Company owed a net principal of $33,000 to Digital Grid.
|
(3)
|
During
2019, the Company borrowed $942,500 from HLI, repaid $0; the loans are non-interest bearing. In addition, the above loans
have been extended, interest-free and without specific repayment date, which is based upon both parties’ agreement as
of the date of this report. As of June 30, 2020 and 2019, the loan balances were $918,450 and $737,040.
|
|
(4)
|
During
the six months of 2020 and 2019, the Company borrowed $842,609 and nil from Mr. Ping Chen, its previous CEO, free of interest
to fund its operation, respectively. The balances were $1,077,753 and nil as of the six months ended June 30, 2020 and 2019.
|
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
Major
Customers
For
the six months ended June 30, 2020, one customer accounted for approximately 87% of the Company’s revenues. For the six
months ended June 30, 2019, two customers each accounted for approximately 33% and 24%, respectively, of the Company’s revenues.
No
other customer accounted for more than 10% of the Company’s revenues for the six months ended June 30, 2020 and 2019.
Major
Suppliers
For
the six months ended June 30, 2020 and 2019, the sole supplier accounted for 100% of the Company’s purchases.
Stock
Option Plan
Under
the employee stock option plan, the Company’s stock options generally expire ten years from the date of grant.
The
following is a summary of the option activity:
|
Stock options
|
|
Shares
|
|
|
Weighted average
exercise price
|
|
|
Aggregate
intrinsic
value(1)
|
|
|
Outstanding as of December 31, 2019
|
|
|
794,867
|
|
|
$
|
2.40
|
|
|
$
|
-
|
|
|
Forfeited
|
|
|
(208,000
|
)
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2020
|
|
|
586,867
|
|
|
|
2.64
|
|
|
$
|
-
|
|
|
Exercisable as of June 30, 2020
|
|
|
586,867
|
|
|
|
2.64
|
|
|
$
|
-
|
|
|
(1)
|
The
intrinsic value of the stock options at June 30, 2020 is the amount by which the market value of the Company’s common
stock of $0.69 as of June 30, 2020 exceeds the exercise price of the options.
|
As
of June 30, 2020, all outstanding options have been vested. For the six months ended June 30, 2020 and 2019, the Company recognized
$0 and $69,177 respectively, as compensation expense under its stock option plan.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
On
April 28, 2016, the Company signed Share Purchase Agreement (“SPA”) with HLI. In this SPA, HLI received warrants to
acquire from the Company 1,000,000 Class B common shares at exercise price of $2.20 per share and exercisable by HLI at any time.
There
was a total of 1,000,000 warrants to purchase Class B common shares issued and outstanding as of June 30, 2020 and December 31,
2019.
The
fair value of the outstanding warrants was calculated using the Black Scholes Model with the following assumptions:
|
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Market price per share (USD/share)
|
|
$
|
0.69
|
|
|
$
|
0.39
|
|
|
Exercise price (USD/share)
|
|
|
2.20
|
|
|
|
2.20
|
|
|
Risk free rate
|
|
|
0.35
|
%
|
|
|
1.81
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected term/Contractual life (years)
|
|
|
5.8
|
|
|
|
6.3
|
|
|
Expected volatility
|
|
|
334.28
|
%
|
|
|
279.93
|
%
|
The
following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring
basis using Level 3 inputs:
|
|
|
Six months ended
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
389,630
|
|
|
$
|
1,129,246
|
|
|
Fair value change of the issued warrants included in earnings
|
|
|
300,304
|
|
|
|
99,821
|
|
|
Ending balance
|
|
$
|
689,934
|
|
|
$
|
1,229,067
|
|
The
following is a summary of the warrants activity:
|
|
|
Number
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Outstanding as of January 1, 2020
|
|
|
1,000,000
|
|
|
$
|
2.20
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Redeemed
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2020
|
|
|
1,000,000
|
|
|
$
|
2.20
|
|
|
|
|
|
From
February to March 2020, the Company consummated three registered direct offerings of 10,990,000 Class A Common Shares and concurrent
private placements of warrants to purchase up to 10,990,000 Class A Common Shares with three investors.
As
of the date hereof, there are outstanding warrants to purchase an aggregate of 10,990,000 Class A common shares, exercisable for
five and one-half years since the respective date of issuance and subject to full ratchet anti-dilution protection. The table below shows the exercise price, floor price,
issuance date and expiration date for these warrants.
|
Amount of Underlying Class A Common Shares
|
|
|
2,590,000
|
|
|
|
3,500,000
|
|
|
|
4,900,000
|
|
|
Exercise price
|
|
$
|
0.6239
|
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
Floor Price
|
|
|
N/A
|
|
|
$
|
0.1701
|
|
|
$
|
0.18
|
|
|
Expiration Date
|
|
|
August 14, 2025
|
|
|
|
August 25, 2025
|
|
|
|
September 2, 2025
|
|
|
Issuance Date
|
|
|
February 14, 2020
|
|
|
|
February 25, 2020
|
|
|
|
March 2, 2020
|
|
In
accordance with ASC 815-40, the Company accounted for the Warrants as equity instruments.
LIANLUO
SMART LIMITED AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In
U.S. dollars)
1)
Debt Extension and Debt Repayment
The
Company has a borrowing of $918,450 due to HLI as of June 30, 2020. The loans due at July 18, July 21, and August 6, 2020, totaling
$211,950, were extended, interest-free and without specific repayment date, which is based upon both parties’ agreement
as of the date of this report.
During 2019, DGHKT borrowed from the Company
loans of principal amounts of $85,000 for a term of 12 months, and the Company borrowed $118,000 from DGHKT for a term of 12 months.
On July 14, 2020, the Company repaid a net principal of $33,000 to DGHKT.
On August 17, 2020, the outstanding amount of $42,000 in service
charge payable to HLI's subsidiary was repaid by the Company.
2)
Change of CEO and Directors
On
August 12, 2020, Mr. Zhitao He resigned from his positions as Chief Executive Officer and director of the Company. Mr. He’s
resignation was not a result of any disagreement with the Company on any matter relating to the Company’s operations, policies
or practices. On August 25, 2020, Mr. Bin Lin was appointed as Chief Executive Officer, a director and Chairman of the Company.
3)
Disposition Transaction
On
August 13, 2020, Lianluo Connection entered into a Share Transfer Agreement (the “Agreement”) with China Mine United
Investment Group Co., Ltd. (“China Mine”), pursuant to which Lianluo Connection transfers its 100% equity interests
in its wholly-owned PRC subsidiary Beijing Dehaier to China Mine for cash consideration of RMB 0. In exchange for all of the equity
interests in Beijing Dehaier, China Mine agrees to assume all liabilities of Beijing Dehaier.
26