Arem Pacific (ARPC) 10-Q2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to____________

Commission File No. 333-207099

Arem Pacific Corporation

(Exact name of the issuer as specified in its charter)

271 Blackburn Road

Mount Waverly

Victoria, Australia 3149

(Address of Principal Executive Offices)

+(61) 393955324

(Registrant Telephone Number)

The Registrant does not have any securities registered pursuant to Section 12(b) of the Exchange Act.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes x No o

Indicate by check mark whether the Registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:

REFERENCES

In this Quarterly Report for the quarter ended December 31, 2022 (the “Quarterly Report”), references to the “Registrant,” “Arem Pacific Corporation,” “Arem,” the “Company,” “we,” “our,” “us” and words of similar import, refer to Arem Pacific Corporation, a Delaware corporation, which is the Registrant, and our wholly-owned subsidiaries, Arem Pacific Corporation, an Arizona corporation (“Arem Pacific Arizona”), formed on July 11, 2007; and Sanyi Group Pty. Ltd., an entity organized on September 28, 2005, under the Corporations Act of 2001 of Australia (“Sanyi Group”).

FORWARD LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should carefully read this Quarterly Report completely, and it should be read and considered with all other historical reports and registration statements filed by us with the United States Securities and Exchange Commission (the “SEC”), including, but not limited to the risk factors outlined in our comprehensive 10-K Annual Report referenced below in the “Explanatory Note,” which are contained in Part I, Item 1A. Risk Factors, thereof. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

EXPLANATORY NOTE

On or about November 21, 2022, we filed our comprehensive Annual Report on Form 10-K in reliance on Section 1320.4 of the SEC Financial Reporting Manual, for the fiscal years ended June 30, 2022, 2021, 2020, and 2019, and the comparative quarterly periods ended September 30 and December 31, 2021, and 2020, and March 31, 2022, and 2021, as part of our effort to become current in our reporting obligations under Section 15(d) of the Exchange Act (the “Annual Report”). That Annual Report was our first periodic report filing with the SEC since the filing of our amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2016, and can be accessed by Hyperlink in Part II, Item 6, of this Quarterly Report. Included in our comprehensive Annual Report were our audited consolidated financial statements for the fiscal years ended June 30, 2022, 2021, 2020, and 2019, which had not been previously filed with the SEC; and our unaudited quarterly consolidated financial statements for the above referenced comparative quarterly periods.

Any decision by the SEC not to seek the filing of additional reports due for prior annual or quarterly periods does not absolve us from any liability under the Exchange Act for our failure to file all required reports and would not foreclose enforcement action for our filing delinquencies.

Arem Pacific Corporation

FORM 10-Q

December 31, 2022

INDEX

PART I - FINANCIAL STATEMENTS

December 31, 2022

Table of Contents

Arem Pacific Corporation

Condensed Consolidated Balance Sheets

See accompanying notes to unaudited condensed consolidated financial statements.

Arem Pacific Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

Arem Pacific Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Common Stock

Additional Paid-in Capital

Other Comprehensive Earnings

Accumulated Losses

See accompanying notes to unaudited condensed consolidated financial statements.

Arem Pacific Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.1         Nature of Operations

Arem Pacific Corporation (Delaware), sometimes referred to as the “Company” below, has been focusing of its business to the operation of an Oriental holistic health wellness centre located in Australia (Victoria) through its wholly-owned subsidiary Sanyi Group Pty. Ltd. (“Sanyi Group”). Sanyi Group operates one wellness centre in Victoria, Australia.

Unless the context indicates otherwise, the term “Group” as used herein includes the Company and Sanyi Group.

1.2         Basis of Accounting

The accompanying financial statements include the accounts its wholly-owned subsidiary, Sanyi Group, which is a company domiciled in Australia. These financial statements have been prepared in accordance with the accounting principles generally accepted in the United States (“GAAP”) and Regulation S-X published by the U.S. Securities and Exchange Commission (the “SEC”). All intercompany accounts and transactions have been eliminated. The Group has evaluated events or transactions through the date of issuance of this report in conjunction with the preparation of these consolidated financial statements. All amounts presented are in U.S. dollars, unless otherwise noted.

The financial statements, except for cash flow information, have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The amounts presented in the financial statements have been rounded to the nearest dollar.

1.3         Going Concern Basis

The financial statements have been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

1.4         Use of Estimates

The preparation of 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

1.5         Foreign Currency Translation

The functional currency of our foreign subsidiary is its local currency. Assets and liabilities of the foreign subsidiary are translated into U.S. dollars at period-end exchange rates; stockholders’ equity is translated at the historical rates; and the consolidated statement of operations and cash flows are translated at average exchange rates during the reporting periods. Resulting translation adjustments are recorded in accumulated other comprehensive income, a separate component of stockholders’ equity. A component of accumulated other comprehensive income will be released into income when the Group executes a partial or complete sale of an investment in a foreign subsidiary or a group of assets of a foreign subsidiary considered a business and/or when the Group no longer holds a controlling financial interest in a foreign subsidiary or group of assets of a foreign subsidiary considered a business.

Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses that are reflected in results of operations as unrealized (based on period end translation) and realized (upon settlement of the transactions) and reported under other general expenses in the consolidated statement of operations.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

1.6         Cash and Cash Equivalents and Concentration of Credit Risk

The Group considers all highly liquid short term investments with original maturities of three (3) months or less at the date of acquisition to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short term nature of these instruments.

The Group’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held in several Australian bank accounts and time deposit accounts. The Group regularly assesses the level of credit risk we are exposed to and whether there are better ways of managing credit risk. The Group invests its cash and cash equivalents with reputable financial institutions. The Group has not incurred any losses related to these deposits.

1.7         Accounts Receivable

The collectability of accounts receivable is continuously monitored and analised based upon historical experience. The use of judgement is required to establish a provision for allowance for doubtful accounts for specific customer collection issues identified. The allowance for doubtful accounts was Nil as of December 31 and June 30, 2022, respectively.

1.8         Property, plant and Equipment

Property, plant and equipment are recorded at cost. Costs of renewal and improvements that substantially extend the useful lives of assets are capitalised. Maintenance and repair costs are expensed when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from two (2) to ten (10) years.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further economic benefits are expected from its use or disposal.

1.9         Leases

The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

As lessee

The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognises lease liabilities representing the obligations to make lease payments and right-of-use assets representing the right to use the underlying leased assets.

Right-of-use assets

The Company recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.

If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment. The accounting policy for impairment is disclosed in key judgement.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

1.9        Leases (Continued)

Lease liabilities

At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects the Company exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g. changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.

These accounting policies are applied before the initial application date of ASC842, July 1, 2019:

Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset – but not the legal ownership – are transferred to entities in the consolidated Group, are classified as finance leases.

Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as expenses on a straight-line basis over the lease term.

1.10     Accrued and other liabilities

Accrued and other liabilities are carried at amortised cost and, due to their short-term nature; they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial period that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within thirty (30) days of recognition.

1.11     Provisions

Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period.

1.12     Loans and Borrowings

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

1.12   Loans and Borrowings (Continued)

The Group’s current liabilities include a loan from a significant shareholder, which is not interest bearing. The shareholder has provided a letter of support to Sanyi Group which states that the loan to the Group will not be recalled without giving at least thirteen (13) months’ notice. This loan is not evidenced by a promissory note.

Loans are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve (12) months after the reporting date.

1.13     Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable after taking into account any discounts.

The Group derives revenue primarily through the provision of therapeutic health services from its Oriental holistic health centre. Revenue is recognized when persuasive evidence of an arrangement exists, the services have been rendered to customers, the pricing is fixed or determinable and collection is reasonably assured. This is generally based on the completion of services provided to the customers at the Oriental holistic health centre and settlement of the transactions either by cash or credit card payments.

Interest revenue is recognised using the effective interest method, which for floating rate financial assets is the rate inherent in the instrument. Dividend revenue is recognised when the right to receive a dividend has been established.

All revenue is stated net of the amount of goods and services tax.

1.14     Income Tax

Taxes payable are based on taxable profit for the period, which excludes items of income or expense that are taxable or deductible in other periods. Taxable profit also excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted as of the balance sheet date.

Deferred income tax expense is calculated using the liability method in accordance with ASC 740 Income Taxes. Deferred tax assets and liabilities are classified as non-current in the balance sheet and are measured based on the difference between the carrying value of assets and liabilities for financial reporting and their tax basis when such differences are considered temporary in nature. Temporary differences related to intercompany profits are deferred using the buyer’s tax rate. Deferred tax assets are reviewed for recoverability every balance sheet date, and the amount probable of recovery is recognised.

Deferred income tax expense represents the change in deferred tax asset and liability balances during the periods discussed, except for the deferred tax related to items recognised in other comprehensive income or resulting from a business combination or disposal. Changes resulting from amendments and revisions in tax laws and tax rates are recognised when the new tax laws or rates become effective or are substantively enacted. Uncertain tax positions are recognised in the financial statements based on management’s expectations.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they are related to income taxes levied by the same taxation authority, and when the Group intends to settle its current tax assets and liabilities on a net basis.

Deferred taxes are not provided on undistributed earnings of subsidiaries when the timing of the reversal of this temporary difference is controlled by Group and is not expected to happen in the foreseeable future. This is applicable for the majority of Group’s subsidiaries.

1.15     Goods and Services Tax (“GST”)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (“ATO”).

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

1.15 Goods and Services Tax (“GST”) (Continued)

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the ATO, is included with other receivables or payables in the statement of financial position.

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities, which are recoverable from or payable to the ATO, are presented as operating cash flows included in receipts from customers or payments to suppliers.

1.16     Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed by dividing income or losses available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is computed similar to basic net income or losses per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per common share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and the if-converted method for any outstanding convertible preferred shares. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the periods discussed. Under if–converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).

1.17     Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) is presented net of applicable income taxes in the accompanying consolidated statements of stockholders’ equity and comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders’ equity instead of net income (loss).

2.      Critical Accounting Estimates and Judgements

The sole Director evaluates estimates and judgements incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Group.

Key Estimates

The Group determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down.

The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

Key Estimates (Continued)

The calculation of the fair value of shares issued requires significant estimate to be made in regards to several variables. The estimations made are subject to variability that may alter the overall fair value determined.

Key Judgements

The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtors’ financial position.

The Group assessed that no indicators of impairment existed at the reporting date and as such no impairment testing was performed.

3.      Segment Information

The consolidated entity operates predominantly in one (1) industry and one (1) geographical segment, those being Oriental holistic health services and Australia, respectively.

4.      Cash and Cash Equivalents

Cash at the end of the financial periods as shown in the statement of cash flows is reconciled to items in the balance sheets as follows:

Cash and Cash Equivalents - Schedule of Cash and Cash Equivalents

5.      Other Assets

6.      Other Receivables

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

7.      Plant and Equipment

Furniture and Fittings

Office Equipment

Computers

Motor Vehicles

Plant and Equipment

Lease Improvements

8.      LEASES

Company as a lessee

The Company has lease contract for land and building. The Company’s obligations under these leases are secured by the lessor’s title to the leased assets. The Company is restricted from assigning and subleasing the leased assets.

Shop Lot 

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

8.      LEASES (Continued)

The carrying amounts of lease liabilities is as follows:

Leases - Schedule of Lease Liabilities

9.      Accrued and Other Liabilities

10.      Borrowings

The loan balance above is an unsecured loan from Xin Jin, a significant shareholder, who is the CEO, CFO and the sole director of the Company. The loan is non-trade, non-interest bearing and repayable on demand.

11.      Other Comprehensive Loss

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

12.      Income Tax Expense

Australia

US

13.      Capital Commitments

There was no capital expenditure as of December 31, 2022.

14.      Contingencies

From time to time, the Group is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Group is a party for which management believes the ultimate outcome would have a material adverse effect on the Group’s financial position.

Arem Pacific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For The Period Ended From June 30, 2022, to December 31, 2022

15.      Related Party Transactions

The ultimate parent entity which exercises control over the Group is Arem Pacific Corporation.

Sanyi Group is a wholly-owned subsidiary of the Company and is incorporated in Australia.

The following balances are outstanding at reporting date in relation to transactions with related parties:

Related Party Transactions - Schedule of Related Party Transactions

The loan balance above is an unsecured loan from Xin Jin, a significant shareholder and the CEO, CFO and the sole director of the Company. The loan is non-trade, non-interest bearing and repayable on demand.

16.      Events After the Reporting Period

There has not arisen in the interval between the end of the financial period and the date of these financial statements any other item, transaction or event of a material and unusual nature likely, in the opinion of the management of the Company, to affect significantly the operation of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

When used in this Quarterly Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act and Section 21e of the Exchange Act regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position.  Persons reviewing this Quarterly Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors.  Such factors are discussed further below under “Trends and Uncertainties,” and include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.

Overview of Current and Planned Business Operations

Through Sanyi Group, we are engaged in providing wellness services that include acupressure/reflexology, massage therapy and cupping. We offer various types of massage therapy, such as Swedish, deep tissue and hot stone oil, among others, all as discussed in Item 1. Business, of our Annual Report that is available by Hyperlink in Part II, Item 6 hereof. We primarily rely on our promotional activities and our shopping centre location in attracting new customers and maintaining our current customers.

We have identified future partners from strategic cities in China to help us exploit and expand to the China market for our wellness services in certain major cities of China, including Guangzhou, Shenzhen, Fujian, Sichuan, Beijing, Shanghai for fiscal 2023, though these plans are subject to the uncertainties related to the coronavirus pandemic and are currently on hold.

On March 11, 2020, the World Health Organisation declared the coronavirus outbreak as a pandemic owing to its rapid spread across the globe. A series of precautionary and control measures have been and continue to be implemented across the world by reason of this declaration and the recent furtherance of the pandemic attributable to variants of the coronavirus outbreak (“Covid-19).

The Australian Government imposed a Movement Control Order (“MCO”) through its Australian Health Protection Principal Committee (“AHPPC”) on February 27, 2020. Following that MCO, it implemented various MCO’s to include travel restrictions and lockdowns to curb the spread of the Covid-19 outbreak in Australia. Consequently, the MCO’s have resulted material adverse effects on Australia’s economy for 2020 and beyond, with variants that continue to pose increased public exposure around the world. On July 6, 2022, border restrictions for people travelling to and from Australia were lifted.

We have accounted for the impact of the pandemic and its consequential effects on our results of operations in our financial statements for the financial fiscal years ended December 31, 2022, and 2021. The Company has slowly recovered from the Covid-19 pandemic, and that has resulted in a positive impact on our performance for the quarter ended December 31, 2022. Our revenue and the profit for the quarter ended December 31, 2022, has increased significantly as compared to the quarter ended December 31, 2021.

Results of Operations

Comparison of the quarter ended December 31, 2022, to the quarter ended December 31, 2021

Revenue

For the three months ended December 31, 2022, we had revenue of US$167,657, compared to the six months ended December 31, 2021, of US$100,840, or an increase of US$66,817. The increased revenue resulted from the Australian Government Authority starting to allow occasional people movement and the removal of Covid-19 lockdowns, allowing our wellness centre to be open for business. The opening of our centre and the cessation of the lockdown supported a higher revenue.

Payroll and employee related expense

For the three months ended December 31, 2022, our payroll and employee related expense was US$45,934, compared to the six months ended December 31, 2021, of US$36,157, or an increase of US$9,777. The payroll and employee related expense including superannuation contribution, employee membership fees, labour hiring costs and staff amenities, which were also greater.

Amortization Right-of-Use Assets

For the three months ended December 31, 2022, the amortization right-of-use assets decreased by US$2,752 to US$29,958, compared to the six months ended September 31, 2021, of US$32,710. This decrease was due to foreign exchange translation.

General and Administrative Expenses

For the six months ended December 31, 2022, general and administrative expense increased by US$20,413 to US$30,438, compared to the six months ended December 31, 2021, of US$10,025. The lower expense for December 31, 2021, resulted from the wellness centre being closed for a much longer period during the Covid-19 pandemic as Australian Government Authority imposed longer and frequent shutdown periods and restricted people movement. However, the of business activity in the latter part of fiscal year 2022 had incurred cost associated with its usual operations, based upon being open for customary hours and periods.

Operating Expenses

For the six months ended December 31, 2022, our operating expenses were US$106,330, compared to the three months ended December 31, 2021, of US$78,892. Operating expenses consisted of payroll and employee related expenses, depreciation on right-of-use assets, and general and administrative expenses. The increase was primarily a result of the relaxation of the lockdown and other restrictions of the MCO, which allowed our wellness centre operations to be fully operational during the three months ended December 31, 2022.

Net Income

For the three months ended December 31, 2022, we had a net income after income tax of US$64,589, compared to the six months ended December 31, 2021, of US$44,150. The increase in revenue was directly related to our additional operating hours during the six months ended December 31, 2022.

Liquidity and Capital Resources

As of December 31, 2022, we had US$146,363 in cash and cash equivalents on hand.

Summary of Significant Accounting Policies

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in U.S. dollars. The Company’s fiscal year end is June 30.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Foreign Currency Translation

The functional currency of our foreign subsidiary is its local currency. Assets and liabilities of the foreign subsidiary are translated into U.S. dollars at period-end exchange rates, stockholders’ equity is translated at the historical rates and the consolidated statement of operations and cash flows are translated at average exchange rates during the reporting periods. Resulting translation adjustments are recorded in accumulated other comprehensive income, a separate component of stockholders’ equity. A component of accumulated other comprehensive income will be released into income when the Company executes a partial or complete sale of an investment in a foreign subsidiary or a group of assets of a foreign subsidiary considered a business and/or when the Company no longer holds a controlling financial interest in a foreign subsidiary or group of assets of a foreign subsidiary considered a business.

Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses that are reflected in results of operations as unrealized (based on period end translation) and realized (upon settlement of the transactions) and reported under other general expenses in the consolidated statement of operations.

Fair Value of Financial Instrument

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held in several Australian bank accounts and time deposit accounts. We regularly assesses the level of credit risk we are exposed to and whether there are better ways of managing credit risk. We invests our cash and cash equivalents with reputable financial institutions. The Company has not incurred any losses related to these deposits.

Income Taxes  

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740-10-50 “Accounting for Income Taxes” as of its inception. Pursuant to the standard, the Company is required to compute tax asset benefits for initial years of operating losses carried forward.

Recent accounting Pronouncements

ASU 2016-02, Leases (Topic 842). ASC 842 requires companies to generally recognize operating and financing lease liabilities and corresponding ROU assets on their balance sheet. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the consolidated statements of operation. Effective in year 2020, the Company adopted this new standard prospectively using a modified retrospective transition approach. The Company elected the package of practical expedients permitted under the transition guidance of the new standard, which allowed the Company to carry forward its historical assessment on whether a contract is or contains a lease, lease classification, and initial direct costs. Upon adoption in year 2020, the Company recognized ROU assets and lease liability of $437.2 thousand. The adoption of ASC 842 did not have a material impact to Company’s consolidated statements of operations and cash flows from operations.

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard update, along with subsequent ASUs, replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. The Company adopted the standard in year 2020 on a modified retrospective basis. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) or (“ASC Topic 606”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The new guidance provides a five-step process for recognizing revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also requires expanded qualitative and quantitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for public companies with annual reporting periods beginning after December 31, 2017, and is to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial adoption. Early adoption is permitted for all entities but not before the original effective date for public entities. The Company adopted ASC Topic 606 in year 2019.

The FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. The new standard is effective for the Company in year 2021. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures but does not expect it to have a material impact.

Off-Balance Sheet Arrangements

We had no Off-Balance Sheet arrangements during the six-month period ended December 31, 2022.

Critical Accounting Policies

Concentrations of Credit Risk

The Group’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held in several Australian bank accounts and time deposit accounts. The Group regularly assesses the level of credit risk we are exposed to and whether there are better ways of managing credit risk. The Group invests its cash and cash equivalents with reputable financial institutions. The Group has not incurred any losses related to these deposits.

Concentration of Major Customer

Our concentration of revenue from customers in our facility that is located in a shopping centre in Victoria, Australia, makes it reasonably possible that we are vulnerable to the risk of a long-term adverse impact, especially with the current rise in variants of this coronavirus that have recently increased public exposure and the number of reported cases of this virus. As a result, governments and other authorities around the world continue to implement significant measures as deemed necessary to control the spread of the virus. While many of these restrictions have been lifted as the rates of Covid-19 infections have decreased or stabilized and as various vaccines have become more widely available, a resurgence of Covid-19 and the impact of variants of the virus that causes Covid-19 may result in the reinstatement of social distancing measures; business closures; lockdowns; restrictions on operations; quarantines and travel bans, among other restrictive measures. In addition, any government mandates that require Covid-19 vaccination or other employee behaviors may result in employee attrition at the Company or its suppliers or customers and may create difficulties in satisfying future employment and supply requirements.

Effect of Recent Accounting Pronouncements

The Company has evaluated all recent accounting pronouncements and believes that none will have a significant effect on the Company’s financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that material information relating to us is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness, as of December 31, 2022, of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2022.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of our Chief Executive Officer and our Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal controls over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records, which in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the SEC, our management assessed the effectiveness of our internal control over the financial reporting as of December 31, 2022, using criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management concluded that our internal control over financial reporting was not effective as of December 31, 2022, and continue to be ineffective, due to the following material weaknesses: 

We have taken steps to remediate the material weaknesses in our internal control over financial reporting practicable by:

Although we increased the training provided to accounting personnel relating to US GAAP and SEC reporting to partially address the foregoing material weaknesses, we do not believe such weaknesses have been remediated, and we can provide no assurance that they will be remediated in a timely manner.

We believe that we are taking the steps necessary for remediation of the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and to make any changes that our management deems appropriate.

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report is not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to satisfy these requirements by providing the management’s report only.

Changes in Internal Control Over Financial Reporting

With the exception of commencing the process of implementing the foregoing steps to resolve the weaknesses in our internal controls, there have been no changes in internal control over financial reporting during the fiscal quarter ended December 31, 2022.

Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgements in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required of smaller reporting companies like us; however, see Part I, Item 1A. Risk Factors, of our 10-K Annual Report for the fiscal year ended June 30, 2022 (see the caption “Explanatory Note” at the forepart of this Quarterly Report), which Annual Report can be accessed by Hyperlink in Part II, Item 6 hereof, for a list of “Risk Factors.”

Further, our business operations could be further impacted by the current world health crisis related to the Covid-19 pandemic. See the caption “COVID-19 PANDEMIC” at the forepart of our referenced and Hyperlinked Annual Report for the fiscal year ended June 30, 2022, for additional information about the Covid-19 pandemic, including the world-wide declaration of the Covid-19 pandemic by the World Health Organisation (“WHO”), and current information about the pandemic restrictions in Australia and China.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None; not applicable.

Item 3. Defaults upon Senior Securities

None; not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information 

None; not applicable.

(This space intentionally left blank) 

Item 6. Exhibits

Exhibits incorporated by reference:

Annual Report on Form 10-K for the year ended June 30, 2022, and filed with the SEC on November 21, 2022.

(Signature Page Follows)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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