| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These unaudited interim condensed consolidated financial statements of the Company, its subsidiaries and VIE (collectively the “Group”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information using accounting policies that are consistent with those used in the preparation of the Group’s audited condensed consolidated financial statements for the fiscal year ended June 30, 2020. Accordingly, these unaudited interim condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, operating results and cash flows of the Group for each of the periods presented. The results of operations for the six months period ended December 31, 2020 are not necessarily indicative of results to be expected for any other interim period or for the year ending June 30, 202 1 condensed consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP for annual financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s condensed consolidated financial statements for the year ended June 30, 2020. Principles of Consolidation The condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and a VIE. All inter-company transactions and balances between the Company, its subsidiaries, and the VIE are eliminated upon consolidation. The Company includes the results of operations of acquired businesses from the respective dates of acquisition. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates estimates, including those related to the expected total costs of integrated solutions contracts and service contracts, allowance for credit losses of accounts receivable, costs and estimated earnings in excess of billings, accounts receivable retention and other receivables , fair value of bifurcated derivative, fair value of warranties, valuation allowance of deferred tax assets, impairment of goodwill and other long-lived assets, goodwill related to the acquisition of Shandong Lukang Pharmaceutical Engineering Design Co., Ltd (“Shandong Lukang”), provision for loss contracts, incremental borrowing rate (“IBR”) for operating leases, net realizable value of inventory, and valuation and recognition of share-based compensation expenses. Management’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates. Foreign currency translations and transactions The Company’s functional currency is the United States dollars (“US dollars” or “$”); whereas the Company’s subsidiaries and VIE use the primary currency of the economic environment in which their operations are conducted as their functional currency. According to the criteria of Accounting Standards Codification (“ASC”) Topic 830, Foreign currency matters The Company translates the assets and liabilities into US dollars using the rate of exchange prevailing at the balance sheet date, and the condensed consolidated statements of comprehensive income are translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from the functional currency into US dollars are recorded in stockholders’ equity as part of accumulated other comprehensive (loss) income. Transactions dominated in currencies other than the functional currency are translated into functional currency at the exchange rates prevailing on the transaction dates, and the exchange gains or losses are reflected in the condensed consolidated statements of comprehensive income for the reporting period. Transactions denominated in foreign currencies are measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities are re-measured Business combinations The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations condensed consolidated statements of comprehensive income. The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling Acquisition-related costs are recognized as general and administrative expenses in the condensed consolidated statements of comprehensive income as incurred. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments that are readily convertible to known amounts of cash with original stated maturities of three months or less are classified as cash equivalents. Short-term investments Short-term investments comprise primarily of principal guaranteed structured deposits placed with financial institutions with maturities within twelve months and interest rates indexed to foreign exchange rates, gold prices or USD LIBOR rates. The indexation of interest rates to foreign exchange rates, gold prices or USD LIBOR rates are considered embedded derivatives that are separated from the host contract of bank structured deposits and are recorded separately in “Other receivables” and measured at fair value in the condensed consolidated balance sheets. Subsequent changes in the fair value of the derivative assets are recorded in “Other income, net” in the condensed consolidated statements of comprehensive income and fair value changes were $609 and $1,000 for the six months December 31, 2019 and 2020, respectively. The fair value of the derivatives assets is disclosed in Note 9. The Company accounts for its short-term investments in accordance with ASC Topic 320, Investments—Debt Securities (“ASC 320”) and as the Company has the positive intent and ability to hold them to maturity, the short-term investments are classified as held-to-maturity securities and stated at amortized cost less allowance for credit losses. As of June 30, 2020 and December 31, 2020, the allowance for credit losses provided for short-term investments was insignificant. As of December 31, 2020, $332,004, $4,490, and $4,410 of short-term investments were placed in financial institutions in the PRC, Singapore, and Malaysia, respectively. As of June 30, 2020, $306,322, $16,127, and $2,500 of short-term investments were placed in financial institutions in the PRC, Singapore, and Malaysia, respectively. Restricted cash Restricted cash mainly consists of the cash deposited in banks pledged for performance guarantees, or bank loans. These cash balances are not available for use until these guarantees are expired or cancelled, or the loans are repaid. Revenue recognition Integrated solutions contracts Revenues generated from designing, building, and delivering customized integrated industrial automation systems are recognized over time as customer simultaneously receives and consumes the benefits provided by the Company’s performance as it occurs or because the customers control the related asset as it is created or enhanced. The contracts for designing, building, and delivering customized integrated industrial automation systems are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract size and ranges from six months to five years excluding the warranty period. The majority of the contracts have a duration longer than one year. Revenue generated from mechanical and electrical solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are also recognized over time as the s hav e a In accordance with ASC 606, Revenue from Contract with Customers The Company reviews and updates the estimated total costs of the contracts at least annually. Revisions to contract revenue and estimated total costs of the contracts are made in the period in which the facts and circumstances that cause the revision become known and are accounted for as changes in estimates. Excluding the respectively. Revisions to the estimated total costs for the six months ended December 31, 2019 and 2020 were made in the ordinary course of business. The Company combines a group of contracts as one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The Company segments a contract into several projects, when they are of different business substance, for example, with different business negotiation, solutions, implementation plans and margins. Revenue in excess of billings on the contracts is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are recorded as deferred revenue until the above revenue recognition criteria are met. Recognition of accounts receivable and costs and estimated earnings in excess of billings are discussed below. The Company generally recognizes 100% of the contractual revenue when the customer acceptance has been obtained and no further major costs are estimated to be incurred, and normally this is also when the warranty period commences. Revenues are presented net of value-added tax collected on behalf of the government. Product sales The Company’s products mainly include hardware and software. Revenue generated from sales of products is recognized when control of promised goods is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods. Revenues are presented net of value-added tax collected on behalf of the government. Services rendered The Company mainly provides the following services: The Company provides maintenance service which is generally completed onsite at the customers’ premises. Revenue is recognized over time by using the cost-to-cost The Company also separately sells extended warranties to their integrated solution customers for a fixed period. Such arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the expiration of the warranty period attached to the integrated solutions contracts. During the extended warranty period, the Company is responsible for addressing issues related to the system. Part replacement is not covered in such services. The Company uses time elapsed to measure the progress toward complete satisfaction of the performance obligation and recognizes revenue ratably over the contractual term. Revenues are presented net of value-added tax collected on behalf of the government. Excluding the impact of change orders, if the estimated total costs of service contracts, which were revised during the six months ended December 31, 2019 and 2020, had been used as a basis of recognition of service contract revenue since the contract commencement, net income for the six months ended December 31, 2019 and 2020 would have decreased by $3,212 and $5,585, respectively; basic net income per share for the six months ended December 31, 2019 and 2020 would have decreased by $0.05 and $0.09, respectively; and diluted net income per share for the six months ended December 31, 2019 and 2020, would have decreased by $0.05 and $0.09, respectively. Revisions to the estimated total costs for the six months ended December 31, 2020 were made in the ordinary course of business. Contract assets Contract assets include amounts that represent the rights to receive payment for goods or services that have been transferred to the customer, with the rights conditional upon something other than the passage of time. Accordingly, the Company include s Performance of the integrated solutions contracts will often extend over long periods and the Company’s right to receive payments depends on its performance in accordance with the contractual terms. There are different billing practices in the PRC, overseas operating subsidiaries and the VIE s trial-run For Concord and Bond Groups, billing claims rendered are subject to the further approval and certification of the customers or their designated consultants. Payments are made to Concord or Bond Groups based on the certified billings according to the payment terms mutually agreed between the customers and Concord or Bond Groups. Certain amounts are retained by the customer and payable to Concord and Bond Groups upon the issuance of the final completion certificate and completion of the defects liability period. The retained amounts are recorded as accounts receivable retention. Contract liabilities Contract liabilities include the amounts that reflect obligations to provide goods or services for which payment has been received. Contract liabilities are presented in the balance sheet as deferred revenue. The Company receives prepayments for integrated solutions contracts, product sales and service contracts for goods or services to be provided in the future. Prepayments received are recorded as deferred revenue, which is recognized as revenue based on the revenue recognition policies disclosed above for integrated solutions contracts, product sales and services rendered. Accounts receivable, costs and estimated earnings in excess of billings and accounts receivable retention The carrying value of the Company’s accounts receivable, costs and estimated earnings in excess of billings and accounts receivable retention, net of the allowance for credit losses, represents their estimated net realizable value. The allowance for credit losses reflects the Company’s current estimate of credit losses expected to be incurred over the life of the receivables. The Company assesses collectability by reviewing accounts receivable, costs and estimated earnings in excess of billings and accounts receivable retention on a collective basis where similar characteristics exist, primarily based on similar business segment, service, product offerings or geographic locations and on an individual basis when the Company identifies specific customers with known disputes or collectability issues. The Company considers various factors in establishing, monitoring, and adjusting its allowance for credit losses including historical collectability based on past due status, the age of the accounts receivable balances, costs and estimated earnings in excess of billings balances and account receivable retention balances, credit quality of the Company’s customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from counter parties. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company does not require collateral from its customers and does not charge interest for late payments by its customers. Inventories Inventories comprised raw materials, work in progress, purchased and manufactured finished goods and low value consumables. Inventories are stated at the lower of cost and net realizable value. The Company uses the weighted average cost method as its The Company assesses the lower of cost and net realizable value for non-saleable, non-saleable, work-in-process Warranties Warranties represent a major term under integrated solutions contracts and maintenance service contracts, which will last, in general, for one to three years or otherwise specified in the terms of the contract. The Company accrues warranty liabilities under a service contract as a percentage of revenue recognized, which is derived from its historical experience, in order to recognize the warranty cost for the related contract throughout the contract period. Property, plant and equipment, net Property, plant and equipment, other than construction in progress, are recorded at cost and are stated net of accumulated depreciation and impairment, if any. Depreciation expense is determined using the straight-line method over the estimated useful lives of the assets as follows:
Buildings 30 - 50
Machinery 5 - 10 years
Software 3 - 10 years
Vehicles 5 -
Electronic and other equipment 3 - 10 years Construction in progress represents uncompleted construction work of certain facilities which, upon completion, management intends to hold for production purposes. In addition to costs under construction contracts, other costs directly related to the construction of such facilities, including duty and tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation commences when the asset is placed in service. Maintenance and repairs are charged directly to expenses as incurred, whereas betterment and renewals are capitalized in their respective accounts. When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized for the reporting period. Prepaid land leases, net Prepaid land lease payments, for the land use right of four parcels of land in the PRC, three parcels of leasehold land in Malaysia and one parcel of leasehold land in Singapore, are initially stated at cost and are subsequently amortized on a straight-line basis over the lease terms of 49 to 88 years. Intangible assets, net Intangible assets are carried at cost less accumulated amortization and any impairment. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets are amortized using a straight-line method. The estimated useful lives for the intangible assets are as follows:
Category Estimated useful life
Patents and copyrights 5 years Residual values are considered nil. Operating lease as lessor The Company classifies a lease as an operating, sales-type or direct financing lease at lease commencement date as appropriate under ASC 842. For operating leases, the Company recognized rental income over the non-cancellable lease term on a straight-line basis. The Company does not have any sales-type or direct financing lease for the six months ended December 31, 2019 and 2020. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not The Company adopted ASC 740, Income Taxes , Segment reporting In accordance with ASC 280, Segment reporting Investments in equity investees and equity securities The Company accounts for its equity investments under the equity method when the Company has rights and ability to exercise significant influence over the investees. The investments in entities over which the Company has the ability to exercise significant influence are accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, are also considered in determining whether the equity method of accounting is appropriate. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities, by the amortization of any basis difference between the amount of the Company’s investment and its share of the net assets of the investee, and by dividend distributions or subsequent investments. When dividends from an investee exceed the carrying amount of an equity method investment, the excess distribution is recognized as a gain and reported as share of net income of equity investees, net in the condensed consolidated statements of comprehensive income when the Company is not liable for the obligations of the investee nor otherwise committed to provide financial support. In such cases, subsequent equity method earnings are not recorded until subsequent earnings equal the gain recorded. Unrealized inter-company profits and losses related to equity investees are eliminated. An impairment charge, being the difference between the carrying amount and the fair value of the equity investee, is recognized in the condensed consolidated statements of comprehensive income when the decline in value is considered other than temporary. The Company will discontinue applying the equity method if an investment (plus additional financial support provided to the investee, if any) has been reduced to zero. When the Company has other investments in its equity-method investee and are not required to advance additional funds to that investee, the Company would continue to report its share of equity method losses in its condensed consolidated statement of comprehensive income after its equity-method investment in ordinary shares has been reduced to zero, to the extent of and as an adjustment to the adjusted basis of its other investments in the investee. Such losses are first applied to those investments of a lower liquidation preference before being further applied to the investments of a higher liquidation preference. The Company uses the cumulative earnings approach to classify distributions received from equity investees. Under this approach, distributions received from equity investees are presumed to be a return on the investment and are classified as cash inflows from operating activities unless the distributions received exceed cumulative equity in earnings recognized by the investor. In such case, the excess is considered a return of investment and is classified as cash inflows from investing activities. For equity investments other than those accounted for under the equity method or those that result in consolidation of the investee, the Company measures equity investments at fair value and recognizes any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient in ASC 820 to estimate fair value using the net asset value per share (or its equivalent) of the investment, the Company chose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. At each reporting date, the Company is required to make a qualitative assessment as to whether equity investments without a readily determinable fair value for which the measurement alternative is elected is impaired. In the event that a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than the carrying value, the carrying value is written down to its fair value. A variety of factors are considered when determining if a decline in fair value is below carrying value, including, among others, the financial condition and prospects of the investee. Income per share Income per share is computed in accordance with ASC 260, Earnings per Share Fair value measurements The Company has adopted ASC 820, Fair Value Measurements and Disclosures
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. Recent accounting pronouncements Recently Adopted Standards In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments Credit Losses $ , net of $ of income taxes, including the allowance for credit losses for accounts receivable, costs and estimated earnings in excess of billings, accounts receivable retention, and other receivables . The Company is exposed to credit losses primarily through integrated solution contracts and sales of products and services. The cumulative effect of the changes made to the Company’s consolidated balance sheet at July 1, 2020, for the adoption of ASU 2016-13 is as follows:
Balance at Adjustment Balance at
Assets
Accounts receivable 242,449 (19,807 ) 222,642
Accounts receivable retention 10,805 (204 ) 10,601
Costs and estimated earnings in excess of billings 189,188 (4,949 ) 184,239
Other receivables 28,257 (21 ) 28,236
Deferred tax assets 8,909 2,641 11,550
Equity
Retained earnings 774,473 (22,340 ) 752,133 The movements in the allowance for credit losses on accounts receivable and accounts receivable retention were as follows:
December 31,
(Unaudited)
Beginning balance, July 1, 2020 41,618
Adoption of ASU 2016-13 19,807
Provision for expected credit losses, net of recoveries 1,208
Amounts written off charged against the allowance (2,688 )
Translation adjustments 4,628
Ending balance, December 31, 2020 64,573
The movements in the allowance for credit losses on costs and estimated earnings in excess of billings were as follows:
December 31,
(Unaudited)
Beginning balance, July 1, 2020 6,150
Adoption of ASU 2016-13 4,949
Provision for expected credit losses, net of recoveries 361
Amounts written off charged against the allowance —
Translation adjustments 862
Ending balance, December 31, 2020 12,322
In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In August 2018, the FASB issued ASU No. 2018-13 , Fair Value Measurement (Topic 820), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement Standards Effective in Future Years In December 2019, the FASB issued ASU 2019-12, “ Simplifying the Accounting for Income Taxes, In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities Investments—Equity Method and Joint Ventures Derivatives and Hedging Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) Impact of COVID-19 Since the third quarter of fiscal year 2020, a novel strain of coronavirus (COVID-19) has spread rapidly globally and the Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The pandemic has resulted in quarantines, travel restrictions and the temporary closure of stores and business facilities globally. Given the rapidly expanding nature of COVID-19 pandemic, the Company believes there is a risk that its global business, results of operations, and financial condition will be adversely affected. Potential impact to the Company’s results of operations will also depend on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities to contain COVID-19 or mitigate its impact, almost all of which are beyond the Company’s control. The COVID-19 pandemic has adversely impacted the Company’s business since the third quarter of the fiscal year ended June 30, 2020. The Company have seen gradual recovery of our overall business resulting from improving health statistics in China since March 2020, however, the pandemic continued to have an adverse effect on overseas business, especially in South East Asia and South Asia. The Company anticipate the negative impact of the pandemic may continue on overseas business. The duration and magnitude of the impact from the pandemic on our business will depend on numerous evolving factors that cannot be accurately predicted or assessed. |
