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333-198940 and 333-178771) and on Form F-3 (Registration Numbers 333-220758 and 333-227817) to the extent not superseded by documents or reports subsequently filed or furnished by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as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
value (1)

 
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