UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of December 2019
Commission File Number: 001-34661
Lianluo Smart Limited
(Translation of registrant’s name in English)
Room 1318, 13 rd Floor, No. 22 Shijingshan Road,
Shijingshan District, Beijing 100040
People’s Republic of China
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
EXPLANATORY NOTE
Lianluo Smart Limited (the “Company”) is furnishing this report on Form 6-K to provide the unaudited consolidated financial statements for the six months ended June 30, 2019 and 2018 and incorporate such financial statements into the Company’s registration statements referenced below.
This Form 6-K is hereby incorporated by reference into the registration statements of the Company on Form S-8 (Registration Numbers 333-222534, 333-208901, 333-198940 and 333-178771) and on Form F-3 (Registration Numbers 333-220758 and 333-227817) to the extent not superseded by documents or reports subsequently filed or furnished by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
| Exhibit Number |
Description | |
| 99.1 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| 99.2 | Unaudited Condensed Consolidated Financial Statements as of June 30, 2019 and for the six months ended June 30, 2019 and 2018 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LIANLUO SMART LIMITED | ||
| December 27, 2019 | By: | /s/ Ping Chen |
| Ping Chen | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) and | ||
| Duly Authorized Officer |
2
Exhibit 99.1
Special Note Regarding Forward-Looking Statements
We have made statements in this report that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “we believe”, “we intend”, “may”, “should”, “could” and similar expressions. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
| ● | projections of revenue, earnings, capital structure and other financial items; |
| ● | statements of our plans and objectives; |
| ● | statements regarding the capabilities and capacities of our business operations; |
| ● | statements of expected future economic performance; and |
| ● | assumptions underlying statements regarding us or our business. |
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.
In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
1
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this report. In this report, the terms “we”, “the Company” and “our” refer to Lianluo Smart Limited, a British Virgin Islands company (“Lianluo Smart”), Beijing Dehaier Medical Technology Company Limited (“BDL”), and Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd. (“LCL”), our operating subsidiaries in the People’s Republic of China. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.
This section should be read together with the unaudited condensed consolidated financial statements attached as an exhibit to this report on Form 6-K.
Overview
Business Overview
Lianluo Smart focuses on four business sectors: medical wearable devices, smart devices, smart ecosystem platform and OSAS service.
The medical wearable sector focuses on wearable sleep respiratory devices. The Company develops and distributes medical devices, focusing primarily on sleep respiratory solutions to Obstructive Sleep Apnea Syndrome (“OSAS”) since 2010. It provides users with medical grade detection and monitoring, long-distance treatment and integration solution of professional rehabilitation. The Company now has professional and accurate collection and valuable big-data analytic technology, which can scientifically and accurately collect and count user data, and provide chronic and high-risk patients with long-distance treatment and professional rehabilitation.
The smart devices sector is specialized in operating easy-use smart devices for sports, social contact, entertainment, remote-control, family health management, which can connect things and humans in an intelligent way. The Company continuously upgrades key algorithms based on big data and develops smart devices based on the combination of hardware and software. This sector will cover several areas, including smart home, smart traveling and smart entertainment.
In the smart ecosystem platform sector, the Company intends to build an ecosystem to facilitate interconnection among smart products and between smart products and users. This ecosystem is designed to address anticipated future trends and user demands. It incorporates wearable devices, home furnishings, mobile smart devices and other smart devices with cloud computing.
In the OSAS sector, starting from fiscal 2018 the Company has been providing examination service to hospitals and medical centers through our developed medical wearable device. Doctors could refer to examination result provided by the device in making diagnosis regarding OSAS. We have established strong cooperation with many China’s large medical check-up centers, such as Meinian Hospital, Ciming Hospital and Sonqao Health Checkup Institution’s high-end physical examination center, to reach and serve their clients. As of the date of this report, we have agreed to cooperate with 33 check-up centers in 19 cities.
We are currently researching new products and evaluating business opportunities in our smart devices and smart ecosystem platform sectors.
2
We design, develop and market our own branded medical products and medical components. Since we do not operate any fully scaled manufacturing facilities, we contract some of the medical components to outside manufacturers in China. Most of our branded products require light assembly by us before distribution.
We completed the corporate and business restructuring plan of scaling down and discontinued, as appropriate, our unprofitable traditional medical equipment business. We aim to concentrate our resources to develop medical wearable devices, smart devices, smart ecosystem platform and OSAS service as our major businesses.
Recent Business Developments
In 2019, BDL and LCL have terminated the employment of over 40 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 BDL and LCL failed to pay them, among others, certain salaries, overtime fees and compensations upon terminations. As of the date of this report, BDL and LCL have entered into settlement agreements with 37 former employees and intend to settle all of the disputes through negotiations with these former employees.
On January 24, 2019, Shenzhen JustDo Display Technology Co., Ltd. (“Shenzhen JustDo”) filed an arbitration application with Beijing Arbitration Commission against BDL, claiming that BDL’s failure of payment for goods in 2018 constituted a breach of a purchase contract entered into by and between Shenzhen JustDo and BDL. On February 21, 2019, BDL submitted an answer to complaint, claiming that JustDo’s delay in delivery of goods constituted a breach of the purchase agreement, and the amount of purchase price payable to JustDo shall be determined according to the quantity of goods actually received by BDL. On May 10, 2019, the parties reached a settlement agreement as administered by Beijing Arbitration Commission under which BDL paid Shenzhen JustDo RMB342,000 (approximately $49,829) for delivered goods and RMB21,702 (approximately $3,162) as Shenzhen JustDo’s attorney’s fees and arbitration fees.
On May 9, 2019, Tianjin Wuqing Bohai Printing Co., Ltd. (“Wuqing Bohai”) filed an arbitration application with Beijing Arbitration Commission against BDL, claiming that BDL failed to pay for goods in according to purchase contracts entered into with Wuqing Bohai in 2017 and 2018 and requested BDL to pay Wuqing Bohai an amount of RMB119,770 (approximately $17,450), plus RMB 10,000 (approximately $1,457) for the expenses for keeping goods that BDL failed to accept. On June 5, 2019, BDL submitted an answer to compliant, claiming that it has not received some goods. Wuqing Bohai also failed to provide required invoices for some received goods. As a result, BDL should only be responsible for the purchase price of RMB48,450 (approximately $7,059). We intend to continue to vigorously defend ourselves in this proceeding.
Growth Strategies
We plan to expand our product portfolios in smart wearable medical device and start to provide reliable products in smart device and smart ecosystem platforms through continuing investments in research and development and pursuing attractive opportunities to acquire complementary products and technologies and strategic collaboration with partners.
In smart wearable medical device products, we plan to establish an accurate, efficient and innovative sleep diagnostic system by developing advanced technologies and focusing on research and development of proprietary products to provide a sleep respiratory solution. We will broaden and differentiate our target markets by cooperating with different types of medical institutions and individual customers across China.
3
We will keep continuously distributing our sleep respiratory solutions to hospitals, check-up centers and other healthcare institutions in China to penetrate the domestic market of OSAS diagnosis, and to grow sales and service revenues. We will develop our sleep respiratory solution business by active marketing and expanding, and leverage our well-established distribution network resources to reach more and more potential customers and partners. We seek to partner with more hospitals and check-up centers across China and to enlarge the scope of OSAS diagnostic services that we are able to provide in order to solidify our market position in this area and drive our revenue growth.
In the smart device and smart ecosystem platform products, we are dedicated to the development and distribution of easy-using smart devices for sports, social contact, entertainment, remote-control and family health management. This ecosystem is designed to address anticipated future trends and user demands.
Results of Operations
Overview
Our Company’s business of product sales is divided into two parts: (i) medical products (including supporting products such as operating room products, ventilators, medical emergency products and medical air compressor products); (ii) mobile medicine (including wearable sleep respiratory solution for OSAS.
For the six months ended June 30, 2019 and 2018, our total revenues amounted to $242,213 and $301,293, respectively. For the first half year of 2019, we continued to redirect our operations from unprofitable product sales of medical products and mobile medicines to 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 assembly and distribution businesses, 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 production business and focus instead on developing a complete 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 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 growing and our products and services have been well appreciated.
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 insurances. We will continue to focus on sleep health with our comprehensive OSAS solution system, aiming to become the domestic product and service provider in this market.
4
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
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, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 242,213 | $ | 301,293 | ||||
| Costs of revenue | (418,227 | ) | (333,995 | ) | ||||
| Gross loss | (176,014 | ) | (32,702 | ) | ||||
| Selling expenses | (556,213 | ) | (1,131,219 | ) | ||||
| General and administrative expenses | (1,753,718 | ) | (2,028,028 | ) | ||||
| Provision for doubtful accounts | (43,873 | ) | (33,621 | ) | ||||
| Operating loss | (2,529,818 | ) | (3,225,570 | ) | ||||
| Financial expenses | (7,911 | ) | (8,725 | ) | ||||
| Other income | 21,682 | 23,100 | ||||||
| Other expense | (18,044 | ) | (124,159 | ) | ||||
| Unrealized loss on securities | (678,304 | ) | - | |||||
| Change in fair value of warrants liability | (99,820 | ) | (110,021 | ) | ||||
| Loss before provision for income tax | $ | (3,312,215 | ) | $ | (3,445,375 | ) | ||
Revenues
Our total revenue decreased by 20% from $301,293 for the six months ended June 30, 2018 to $242,213 for the six months ended June 30, 2019, mainly due to the decrease in revenue from product sales by $89,153, partially offset by the increase in service revenue from the provision of OSAS diagnostic services of $30,073. Starting from 2018, we redirected our operations from unprofitable product sales of medical products and mobile medicines to marketing and expanding OSAS diagnosis services in hospitals and physical examination centers. In the first half of 2019, our revenue from sale of medical equipment and provision of technical services in relation to OSAS was $141,272 and $100,941, respectively, compared to $230,425 and $70,868 for the same period last year.
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, amortization of software copyrights and other software related to our products, and other expenses associated with the assembly and distribution of product. Our costs of revenue increased by 25% from $333,995 for the six months ended June 30, 2018 to $418,227 for the six months ended June 30, 2019, mainly a result of depreciation on productive assets used in the provision of OSAS diagnostic services.
Gross Loss
Our gross loss was $32,702, or 11% of our total revenue for the six months ended June 30, 2018 while our gross loss is $176,014, or 73% of our total revenue in the same period of 2019. We incurred significant amounts of relatively fixed costs of revenues, in particular depreciation and amortization of our long-lived assets related to our product and service revenues in 2019 and 2018, resulting in a high gross loss both in dollar terms and in percentage terms.
5
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 51% from $1,131,219 for the six months ended June 30, 2018 to $556,213 for the six months ended June 30, 2019. In order to control costs, in 2019 we reduced our sales team headcount and participated in fewer promotional events and exhibitions.
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 our research and development, registration of patent and intellectual property rights in China and abroad, 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 14% from $2,028,028 for the six months ended June 30, 2018 to $1,753,718 for the six months ended June 30, 2019. The decrease was mainly caused by stock-based compensation to employees and non-employees, which decreased from $1,001,459 in the six months ended June 30, 2018 to $69,177 in the same period of 2019, partially offset by an increase in other staff costs of $442,767, mainly a result of compensation incurred in relation to the reduction of headcount in 2019.
Provision for Doubtful Accounts
Our provision for doubtful accounts increased by 30% from the amount of $33,621 for the six months ended June 30, 2018 to $43,873 for the six months ended June 30, 2019. 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 $2,529,818 in the six months ended June 30, 2019, compared to an operating loss of $3,225,570 in the same period of 2018, representing a decrease of 22%.
Unrealized Loss on Securities
Equity investments with readily determinable fair values are measured at fair value. We had unrealized losses of $678,304 for the six months ended June 30, 2019, compared to $nil in the same period of 2018. In 2018, the carrying value of our non-marketable equity securities was adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). No gains and losses on non-marketable equity securities, realized and unrealized, were recognized in 2018.
Change in Fair Value of Warrants Liability
For the six months ended June 30, 2018, the loss related to changes in the fair value of warrants liability was $110,021, compared to a loss of $99,820 for the six months ended June 30, 2019, 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 taxable loss in the six months ended June 30, 2019 and 2018 and had no income tax expenses.
6
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 $3,312,215 for the six months ended June 30, 2019, compared to $3,445,375 in the same period of 2018.
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 recurring losses from operations, and recorded a working capital deficit of $937,906 as of June 30, 2019. These conditions raise 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 its 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 entered into a loan agreement with HLI during the six months ended June 30, 2019 to obtain a loan of $728,500 (RMB5,000,000) for a period of 12 months with 8% annual interest. As of June 30, 2019, the Company owed principal and interest totaled $737,040 to HLI.
During the six months ended June 30, 2019, we also entered into a loan agreement with Digital Grid (Hong Kong) Technology Co. Ltd (“Digital Grid”) to provide a loan of $85,000 to Digital Grid for a period of 12 months with 3.5% yearly interest rate. Digital Grid is a wholly-owned subsidiary of HLI. At the same time, the Company borrowed a loan of $90,000 from Digital Grid for a period of 12 months with 3.5% yearly interest rate. As of June 30, 2019, the Company owed a net principal and interest of $4,345 to Digital Grid.
In the event that we require additional funding to finance the growth of our current and expected future operations as well as to achieve our strategic objectives, HLI has indicated the intent and ability to provide additional financing to us. 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 us. Even if we are able to obtain additional financing, if needed, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, 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 we be unable to continue as going concern.
As of June 30, 2019, we had $53,548 in cash and cash equivalents. As of December 31, 2018, we had $477,309 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, 2019 and 2018:
| (In U.S. dollars) | For Six Months Ended June 30, | |||||||
| 2019 | 2018 | |||||||
| Net cash used in operating activities | $ | (1,042,599 | ) | $ | (2,454,528 | ) | ||
| Net cash used in investing activities | (68,698 | ) | (5,870,535 | ) | ||||
| Net cash provided by financing activities | 818,500 | 2,767,851 | ||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | (130,964 | ) | (178,370 | ) | ||||
| Net decrease in cash and cash equivalents | (423,761 | ) | (5,735,582 | ) | ||||
| Cash and cash equivalents at beginning of period | 477,309 | 6,809,485 | ||||||
| Cash and cash equivalents at end of period | $ | 53,548 | $ | 1,073,903 | ||||
7
Cash Flows from Operating Activities
Net cash used in operating activities was $1,042,599 for the six months ended June 30, 2019, as compared to $2,454,528 for the same period in 2018. The reason for this decrease in cash outflows is mainly due to an increase in cash inflow from inventory (including inventory obsolescence) by $1.2 million, from a cash outflow of $1.0 million in the six months ended June 30, 2018 to a cash inflow of $0.2 million in the same period in 2019.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2019 was $68,698, compared to $5,870,535 for the same period of 2018. The cash used in investing activities in the six months ended June 30, 2019 was mainly attributable to the loans of $85,000 to Digital Grid. The cash used in investing activities in the same period in 2018 was mainly attributable to a loan of $6,000,000 to Digital Grid.
Cash Flows from Financing Activities
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 Digital Grid for twelve months. Net cash provided by financing activities for the six months ended June 30, 2018 was $2,767,851, which was mainly a result of obtaining short-term loans of $2.75 million from HLI 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.
8
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, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 53,548 | $ | 477,309 | ||||
| Accounts receivable, net | 44,766 | 92,149 | ||||||
| Other receivables and prepayments, net | 44,121 | 267,781 | ||||||
| Advance to suppliers | 148,030 | 152,751 | ||||||
| Inventories, net | 1,117,256 | 1,349,102 | ||||||
| Other taxes receivable | 352,628 | 374,270 | ||||||
| Operating lease right-of-use assets, current | 41,546 | - | ||||||
| Total Current Assets | 1,801,895 | 2,713,362 | ||||||
| Property and equipment, net | 853,504 | 1,261,493 | ||||||
| Construction in progress | 224,147 | 223,772 | ||||||
| Operating lease right-of-use assets, net | 17,714 | - | ||||||
| Marketable equity securities | 821,739 | - | ||||||
| Non-marketable equity securities | - | 1,500,043 | ||||||
| Total assets | $ | 3,718,999 | $ | 5,698,670 | ||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 261,459 | $ | 234,449 | ||||
| Operating lease liabilities, current | 44,268 | - | ||||||
| Advances from customers | 298,564 | 232,565 | ||||||
| Accrued expenses and other current liabilities (including rental payable to a related party of $77,104 and $42,223 at June, 30, 2019 and December 31, 2018, respectively) | 1,389,273 | 977,119 | ||||||
| Due to related parties | ||||||||
| - Short-term borrowings and interest payable | 741,385 | - | ||||||
| Warranty obligation | 4,852 | 8,671 | ||||||
| Total Current Liabilities | 2,739,801 | 1,452,804 | ||||||
| OTHER LIABILITIES | ||||||||
| Warrants liability | 1,229,067 | 1,129,246 | ||||||
| Total Liabilities | $ | 3,968,868 | $ | 2,582,050 | ||||
| SHAREHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Common shares, $0.002731 par value, 50,000,000 shares authorized, 17,806,586 shares issued and outstanding at June 30, 2019 and December 31, 2018 | $ | 48,630 | $ | 48,630 | ||||
| Additional paid in capital | 40,689,949 | 40,620,772 | ||||||
| Accumulated deficit | (43,468,419 | ) | (40,156,204 | ) | ||||
| Accumulated other comprehensive income | 2,479,971 | 2,603,422 | ||||||
| Total shareholders’ (deficit) equity | (249,869 | ) | 3,116,620 | |||||
| Total liabilities and shareholders’ (deficit) equity | $ | 3,718,999 | $ | 5,698,670 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-1
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, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | 242,213 | 301,293 | ||||||
| Costs of revenue | (418,227 | ) | (333,995 | ) | ||||
| Gross loss | (176,014 | ) | (32,702 | ) | ||||
| Selling expenses | (556,213 | ) | (1,131,219 | ) | ||||
| General and administrative expenses | (1,753,718 | ) | (2,028,028 | ) | ||||
| Provision for doubtful accounts | (43,873 | ) | (33,621 | ) | ||||
| Operating loss | (2,529,818 | ) | (3,225,570 | ) | ||||
| Financial expenses | (7,911 | ) | (8,725 | ) | ||||
| Other income | 21,682 | 23,100 | ||||||
| Other expense | (18,044 | ) | (124,159 | ) | ||||
| Unrealized loss on securities | (678,304 | ) | - | |||||
| Change in fair value of warrants liability | (99,820 | ) | (110,021 | ) | ||||
| Loss before provision for income tax | (3,312,215 | ) | (3,445,375 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss attributable to Lianluo Smart Limited | $ | (3,312,215 | ) | $ | (3,445,375 | ) | ||
| Other comprehensive loss: | ||||||||
| Foreign currency translation loss | (123,451 | ) | (103,418 | ) | ||||
| Comprehensive loss | $ | (3,435,666 | ) | $ | (3,548,793 | ) | ||
| Loss per share | ||||||||
| Basic and diluted | $ | (0.19 | ) | $ | (0.20 | ) | ||
| Weighted average number of common shares outstanding | ||||||||
| Basic and diluted | 17,806,586 | 17,501,354 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
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, 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 | ) | |||||||||||
Six Months Ended June 30, 2018
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||
| Balance as of January 1, 2018 | 17,312,586 | $ | 47,281 | $ | 39,233,137 | $ | (31,246,202 | ) | $ | 3,118,899 | $ | 11,153,115 | ||||||||||||
| Issuance of shares upon excise of share-based awards | 19,000 | 52 | 17,799 | - | - | 17,851 | ||||||||||||||||||
| Issuance of shares to non-employees | 275,000 | 751 | 835,249 | - | - | 836,000 | ||||||||||||||||||
| Stock based compensation | - | - | 166,210 | - | - | 166,210 | ||||||||||||||||||
| Foreign currency translation | - | - | - | - | (103,418 | ) | (103,418 | ) | ||||||||||||||||
| Net loss | - | - | - | (3,445,375 | ) | - | (3,445,375 | ) | ||||||||||||||||
| Balance as of June 30, 2018 | 17,606,586 | $ | 48,084 | $ | 40,252,395 | $ | (34,691,577 | ) | $ | 3,015,481 | $ | 8,624,383 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
LIANLUO SMART LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In U.S. dollars)
| For Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (3,312,215 | ) | $ | (3,445,375 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | 69,177 | 1,001,459 | ||||||
| Depreciation and amortization | 414,224 | 290,667 | ||||||
| (Gain) Loss on disposal of equipment | (15,247 | ) | 122,122 | |||||
| Provision for doubtful accounts | 43,873 | 33,621 | ||||||
| Change in warranty obligation | (3,881 | ) | (12,073 | ) | ||||
| Provision for inventory obsolescence | 114 | 61,253 | ||||||
| Change in fair value of warrants liability | 99,820 | 110,021 | ||||||
| Unrealized loss on securities | 678,304 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (Increase) in accounts receivable | 42,873 | (18,773 | ) | |||||
| Decrease in advances to suppliers | 4,721 | 348,539 | ||||||
| Increase in other receivables and prepayments, net - related party | - | (61,363 | ) | |||||
| Decrease in other receivables and prepayments, net - third parties | 184,296 | 51,824 | ||||||
| Increase in interest receivables - related party | (1,023 | ) | - | |||||
| Decrease (Increase) in inventories | 231,644 | (1,068,701 | ) | |||||
| Increase in operating lease right-of-use assets, net | (59,260 | ) | - | |||||
| Decrease (Increase) in other taxes receivable | 21,642 | (115,254 | ) | |||||
| Increase in accounts payable | 27,010 | 504,582 | ||||||
| Increase in interest payable – related party | 8,908 | - | ||||||
| Increase in operating lease liabilities, current | 44,268 | - | ||||||
| Increase (Decrease) in advances from customers | 65,999 | (79,033 | ) | |||||
| Increase (Decrease) in accrued expenses and other current liabilities | 412,154 | (178,044 | ) | |||||
| Net cash used in operating activities | (1,042,599 | ) | (2,454,528 | ) | ||||
| Cash flows from investing activities | ||||||||
| Proceeds from disposal of equipment | 16,302 | - | ||||||
| Capital expenditures and other additions | - | (16,127 | ) | |||||
| Loan to a related party | (85,000 | ) | (6,000,000 | ) | ||||
| Repayment from a related party | - | 145,592 | ||||||
| Net cash used in investing activities | (68,698 | ) | (5,870,535 | ) | ||||
| Cash flows from financing activities | ||||||||
| Loans from related parties | 818,500 | 2,749,250 | ||||||
| Net proceeds from issuance of common stock | - | 18,601 | ||||||
| Net cash provided by financing activities | 818,500 | 2,767,851 | ||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | (130,964 | ) | (178,370 | ) | ||||
| Net decrease in cash and cash equivalents | (423,761 | ) | (5,735,582 | ) | ||||
| Cash and cash equivalents at beginning of period | 477,309 | 6,809,485 | ||||||
| Cash and cash equivalents at end of period | $ | 53,548 | $ | 1,073,903 | ||||
| Supplemental cash flow information | ||||||||
| Income tax paid | $ | - | $ | - | ||||
| Interest paid | $ | - | $ | 17,991 | ||||
| Non-cash investing and financing activities: | ||||||||
| Offset short-term borrowings - related party against loans to a related party (including accrued interests) | 86,023 | - | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
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.
Currently, Lianluo Smart owns 100% of LCL and LCL owns 100% of BDL.
Lianluo Smart, through its subsidiaries, now distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and laryngoscope. Standard product registration, product certification and quality management system have been established; ISO13485 industry standard has also already been passed. It also has the distribution rights for a number of international medical equipment suppliers for products including ventilator, laryngoscope, sleep apnea machines and other medical equipment accessories. Starting from fiscal 2018 the Company is providing examination service to hospitals and medical centers through its developed medical wearable device. Doctors could refer to examination result provided by the device in making diagnosis regarding Obstructive Sleep Apnea Syndrome (“OSAS”).
“Lianluo Smart” and the “Company” collectively refer to Lianluo Smart, a BVI registered company, and its subsidiaries, BDL and LCL.
| 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, 2018. The unaudited condensed consolidated balance sheet at December 31, 2018 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, 2019 are not necessarily indicative of the results expected for the full fiscal year.
F-5
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, and records a working capital deficit of $937,906 as of June 30, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. 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. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, a shareholder has indicated the intent and ability to provide additional financing. 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.
F-6
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
Leases
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. The standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This standard also requires classification of all cash payments within operating activities in the statement of cash flows. In July 2018, the Financial Accounting Standards Board issued ASU No. 2018-11, Leases - Targeted Improvements, which provides an additional transition method.
The Company adopted the new leasing standard effective January 1, 2019, using the modified retrospective approach and applying the transition method which does not require adjustments to comparative periods nor require modified disclosures in the comparative periods. The Company elected to use the package of practical expedients so as to not reassess whether a contract is or contains a lease, lease classification, and initial direct costs, for contracts that expired or existed prior to the effective date. The Company also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term. As the lessee to material operating leases, the most significant impact of adoption of the new leasing standard relates to the recognition of right-of-use assets of $79,244 and lease liabilities of $43,070 as of January 1, 2019 for the Company’s operating leases.
The Company accounts for leases by first determining if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company’s leases do not provide an implicit rate, therefore, the incremental borrowing rate based on the information available at commencement date was used to determine the present value of lease payments. The right-of-use assets exclude lease incentives, which are accounted as a reduction of lease liabilities if they have not yet been received. The Company’s lease terms may include options to extend or terminate the lease. These options are included in the lease terms when it is reasonably certain they will be exercised. Lease expense related to lease components is recognized on a straight-line basis over the lease term.
Equity Securities
As of December 31, 2018, the Company’s non-marketable equity securities were investments in a privately held company. The carrying value of the Company’s non-marketable equity securities was adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in non-operating other income (expenses).
As of June 30, 2019, fair value of the Company’s listed equity securities is based on quoted prices in active markets for identical assets or liabilities.
F-7
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.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
F-8
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company currently intends to adopt this guidance for the fiscal year beginning January 1, 2020, and does not anticipate that the adoption of this guidance will have a material impact on its financial statements or disclosures because the Company does not currently have any recorded goodwill.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
| 3. | REVENUES |
The following represents the revenues by categories, all derived from China:
| For the six months ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Categories | ||||||||
| Product sales | ||||||||
| Medical Devices | $ | 59,722 | $ | 164,445 | ||||
| Mobile Medicine (sleep apnea diagnostic products) | 81,550 | 65,980 | ||||||
| OSAS service (analysis and detection) | 100,941 | 70,868 | ||||||
| Total revenues | $ | 242,213 | $ | 301,293 | ||||
| 4. | ACCOUNTS RECEIVABLE, NET |
Accounts receivable as of June 30, 2019 and December 31, 2018 consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Accounts receivable | $ | 76,051 | $ | 118,922 | ||||
| Less: reserve for doubtful accounts | (31,285 | ) | (26,773 | ) | ||||
| Accounts receivable, net | $ | 44,766 | $ | 92,149 | ||||
During the six months ended June 30, 2019 and 2018, bad debts were $4,509 and $1,680 respectively.
F-9
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, 2019 and December 31, 2018 consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Rental deposits | $ | 44,633 | $ | 43,838 | ||||
| Prepaid expenses | 71,634 | 271,965 | ||||||
| Other receivables – third parties | 14,324 | - | ||||||
| Advances to employees | 876 | 47 | ||||||
| 131,467 | 315,850 | |||||||
| Less: reserve for doubtful accounts | (87,346 | ) | (48,069 | ) | ||||
| Other receivables and prepayments, net | $ | 44,121 | $ | 267,781 | ||||
During the six months ended June 30, 2019 and 2018, bad debts on other receivables and prepayments were $39,364 and $31,941 respectively.
| 6. | INVENTORIES |
Inventories as of June 30, 2019 and December 31, 2018 consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Raw materials | $ | 26,538 | $ | 27,638 | ||||
| Work in progress | 904 | 902 | ||||||
| Finished goods | 1,089,814 | 1,320,562 | ||||||
| Total inventories | $ | 1,117,256 | $ | 1,349,102 | ||||
During the six months ended June 30, 2019 and 2018, write-downs of inventories to lower of cost or net realizable value was $114 and $61,253, respectively, which were charged as cost of revenues.
| 7. | PROPERTY AND EQUIPMENT, NET |
Property and equipment as of June 30, 2019 and December 31, 2018 consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Plant and machinery | $ | 1,779,143 | $ | 1,770,626 | ||||
| Automobiles | 139,668 | 139,380 | ||||||
| Office and computer equipment | 30,566 | 37,005 | ||||||
| Total property and equipment | 1,949,377 | 1,947,011 | ||||||
| Less: Accumulated depreciation | (1,095,873 | ) | (685,518 | ) | ||||
| Property and equipment, net | $ | 853,504 | $ | 1,261,493 | ||||
Depreciation were $414,224 and $103,922 for the six months ended June 30, 2019 and 2018, respectively. The Company did not record any impairment on its property and equipment for the six months ended June 30, 2019 and 2018.
F-10
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
| 8. | CONSTRUCTION IN PROGRESS |
Construction in progress as of June 30, 2019 and December 31, 2018 represented equipment pending installation.
| 9. | 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, 2019 and 2018 was $177,464 and $158,080 respectively.
The components of lease costs, lease term and discount rate with respect of leases with an initial term of more than 12 months are as follows:
| For the six months ended | ||||
| June 30, 2019 | ||||
| Operating lease cost | $ | 59,260 | ||
| Weighted Average Remaining Lease Term - Operating leases | 1.41 years | |||
| Weighted Average Discount Rate - Operating leases | 5.225 | % | ||
The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2019:
| Operating Leases | ||||
| The remainder of 2019 | $ | 45,203 | ||
| Fiscal year 2020 | - | |||
| Fiscal year 2021 | - | |||
| Fiscal year 2022 | - | |||
| Fiscal year 2023 | - | |||
| Thereafter | - | |||
| Total undiscounted cash flows | 45,203 | |||
| Less: imputed interest | (935 | ) | ||
| Present value of lease liabilities | $ | 44,268 | ||
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 Labor Contract Law of the People’s Republic of China requires employers to assure the liability of the severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The Company has estimated its possible severance payments of approximately $505,972 and $886,049 as of June 30, 2019 and December 31, 2018, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
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.
During the six months ended June 30, 2019, the Company has labor disputes with certain employees upon termination of their employment in April 2019. As of June 30, 2019, the Company has accrued for compensation for these employees in accordance with labor laws。
F-11
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
| 10. | LOSS PER SHARE |
The following is a reconciliation of the basic and diluted loss per share computation for the six months ended June 30, 2019 and 2018:
| Six months ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Net loss attributable to the Company’s common shareholders | $ | (3,312,215 | ) | $ | (3,445,375 | ) | ||
| Weighted average shares outstanding – Basic and diluted | 17,806,586 | 17,501,354 | ||||||
| Loss per share – Basic and diluted | $ | (0.19 | ) | $ | (0.20 | ) | ||
For the six months ended June 30, 2019 and 2018, all the outstanding warrants and options were anti-dilutive.
| 11. | 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, 2019 and 2018 were $39,091 and $0 respectively. As of June 30, 2019 and December 31, 2018, the Company reported an outstanding rental payable of $77,104 and $42,223 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 with a fixed annual interest rate of 3.5%. During the six months ended June 30, 2019, the Company earned unpaid interest income of $1,023. |
On May 20, 2019 the Company borrowed $90,000 from Digital Grid for a term of 12 months with a fixed annual interest rate of 3.5%. During the six months ended June 30, 2019, interest expense of $368 was incurred.
As of June 30, 2019, the Company owed a net principal and interest of $4,345 to Digital Grid.
| (3) | From February to June 2019, the Company entered into loan agreements with HLI to obtain a loan of $728,500 (RMB5,000,000) for a period of 12 months with 8% annual interest. As of June 30, 2019, the Company owed principal and interest totaled $737,040 to HLI. |
F-12
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
| 12. | CONCENTRATIONS |
Major Customers
For the six months ended June 30, 2019, two customers each accounted for approximately 33% and 24%, respectively, of the Company’s revenues. For the six months ended June 30, 2018, four customers each accounted for approximately 19%, 17%, 11% and 10%, 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, 2019 and 2018.
Major Suppliers
For the six months ended June 30, 2019, the sole supplier accounted for 100% of the Company’s purchases. For the six months ended June 30, 2018, three suppliers each accounted for approximately 44%, 12% and 11%, respectively, of the Company’s purchases.
No other suppliers accounted for more than 10% of the Company’s purchases for the six months ended June 30, 2019 and 2018.
| 13. | EQUITY |
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 | |||||||||
| Outstanding as of December 31, 2018 | 881,867 | $ | 2.34 | $ | - | |||||||
| Forfeited | (93,000 | ) | ||||||||||
| Exercised | - | |||||||||||
| Outstanding as of June 30, 2019 | 788,867 | 2.34 | $ | - | ||||||||
| Exercisable as of June 30, 2019 | 762,667 | 2.42 | $ | - | ||||||||
| (1) | The intrinsic value of the stock options at June 30, 2019 is the amount by which the market value of the Company’s common stock of $1.23 as of June 30, 2019 exceeds the exercise price of the options. |
As of June 30, 2019, 26,200 options have not been vested. For the six months ended June 30, 2019 and 2018, the Company recognized $69,177 and $166,210 respectively, as compensation expense under its stock option plan. As of June 30, 2019, unrecognized share-based compensation expense related to options was $16,577.
F-13
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
| 14. | WARRANTS |
On April 28, 2016, the Company signed Share Purchase Agreement (“SPA”) with HLI. In this SPA, HLI is entitled with 1,000,000 warrants to acquire from the Company 1,000,000 common shares at purchase price of $2.20 per share. The new warrants will be exercisable at any time.
1,000,000 warrants were issued and outstanding as of June 30, 2019 and December 31, 2018
The fair value of the outstanding warrants was calculated using the Black Scholes Model with the following assumptions:
| June
30, 2019 | December
31, 2018 | |||||||
| Market price per share (USD/share) | $ | 1.23 | $ | 1.13 | ||||
| Exercise price (USD/share) | 2.20 | 2.20 | ||||||
| Risk free rate | 1.86 | % | 2.6 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected term/Contractual life (years) | 6.8 | 7.3 | ||||||
| Expected volatility | 262.47 | % | 256.20 | % | ||||
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, | ||||||||
| 2019 | 2018 | |||||||
| Beginning balance | $ | 1,129,246 | $ | 1,729,111 | ||||
| Fair value change of the issued warrants included in earnings | 99,821 | 110,018 | ||||||
| Ending balance | $ | 1,229,067 | $ | 1,839,129 | ||||
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, 2019 | 1,000,000 | $ | 2.20 | |||||||||
| Granted | - | |||||||||||
| Forfeited | - | |||||||||||
| Exercised | - | |||||||||||
| Redeemed | - | |||||||||||
| Outstanding as of June 30, 2019 | 1,000,000 | $ | 2.20 | |||||||||
F-14
LIANLUO SMART LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In U.S. dollars)
| 15. | SUBSEQUENT EVENTS |
On July 19, 2019, July 22, 2019 and August 6, 2019, the Company borrowed an aggregate unsecured amount of RMB1.5 million ($0.22 million) from HLI for a term of twelve months, with a fixed annual interest rate 8%.
On November 28, 2019, the Company borrowed an aggregate unsecured amount of $0.017 million from DGHKT for a term of twelve months, with a fixed annual interest rate 3.5%.
F-15
Warrants (Details) - $ / shares |
6 Months Ended | 12 Months Ended |
|---|---|---|
Jun. 30, 2019 |
Dec. 31, 2018 |
|
| Warrants [Line Items] | ||
| Exercise price (USD/share) | $ 1,230,000 | |
| Stock options [Member] | ||
| Warrants [Line Items] | ||
| Market price per share (USD/share) | 1.23 | $ 1.13 |
| Exercise price (USD/share) | $ 2.20 | $ 2.20 |
| Risk free rate | 1.86% | 2.60% |
| Dividend yield | 0.00% | 0.00% |
| Expected term/Contractual life (years) | 6 years 9 months 18 days | 7 years 3 months 19 days |
| Expected volatility | 262.47% | 256.20% |
Subsequent Events (Details) |
1 Months Ended | ||||||
|---|---|---|---|---|---|---|---|
|
Aug. 06, 2019
USD ($)
|
Nov. 28, 2019
USD ($)
|
Jul. 22, 2019
USD ($)
|
Jul. 19, 2019
USD ($)
|
Aug. 06, 2019
CNY (¥)
|
Jul. 22, 2019
CNY (¥)
|
Jul. 19, 2019
CNY (¥)
|
|
| HLI [Member] | |||||||
| Subsequent Events (Textual) | |||||||
| Fixed annual interest rate | 8.00% | 8.00% | 8.00% | ||||
| Unsecured borrowed amount | $ 220,000 | $ 220,000 | $ 220,000 | ||||
| HLI [Member] | RMB Member | |||||||
| Subsequent Events (Textual) | |||||||
| Unsecured borrowed amount | ¥ | ¥ 1,500,000 | ¥ 1,500,000 | ¥ 1,500,000 | ||||
| DGHKT [Member] | Forecast [Member] | |||||||
| Subsequent Events (Textual) | |||||||
| Fixed annual interest rate | 3.50% | ||||||
| Unsecured borrowed amount | $ 17,000 | ||||||
Revenues (Details) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
|
| Total revenues | $ 242,213 | $ 301,293 |
| Medical Devices [Member] | ||
| Total revenues | 59,722 | 164,445 |
| Mobile Medicine (sleep apnea diagnostic products) [Member] | ||
| Total revenues | 81,550 | 65,980 |
| OSAS service (analysis and detection) [Member] | ||
| Total revenues | $ 100,941 | $ 70,868 |
Equity (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity Note [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of option activity |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Receivables and Prepayments, Net (Details Textual) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
|
| Other Receivables and Prepayments, Net (Textual) | ||
| Bad debts on other receivables and prepayments | $ 39,364 | $ 31,941 |
Property and Equipment, Net |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET |
Property and equipment as of June 30, 2019 and December 31, 2018 consist of the following:
Depreciation were $414,224 and $103,922 for the six months ended June 30, 2019 and 2018, respectively. The Company did not record any impairment on its property and equipment for the six months ended June 30, 2019 and 2018. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Party Transactions and Balances |
6 Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | |||||||||||||
| Related Party Transactions [Abstract] | |||||||||||||
| 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:
On May 20, 2019 the Company borrowed $90,000 from Digital Grid for a term of 12 months with a fixed annual interest rate of 3.5%. During the six months ended June 30, 2019, interest expense of $368 was incurred.
As of June 30, 2019, the Company owed a net principal and interest of $4,345 to Digital Grid.
|
Loss Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of reconciliation of the basic and diluted loss per share |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Organization and Principal Activities |
6 Months Ended | ||
|---|---|---|---|
Jun. 30, 2019 | |||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
| 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.
Currently, Lianluo Smart owns 100% of LCL and LCL owns 100% of BDL.
Lianluo Smart, through its subsidiaries, now distributes branded, proprietary medical equipment, such as sleep apnea machines, ventilator air compressors, and laryngoscope. Standard product registration, product certification and quality management system have been established; ISO13485 industry standard has also already been passed. It also has the distribution rights for a number of international medical equipment suppliers for products including ventilator, laryngoscope, sleep apnea machines and other medical equipment accessories. Starting from fiscal 2018 the Company is providing examination service to hospitals and medical centers through its developed medical wearable device. Doctors could refer to examination result provided by the device in making diagnosis regarding Obstructive Sleep Apnea Syndrome ("OSAS").
"Lianluo Smart" and the "Company" collectively refer to Lianluo Smart, a BVI registered company, and its subsidiaries, BDL and LCL. |
Subsequent Events |
6 Months Ended | ||
|---|---|---|---|
Jun. 30, 2019 | |||
| Subsequent Events [Abstract] | |||
| SUBSEQUENT EVENTS |
On July 19, 2019, July 22, 2019 and August 6, 2019, the Company borrowed an aggregate unsecured amount of RMB1.5 million ($0.22 million) from HLI for a term of twelve months, with a fixed annual interest rate 8%.
On November 28, 2019, the Company borrowed an aggregate unsecured amount of $0.017 million from DGHKT for a term of twelve months, with a fixed annual interest rate 3.5%. |
Other Receivables and Prepayments, Net (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of other receivables and prepayments |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Condensed Consolidated Balance Sheets (Parenthetical) (Unaudited) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Rental payable to a related party | $ 77,104 | $ 42,223 |
| Common stock, par value | $ 0.002731 | $ 0.002731 |
| Common stock, shares authorized | 50,000,000 | 50,000,000 |
| Common stock, shares issued | 17,806,586 | 17,806,586 |
| Common stock, shares outstanding | 17,806,586 | 17,806,586 |
Commitments and Contingencies (Details 1) |
Jun. 30, 2019
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| The remainder of 2019 | $ 45,203 |
| Fiscal year 2020 | |
| Fiscal year 2021 | |
| Fiscal year 2022 | |
| Fiscal year 2023 | |
| Thereafter | |
| Total undiscounted cash flows | 45,203 |
| Less: imputed interest | (935) |
| Present value of lease liabilities | $ 44,268 |
Inventories (Details Textual) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
|
| Inventories (Textual) | ||
| Inventory reversals of write-downs | $ 114 | $ 61,253 |
Warrants |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants and Rights Note Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WARRANTS |
On April 28, 2016, the Company signed Share Purchase Agreement ("SPA") with HLI. In this SPA, HLI is entitled with 1,000,000 warrants to acquire from the Company 1,000,000 common shares at purchase price of $2.20 per share. The new warrants will be exercisable at any time.
1,000,000 warrants were issued and outstanding as of June 30, 2019 and December 31, 2018
The fair value of the outstanding warrants was calculated using the Black Scholes Model with the following assumptions:
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:
The following is a summary of the warrants activity:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||