EX-99.1 2 ea139995ex99-1_urbanteainc.htm UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2020 AND 2019

Exhibit 99.1

 

URBAN TEA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars, except for shares)

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
ASSETS        
Cash  $13,333,034   $5,311,693 
Short-term investments   3,335,640    2,266,069 
Trade receivables   470,894    183,566 
Inventories   1,475,924    1,403,582 
Prepayments   26,874    - 
Loans due from third parties   2,785,636    2,222,191 
Due from a related party   3,411    1,127 
Other current assets   106,244    108,224 
Total current assets   21,537,657    11,496,452 
           
Investment in equity investees   1,289,077    187,755 
Goodwill   8,610,173    8,073,011 
Property and equipment, net   1,327,658    1,315,326 
Deposits for plant, property and equipment   1,013,825    849,245 
Intangible assets   66,522    66,442 
Right of use assets   363,318    553,904 
Other noncurrent assets   67,089    92,992 
           
Total Assets  $34,275,319   $22,635,127 
           
LIABILITIES AND EQUITY          
Trade payable  $80,740   $64,300 
Unearned income   101,240    127,279 
Other current liabilities   167,379    68,579 
Income tax payable   268,215    - 
Lease liabilities, current   308,276    315,259 
Warrants liabilities   304,734    1,150,416 
Total current liabilities   1,230,584    1,725,833 
           
Lease liabilities, noncurrent   124,673    310,098 
Total Liabilities   1,355,257    2,035,931 
           
Shareholders’ Equity          
Ordinary shares, $0.0001 par value share, 150,000,000 shares authorized 79,491,998 and 45,188,648 shares issued and outstanding at December 31, 2020 and June 30, 2020, respectively   7,949    4,519 
Preferred shares, par value $0.0001 per share, 5,000,000 shares authorized; none issued or outstanding   -    - 
Additional paid-in capital   36,837,553    25,568,478 
Statutory reserve   5,848    - 
Accumulated deficit   (10,967,630)   (10,280,741)
Accumulated other comprehensive income (loss)   998,913    (352,649)
Total Urban Tea, Inc.’s Shareholders’ Equity   26,882,633    14,939,607 
           
Non-controlling interests   6,037,429    5,659,589 
Total Liabilities and Equity  $34,275,319   $22,635,127 

 

See notes to the unaudited condensed consolidated financial statements

 

1

 

 

URBAN TEA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

(Expressed in U.S. dollars, except share and per share data)

 

   For the Six Months Ended
December 31,
 
   2020   2019 
         
Revenue  $3,874,080   $418,219 
Cost of revenues   (2,328,001)   (300,124)
Gross profit   1,546,079    118,095 
           
Operating expenses          
General and administrative expenses   (2,205,377)   (1,597,112)
Total operating expenses   (2,205,377)   (1,597,112)
           
Other income, net          
Interest income   138,306    49,395 
Change in fair value of warrants   845,683    15,330 
Share of equity investees   (201,815)   - 
Other (loss) income   (167,046)   73,531 
Total other income, net   615,128    138,256 
           
Net loss before income taxes   (44,170)   (1,340,761)
           
Income tax expenses   (259,031)   - 
Net loss   (303,201)   (1,340,761)
           
Less: Net (income) loss attributable to non-controlling interests   (377,840)   4,995 
           
Net loss attributable to Urban Tea, Inc.’s Shareholders   (681,041)   (1,335,766)
           
Other comprehensive income          
Foreign currency translation adjustment   1,351,562    81,152 
           
Comprehensive income (loss)   670,521    (1,259,609)
Less: Comprehensive loss attributable to non-controlling interests   (377,840)   4,995 
Comprehensive income (loss) attributable to Urban Tea, Inc.’s Shareholders  $292,681   $(1,254,614)
           
Loss per share- basic and diluted  $(0.09)  $(0.04)
           
Weighted Average Shares Outstanding-Basic and Diluted   72,370,528    31,289,010 

 

See notes to the unaudited condensed consolidated financial statements

 

2

 

 

URBAN TEA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Expressed in U.S. dollars, except share data)

 

   Attributable to Urban Tea, Inc.’s Shareholders’ Equity         
   Share capital               Accumulated
other
         
   Ordinary
share
   Amount   Additional
paid-in
capital
   Statutory
reserve
  

Accumulated
deficit

   comprehensive
(loss)
income
   Non-controlling Interest   Total 
                                 
Balance as of July 1, 2019   26,180,314   $2,618   $17,625,612   $-   $(8,174,141)  $(302,222)  $-   $9,151,867 
Issuance of ordinary shares in connection with acquisition of a subsidiary   10,000,000    1,000    3,399,000    -    -    -    5,675,416    9,075,416 
Net loss for the period   -    -    -    -    (1,335,766)   -    (4,995)   (1,340,761)
Foreign currency translation adjustment   -    -    -    -    -    81,152    -    81,152 
                                         
Balance as of December 31, 2019   36,180,314   $3,618   $21,024,612   $-   $(9,509,907)  $(221,070)  $5,670,421   $16,967,674 
                                         
Balance as of July 1, 2020   45,188,648   $4,519   $25,568,478   $-   $(10,280,741)  $(352,649)  $5,659,589   $20,599,196 
Issuances of ordinary shares in connection with private placements   33,750,000    3,375    11,046,625    -    -    -    -    11,050,000 
Issuances of ordinary shares for professional services   553,350    55    222,450    -    -    -    -    222,505 
Net (loss) income for the period   -    -    -    -    (681,041)   -    377,840    (303,201)
Appropriation of net income   -    -    -    5,848    (5,848)   -    -    - 
Foreign currency translation adjustment   -    -    -    -    -    1,351,562    -    1,351,562 
                                         
Balance as of December 31, 2020   79,491,998   $7,949   $36,837,553   $5,848   $(10,967,630)  $998,913   $6,037,429   $32,920,062 

 

See notes to the unaudited condensed consolidated financial statements

 

3

 

 

URBAN TEA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars, except share data)

 

   For the Six Months Ended
December 31,
 
   2020   2019 
Cash Flows from Operating Activities:        
Net loss  $(303,201)  $(1,340,761)
Adjustments to reconcile net income to net cash used in operating activities:          
Reversal of provision for doubtful accounts   -    (1,423)
Depreciation of property and equipment   78,671    68,941 
Amortization of intangible assets   9,935    6,625 
Net loss from disposal of property and equipment   15,242    1,025 
Amortization of right of use assets   227,566    152,788 
Change in fair value of warrants   (845,683)   (15,330)
Share based compensation expenses   222,500    - 
Share of equity investees   201,815    - 
Changes in assets and liabilities:          
Trade receivables   (262,396)   7,766 
Inventories   41,445    (33,261)
Prepayments   (25,902)   45,953 
Due from a related party   (2,113)   - 
Other current assets   10,480    99,815 
Other noncurrent assets   32,331    57,784 
Trade payable   29,198    (50,325)
Unearned income   (53,623)   (44,613)
Income tax payable   259,284    - 
Other current liabilities   94,317    46,487 
Lease liabilities   (240,271)   (153,036)
Net cash used in operating activities   (510,405)   (1,151,565)
           
Cash Flows from Investing Activities:          
Purchases of property and equipment   (1,620)   (220,849)
Payment of deposits in property and equipment   (91,364)   (247,897)
Proceeds from disposal of property and equipment   -    740 
Purchases of intangible assets   (4,751)   - 
Investment in short-term investments   (9,393,389)   - 
Collection of short-term investments   8,541,987    1,244,736 
Collection of loans from a third party   (367,057)   - 
Investment in equity investees   (1,257,714)   (105,000)
Acquisition of a subsidiary, net of cash acquired   -    (2,369,768)
Net cash used in investing activities   (2,573,908)   (1,698,038)
           
Cash Flows from Financing Activities:          
Cash raised in private placement of ordinary shares   11,050,000    - 
Net cash provided by financing activities   11,050,000    - 
           
Effect of exchange rate changes on cash and cash equivalents   55,654    (17,962)
           
Increase (Decrease) in cash and cash equivalents   8,021,341    (2,867,565)
           
Cash and cash equivalents at beginning of period   5,311,693    4,668,745 
Cash and cash equivalents at end of period  $13,333,034   $1,801,180 
           
Supplemental disclosures of cash flow information:          
Interest paid  $-   $- 
Tax paid  $-   $- 
           
Major non-cash transactions:          
Issuance of ordinary shares for professional services  $222,505   $- 
Issuance of ordinary shares for acquisition of a subsidiary  $-   $3,400,000 
Right-of-use assets obtained in exchange for operating lease obligations  $-   $1,360,822 
Loan due from a third party transferred from short-term investments  $-   $2,304,541 

 

See notes to the unaudited condensed consolidated financial statements

 

4

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Urban Tea, Inc., Inc. (formerly known as Delta Technology Holdings Limited) (“MYT” or the “the Company”), is a holding company that was incorporated on November 28, 2011, under the laws of the British Virgin Islands. On February 14, 2019, the Company changed its name to Urban Tea, Inc., Inc.

 

The Company owns 100% equity interest in NTH Holdings Limited (“NTH BVI”), an entity incorporated on August 28, 2018 in accordance with the laws and regulations in British Virgin Islands (“BVI”). NTH BVI owns 100% equity interest in Tea Language Group Limited (“NTH HK”), an entity incorporated on September 11, 2018 in accordance with the laws and regulations in Hong Kong (“HK”). On October 19, 2018, the Company, through NTH HK, established Mingyuntang (Shanghai) Tea Co. Ltd.  (“Shanghai MYT”), as a Wholly Foreign-Owned Enterprise (“WFOE”) in the People’s Republic of China (“PRC”).

 

The Company previously was engaged in the manufacturing and sale of organic compounds. The Company discontinued the manufacturing and sale of organic compounds business in April 2019. Currently, the Company conducts its business through two variable interest entities (“VIEs”), Hunan Mingyuntang Brand Management Company (“Hunan MYT”) and Hunan 39 PU Tea Co., Ltd. (“39Pu”). Hunan Mingyuntang is primarily engaged in specialty tea product distribution and retail business by providing high-quality tea beverages through its tea shop chains and 39Pu is engaged in dark tea distribution in the People’s Republic of China (“PRC”).

 

On November 19, 2018, Shanghai MYT entered into a series of variable interest entity agreements (“Hunan MYT VIE Agreements”) with Hunan MYT and Peng Fang, the sole shareholder of Hunan MYT. The Hunan MYT VIE Agreements are designed to provide Shanghai MYT with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Hunan MYT, including absolute control rights and the rights to the management, operations, assets, property and revenue of Hunan MYT. The purpose of the Hunan MYT VIE Agreements is solely to give Shanghai MYT the exclusive control over Hunan MYT’s management and operations.

 

On October 2, 2019, Shanghai MYT entered into a series of variable interest entity agreements (“39Pu VIE Agreements”) with 39Pu and three shareholders who collectively owned 51% equity interest in 39Pu. The 39Pu VIE Agreements are designed to provide Shanghai MYT with the power, rights and obligations equivalent in all material respects to those it would possess as the controlling equity holder of 39Pu, including absolute control rights and the rights to the management, operations, assets, property and revenue of 39Pu. The purpose of the 39Pu VIE Agreements is solely to give Shanghai MYT the exclusive control over 39Pu’s management and operations. In exchange for the controlling interest in 39Pu, the Company is obliged to pay a cash consideration of $2.4 million and a share consideration of 10,000,000 ordinary shares of the Company, no par value (“Ordinary Shares”). In addition, a contingent cash consideration of $0.6 million and share consideration of 4,000,000 Ordinary Shares will be delivered to the three shareholders according to the earn-out payment based on the financial performance of 39 Pu in its next fiscal year. On October 17 and 28, 2019, the Company paid share consideration of 10,000,000 Ordinary Shares and the cash consideration of $2.4 million, respectively.

 

5

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)

 

The accompanying consolidated financial statements reflect the activities of Hunan Mingyuntang, 39Pu and each of the following holding entities:

 

Name   Background   Ownership

Delta Technology Holdings USA Inc.

(“Urban Tea USA”)

 

●     A US company

●     Incorporated on May 22, 2018

●     A holding company

  100% owned by the Company
NTH BVI  

●     A BVI company

●     Incorporated on August 28, 2018

●     A holding company

  100% owned by the Company
NTH HK  

●     A Hong Kong company

●     Incorporated on September 11, 2018

●     A holding company

  100% owned by NTH BVI
Shanghai MYT  

●     A PRC company and deemed a wholly foreign owned enterprise (“WOFE”)

●     Incorporated on October 19

●     Registered capital of $1 million

●     A holding company

  WOFE, 100% owned by NTH HK
Hunan MYT  

●     A PRC limited liability company

●     Incorporated on October 17, 2018

●     Registered capital of $4,330,590 (RMB 30 million)

●     Engaged in specialty tea product distribution and retail business by provision of high-quality tea beverages in its tea shop chain

  100% VIE of Shanghai MYT  
39Pu  

●     A PRC limited liability company

●     Incorporated on April 14, 2011

●     Registered capital of $3,522,424 (RMB 20.9 million) with registered capital fully paid-up

●    Engaged in dark tea distribution

  51% VIE of Shanghai MYT 

 

6

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation and principle of consolidation

 

The unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

The unaudited interim financial information as of December 31, 2020 and for the six months ended December 31, 2020 and 2019 have been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. As of December 31, 2019, the Company had two VIEs – Hunan MYT and 39Pu. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 20-F for the fiscal year ended June 30, 2020, which was filed with the SEC on October 30, 2020.

 

In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited financial position as of December 31, 2020, its unaudited results of operations for the six months ended December 31, 2020 and 2019, and its unaudited cash flows for the six months ended December 31, 2020 and 2019, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

(b) Consolidation of Variable Interest Entity

 

Material terms of the Hunan MYT VIE Agreements and 39Pu VIE Agreements are described below:

 

Exclusive Business Cooperation Agreement

 

Pursuant to the Exclusive Business Cooperation Agreements, Shanghai MYT and 39Pu each provides Hunan MYT with technical support, consulting services and management services on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Hunan MYT and 39Pu each granted an irrevocable and exclusive option to Shanghai MYT to purchase from each of Hunan MYT and 39Pu, any or all of Hunan MYT’s and 39Pu assets at the lowest purchase price permitted under the PRC laws. Should Shanghai MYT exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services rendered to Hunan MYT and 39Pu by Shanghai MYT under the agreement, Shanghai MYT is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, plus amount of the services fees or ratio decided by the board of directors of Shanghai MYT based on the value of services rendered by Shanghai MYT and the actual income of Hunan MYT and 39Pu from time to time, which is substantially equal to all of the net income of Hunan MYT and 51% of net income of 39Pu, respectively.

 

The Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by Shanghai MYT with 30-day prior written notice. Hunan MYT or 39Pu does not have the right to terminate the agreement unilaterally. Shanghai MYT may unilaterally extend the term of this agreement with prior written notice.

 

7

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b) Consolidation of Variable Interest Entity (continued)

 

Exclusive Option Agreement

 

Under the Exclusive Option Agreement between Peng Fang and Shanghai MYT, irrevocably granted Shanghai MYT (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Hunan MYT. The option price is equal to the capital paid in by Peng Fang subject to any appraisal or restrictions required by applicable PRC laws and regulations.

 

Under the Exclusive Option Agreement between three shareholders of 39Pu and Shanghai MYT, the three shareholders irrevocably granted Shanghai MYT (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in 39Pu. The option price is equal to the capital paid in by the three shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations.

 

The agreement remains effective for a term of ten years and may be renewed at Shanghai MYT’s election.

 

Share Pledge Agreement

 

Under the Share Pledge Agreement, Peng Fang and the three shareholders of 39Pu each pledged all of their equity interests in Hunan MYT and 39Pu to Shanghai MYT to guarantee the performance of Hunan MYT’s and 39Pu’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in any event of default, as set forth in the Share Pledge Agreement, including that Hunan MYT or Peng Fang, 39Pu or the three shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, Shanghai MYT, as pledgee, will be entitled to certain rights, including, but not limited to, the right to dispose of the pledged equity interest in accordance with applicable PRC laws. Shanghai MYT shall have the right to collect any and all dividends declared or generated in connection with the equity interest during the term of pledge.

 

The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Hunan MYT and 39Pu, respectively. Shanghai MYT shall cancel or terminate the Share Pledge Agreement upon Hunan MYT’s and 39Pu’s full payment of fees payable under the Exclusive Business Cooperation Agreement.

 

Timely Reporting Agreement

 

To ensure Hunan MYT and 39Pu promptly provide all of the information that Shanghai MYT and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Shanghai MYT, and Hunan MYT and 39Pu, respectively. Under the Timely Reporting Agreement, Hunan MYT and 39Pu each agreed that it is obligated to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.

 

Although it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation Agreement.

 

8

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b) Consolidation of Variable Interest Entity (continued)

 

Power of Attorney

 

Under the Power of Attorney, Peng Fang and the three shareholders of 39Pu each authorized Shanghai MYT to act on her behalf as her exclusive agent and attorney with respect to all rights as shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association of Hunan MYT and 39Pu, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Hunan MYT and 39Pu.

 

Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.

 

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution of this Power of Attorney, so long as Peng Fang is a shareholder of Company.

 

The VIE Agreements became effective immediately upon their execution.

 

VIE is an entity that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Shanghai MYT is deemed to have a controlling financial interest and be the primary beneficiary of Hunan MYT and 39Pu, because it has both of the following characteristics:

 

  1. power to direct activities of a VIE that most significantly impact the entity’s economic performance, and

 

  2. obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.

 

Pursuant to the VIE Agreements, Hunan MYT and 39Pu pay service fees equal to 100% and 51% of its net income to Shanghai MYT, respectively. At the same time, Shanghai MYT is entitled to receive 100% and 51% of expected residual returns from Hunan MYT and 39Pu, respectively. The VIE Agreements are designed so that Hunan MYT and 39Pu operate for the benefit of the Company. Accordingly, the accounts of Hunan MYT are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s consolidated financial statements.

 

In addition, as all of these VIE agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these VIE agreements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these VIE agreements, it may not be able to exert effective control over Hunan MYT or 39Pu and its ability to conduct its business may be materially and adversely affected.

 

9

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(b) Consolidation of Variable Interest Entity (continued)

 

All of the Company’s main current operations are conducted through Hunan MYT since November 2018, and through 39Pu since October 2019. Current regulations in China permit Hunan MYT and 39Pu to pay dividends to the Company only out of their accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of Hunan MYT and 39Pu to make dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and other laws and regulations.

   

The following financial statement balances and amounts only reflect the financial position and financial performances of Hunan MYT and 39Pu, which were included in the consolidated financial statements as of December 31 and June 30, 2020:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Cash  $1,142,514   $362,384 
Short-term investments   3,335,640    2,266,069 
Inventories   1,475,924    1,403,582 
Loans due from a third party   2,785,636    2,222,191 
Other current assets   607,423    292,917 
Investments in equity investees   1,096,370    - 
Property and equipment, net   1,327,658    1,315,326 
Deposits for plant, property and equipment   1,013,825    849,245 
Right of use assets   363,318    553,904 
Other noncurrent assets   133,611    159,434 
Total Assets  $13,281,919   $9,425,052 
         - 
Due to MYT*  $10,466,925   $7,270,932 
Other current liabilities   1,050,524    885,515 
Total Liabilities  $11,517,449   $8,156,447 

 

*Payable due to MYT is eliminated upon consolidation.

 

   For the Six Months Ended
December 31,
 
   2020   2019 
   (unaudited)   (unaudited) 
Revenue  $3,874,080   $418,219 
Net income (loss)  $377,453   $(847,182)

 

10

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c) Segment reporting

 

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operation results by the revenue of different services.

 

For the six months ended December 31, 2020 and 2019, the Company has two operating business lines, including retail business by provision of high-quality tea beverages in its tea shop chain business conducted by Hunan MYT and dark tea distribution business by 39Pu. Based on management’s assessment, the Company has determined that the two operating business lines are two operating segments as defined by ASC 280.

 

(d) Trade receivables

 

Trade receivables are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of potential losses based on the credit history and relationships with the customers. Management reviews its receivables on a regular basis to determine if bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

 

The Company considered the amounts of receivables in dispute and believes an allowance for these receivables were not necessary as at December 31, 2020 and June 30, 2020.

 

(e) Inventories

 

Inventories, consisting of products available for sale, are stated at the lower of cost and market. Cost of inventories is determined using the weighted average cost method. Adjustments are recorded to write down the cost of inventories to the estimated net realizable value due to slow-moving merchandise and damaged goods, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment. The Company takes ownership, risks and rewards of the products purchased. Write downs are recorded in cost of revenues in the consolidated statements of income and comprehensive income.

 

11

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(f) Revenue recognition

 

The Company adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) beginning on July 1, 2018 using the modified retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

In according with ASC 606, revenues are recognized when control of the promised services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

 

During the six months ended December 31, 2020 and 2019, the Company generated revenues primarily from sales of tea products, beverages and light meals in its tea shop chains by Hunan MYT, and from sales of dark team products by 39Pu.

 

Sales of tea products, beverages and light meals in retail shop chains by Hunan MYT

 

Customers place order and pay for tea products, beverage drinks and light meals in the Company’s tea shop chains. Revenues are recognized at the point of delivery to customers. Customers that purchase prepaid cards are issued additional points for free at the time of purchase. Cash received from the sales of prepaid vouchers are recognized as unearned income. Consideration collected for prepaid cards is equally allocated to each point as an element, including the points issued for free, to determine the transaction price for each point. The allocated transaction price are recognized as revenues upon the redemption of the points for purchases.

 

Sales of dark tea products by 39Pu - The Company identifies a single performance obligation from contracts. The Company recognizes revenues on a gross basis as the Company is acting as a principal in these transactions and is responsible for fulfilling the promise to provide the specified goods, subject to inventory risks and has the discretion in establishing prices. The transaction fees are fixed. Payments received in advance from customers are recorded as “advance from customers” in the consolidated balance sheets. Advance from customers is recognized as revenue when the Company delivers the courses to its customers. Such advance payment received are non-refundable. In cases where fees are collected after the sales, revenue and accounts receivable are recognized upon delivery of products to the Company.

 

12

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Disaggregation of revenue - The Company disaggregates its revenue from contracts by segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the six months ended December 31, 2020 and 2019 is as follows:

 

   For the Six Months Ended
December 31,
 
   2020   2019 
   (unaudited)    (unaudited) 
Sales by Hunan MYT  $169,656   $348,816 
Sales by 39Pu   3,704,424    69,403 
   $3,874,080   $418,219 

 

(g) Investment in equity investees

 

The investments for which the Company has the ability to exercise significant influence are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities, the amortization of intangible assets recognized upon purchase price allocation and dividend distributions or subsequent investments. All unrecognized inter-company profits and losses have been eliminated under the equity method. When the estimated amount to be realized from the investments falls below its carrying value, an impairment charge is recognized in the consolidated statements of operations when the decline in value is considered other than temporary.

 

(h) Leases

 

The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2019, using a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.

 

The Company leases its offices which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. No impairment for right-of-use lease assets as of December 31, 2020.

 

13

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(i) Recently announced accounting standards

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of the Company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Its mandatory effective dates are as follows: 1. Public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; 2. All other public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years; and 3. All other entities (private companies, not-for-profit organizations, and employee benefit plans) for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. On November 15, 2019, FASB issued ASU 2019-10 which provides a framework to stagger effective dates for future major accounting standards (including ASC 326 Financial instrument-credit losses) and amends the effective dates to give implementation relief to certain type of entities: 1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies, or SRC, as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; and 2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an “emerging growth company,” or EGC, the Company has elected to take advantage of the extended transition period provided in the Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards applicable to private companies. The Company will adopt ASU 2016-13 and its related amendments effective January 1, 2023, and the Company is in the process of evaluating the potential effect on its consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows. 

 

14

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. RISKS

 

(a) Credit risk

 

Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of December 31, 2020, approximately $12.2 million was deposited with a bank in the United States which was insured by the government up to $250,000. As of December 31, 2020, approximately $1.1 million was primarily deposited in financial institutions located in Mainland China, and each bank accounts is insured by the government authority with the maximum limit of RMB 500,000 (equivalent to approximately $70,770). To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.

 

The Company’s operations are carried out in Mainland China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.

 

(b) Liquidity risk

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

 

(c) Foreign currency risk

 

Substantially all of the Company’s operating activities and the Company’s major assets and liabilities are denominated in RMB, except for the cash deposit of approximately $12.2 million which was in U.S. dollars as of December 31, 2020, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Where there is a significant change in value of RMB, the gains and losses resulting from translation of financial statements of a foreign subsidiary will be significant affected.

 

(c) VIE risk

 

It is possible that the Hunan MYT VIE Agreements and 39Pu VIE Agreements would not be enforceable in China if PRC government authorities or courts were to find that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event that the Company were unable to enforce these contractual arrangements, the Company would not be able to exert effective control over the VIE. Consequently, the VIE’s results of operations, assets and liabilities would not be included in the Company’s consolidated financial statements. If such were the case, the Company’s cash flows, financial position, and operating performance would be materially adversely affected. The Company’s contractual arrangements among Shanghai MYT, Hunan MYT and the Hunan MYT Shareholders, and among Shanghai MYT, 39Pu and the three shareholders of 39Pu are approved and in place. Management believes that such contracts are enforceable, and considers the possibility remote that PRC regulatory authorities with jurisdiction over the Company’s operations and contractual relationships would find the contracts to be unenforceable.

 

The Company’s operations and businesses rely on the operations and businesses of Hunan MYT and 39Pu, the VIEs of the Company, each of which holds certain recognized revenue-producing assets including tea beverage related raw materials, lease arrangements, and dark tea products. The VIEs also have an assembled workforce, focused primarily on promotion and marketing, whose costs are expensed as incurred. The Company’s operations and businesses may be adversely impacted if the Company loses the ability to use and enjoy assets held by its VIEs.

 

  (e) Other risk

 

The Company’s business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, such as the COVID-19 outbreak and spread, which could significantly disrupt the Company’s operations.

 

15

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. ACQUISITION OF 39PU

 

On October 2, 2019, the Company completed the acquisition of 51% equity interest in 39Pu, which is engaged in the distribution of dark tea and based in Hunan Province, China. Under the terms of the purchase agreement, the consideration was comprised of cash consideration of $2.4 million and share consideration of 10,000,000 Ordinary Shares, at a per share price of $0.34. In addition, a contingent cash consideration of $0.6 million and a share consideration of $1.2 million will be delivered to the three shareholders according to the earn-out payment based on the financial performance of 39Pu in its next fiscal years. On October 17 and 28, 2019, the Company paid the share consideration of 10,000,000 Ordinary Shares and the cash consideration of $2.4 million, respectively. Upon the close of the acquisition and as of June 30, 2020, the Company did not pay the contingent consideration due to 39Pu’s financial performance for the three months ended December 31, 2019 not reaching the earn-out payment condition.   In addition, due to the effects of COVID-19, the financial performance of 39Pu for the year ended June 30, 2020 did not meet the earn-out payment condition.

 

The acquisition had been accounted for as a business combination and the results of operations of 39Pu have been included in the Company’s consolidated financial statements from the acquisition date. The Company made estimates and judgments in determining the fair value of acquired assets and liabilities, based on an independent preliminary valuation report and management’s experiences with similar assets and liabilities. The following table summarizes the estimated fair values for major classes of assets acquired and liabilities assumed at the date of acquisition, using the exchange rate of 7.1489 on that day.

 

   Fair value 
Net tangible assets  $3,509,468 
Goodwill   7,863,081 
Foreign exchange adjustments   102,867 
Less: Noncontrolling interests   (5,675,416)
Total purchase consideration  $5,800,000 

 

5. SHORT-TERM INVESTMENTS

 

As of December 31, 2020 and June 30, 2020, the balance of short-term investments was comprised of investments of various financial products from Chinese banks and financial institutions, with variable return rate and with maturities between three months and one year. The Company classified these financial assets as held-to-maturity financial assets and recorded the assets at amortized cost, which approximates fair value. As of December 31, 2020 and June 30, 2020, the Company did not provide OTTI on short-term investments.

 

16

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. INVENTORIES

 

Inventories consisted of the following:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Merchant products  $1,000,837   $968,642 
Raw materials   40,796    18,542 
Packaging and other supplies   391,000    376,394 
Other products   43,291    40,004 
    1,475,924    1,403,582 
Less: inventory write-down   -    - 
Total inventories  $1,475,924   $1,403,582 

 

7. LOANS DUE FROM THIRD PARTIES

 

Loans due from third parties consisted of the following:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Sichuan Senmiao Ronglian Technology Co, Ltd.
(“Senmiao Ronglian”) (a)
  $1,560,258   $2,222,191 
Shenzhen Qianhai Leshi Health Management Co., Ltd.
(“Shenzhen Qianhai) (b)
   1,225,378    - 
Total loans due from third parties  $2,785,636   $2,222,191 

 

(a)The Company purchased short-term investments of $1,148,930 in April 2019, and acquired short-term investments of $1,177,653 from the acquisition of 39Pu, both of which were investments in Senmiao Ronglian which was a variable interest entity of Senmiao Technology Ltd, a US listed company which used to operate a peer-to-peer marketplace before October 2019. In October 2019, Senmiao Ronglian disposed of the peer-to-peer marketplace, and the Company’s short-term investments became a loan due from Sichuan Ronglian as of December 31, 2019.

 

According to the loan agreement between the Company and Sichuan Ronglian, the loans will be paid in 12 months before December 9, 2020, with a per annum interest rate of 7%. During the six months ended December 31, 2020 and 2019, Senmiao Ronglian repaid an aggregation of $814,003 and $nil to the Company with remaining balance to be repaid before December 31, 2021.

 

The Company asssessed the payment ability of Senmiao Ronglian and did not provide allowance against the balance.

 

(b)In December 2020, the Company entered into a loan agreement with Shenzhen Qianhai to provide a loan of $1,225,378 to the third party. The loan matured in June 2021 with an interest rate of 1.495% per annum. The loan was made for the purpose of making use of idle cash.

 

17

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. INVESTMENT IN EQUITY INVESTEES

 

As of December 31, 2020 and June 30, 2020, the Company’s investment in equity investees were as following:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Urban Tea Management Inc. (“Meno”)  $310,000   $210,000 
Guokui Management Inc. (“Guokui”)   100,000    - 
Chuangyeying Brand Management Co., Ltd. (“CYY”)   390,589    - 
Store Master Food Trading Co., Ltd. (“Store Master”)   706,818    - 
Less: Share of results of equity investees   (218,330)   (22,245)
   $1,280,077   $187,755 

 

As of December 31, 2020, the Company made investments aggregating $310,000 in Meno, in which the Company and an unrelated third party invested capital of 70% and 30%, respectively, and was entitled to 51% and 49% profit earned from Meno, respectively. Meno did not commence operations until August 1, 2020. The investment was for the purpose of expansion its tea shop chain to overseas market.

 

On September 23, 2020, the Company entered into a share purchase agreement, pursuant to which the Company agreed to pay $400,000 in cash to acquire 80% of the equity interest in Guokui, in which the Company and other unrelated third party investor were entitled to 51% and 49% profit earned from Guokui, respectively. As of December 31, 2020, the Company made investments aggregating $100,000. The investment was for the purpose of expansion its tea shop chain to overseas market.

 

In October 2020, the Company, through its WFOE, acquired 51% equity interest in each of CYY and Store Master in cash consideration of $376,462 and $681,252, respectively. In addition, the existing shareholders of CYY and Store Master will be rewarded additional incentives if certain performance targets were met. The Company did not accrue contingent consideration for the acquisition as the Company did not expect such perform targets would be met.

 

Pursuant to the articles of association of these equity investees, the operating and financing activities shall be unanimously approved by the Company and other shareholders, thus the Company does not control the equity investee but exercised significant influence over the equity investee. In accordance with ASC 323 “Investments — Equity Method and Joint Ventures,”, the Company accounted for the investments using equity method.

 

For the six months ended December 31, 2020 and 2019, the equity investees incurred net loss aggregating $218,330 and $nil, respectively.

 

18

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. PROPERTY AND EQUIPMENT, NET

 

The property and equipment consisted of the following:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Building  $855,570   $790,605 
Office equipment   652,169    618,323 
Electronic equipment   55,760    51,526 
Vehicles   27,271    25,200 
Leasehold improvements   621,105    573,937 
Less: accumulated depreciation   (884,217)   (744,265)
   $1,327,658   $1,315,326 

 

For the six months ended December 31, 2020 ad 2019, the depreciation expenses were $78,671 and $68,941, respectively.

 

For the six months ended December 31, 2020, the Company disposed of office equipment with original cost of $18,644 and accumulated depreciation of $2,830. The Company incurred a net loss of $15,242 from the disposal of office equipment.

 

For the six months ended December 31, 2019, the Company disposed of office equipment with original cost of $3,047 and accumulated depreciation of $1,282. The Company incurred a net loss of $1,025 from the disposal of office equipment.

 

10. EQUITY

 

Ordinary Shares

 

The Company is authorized to issue up to 100,000,000 Ordinary Shares.

 

As of June 30, 2020, the Company had 45,188,648 shares issued and outstanding.

 

On June 5, 2020, the Company issued 8,834 ordinary shares to one independent director, at a per share price at the market price of the issuance date.

 

On July 30, 2020, the Company and certain institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors an aggregate of 18,750,000 ordinary shares, no par value, at a price of $0.32 per share, for gross proceeds of approximately $6.0 million and net proceeds of approximately $5.5 million. The offering closed on August 3, 2020.

 

On August 14, 2020, the Company and certain institutional investors entered into a securities purchase agreement, pursuant to which the Company agreed to sell to such investors an aggregate of 15,000,000 ordinary shares, no par value, at a price of $0.4 per share, for gross proceeds of approximately $6.0 million and net proceeds of approximately $5.5 million. The offering closed on August 18, 2020.

 

As of December 31, 2020, the Company had 79,491,998 shares issued and outstanding.

 

19

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. EQUITY (CONTINUED)

 

Warrants

 

A summary of warrants activity for the six months ended December 31, 2020 and 2019 was as follows:

 

   Number of
shares
  Weighted
average life
  Expiration
dates
          
Balance of warrants outstanding as of July 1, 2019   2,396,747  4.68 years  *
           
Balance of warrants outstanding as of December 31, 2019   2,396,747  4.18 years  *
           
Balance of warrants outstanding as of July 1, 2020   2,396,747  3.67 years  *
           
Balance of warrants outstanding as of December 31, 2020   2,396,747  3.17 years  *

 

* Among the 2,396,747 shares of warrants, 359,727 shares will expire on November 20, 2022, 2,037,020 shares will be expire on May 23, 2024.

 

Private placement warrants

 

On November 21, 2017, the company issued 359,727 warrants to the shareholder in connection with a private placement offering of 1,798,635 Ordinary Shares. The warrant has an exercise price of $1.31 per share and is exercisable for five years from the date of issuance.

 

As at December 31, 2020 and June 30, 2020, there were 359,727 warrants outstanding. The fair value of the warrants is $27,699 and $142,092, using the Black-Scholes valuation model, which took into consideration the underlying price of ordinary shares, a risk-free interest rate, expected term and expected volatility. As a result, the valuation of the warrant was categorized as Level 3 in accordance with ASC 820, “Fair Value Measurement”. 

 

Registered direct offering warrants and placement agent warrants

 

On May 24, 2019, the Company issued warrants to investors in connection with a registered direct offering to purchase a total of 1,809,420 Ordinary Shares with a warrant term of five (5) years. On the same date, the Company issued warrants to the Placement Agent in connection with a registered direct offering to purchase a total of 227,600 Ordinary Shares with a warrant term of five (5) years. Both warrants have an exercise price of $1.86 per share.

 

The warrants have customary anti-dilution protections including a “full ratchet” anti-dilution adjustment provision which are triggered in the event the Company sells or grants any additional ordinary shares, options, warrants or other securities that are convertible into ordinary shares at a price lower than $1.86 per share. As such, the warrants were classified as a liability, which requires the warrant to be re-measured to their fair value for each reporting period.

 

As of December 31, 2020 and June 30, 2020, the Company estimated fair value of the registered direct offering warrants at $246,081 and $895,663, respectively, using the Black-Scholes valuation model, which took into consideration the underlying price of ordinary shares, a risk-free interest rate, expected term and expected volatility. As a result, the valuation of the warrant was categorized as Level 3 in accordance with ASC 820, “Fair Value Measurement”. 

 

As of December 31, 2020 and June 30, 2020, the Company estimated fair value of the Placement Agent Warrants at $30,954 and $246,718, respectively, using the Black-Scholes valuation model. The assumptions used to estimate the fair value of the warrants were the same as those used for registered direct offering warrants.

 

20

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted loss per common share for the six months ended December 31, 2020 and 2019, respectively:

 

   For the Six Months Ended
December 31,
 
   2020   2019 
   (unaudited)   (unaudited) 
Net loss attributable to Urban Tea’s shareholders  $(681,041)  $(1,335,766)
           
Weighted Average Shares Outstanding-Basic and Diluted  $72,370,528   $31,289,010 
           
Loss per share- basic and diluted  $(0.09)  $(0.04)

 

Basic income per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted income per share is the same as basic loss per share due to the lack of dilutive items in the Company for the six months ended December 31, 2020 and 2019. The number of warrants is excluded from the computation as the anti-dilutive effect.

 

12. INCOME TAXES

 

British Virgin Islands

 

Under the current tax laws of BVI, the Company’s subsidiary incorporated in the BVI is not subject to tax on income or capital gains.

 

The United States of America

 

Delta Technology Holdings USA Inc is incorporated in the State of Delaware in the U.S., and is subject to U.S. federal corporate income taxes.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law, which has made significant changes to the Internal Revenue Code. Those changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017. Accordingly, the Company reevaluated its deferred tax assets on net operating loss carryforward in the U.S and concluded there was no effect on the Company’s income tax expenses as the Company has no deferred tax assets generated since inception. 

 

As of December 31, 2020 and June 30, 2020, the Company’s federal net operating loss carryforward for U.S. income taxes was $1,519,567 and $1,245,761, respectively. The federal net operating loss carryforward is available to reduce future years’ taxable income through year 2037 and net operating losses generated before 2018 will not expire. Management believes that the realization of the benefit from this loss appears uncertain due to the Company’s operating history.

 

Utilization of the Company’s U.S. net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.

  

21

 

 

URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. INCOME TAXES (CONTINUED)

 

Hong Kong

 

NTH HK is incorporated in Hong Kong and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate for the first HKD$2 million of assessable profits is 8.25% and assessable profits above HKD$2 million will continue to be subject to the rate of 16.5% for corporations in Hong Kong, effective from the year of assessment 2018/2019. Before that, the applicable tax rate was 16.5% for corporations in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax laws, NTH HK is exempted from income tax on its foreign-derived income and there are no withholding taxed in Hong Kong on remittance of dividends.

 

PRC

 

Effective January 1, 2008, the New Taxation Law of PRC stipulates that domestic enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform tax rate of 25%. Under the PRC tax law, companies are required to make quarterly estimate payments based on 25% tax rate; companies that received preferential tax rates are also required to use a 25% tax rate for their installment tax payments. The overpayment, however, will not be refunded and can only be used to offset future tax liabilities.

 

The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the six months ended December 31, 2020 and 2019, the Company had no unrecognized tax benefits. Due to uncertainties surrounding future utilization, the Company estimates there will not be sufficient future income to realize the deferred tax assets. As of December 31, 2020 and June 30, 2020, the Company had net operating loss carryforwards of $2,926,042 and $2,266,653, respectively, and maintains a full valuation allowance on its net deferred tax assets.

 

The Company incurred current income tax expenses of $259,031 arising from taxable profit generated by 39Pu. The Company did not have any current and deferred tax expenses for the six months ended December 31, 2019.

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. The Company is subject to income taxes in the PRC. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. There were no uncertain tax positions as of December 31, 2020 and June 30, 2020, and the Company does not believe that its unrecognized tax benefits will change over the next twelve months.

 

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URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. RELATED PARTY TRANSACTIONS AND BALANCES

 

As of December 31, 2020 and June 30, 2020, the Company had a balance of $3,411 and $1,127 due from a related party which was indirectly controlled Mr. Guo’an Hu, one of the shareholders of 39Pu, generated from sales of dark tea products prior to acquisition of 39Pu by the Company.

 

During the six months ended December 31, 2020, the Company sold dark tea products of $25,932 to one related party. During the six months ended December 31, 2019, the Company did not incur significant related party transactions.

  

14. COMMITMENTS AND CONTINGENCIES  

 

1) Lease Commitments

 

As of December 31, 2020, the Company leases offices space under certain non-cancelable operating leases, with terms ranging between one and ten years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for lease payment is recognized on a straight-line basis over the lease term.

 

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments based on an estimate of its incremental borrowing rate.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The table below presents the operating lease related assets and liabilities recorded on the balance sheets.

 

   December 31,
2020
   June 30,
2020
 
    (unaudited)     
Rights of use lease assets  $363,318   $553,904 
           
Operating lease liabilities, current   308,276    315,259 
Operating lease liabilities, noncurrent   124,673    310,098 
Total operating lease liabilities  $432,949   $625,357 

 

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2020 and June 30, 2020:

 

   December 31,
2020
   June 30,
2020
 
   (unaudited)     
Remaining lease term and discount rate        
Weighted average remaining lease term (years)   2.35    3.30 
Weighted average discount rate   4.75%   4.75%

 

During the six months ended December 31, 2020 and 2019, the Company incurred total operating lease expenses of $100,892 and $202,970, respectively. 

 

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URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

2) Lease Commitments (continued)

 

The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2020:

 

For the six months ended June 30, 2021  $214,272 
For the twelve months ended June 30, 2022   165,017 
For the twelve months ended June 30, 2023   38,840 
For the twelve months ended June 30, 2024 and thereafter   33,232 
Total lease payments   451,361 
Less: imputed interest   (18,412)
Present value of lease liabilities  $432,949 

 

15. SEGMENT REPORTING

 

The Company presents segment information after elimination of inter-company transactions. In general, revenue, cost of revenue and operating expenses are directly attributable, or are allocated, to each segment. The Company allocates costs and expenses that are not directly attributable to a specific segment, such as those that support infrastructure across different segments, to different segments mainly on the basis of usage, revenue or headcount, depending on the nature of the relevant costs and expenses. The Company does not allocate assets to its segments as the CODM does not evaluate the performance of segments using asset information. As of December 31, 2020 and June 30, 2020, the Company had two segments, which is retail business by provision of high-quality tea beverages in its tea shop chain (“tea shop chain”) conducted by Hunan MYT and distribution of dark tea products conducted by 39Pu.

 

The following tables present the summary of each segment’s revenue, loss from operations, loss before income taxes and net loss which is considered as a segment operating performance measure, for the six months ended December 31, 2020 and 2019:

 

   For the Six Months Ended December 31, 2020 
   Tea shop   Distribution of Dark tea         
   chains   products   Unallocated   Total 
                 
Revenues  $169,656   $3,704,424   $-   $51,189 
Income (Loss) from operations  $(460,535)  $910,067   $(1,108,830)  $(659,298)
Net income (loss)  $(393,649)  $771,102   $(680,654)  $(303,201)

 

 

   For the Six Months Ended December 31, 2019 
   Tea shop   Distribution of Dark tea         
   chains   products   Unallocated   Total 
                 
Revenues  $348,816   $69,403   $-   $418,219 
Loss from operations  $(884,478)  $(85,628)  $(508,911)  $(1,479,017)
Net loss  $(836,986)  $(10,194)  $(493,581)  $(1,340,761)
                     

 

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URBAN TEA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. SEGMENT REPORTING (CONTINUED)

 

Details of the Company’s revenue by segment are set out in Note 2(f).

 

As of December 31, 2020, the Company’s total assets were $7,306,504 for its tea shop chains, $5,975,415 for its distribution of dark tea business, and $20,993,400 unallocated.

 

As substantially all of the Company’s long-lived assets are located in the PRC and substantially all of the Company’s revenue is derived from within the PRC, no geographical information is presented.

 

16. SUBSEQUENT EVENT

 

On March 26, 2021, the Company entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell an aggregate of 3,797,488 units (the “Units”), each Unit consisting of one ordinary share of the Company, no par value (“Share”) and a warrant to purchase three Shares (“Warrant”) with an initial exercise price of $4.65 per Share, at a price of $3.72 per Unit, for an aggregate purchase price of approximately $14.1 million (the “Offering”). The net proceeds to the Company from such Offering will be approximately $14.1 million and shall be used by the Company for the planned blockchain and cryptocurrency mining operation and for working capital and general corporate purposes.

 

The Warrants are exercisable six (6) months from the date of issuance at an initial exercise price of $4.65 per Share, for cash (the “Warrant Shares”). The Warrants may also be exercised cashlessly if at any time after the six-month anniversary of the issuance date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares. The Warrants shall expire five and a half (5.5) years from its date of issuance. The Warrants are subject to customary anti-dilution provisions reflecting stock dividends and splits or other similar transactions. The Warrants contain a mandatory exercise right for the Company to force exercise of the Warrants if the Company’s Shares trades at or above $23.25 per Share, for 20 consecutive trading days, provided, among other things, that the shares issuable upon exercise of the Warrants are registered or may be sold pursuant to Rule 144 and the daily trading volume exceeds 300,000 Shares per trading day on each trading day in a period of 20 consecutive trading days prior to the applicable date.

 

On April 20, 2021, the transaction contemplated by the SPA consummated when all the closing conditions of the SPA have been satisfied and the Company issued 3,797,488 Units to the Purchasers pursuant to the SPA.

 

 

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