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Acquisition of Anivia Limited and Subsidiaries and Variable Interest Entity | 9 Months Ended
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Mar. 31, 2022
Acquisition Of Anivia Limited And Subsidiaries And Variable Interest Entity |
Acquisition of Anivia Limited and Subsidiaries and Variable Interest Entity | Note 4 - Acquisition of Anivia Limited and Subsidiaries and Variable Interest Entity On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia Limited (“Anivia”), a corporation organized under the laws of the British Virgin Islands (“BVI”), in accordance with the terms of a share transfer framework agreement (the “Transfer Agreement”), dated February 15, 2022, by and between the Company, White Cherry Limited, a BVI company (“White Cherry”), White Cherry’s equity holders, Li Zanyu and Xie Jing (together with White Cherry, the “Sellers”), Anivia, Fly Elephant Limited, a Hong Kong company, Dayou Renzai (Shenzhen) Technology Company Limited and Daheshou (Shenzhen) Information Technology Limited. Anivia owns 100% of the equity of Fly Elephant Limited, which in turn owns 100% of the equity of Dayou Renzai (Shenzhen) Technology Co., Ltd., a corporation located in the People’s Republic of China (“PRC”) and which is a wholly foreign-owned enterprise (“WFOE”) of Fly Elephant Limited. The WFOE controls, through contractual arrangements summarized below, the business, revenues and profits of Daheshou (Shenzhen) Information Technology Co., Ltd., a company organized under the Laws of the PRC (“DHS”) and located in Shenzhen, China. The contractual arrangements between the WFOE and DHS are established through a variable interest operating entity structure, which is reflected in (i) an exclusive business cooperation agreement, dated December 15, 2021, between the WFOE and DHS, (ii) an exclusive equity interest pledge agreement, dated December 15, 2021, between the WFOE and DHS in which the equity of DHS was pledged to the WFOE, (iii) an exclusive option agreement, dated December 15, 2021, between the WFOE, DHS and its equity holders, Li Zanyu and Xie Jing (the “Equity Holders), pursuant to which the Equity Holders give the WFOE the irrevocable and exclusive right to purchase the equity interests in DHS, and (iii) a power of attorney, dated December 15, 2021, pursuant to which Li Zanyu and Xie Jing, the holders of 100% of the equity interest of DHS, granted the WFOE all voting and other rights to their equity interest in DHS. According to the exclusive business cooperation agreement, in consideration for the services provided by the WFOE, DHS shall pay a service fee to the WFOE on annual basis (or at any time agreed by the Parties). The service fees for each year (or for any other period agreed to by the Parties) shall consist of a management fee and a fee for services provided, which shall be reasonably determined by the WFOE based on the nature, complexity, time, and other market and operation factors. The WFOE may provide a separate confirmation letter and/or invoice to DHS to indicate the amount of service fees due for each service period; or the amount of services fees may be as set forth in the relevant contracts separately executed by the Parties. DHS is principally engaged in selling a wide range of products and providing logistic services in the PRC. Pursuant to the terms of the Agreements, the Company does not have direct ownership in DHS but is actively involved in DHS’s operations as the sole manager to direct the activities and significantly impact DHS’s economic performance. As such, based on the determination that the Company is the primary beneficiary of DHS, in accordance with ASC 810-10-25-38A through 25-38J, DHS is considered a variable interest entity (“VIE”) of the Company and the financial statements of DHS have been consolidated from the date such control existed, February 15, 2022. Total fair value of the consideration for the transaction was $10,629,000, which was paid to White Cherry as follows: at closing, the Company (i) paid $3,500,000 in the form of a two-year unsecured 6% subordinated promissory note, payable in equal semi-annual installments commencing August 15, 2022 (the “Purchase Note”), (ii) issued 3,083,700 restricted shares (subject to a lock-up period of 180 days and insider trading rules) of the Company’s Class A common stock, and (iii) an additional $1,500,000 in cash was to be paid after closing. JP Morgan Chase Bank, the Company’s senior secured lender (“JPM”), consented to the transaction. In conjunction with obtaining JPM’s consent, the Company delivered an amendment to the pledge and security agreement with JPM, pursuant to which the Company pledged to JPM 65% of the equity interest of Anivia Limited, Fly Elephant Limited and the WFOE. In addition, in conjunction with the closing of the transaction, the WFOE entered into an employment agreement with Li Zanyu, dated February 15, 2022 (the “Employment Agreement”), pursuant to which Mr. Li has been appointed to serve as general manager of the WFOE for a term of 10 years (through February 14, 2032), with annual base compensation of up to 500,000 RMB plus bonus as may be determined by the WFOE from time to time, in its sole discretion, based on Mr. Li’s performance. During such employment, Mr. Li may not engage in other employment without the consent of the WFOE. The acquisition of Anivia was accounted for as a business combination under ASC 805. As the acquirer for accounting purposes, the Company has estimated the fair value of Anivia and its subsidiaries’ assets acquired and conformed the accounting policies of Anivia to its own accounting policies. The Company applied the income approach and cost approach in determining the fair value of the intangible assets, which intangible assets consisted of a covenant not to compete, supplier relationship and software. The fair value of the remaining assets acquired and liabilities assumed were not significantly different from their carrying values at the acquisition date. The Company recognized an approximately $6.1 million of goodwill in the transaction, which is primarily due to the subsumed assembled workforce intangible assets. Goodwill is not deductible for income tax purposes. The Company expensed with the acquisition, certain legal and accounting costs of $54,702, as general and administration expenses and $50,000 paid to JPM as financing fees. The following information summarizes the purchase consideration and allocation of the fair values assigned to the assets at the purchase date, February 15, 2022:
Schedule of allocation of acquisition price |  |  |  |
Fair Value of Purchase Price: |  |  |  |
Cash |  | $ | 1,500,000 |
Promissory note issued |  |  | 3,600,627 |
Common stock issued |  |  | 5,528,373 |
Total purchase consideration |  | $ | 10,629,000 |
Purchase Price Allocation: |  |  |  |
Covenant not to compete |  | $ | 3,459,120 |
Supplier relationship |  |  | 1,179,246 |
Software |  |  | 534,591 |
Current assets |  |  | 1,104,407 |
Property and equipment |  |  | 46,548 |
ROU asset |  |  | 175,231 |
Goodwill |  |  | 6,094,144 |
Deferred tax liabilities |  |  | (1,389,113 | )
Current liabilities |  |  | (394,659 | )
Lease liability |  |  | (180,515 | )
Total purchase consideration |  | $ | 10,629,000 |
As of the date of this report, the cash portion of the consideration, $1.5 million, had not been paid as the seller’s bank account was still not opened due to the delay caused by the COVID-19 conditions in Hong Kong and China. The results of operations of Anivia for the period from February 16, 2022 through March 31, 2022 were included in the Company's consolidated financial statements as of and for the period ended March 31, 2022. See Note 5 for details. Pro Forma Financial Information The following pro forma information presents a summary of the Company’s combined operating results for the nine months ended March 31, 2022 and 2021, as if the acquisition had occurred on July 1, 2020. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
Schedule of Business Acquisition, Pro Forma Information |  |  |  |  |  |  |  |
|  | Nine months ended |
|  | March 31, |
|  | 2022 |  |  | 2021 |
Total Revenues |  | $ | 57,300,642 |  |  | $ | 39,348,154 |
Income from Operations |  | $ | 4,623,664 |  |  | $ | 3,043,253 |
Basic and diluted income per share |  | $ | 0.12 |  |  | $ | 0.06 |

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