Note 3 – Variable interest entity (“VIE”)

A VIE is an entity that has 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. Xiangtai WFOE is deemed to have a controlling financial interest and be the primary beneficiary of CQ Penglin because it has both of the following characteristics:

(1)

The power to direct activities at CQ Penglin that most significantly impact such entity’s economic performance, and

(2)

The obligation to absorb losses of, and the right to receive benefits from CQ Penglin that could potentially be significant to such entity.

Pursuant to the Contractual Arrangements, CQ Penglin pays service fees equal to all of its net income to Xiangtai WFOE. At the same time, Xiangtai WFOE is obligated to absorb all of CQ Penglin’s losses. The Contractual Arrangements are designed so that CQ Penglin operates for the benefit of Xiangtai WFOE and ultimately, the Company. Accordingly, the accounts of CQ Penglin are consolidated in the accompanying financial statements. In addition, its financial positions and results of operations are included in the Company’s financial statements.

The carrying amount of VIE’s consolidated assets and liabilities are as follows:


	June 30, 2019		June 30, 2018

Current assets	$	39,258,826	$	27,501,962
Property and equipment, net		868,435		1,050,013
Other noncurrent assets		162,142		392,876
Total assets		40,289,403		28,944,851
Total liabilities		(30,645,069)		(18,922,393)
Net assets	$	9,644,334	$	10,022,458


	June 30, 2019		June 30, 2018

Current liabilities:
Short-term loans - banks	$	4,150,310	$	4,530,011
Loans from third parties		2,303,420		4,756,512
Short-term loans - related parties		329,120		—
Accounts payable		6,995,932		651,404
Other payables and accrued liabilities		238,882		206,850
Other payables – related parties		528,717		444,709
Intercompany payables		8,928,579		4,291,604
Customer deposits		367,149		150,578
Taxes payable		2,805,722		2,909,223
Total current liabilities		26,647,831		17,940,891

Other liabilities:
Long-term loan – bank		866,231		981,502
Loan from a third party		3,131,007		—
		3,997,238		981,502

Total liabilities	$	30,645,069	$	18,922,393

The summarized operating results of the VIE’s are as follows:


	For the year ended		For the year ended		For the year ended
	June 30, 2019		June 30, 2018		June 30, 2017

Operating revenues	$	89,959,760	$	94,596,470	$	60,944,017
Gross profit	$	7,809,539	$	9,011,763	$	5,146,692
Income from operations	$	6,556,351	$	9,454,230	$	3,694,021
Net income	$	5,533,912	$	3,786,061	$	2,627,212