The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021 (UNAUDITED) AND DECEMBER 31, 2020
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Recycling Energy Corporation (the “Company” or “CREG”) is incorporated in Nevada state. The Company, through
its subsidiaries, provides energy saving solutions and services, including selling and leasing energy saving systems and equipment
to customers, and project investment in the Peoples Republic of China (“PRC”).
The
Company’s organizational chart as of March 31, 2021 is as follows:
Erdos
TCH – Joint Venture
On April 14, 2009, the Company formed a joint
venture (the “JV”) with Erdos Metallurgy Co., Ltd. (“Erdos”) to recycle waste heat from Erdos’ metal refining
plants to generate power and steam to be sold back to Erdos. The name of the JV was Inner Mongolia Erdos TCH Energy Saving Development
Co., Ltd. (“Erdos TCH”) with a term of 20 years. Erdos contributed 7% of the total investment of the project, and Xi’an
TCH Energy Technology Co., Ltd. (“Xi’an TCH”) contributed 93%. On June 15, 2013, Xi’an TCH and Erdos entered into
a share transfer agreement, pursuant to which Erdos sold its 7% ownership interest in the JV to Xi’an TCH for $1.29 million (RMB
8 million), plus certain accumulated profits. Xi’an TCH paid the $1.29 million in July 2013 and, as a result, became the sole stockholder
of the JV. Erdos TCH currently has two power generation systems in Phase I with a total of 18 MW power capacity, and three power generation
systems in Phase II with a total of 27 MW power capacity. On April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement,
effective May 1, 2016, whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and started to charge Erdos based on actual
electricity sold at RMB 0.30 / KWH. The selling price of each KWH is determined annually based on prevailing market conditions. Since
May 2019, Erdos TCH has ceased its operations due to renovations and furnace safety upgrades of Erdos, and the Company initially expected
the resumption of operations in July 2020, but the resumption of operations was further delayed due to government’s mandate for
Erdos to significantly lower its energy consumption per unit of GDP. Erdos and the municipal government are currently under discussion
for seeking the solution of achieving the energy saving target. During this period, Erdos will compensate Erdos TCH RMB 1 million ($145,460)
per month, until operations resume.
In
addition, Erdos TCH has 30% ownership in DaTangShiDai (BinZhou) Energy Savings Technology Co., Ltd. (“BinZhou Energy Savings”),
30% ownership in DaTangShiDai DaTong Recycling Energy Technology Co., Ltd. (“DaTong Recycling Energy”), and 40% ownership
in DaTang ShiDai TianYu XuZhou Recycling Energy Technology Co, Ltd. (“TianYu XuZhou Recycling Energy”). These companies
were incorporated in 2012 but there have not been any operations since then nor has any registered capital contribution been made.
Shenqiu
Yuneng Biomass Power Generation Projects
On
September 28, 2011, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2011 Shenqiu Lease”).
Under the 2011 Shenqiu Lease, Xi’an TCH agreed to lease a set of 12 MW BMPG systems to Shenqiu at a monthly rental of $286,000
(RMB 1,800,000) for 11 years.
On
March 30, 2013, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”).
Under the 2013 Shenqiu Lease, Xi’an TCH agreed to lease the second set of 12 MW BMPG systems to Shenqiu for $239,000 (RMB
1.5 million) per month for 9.5 years.
As
repayment for a loan made by Xi’an Zhonghong to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”)
on January 10, 2019 (see further discussion in Note 8); on January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong
Bai (or “Mr. Bai”), a resident of China, entered into a Projects Transfer Agreement (the “Agreement”),
pursuant to which Xi’an TCH transferred two BMGP in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for
RMB 127,066,000 ($18.55 million). As consideration for the transfer of the Shenqiu Phase I and II Projects to Mr. Bai (Note 8),
Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng Enterprises Management Consulting Co.
Ltd. (“Xi’an Hanneng”) to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”)
as repayment for a loan made by Xi’an Zhonghong to HYREF on January 10, 2019. The transfer of the projects was completed
on February 15, 2019. The Company recorded $208,359 loss from the transfer during the year ended December 31, 2019. Xi’an
Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd for the repayment of Shenqiu system and
Huayu system. However, Xi’an Hanneng was not able to obtain all the Huaxin shares due to halted trading of Huaxin stock
by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr. Bai and all the related parties therefore agreed to have
Mr. Bai instead make a payment in cash for the transfer price of Shenqiu (see Note 8 for detail).
Chengli
Waste Heat Power Generation Projects
On
July 19, 2013, Xi’an TCH formed a new company, “Xi’an Zhonghong New Energy Technology Co., Ltd.” (“Zhonghong”),
of which it owns 90% of Zhonghong, with HYREF owning the other 10%. Zhonghong is engaged to provide energy saving solution and
services, including constructing, selling and leasing energy saving systems and equipment to customers. On December 29, 2018,
Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF transferred its 10% ownership in Zhonghong
to Shanghai TCH for RMB 3 million ($0.44 million). The transfer was completed on January 22, 2019. The Company owns 100%
of Xi’an Zhonghong after the transaction.
On
July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power
Generation Project) with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”). The parties entered into a supplement
agreement on July 26, 2013. Pursuant to these agreements, Zhonghong will design, build and maintain a 25 MW CDQ system and a CDQ
WHPG system to supply power to Chengli, and Chengli will pay energy saving fees (the “Chengli Project”).
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station (‘the Station”)
as the repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF. Xi’an Zhonghong, Xi’an TCH, Guohua Ku
and Chonggong Bai also agreed to a Buy Back Agreement for the Station when certain conditions are met (see Note 8). The transfer
of the Station was completed January 22, 2019, at which time the Company recorded a $624,133 loss from this transfer. Since the
original terms of the Buy Back Agreement are still valid, and the Buy Back possibility could occur; therefore, the loan principal
and interest and the corresponding asset of the Station cannot be derecognized due to the existence of Buy Back clauses (see Note
8 for detail).
Tianyu
Waste Heat Power Generation Project
On
July 19, 2013, Zhonghong entered into a Cooperative Agreement (the “Tianyu Agreement”) for Energy Management of CDQ
and CDQ WHPG Projects with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”). Pursuant to the Tianyu Agreement,
Zhonghong will design, build, operate and maintain two sets of 25 MW CDQ systems and CDQ WHPG systems for two subsidiaries of
Tianyu – Xuzhou Tian’an Chemical Co., Ltd. (“Xuzhou Tian’an”) and Xuzhou Huayu Coking Co., Ltd.
(“Xuzhou Huayu”) – to be located at Xuzhou Tian’an and Xuzhou Huayu’s respective locations (the
“Tianyu Project”). Upon completion of the Tianyu Project, Zhonghong will charge Tianyu an energy saving fee of RMB
0.534 ($0.087) per kilowatt hour (excluding tax). The term of the Tianyu Agreement is 20 years. The construction of the Xuzhou
Tian’an Project is anticipated to be completed by the second quarter of 2020. The Xuzhou Huayu Project has been on hold
due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues.
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the
“Agreement”), pursuant to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located
in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million).
Mr. Bai agreed that as consideration for the transfer of the Xuzhou Huayu Project to him, as well as Shenqiu discussed above,
he would transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan made
by Xi’an Zhonghong to HYREF. (Note 8). The transfer of the project was completed on February 15, 2019. The Company recorded
$397,033 loss from this transfer during the year ended December 31, 2019. On January 10, 2019, Mr. Chonggong Bai transferred
all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan. Xi’an Hanneng
was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd for the repayment of Huayu system and Shenqiu
system. As of September 30, 2019, Xi’an Hanneng already owned 29,948,000 shares of Huaxin, but was not able to obtain the
remaining 17,202,000 shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report. On December 20,
2019, Mr. Bai and all the related parties agreed to have Mr. Bai instead making a payment in cash for the transfer price of Huayu
(see Note 8 for detail).
On
January 10, 2020, Zhonghong, Tianyu and Huaxin signed a transfer agreement to transfer all assets under construction and related
rights and interests of Xuzhou Tian’an Project to Tianyu for RMB 170 million including VAT ($24.37 million) in three installment
payments. The 1st installment payment of RMB 50 million ($7.17 million) to be paid within 20 working days after the contract is
signed. The 2nd installment payment of RMB 50 million ($7.34 million) is to be paid within 20 working days after completion of
the project construction but no later than July 31, 2020. The final installment payment of RMB 70 million ($10.28 million) is
to be paid before December 31, 2020. The Company received the payment in full for Tian’an Project as of December 31, 2020.
Zhongtai
Waste Heat Power Generation Energy Management Cooperative Agreement
On
December 6, 2013, Xi’an TCH entered into a CDQ and WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”)
with Xuzhou Zhongtai Energy Technology Co., Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu
Province, China.
Pursuant
to the Zhongtai Agreement, Xi’an TCH was to design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG
system and sell the power to Zhongtai, and Xi’an TCH is also to build a furnace to generate steam from the smoke pipeline’s
waste heat and sell the steam to Zhongtai.
In
March 2016, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin
(the “Transfer Agreement”). Under the Transfer Agreement, Xi’an TCH agreed to transfer to Zhongtai all of the
assets associated with the CDQ Waste Heat Power Generation Project (the “Project”), which is under construction pursuant
to the Zhongtai Agreement. Additionally, Xi’an TCH agreed to transfer to Zhongtai the Engineering, Procurement and Construction
(“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an
Huaxin in connection with the Project. Xi’an Huaxin will continue to construct and complete the Project and Xi’an
TCH agreed to transfer all its rights and obligations under the EPC Contract to Zhongtai. As consideration for the transfer of
the Project, Zhongtai agreed to pay to Xi’an TCH RMB 167,360,000 ($25.77 million) including (i) RMB 152,360,000 ($23.46
million) for the construction of the Project; and (ii) RMB 15,000,000 ($2.31 million) as payment for partial loan interest accrued
during the construction period. Those amounts have been, or will be, paid by Zhongtai to Xi’an TCH according to the following
schedule: (a) RMB 50,000,000 ($7.70 million) was to be paid within 20 business days after the Transfer Agreement was signed; (b)
RMB 30,000,000 ($4.32 million) was to be paid within 20 business days after the Project was completed, but no later than July
30, 2016; and (c) RMB 87,360,000 ($13.45 million) was to be paid no later than July 30, 2017. Xuzhou Taifa Special Steel Technology
Co., Ltd. (“Xuzhou Taifa”) guaranteed the payments from Zhongtai to Xi’an TCH. The ownership of the Project
was conditionally transferred to Zhongtai following the initial payment of RMB 50,000,000 ($7.70 million) by Zhongtai to Xi’an
TCH and the full ownership of the Project will be officially transferred to Zhongtai after it completes all payments pursuant
to the Transfer Agreement. The Company recorded a $2.82 million loss from this transaction in 2016. In 2016, Xi’an TCH had
received the first payment of $7.70 million and the second payment of $4.32 million. However, the Company received a repayment
commitment letter from Zhongtai on February 23, 2018, in which Zhongtai committed to pay the remaining payment of RMB 87,360,000
($13.45 million) no later than the end of July 2018; in July 2018, Zhongtai and the Company reached a further oral agreement to
extend the repayment term of RMB 87,360,000 ($13.45 million) by another two to three months. In January 2020, Zhongtai paid RMB
10 million ($1.41 million); in March 2020, Zhongtai paid RMB 20 million ($2.82 million); in June 2020, Zhongtai paid RMB 10 million
($1.41 million); and in December 2020, Zhongtai paid RMB 30 million ($4.28 million), which was payment in full. Accordingly, the
Company reversed the bad debt expense of $5.80 million in 2020 which had been recorded earlier.
Formation
of Zhongxun
On
March 24, 2014, Xi’an TCH incorporated a subsidiary, Zhongxun Energy Investment (Beijing) Co., Ltd. (“Zhongxun”)
with registered capital of $5,695,502 (RMB 35,000,000), which must be contributed before October 1, 2028. Zhongxun is 100% owned
by Xi’an TCH and will be mainly engaged in project investment, investment management, economic information consulting, and
technical services. Zhongxun has not yet commenced operations nor has any capital contribution been made as of the date of this
report.
Formation
of Yinghua
On
February 11, 2015, the Company incorporated a subsidiary, Shanghai Yinghua Financial Leasing Co., Ltd. (“Yinghua”)
with registered capital of $30,000,000, to be paid within 10 years from the date the business license is issued. Yinghua is 100%
owned by the Company and will be mainly engaged in financial leasing, purchase of financial leasing assets, disposal and repair
of financial leasing assets, consulting and ensuring of financial leasing transactions, and related factoring business. Yinghua
has not yet commenced operations nor has any capital contribution been made as of the date of this report.
Reverse
Stock Split
On
April 13, 2020, the Company filed a certificate of change (“Certificate of Change”) with the Secretary of State of
the State of Nevada, pursuant to which, on April 13, 2020, the Company effected a reverse stock split of its Common Stock, at
a rate of 1-for-10, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of Common Stock
(the “Reverse Stock Split”). The accompanying consolidated financial statements and related disclosure in for periods
prior to the Reverse Stock Split have been retroactively restated to reflect this reverse stock split.
Other
Events
In December 2019, a novel strain of coronavirus
(COVID-19) was reported and the World Health Organization has declared the outbreak to constitute a “Public Health Emergency of
International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting supply chains and affecting
production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions
in connection with the outbreak. However, as a result of PRC government’s effort on disease control, most cities in China were reopened,
the outbreak in China is under the control. As of this report date, there are some new Covid-19 cases discovered in a few provinces of
China, however, the number of new cases is not significant due to PRC government’s strict control.
On
December 22, 2020, Shanghai TCH entered into an Equity Acquisition Agreement with Xi’an Taiying Energy Saving Technology
Co., Ltd., a PRC company (“Xi’an Taiying”) and its three shareholders to purchase all of the issued and outstanding
shares of stock of Xi’an Taiying. The purchase price for said shares shall consist of (i) 619,525 shares of common stock
at an issuance price of $4.37 per share, (ii) 60,000,000 shares of Series A convertible stock and (iii) a cash payment of
RMB 1,617,867,026 (approximately $247 million at a conversion rate of 1:6.55). The shares shall be issued within 15 business days
after approval by the Board of Directors and/or shareholders of the Company and Nasdaq approval and the cash shall be paid in
three tranches – RMB 390 million (approximately $59.5 million) within 10 days after the agreement is executed, RMB 300 million
(approximately $45.8 million) by March 31, 2021 and RMB 927,867,026 (approximately $141.7 million) within 10 days after the shares
of Xi’an Taiying are registered to Buyer. As of the date of this report, the Company has not obtained and there is no assurance
that the Company will be able to obtain necessary approval to proceed with the transaction. In addition, the Company is currently
renegotiating the payment terms with the sellers for paying less shares but does not know when the renegotiation will be completed.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited financial information as of and for the three months ended March 31, 2021 and 2020 has been prepared in accordance
with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report
on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting
only of normal recurring adjustments, unless otherwise indicated) considered necessary for a fair presentation of our financial position
at such date and the operating results and cash flows for such periods. Operating results for the three months ended March 31, 2021 are
not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period. The interim
consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC on April 15, 2021.
Basis
of Consolidation
The
CFS include the accounts of CREG and its subsidiaries, Shanghai Yinghua Financial Leasing Co., Ltd. (“Yinghua”) and
Sifang Holdings; Sifang Holdings’ wholly owned subsidiaries, Huahong New Energy Technology Co., Ltd. (“Huahong”)
and Shanghai TCH Energy Tech Co., Ltd. (“Shanghai TCH”); Shanghai TCH’s wholly-owned subsidiary, Xi’an
TCH Energy Tech Co., Ltd. (“Xi’an TCH”); and Xi’an TCH’s subsidiaries, 1) Erdos TCH Energy Saving
Development Co., Ltd (“Erdos TCH”), 100% owned by Xi’an TCH, 2) Zhonghong, 90% owned by Xi’an TCH and
10% owned by Shanghai TCH, and 3) Zhongxun, 100% owned by Xi’an TCH. Substantially all the Company’s revenues are
derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all the Company’s consolidated
assets and liabilities as of March 31, 2021. However, there was no revenue for the Company for the three months ended March 31,
2021. All significant inter-company accounts and transactions were eliminated in consolidation.
Uses
and Sources of Liquidity
For the three months ended March 31, 2021, the
Company had a net loss of $0.28 million. For the three months ended March 31, 2020, the Company had net loss of $0.60 million. The Company
had an accumulated deficit of $43.31 million as of March 31, 2021. The Company disposed all of its systems and currently holds only five
power generating systems through Erdos TCH, the five power generating systems are currently ceased production for seeking the solution
of meeting the energy saving target. The Company is in the process of transforming and expanding into an energy storage integrated solution
provider. The Company plans to pursue disciplined and targeted expansion strategies for market areas the Company currently does not serve.
The Company actively seeks and explores opportunities to apply energy storage technologies to new industries or segments with high growth
potential, including industrial and commercial complexes, large scale photovoltaic (PV) and wind power stations, remote islands without
electricity, and smart energy cities with multi-energy supplies. The Company had cash of $144.07 million as of March 31, 2021.
The Company’s cash flow forecast indicate it will have sufficient cash to fund its operations for the next 12 months from the date
of issuance of these financial statements.
The historical operating results indicate the
Company has recurring losses from operations which rise the question related to the Company’s ability to continue as a going concern.
However, the Company had $144.07 million cash on hand at March 31, 2021 as a result of collections of the full payments from all the projects
that had been disposed earlier.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering, or debt
financing including bank loans. The consolidated financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Use
of Estimates
In
preparing these CFS in accordance with US GAAP, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities in the balance sheets as well as revenues and expenses during the period reported. Actual results may differ
from these estimates. On an on-going basis, management evaluates their estimates, including those related to allowances for
bad debt and inventory obsolescence, impairment loss on fixed assets and construction in progress, income taxes, and contingencies
and litigation. Management bases their estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other resources.
Revenue
Recognition
A) Sales-type
Leasing and Related Revenue Recognition
On
January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 842 using the modified retrospective transition approach by applying the new standard to all leases
existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January
1, 2019 are presented under ASC Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance
with our historical accounting under Topic 840. (See Operating lease below as relates to the Company as a lessee). The Company’s
sales type lease contracts for revenue recognition fall under ASC 842. During the three months ended March 31, 2021 and 2020,
the Company did not sell any new power generating projects.
The
Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically transfers
legal ownership of the waste energy recycling power generating projects to its customers at the end of the lease. Prior to January
1, 2019, the investment in these projects was recorded as investment in sales-type leases in accordance with ASC Topic 840,
“Leases,” and its various amendments and interpretations.
The
Company finances construction of waste energy recycling power generating projects. The sales and cost of sales are recognized
at the inception of the lease, which is when the control is transferred to the lessee. The Company accounts for the transfer of
control as a sales type lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded
when collection of payments is probable. This is in accordance with the revenue recognition principle in ASC 606 - Revenue from
contracts with customers. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less
unearned interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company
(as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value
of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and contingent
rentals, if any. Unearned interest is amortized to income over the lease term to produce a constant periodic rate of return on
net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow from the sales-type lease
occurs over the course of the lease, which results in interest income and reduction of receivables. Revenue is recognized net
of value-added tax.
B) Contingent
Rental Income
The Company records income from actual electricity generated of each
project in the period the income is earned, which is when the electricity is generated. Contingent rent is not part of minimum lease payments.
Operating
Leases
The
Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based
on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date.
As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental
borrowing rate based on information available at the commencement date to determine the present value of future lease payments.
Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified
asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the
lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. The lease has
remaining lease term of approximately 2.75 years. Lease expense is recognized on a straight-line basis over the lease term. The
Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease
components as a single lease component for operating leases associated with the Company’s office space lease, and to keep
leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated
statements of income on a straight-line basis over the lease term.
ROU
assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are
subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU
assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not
independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets
to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities. At March 31, 2021, the ROU was $173,502.The Company recognized no impairment of ROU
assets as of March 31, 2021.
Operating
leases are included in operating lease right-of-use assets and operating lease liabilities (current and non-current), on the consolidated
balance sheets.
Cash
Cash
include cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with
an original maturity of three months or less as of the purchase date.
Accounts
Receivable
The
Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
As of March 31, 2021 and December 31, 2020, the
Company had gross accounts receivable of $340,553 and $342,974 of Erdos TCH for electricity sold, respectively. As of March 31, 2021 and
December 31, 2020, the Company had bad debt allowance of $34,055 and $34,297 for Erdos TCH due to the customer not making the payments
as scheduled, respectively.
Concentration
of Credit Risk
Cash includes cash on hand and demand deposits
in accounts maintained within China. Balances at financial institutions and state-owned banks within the PRC are covered by insurance
up to RMB 500,000 (US$76,000) per bank. Any balance over RMB 500,000 (US$76,000) per bank in PRC will not be covered. At March 31, 2021,
cash held in the PRC bank of $143,935,525 was not covered by such insurance. The Company has not experienced any losses in such accounts.
Certain
other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables.
The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews
of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The
operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environments in the PRC.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the straight-line method over the estimated lives as follows:
Vehicles
|
|
2 - 5 years
|
|
Office and Other Equipment
|
|
2 - 5 years
|
|
Software
|
|
2 - 3 years
|
|
Impairment
of Long-lived Assets
In
accordance with FASB ASC Topic 360, “Property, Plant, and Equipment,” the Company reviews its long-lived
assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying
amounts of the assets may not be fully recoverable. If the total expected undiscounted future net cash flows are less than the
carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.
The Company recorded $0 asset impairment loss for the three months ended March 31, 2021 and 2020.
Cost
of Sales
Cost
of sales consists primarily of the direct material of the power generating system and expenses incurred directly for project construction
for sales-type leasing and sales tax and additions for contingent rental income.
Income
Taxes
Income
taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The
Company follows FASB ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under
the provisions of FASB ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount
of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in
the period during which, based on all available evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described
above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest
and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits
is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement
of income. At March 31, 2021 and December 31, 2020, the Company did not take any uncertain positions that would necessitate
recording a tax related liability.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s
operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on
the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, other
receivables, accounts payable, accrued liabilities and short-term debts, the carrying amounts approximate their fair values due
to their short maturities. Receivables on sales-type leases are based on interest rates implicit in the lease.
FASB
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the FV of financial
instruments held by the Company. FASB ASC Topic 825, “Financial Instruments,” defines FV, and establishes
a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The
carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their FV because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to FV measurement.
|
Effective
on January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments
in the FV hierarchy.
The
Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC 480, “Distinguishing
Liabilities from Equity,” and ASC 815, “Derivatives and Hedging.”
As
of March 31, 2021 and December 31, 2020, the Company did not have any long-term debt obligations; and the Company did not identify
any assets or liabilities that are required to be presented on the balance sheet at FV.
Stock-Based
Compensation
The
Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation –
Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date
fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.
The
Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic
505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity
instruments to non-employees is measured at the fair value of the equity instrument issued or committed to be issued, as this
is more reliable than the fair value of the services received. The fair value is measured at the date that the commitment for
performance by the counterparty has been reached or the counterparty’s performance is complete.
Effective
on January 1, 2020, the Company adopted ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions
for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards
except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC
718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment awards. The adoption of ASU 2018-07 did not have an impact on the
Company’s financial statements.
Basic
and Diluted Earnings per Share
The
Company presents net income (loss) per share (“EPS”) in accordance with FASB ASC Topic 260, “Earning
Per Share.” Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common
stockholders by the weighted average number of shares outstanding, without consideration for common stock equivalents. Diluted
EPS is computed by dividing the net income by the weighted-average number of common shares outstanding as well as common share
equivalents outstanding for the period determined using the treasury-stock method for stock options and warrants and the if-converted
method for convertible notes. The Company made an accounting policy election to use the if-converted method for convertible securities
that are eligible to receive common stock dividends, if declared. Diluted EPS reflect the potential dilution that could occur
based on the exercise of stock options or warrants or conversion of convertible securities using the if-converted method.
For
the three months ended March 31, 2021 and 2020, the basic and diluted loss per share were the same due to the anti-dilutive features
of the warrants and options. For the three months ended March 31, 2021 and 2020, 31,311 shares purchasable under warrants and
options were excluded from the EPS calculation as these were not dilutive due to the exercise price was more than the stock market
price.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated
into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated
at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange
prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains
and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange
rate for the conversion of RMB to USD after the balance sheet date.
The
Company follows FASB ASC Topic 220, “Comprehensive Income.” Comprehensive income is comprised of
net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders.
Segment
Reporting
FASB
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s management organizes segments within the
company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management disaggregates a company. FASB ASC Topic 280 has
no effect on the Company’s CFS as substantially all of the Company’s operations are conducted in one industry segment.
All of the Company’s assets are located in the PRC.
New
Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement
of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the
impact that the standard will have on its CFS.
In
January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount
by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance
should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim
and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial statements.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04
contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.
The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues
to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In
August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-
20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the
accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the
accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC
470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion
features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises
the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features
that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain
criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to
require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method.
In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled
in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years
beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no
earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal
years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the
guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The
Company is currently evaluating the impact that ASU 2020-06 may have on its consolidated financial statements and related
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future CFS.
3.
OTHER RECEIVABLES
As
of March 31, 2021, other receivables mainly consisted of (i) advances to third parties of $7,609, bearing no interest, payable
upon demand, ii) advance to employees of $7,584, iii) advance to suppliers of $2,737 and (iv) others of $12,583 including social
insurance receivable of $5,083.
As
of December 31, 2020, other receivables mainly consisted of (i) advances to third parties of $7,663, bearing no interest, payable
upon demand, ii) advance to employees of $11,011, iii) advance to suppliers of $4,791 and (iv) others of $12,222 including social
insurance receivable of $4,579.
4.
ASSET SUBJECT TO BUYBACK
As
of March 31, 2021 and December 31, 2020, the Company had asset subject to buyback of $28.71 million and $28.92 million, respectively,
which was for the Chengli project.
The Chengli project finished construction, and
was transferred to the Company’s fixed assets at a cost of $35.24 million (without impairment loss) and ready to be put into operation
as of December 31, 2018. On January 22, 2019, Xi’an Zhonghong completed the transfer of Chengli CDQ WHPG project as the partial
repayment for the loan and accrued interest of RMB 188,639,400 ($27.54 million) to HYREF (see Note 8). However, because the loan was not
deemed repaid due to the buyback provision (See Note 8 for detail), the Company kept the loan and the Chengli project recognized in its
CFS as of March 31, 2021 and December 31, 2020.
5.
TAXES PAYABLE
Taxes
payable consisted of the following as of March 31, 2021 and 2020:
|
|
2021
|
|
|
2020
|
|
Income tax – current
|
|
$
|
2,744,539
|
|
|
$
|
2,746,757
|
|
Value-added tax
|
|
|
-
|
|
|
|
322,652
|
|
Other taxes
|
|
|
111
|
|
|
|
76,203
|
|
Total – current
|
|
|
2,744,649
|
|
|
|
3,145,612
|
|
Income tax – noncurrent
|
|
$
|
5,174,625
|
|
|
$
|
5,174,625
|
|
Income
tax payable included $7.61 million ($2.44 million included in current above and $5.17 million noncurrent) from recording the estimated
one-time transition tax on post-1986 foreign unremitted earnings under the Tax Cut and Jobs Act signed on December 22, 2017. An
election is available for the U.S. shareholders of a foreign company to pay the tax liability in installments over a period of
eight years with 8% of net tax liability in the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the
eighth year. The Company made such an election.
6.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following as of March 31, 2021 and December 31, 2020:
|
|
2021
|
|
|
2020
|
|
Education and union fund and social insurance payable
|
|
$
|
371,102
|
|
|
$
|
373,740
|
|
Consulting and legal expenses
|
|
|
31,090
|
|
|
|
31,090
|
|
Accrued payroll and welfare
|
|
|
253,597
|
|
|
|
255,278
|
|
Other
|
|
|
41,728
|
|
|
|
66,588
|
|
Total
|
|
$
|
697,517
|
|
|
$
|
726,696
|
|
7.
DEFERRED TAX, NET
Deferred
tax assets resulted from asset impairment loss which was temporarily non-tax deductible for tax purposes but expensed in accordance
with US GAAP, interest income in sales-type leases which was recognized as income for tax purposes but not for book purpose as
it did not meet revenue recognition in accordance with US GAAP, accrued employee social insurance that can be deducted for tax
purposes in the future, and the difference between tax and accounting basis of cost of fixed assets which was capitalized for
tax purposes and expensed as part of cost of systems in accordance with US GAAP. Deferred tax liability arose from the difference
between tax and accounting basis of net investment in sales-type leases.
As
of March 31, 2021 and December 31, 2020, deferred tax assets consisted of the following:
|
|
2021
|
|
|
2020
|
|
Accrued expenses
|
|
$
|
69,525
|
|
|
$
|
70,019
|
|
Write-off Erdos TCH net investment in sales-type leases
|
|
|
5,954,586
|
|
|
|
6,155,300
|
|
US NOL
|
|
|
310,424
|
|
|
|
254,035
|
|
PRC NOL
|
|
|
10,934,511
|
|
|
|
10,849,690
|
|
Total deferred tax assets
|
|
|
17,269,047
|
|
|
|
17,329,044
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(17,269,047
|
)
|
|
|
(17,329,044
|
)
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
8.
LOAN PAYABLE
Entrusted
Loan Payable (HYREF Loan)
The
HYREF Fund was established in July 2013 with a total fund size of RMB 460 million ($77 million) invested in Xi’an Zhonghong
for Zhonghong’s three new CDQ WHPG projects. The HYREF Fund invested RMB 3 million ($0.5 million) as an equity investment
and RMB 457 million ($74.5 million) as a debt investment in Xi’an Zhonghong; in return for such investments, the HYREF Fund
was to receive interest from Zhonghong for the HYREF Fund’s debt investment. The loan was collateralized by the accounts
receivable and the fixed assets of Shenqiu Phase I and II power generation systems; the accounts receivable and fixed assets of
Zhonghong’s three CDQ WHPG systems; and a 27 million RMB ($4.39 million) capital contribution made by Xi’an TCH in
Zhonghong. Repayment of the loan (principal and interest) was also jointly and severally guaranteed by Xi’an TCH and the
Chairman and CEO of the Company. In the fourth quarter of 2015, three power stations of Erdos TCH were pledged to Industrial Bank
as an additional guarantee for the loan to Zhonghong’s three CDQ WHPG systems. In 2016, two additional power stations of
Erdos TCH and Pucheng Phase I and II systems were pledged to Industrial Bank as an additional guarantee along with Xi’an
TCH’s equity in Zhonghong.
The term of this loan was for 60 months from July
31, 2013 to July 30, 2018, with an interest rate of 12.5%. On August 6, 2016, Zhonghong was required to repay principal of RMB 280 million
($42.22 million), of which the Company paid RMB 50 million ($7.54 million); while on August 6, 2017, Zhonghong was initially supposed
to repay principal of RMB 100 million ($16.27 million) and on July 30, 2018, Zhonghong was initially supposed to repay the remainder of
RMB 77 million ($12.52 million). During the term, Zhonghong was to maintain a minimal funding level and capital level in its designated
account with the Supervising Bank to make sure it has sufficient funds to make principal payments when they are due. Notwithstanding the
requirements, the HYREF Fund and Supervising Bank verbally notified Zhonghong from the beginning that it was unlikely that they would
enforce these requirements for the purpose of the efficient utilization of working capital. The Company had paid RMB 50 million ($7.54
million) of the RMB 280 million ($42.22 million), and on August 5, 2016, the Company entered into a supplemental agreement with the lender
to extend the due date of the remaining RMB 230 million ($34.68 million) of the original RMB 280 million ($45.54 million) to August 6,
2017. During the year ended December 31, 2017, the Company negotiated with the lender again to further extend the remaining loan balance
of RMB 230 million ($34.68 million), RMB 100 million ($16.27 million), and RMB 77 million ($12.52 million) (which included investment
from Xi’an TCH of RMB 75 million and was netted off with the entrusted loan payable of the HYREF Fund in the balance sheet). The
lender had tentatively agreed to extend the remaining loan balance until August 2019 with an adjusted annual interest rate of 9%, subject
to the final approval from its headquarters. The headquarters did not approve the extension proposal with an adjusted annual interest
rate of 9%; however, on December 29, 2018, the Company worked out with the lender an alternative repayment proposal as described below.
As of December 31, 2018, the entrusted loan payable had an outstanding balance of $59.29 million, of which, $10.92 million was from the
investment of Xi’an TCH; accordingly, the Company netted the loan payable of $10.92 million with the long-term investment to the
HYREF Fund made by Xi’an TCH. As of March 31, 2021, the interest payable for this loan was $10.07 million and the outstanding balance
for this loan was $22.05 million including a non-current portion of $0.30 million. As of December 31, 2020, the interest payable for this
loan was $10.14 million and the outstanding balance for this loan was $22.20 million including a non-current portion of $0.30 million.
Repayment
of HYREF loan
1. Transfer
of Chengli project as partial repayment
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station as the repayment
for the loan of RMB 188,639,400 ($27.54 million) to HYREF, the transfer of which was completed on January 22, 2019.
Xi’an TCH is a secondary limited partner
of HYREF. The fair value of the CDQ WHPG station applied in the transfer was determined by the parties based upon the appraisal report
issued by Zhonglian Assets Appraisal Group (Shaanxi) Co., Ltd. as of August 15, 2018. However, per the discussion below, Xi’an Zhonghong,
Xi’an TCH, Guohua Ku and Chonggong Bai (the “Buyers”) entered into a Buy Back Agreement, also agreed to buy back the
Station when conditions under the Buy Back Agreement are met. Due to the Buy Back agreement, the loan was not deemed repaid, and therefore
the Company recognized Chengli project as assets subject to buyback and kept the loan payable remained recognized under ASC 405-20-40-1
as of March 31, 2021 and December 31, 2020.
2. Buy
Back Agreement
On
December 29, 2018, Xi’an TCH, Xi’an Zhonghong, HYREF, Guohua Ku, Chonggong Bai and Xi’an Hanneng Enterprises
Management Consulting Co. Ltd. (“Xi’an Hanneng”) entered into a Buy Back Agreement.
Pursuant to the Buy Back Agreement, the Buyers
jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong
Bai (see 3 below), and a CDQ WHPG station in Boxing County which was transferred to HYREF by Xi’an Zhonghong. The buy-back price
for the Xi’an Hanneng’s equity was based on the higher of (i) the market price of the equity shares at the time of buy-back;
or (ii) the original transfer price of the equity shares plus bank interest. The buy-back price for the Station was based on the higher
of (i) the fair value of the Station on the date transferred; or (ii) the loan balance at the date of the transfer plus interest accrued
through that date. HYREF could request that the Buyers buy back the equity shares of Xi’an Hanneng and/or the CDQ WHPG station if
one of the following conditions is met: (i) HYREF holds the equity shares of Xi’an Hanneng until December 31, 2021; (ii) Xi’an
Huaxin New Energy Co., Ltd., is delisted from The National Equities Exchange And Quotations Co., Ltd., a Chinese over-the-counter trading
system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the Buyers or its affiliates has a credit problem, including
not being able to issue an auditor report or standard auditor report or any control person or executive of the Buyers is involved in crimes
and is under prosecution or has other material credit problems, to HYREF’s reasonable belief; (iv) if Xi’an Zhonghong fails
to timely make repayment on principal or interest of the loan agreement, its supplemental agreement or extension agreement; (v) the Buyers
or any party to the Debt Repayment Agreement materially breaches the Debt Repayment Agreement or its related transaction documents, including
but not limited to the Share Transfer Agreement, the Pledged Assets Transfer Agreement, the Entrusted Loan Agreement and their guarantee
agreements and supplemental agreements. Due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report, on December
19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding
capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back price was RMB 261,727,506
($37.52 million) including accrued interest of RMB 14,661,506 ($2.10 million), and was paid in full by Xi’an TCH on December 20,
2019.
The Buy Back agreement related to the CDQ WHPG
station is still outstanding as of March 31, 2021. The Company might be contingently liable for the difference between the fair value
of the transferred asset and the loan and related interest if the fair value of the transferred asset at the time of the exercise of the
buyback option is higher than the loan and related accrued interest. Based on an appraisal, as of March 31, 2021, the asset was valued
at $27.77 million while the loan and related interest was $32.12 million.
On April 9, 2021, the Buyers and HYREF entered
a Termination of Fulfillment Agreement (termination agreement). Under the termination agreement, the original buyback agreement was terminated
upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from
the buyers other than keeping the CDQ WHPG station (also see Note 17).
3.Transfer of Xuzhou Huayu
Project and Shenqiu Phase I & II project to Mr. Bai for partial repayment of HYREF loan
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement, pursuant
to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking
Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million) and Xi’an TCH transferred
two Biomass Power Generation Projects in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB 127,066,000
($18.55 million). Mr. Bai agreed to transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF
as repayment for the RMB 247,066,000 ($36.07 million) loan made by Xi’an Zhonghong to HYREF as consideration for the transfer
of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
On
February 15, 2019, Xi’an Zhonghong completed the transfer of the Xuzhou Huayu Project and Xi’an TCH completed the
transfer of Shenqiu Phase I and II Projects to Mr. Bai, and on January 10, 2019, Mr. Bai transferred all the equity shares of
his wholly owned company, Xi’an Hanneng, to HYREF as repayment of Xi’an Zhonghong’s loan to HYREF as consideration
for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
Xi’an
Hanneng is a holding company and was supposed to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”),
so that HYREF will indirectly receive and own such shares of Xi’an Huaxin as the repayment for the loan of Zhonghong. Xi’an
Hanneng already owned 29,948,000 shares of Huaxin; however, Xi’an Hanneng was not able to obtain the remaining 17,202,000
shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report.
On
December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back
all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back
price was RMB 261,727,506 ($37.52 million) including accrued interest of RMB 14,661,506 ($2.10 million), and was paid in full
by Xi’an TCH on December 20, 2019. On December 20, 2019, Mr. Bai, Xi’an TCH and Xi’an Zhonghong agreed to have
Mr. Bai repay the Company in cash for the transfer price of Xuzhou Huayu and Shenqiu in five installment payments. The 1st payment
of RMB 50 million ($7.17 million) is due on January 5, 2020, the 2nd payment of RMB 50 million ($7.17 million)
was due on February 5, 2020, the 3rd payment of RMB 50 million ($7.17 million) was due on April 5, 2020, the 4th payment
of RMB 50 million ($7.17 million) is due on June 30, 2020, and the final payment of RMB 47,066,000 ($6.75 million) is due on September
30, 2020. As of March 31, 2020, the Company has received the full payment of RMB 247 million ($36.28 million) from Mr. Bai.
4.
The lender agreed to extend the repayment of RMB 77.00 million ($11.04 million) to July 8, 2023; of which, RMB 75.00 million ($10.81
million) was Xi’an TCH’s investment into the HYREF fund as a secondary limited partner, and the Company netted off
the investment of RMB 75 million ($10.81 million) by Xi’an TCH with the entrusted loan payable of the HYREF Fund.
9.
RELATED PARTY TRANSACTIONS
As
of March 31, 2021 and December 31, 2020, the Company had $28,466 and $28,440, respectively, in advances from the Company’s
management, which bear no interest, are unsecured, and are payable upon demand.
On February 23, 2021, the Company entered into
certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed
to sell to the Purchasers, an aggregate of up to 3,320,000 shares of common stock of the Company, at $11.522 per share. One
of the purchaser is the Company’s CEO (also is the Company’s Chairman), he purchased 1,000,000 common shares of the Company.
In April 2021, the Company’s CEO amended the number of shares that he would purchase from 1,000,000 shares to 940,000 shares. The
Company returned $691,320 extra proceeds that were received earlier to the Company’s CEO in April 2021 (see Note 11).
10.
NOTE PAYABLE, NET
Promissory
Notes in December 2020
On
December 4, 2020, the Company entered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company
sold and issued to the Purchaser a Promissory Note of $3,150,000. The Purchaser purchased the Note with an original issue discount
of $150,000, which was recognized as a debt discount and will be amortized using the interest method over the life of the note.
The Note bears interest at 8% per annum and has a term of 24 months. All outstanding principal and accrued interest on the Note
will become due and payable on December 3, 2022. The Company’s obligations under the Note may be prepaid at any time, provided
that in such circumstance the Company would pay 125% of any amounts outstanding under the Note and being prepaid. Beginning on
the date that is six months from the issue date of the Note, Purchaser shall have the right to redeem any amount of this Note
up to $500,000 per calendar month by providing written notice to the Company. During the three months ended March 31, 2021, the
Company amortized OID of $18,750 and recorded $63,000 interest expense on this Note.
11.
SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Shares to be Issued for Equity
Financing in 2021
On February 23, 2021, the Company entered into
certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed
to sell to the Purchasers, an aggregate of up to 3,320,000 shares of common stock of the Company, at $11.522 per share, which is
the five-day average closing price immediately prior to signing the Purchase Agreements. One of the purchaser is the Company’s
CEO (also is the Company’s Chairman), he purchased 1,000,000 common shares of the Company. On March 11, 2021, the Company received
approximately $38.25 million proceeds from the issuance of 3,320,000 shares under the securities purchase agreements, there anywhere no
fees paid in connection with this financing. In April 2021, the Company’s CEO amended the number of shares that he would purchase
from 1,000,000 shares to 940,000 shares; accordingly, total number of shares sold in this offering became 3,260,000 shares. The Company
returned $691,320 extra proceeds that were received earlier to the Company’s CEO in April 2021.
Shares Issued for Equity Financing in 2020
On August 24, 2020 and September 28, 2020, the
Company entered into Securities Purchase Agreements with the purchaser and offered and sold to such purchaser 265,250 shares of Common
Stock at negotiated purchase prices (132,000 shares at $2.15 per share and 133,250 shares at $2.34 per share) without reference
to the market price and received the net proceeds was $497,187 after deducting the placement agent commission and certain expenses. These
265,250 shares were offered and sold in a registered public offering pursuant to the prospectus supplement dated August 24, 2020, and
the original prospectus contained in an effective shelf registration statement on Form S-3 (the “Registration Statement”),
which was originally filed with the Securities and Exchange Commission on December 1, 2017, and was declared effective on December 8,
2017 (File No. 333-221868).
Warrants
Following
is a summary of the activities of warrants that were issued from equity financing (post-reverse stock split) for the three months
ended March 31, 2021
|
|
|
Number of
Warrants
|
|
|
Average
Exercise
Price
(post-reverse
stock split
price)
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Outstanding at January 1, 2021
|
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.21
|
|
Exercisable at January 1, 2021
|
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.21
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exchanged
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2021
|
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
2.96
|
|
Exercisable at March 31, 2021
|
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
2.96
|
|
Shares
Issued for Stock Compensation
On
March 16, 2020, the Company’s Board of Director agreed to issue 3,333 shares of the Company’s Common Stock (post-reverse
stock split) to the Company’s law firm. The shares are earned in full and non-refundable as of March 9, 2020. The FV of
these shares are $10,999 on March 9, 2020.
12.
INCOME TAX
The
Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which
are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments.
Under Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau
continues to treat the Company’s sales-type leases as operating leases. Accordingly, the Company recorded deferred income
taxes.
The
Company’s subsidiaries generate all of their income from their PRC operations. All of the Company’s Chinese subsidiaries’
effective income tax rate for 2021 and 2020 was 25%. Yinghua, Shanghai TCH, Xi’an TCH, Huahong, Zhonghong and Erdos TCH
file separate income tax returns.
There
is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s CFS do not present any income
tax provisions related to Cayman Islands tax jurisdiction, where Sifang Holding is domiciled.
The
US parent company, CREG is taxed in the US and, as of March 31, 2021, had net operating loss (“NOL”) carry forwards
for income taxes of $1.48 million; for federal income tax purposes, the NOL arising in tax years beginning after 2017 may only
reduce 80% of a taxpayer’s taxable income, and may be carried forward indefinitely. However, the coronavirus Aid, Relief
and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate
taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and
2020. The management believes the realization of benefits from these losses may be uncertain due to the US parent company’s
continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
As
of March 31, 2021, the Company’s PRC subsidiaries had $43.74 million NOL that can be carried forward to offset future taxable
income for five years from the year the loss is incurred. The NOL was mostly from Xi’an TCH, Erdos TCH and Zhonghong. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making
this assessment. After consideration of all the information available, management believes that significant uncertainty exists
with respect to future realization of the deferred tax assets due to the recurring losses from operations of these entities, accordingly,
the Company recorded a 100% deferred tax valuation allowance for PRC NOL.
The
following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March
31, 2021 and 2020, respectively:
|
|
2021
|
|
|
2020
|
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
0.2
|
%
|
|
|
(2.3
|
)%
|
Permanent differences
|
|
|
1.4
|
%
|
|
|
4.0
|
%
|
Change in valuation allowance
|
|
|
21.3
|
%
|
|
|
19.30
|
%
|
Tax expense per financial statements
|
|
|
1.9
|
%
|
|
|
-
|
%
|
The
provision for income tax expense for the three months ended March 31, 2021 and 2020 consisted of the following:
|
|
2021
|
|
|
2020
|
|
Income tax expense – current
|
|
$
|
5,125
|
|
|
$
|
-
|
|
Income tax benefit – deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax expense
|
|
$
|
5,125
|
|
|
$
|
-
|
|
13.
STOCK-BASED COMPENSATION PLAN
Options
to Employees and Directors
On
June 19, 2015, the stockholders of the Company approved the China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”)
at its annual meeting. The total shares of Common Stock authorized for issuance during the term of the Plan is 124,626 (post-reverse
stock split). The Plan was effective immediately upon its adoption by the Board of Directors on April 24, 2015, subject to stockholder
approval, and will terminate on the earliest to occur of (i) the 10th anniversary of the Plan’s effective date, or (ii)
the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares. The stockholders
approved the Plan at their annual meeting on June 19, 2015.
The
following table summarizes option activity with respect to employees and independent directors for the three months ended March
31, 2021, and the number of options reflects the Reverse Stock Split effective April 13, 2020:
|
|
|
Number of
Shares
|
|
|
Average
Exercise Price
per Share (post-reverse stock split price)
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Outstanding at January 1, 2021
|
|
|
|
500
|
|
|
$
|
16.1
|
|
|
|
6.32
|
|
Exercisable at January 1, 2021
|
|
|
|
500
|
|
|
$
|
54.3
|
|
|
|
6.32
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2021
|
|
|
|
500
|
|
|
$
|
16.1
|
|
|
|
6.07
|
|
Exercisable at March 31, 2021
|
|
|
|
500
|
|
|
$
|
54.3
|
|
|
|
6.07
|
|
14.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective January 1, 2006, the Company is only required to maintain one statutory reserve by appropriating
from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company’s Chinese subsidiaries are required to transfer 10% of their net income, as determined under PRC accounting rules
and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses,
if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders
in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered capital.
During
the three months ended March 31, 2021, the Company transferred $1,538, which is 10% of Xi’an TCH’s net income to the
statutory reverse. The maximum statutory reserve amount has not been reached for any subsidiary. The table below discloses the
statutory reserve amount in the currency type registered for each Chinese subsidiary as of March 31, 2021 and December 31, 2020:
Name of Chinese Subsidiaries
|
|
Registered
Capital
|
|
|
Maximum
Statutory
Reserve
Amount
|
|
Statutory
reserve at
March 31,
2021
|
|
Statutory
reserve at
December 31,
2020
|
|
Shanghai TCH
|
|
$
|
29,800,000
|
|
|
$
|
14,900,000
|
|
¥6,564,303 ($1,003,859)
|
|
¥6,564,303 ($1,003,859)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an TCH
|
|
¥
|
202,000,000
|
|
|
¥
|
101,000,000
|
|
¥73,710,678 ($11,237,852)
|
|
¥73,700,706 ($11,236,314)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erdos TCH
|
|
¥
|
120,000,000
|
|
|
¥
|
60,000,000
|
|
¥19,035,814 ($2,914,869)
|
|
¥19,035,814 ($2,914,869)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an Zhonghong
|
|
¥
|
30,000,000
|
|
|
¥
|
15,000,000
|
|
Did not accrue yet due to accumulated deficit
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Huahong
|
|
$
|
2,500,300
|
|
|
$
|
1,250,150
|
|
Did not accrue yet due to accumulated deficit
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhongxun
|
|
¥
|
35,000,000
|
|
|
¥
|
17,500,000
|
|
Did not accrue yet due to accumulated deficit
|
|
Did not accrue yet due to accumulated deficit
|
|
Common
Welfare Fund
The
common welfare fund is a voluntary fund to which the Company can transfer 5% to 10% of its net income. This fund can only be utilized
on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company does not participate
in this fund.
15.
CONTINGENCIES
China
maintains a “closed” capital account, meaning companies, banks, and individuals cannot move money in or out of the
country except in accordance with strict rules. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange
(SAFE) regulate the flow of foreign exchange in and out of the country. For inward or outward foreign currency transactions, the
Company needs to make a timely declaration to the bank with sufficient supporting documents to declare the nature of the business
transaction. The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s
assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current
law. Remittances in currencies other than RMB may require certain supporting documentation in order to make the remittance.
The
Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
16.
COMMITMENTS
Lease
Commitment
On
November 20, 2017, Xi’an TCH entered into a lease for its office with a term from December 1, 2017 through November 30,
2020. The monthly rent is RMB 36,536 ($5,600) with quarterly payment in advance. This lease was expired in November 2020. The
Company entered a new lease contract for the same location for a period from January 1, 2021 through December 31, 2023 with monthly
rent of RMB 36,536 ($5,600), to be paid every half year in advance.
For
the three months ended March 31, 2021 and 2020, the rental expense of the Company was $16,903 and $16,374, respectively.
The
components of lease costs, lease term and discount rate with respect of the office lease with an initial term of more than 12
months are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
2021
|
|
Operating lease cost – amortization of ROU
|
|
$
|
14,989
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
1,914
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
2.75 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
5
|
%
|
|
|
Three Months Ended
|
|
|
|
March 31,
2020
|
|
Operating lease cost– amortization of ROU
|
|
$
|
15,987
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
387
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
0.67 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
3
|
%
|
The
following is a schedule, by years, of maturities of the office lease liabilities as of March 31, 2021
|
|
|
Operating
Leases
|
|
For the years ended March 31, 2022,
|
|
$
|
66,720
|
|
For the years ended March 31, 2023
|
|
|
66,720
|
|
For the years ended March 31, 2024
|
|
|
33,360
|
|
Total undiscounted cash flows
|
|
|
166,800
|
|
Less: imputed interest
|
|
|
(9,978
|
)
|
Present value of lease liabilities
|
|
$
|
156,822
|
|
Employment
Agreement
On
May 8, 2020, the Company entered an employment agreement with Yongjiang Shi, the Company’s CFO for a term of 24 months.
The monthly salary is RMB 16,000 ($2,300). The Company will grant the CFO no less than 5,000 shares of the Company’s Common
Stock annually.
Investment
Banking Engagement Agreement
On
October 10, 2019, the Company entered an investment banking engagement agreement with an investment banker firm to engage them
as the exclusive lead underwriter for a registered securities offering of up to $20 million. The Company shall pay to the investment
banker an equity retainer fee of 15,000 shares (post-reverse stock split) of the restricted Common Stock of the Company (10,000
shares was issued within 10 business days of signing the agreement, and remaining 5,000 shares will be paid upon completion of
the offering). The agreement expired in March 2021.
17.
SUBSEQUENT EVENTS
The
Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events
through the date the financial statements were issued and determined the Company has the following material subsequent
events:
On
April 2, 2021, the Company entered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company
sold and issued to the Purchaser a Promissory Note of $5,250,000. The Purchaser purchased the Note with an original issue discount
of $250,000, which was recognized as a debt discount and will be amortized using the interest method over the life of the note.
The Note bears interest at 8% per annum and has a term of 24 months. All outstanding principal and accrued interest on the Note
will become due and payable on April 1, 2023. The Company’s obligations under the Note may be prepaid at any time, provided
that in such circumstance the Company would pay 125% of any amounts outstanding under the Note and being prepaid. Beginning on
the date that is six months from the issue date of the Note, Purchaser shall have the right to redeem any amount of this Note
up to $825,000 per calendar month by providing written notice to the Company.
On
April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment
Agreement (termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019
shall be terminated upon the effective date of the termination agreement. HYREF will not execute the buy-back option and will
not ask for any additional payment from the buyers other than keeping the CDQ WHPG station. The Company will record a gain of
approximately $3.1 million from transferring the CDP WHPG station to HYREF as partial repayment of the entrusted loan resulting
from the termination of the buy-back agreement.
In April 2021, the Company’s CEO amended
the number of shares that he would purchase from 1,000,000 shares (under the securities purchase agreement entered on February 23, 2021)
to 940,000 shares. The Company returned $691,320 extra proceeds that were received earlier to the Company’s CEO in April 2021 (see
Note 11).
On
May 2, 2021, the Company entered an agreement with an investment banker with the intension to raise approximately $10,000,000
from either a public offering or a private placement.