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 and JMC because it has both of the following characteristics:

(1)

The power to direct activities at CQ Penglin and JMC 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 and JMC 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 and JMC pays service fees equal to 51% of its net income to Xiangtai WFOE. At the same time, Xiangtai WFOE is obligated to absorb all of CQ Penglin’s losses and to absorb 51% of JMC's losses. The Contractual Arrangements are designed so that CQ Penglin and JMC operate for the benefit of Xiangtai WFOE and ultimately, the Company. Accordingly, the accounts of CQ Penglin and JMC are consolidated in the accompanying consolidated financial statements. In addition, its financial positions and results of operations are included in the Company’s consolidated financial statements.

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


	June 30, 2020		June 30, 2019

Current assets	$	48,347,542	$	39,258,826
Property and equipment, net		1,403,707		868,435
Other noncurrent assets		3,558,210		162,142
Total assets		53,309,459		40,289,403
Total liabilities		(42,919,217)		(30,645,069)
Net assets	$	10,390,242	$	9,644,334


	June 30, 2020		June 30, 2019

Current liabilities:
Short-term loans - banks	$	4,359,210	$	4,150,310
Loans from third parties		4,449,563		2,303,420
Short-term loans - related parties		—		329,120
Current maturities of long-term loan - bank		777,558		—
Accounts payable		6,606,723		6,995,932
Other payables and accrued liabilities		1,526,051		238,882
Other payables - related parties		7,161,232		528,717
Intercompany payables		10,334,680		8,928,579
Customer deposits		1,159,902		367,149
Operating lease liabilities		49,171		—
Taxes payable		3,125,847		2,805,722
Total current liabilities		39,549,937		26,647,831

Other liabilities:
Long-term loan - bank		—		866,231
Loan from a third party		2,074,871		3,131,007
Long-term loans - related parties		713,325		—
Operating lease liabilities - noncurrent		581,084		—
		3,369,280		3,997,238

Total liabilities	$	42,919,217	$	30,645,069

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, 2020		June 30, 2019		June 30, 2018

Operating revenues	$	105,100,563	$	89,959,760	$	94,596,470
Gross profit	$	6,218,590	$	7,809,539	$	9,011,763
Income from operations	$	2,867,697	$	6,556,351	$	9,454,230
Net income	$	974,302	$	5,533,912	$	3,786,061