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
JUNE 30, 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 June 30, 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. The Company has not recognized any income due to the uncertainty of collection.
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 on January 22, 2019, at which time the Company recorded a $624,133
loss from this transfer. 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 consolidated financial statements (“CFS”) until April 9,
2021. The Buy Back Agreement was terminated on April 9, 2021, HYREF did not execute the buy-back
option and did not ask for any additional payment from the buyers other than keeping the CDQ WHPG station.
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. 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 and there is great uncertainty about the acquisition.
On July 27, 2021, the Company filed a certificate of change to the Company’s Articles of Incorporation
with the Secretary of State of the State of Nevada to increase the total number of the Company’s authorized shares of common
stock from 10,000,000 shares to 100,000,000 shares, par value $0.001 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial information as of and for the
six and three months ended June 30, 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 six and three months ended June 30, 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 June 30, 2021. However, there was no revenue for the Company for the six and three months ended June 30,
2021. All significant inter-company accounts and transactions were eliminated in consolidation.
Uses and Sources of Liquidity
For the six and three months ended June 30, 2021, the Company had a
net income of $1.94 million and $2.22 million. For the six and three months ended June 30, 2020, the Company had net income of $0.40 million
and 1.0 million. The Company had an accumulated deficit of $41.10 million as of June 30, 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 not producing
any electricity. 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’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.
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 six and three
months ended June 30, 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.
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 June 30, 2021, the ROU was $161,510. The
Company recognized no impairment of ROU assets as of June 30, 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 June 30, 2021 and December 31, 2020, the Company had gross accounts
receivable of $0 and $342,974 of Erdos TCH for electricity sold, respectively. As of June 30, 2021 and December 31, 2020, the Company
had bad debt allowance of $0 and $34,297 for Erdos TCH due to the customer not making the payments as scheduled, respectively. As of June
30, 2021, all outstanding accounts receivable balance was collected in full.
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 June 30, 2021, cash held in the PRC bank of
approximately $145,934,700 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 six and three months ended June 30, 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
June 30, 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 June 30, 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 six and three months ended June 30, 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 six and three months ended
June 30, 2021, 30,911 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. For the six and three months ended June 30, 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 June 30, 2021, other receivables mainly consisted of (i) advances
to third parties of $7,739, bearing no interest, payable upon demand, ii) advance to employees of $8,742, iii) advance to suppliers of
$2,786 and (iv) others of $12,269 including social insurance receivable of $4,625.
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 June 30, 2021 and December 31, 2020, the Company had asset subject
to buyback of $0 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).
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 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. As a result of the termination
of the buy-back agreement, the Company recorded a gain of approximately $3.1 million from transferring the CDP WHPG station to HYREF as
partial repayment of the entrusted loan
5. TAXES PAYABLE
Taxes payable consisted of the following as of June 30, 2021 and 2020:
|
|
2021
|
|
|
2020
|
|
Income tax – current
|
|
$
|
2,443,750
|
|
|
$
|
2,746,757
|
|
Value-added tax
|
|
|
-
|
|
|
|
322,652
|
|
Other taxes
|
|
|
108
|
|
|
|
76,203
|
|
Total – current
|
|
|
2,443,858
|
|
|
|
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 June 30, 2021 and December 31, 2020:
|
|
2021
|
|
|
2020
|
|
Education and union fund and social insurance payable
|
|
$
|
377,490
|
|
|
$
|
373,740
|
|
Consulting and legal expenses
|
|
|
31,090
|
|
|
|
31,090
|
|
Accrued payroll and welfare
|
|
|
257,665
|
|
|
|
255,278
|
|
Other
|
|
|
37,400
|
|
|
|
66,588
|
|
Total
|
|
$
|
703,645
|
|
|
$
|
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 June 30, 2021 and December 31, 2020, deferred tax assets consisted
of the following:
|
|
2021
|
|
|
2020
|
|
Accrued expenses
|
|
$
|
70,721
|
|
|
$
|
70,019
|
|
Write-off Erdos TCH net investment in sales-type leases
|
|
|
6,536,960
|
|
|
|
6,155,300
|
|
US NOL
|
|
|
533,834
|
|
|
|
254,035
|
|
PRC NOL
|
|
|
10,642,867
|
|
|
|
10,849,690
|
|
Total deferred tax assets
|
|
|
17,784,382
|
|
|
|
17,329,044
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(17,784,382
|
)
|
|
|
(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 June 30, 2021,
the interest payable for this loan was $0 and the outstanding balance for this loan (non-current) was $0.31 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 December 31, 2020.
The Buy Back agreement was terminated in April 2021 (see 2 below for detail).
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.
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 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. The Company recorded
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.
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 June 30, 2021, the Company has received the full payment of RMB 247 million ($36.28
million) from Mr. Bai.
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 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. The Company recorded 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.
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 June 30, 2021 and December 31, 2020, the Company had $28,404
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 purchasers is the Company’s
CEO (who is also the Company’s Chairman), who 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. In April 2021 the Company returned to
the Company’s CEO the $691,320 in extra proceeds that had been received earlier .
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. Upon receipt of the redemption notice from
the lender, the Company shall pay the applicable redemption amount in cash to lender within three trading days of receipt of such redemption
notice; if the Company fails to pay, then the outstanding balance will automatically be increased by 25%. During the six months ended
June 30, 2021, the Company amortized OID of $37,500 and recorded $127,222 interest expense on this Note. During the three months ended
June 30, 2021, the Company amortized OID of $18,750 and recorded $64,222 interest expense on this Note.
On June 14, 2021, Company entered into an
Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned a new Promissory Note in the original
principal amount of $500,000 from the original Promissory Note. The Company and Lender exchanged this Partitioned Note for the delivery
of 54,348 shares of the Company’s Common Stock. The Company recorded $2,719 loss on conversion of this note. In addition, the investor
also made adjustments of $818,914 to increase the principle of the notes during the second quarter of 2021 as a result of the Company’s
failure to pay the redemption amount in cash to lender within three trading days from receipt of the redemption notice, the Company recorded
$818,914 principal adjustment as interest expense. The Note has been classified as a current liability in accordance with ASC 470-10-45
Other Presentation Matters – General Due on Demand Loan Arrangements.
Promissory Notes in April 2021
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. Upon receipt of the redemption
notice from the lender, the Company shall pay the applicable redemption amount in cash to lender within three trading days of receipt
of such redemption notice; if the Company fails to pay, then the outstanding balance will automatically be increased by 25%. During the
six and three months ended June 30, 2021, the Company amortized OID of $31,250 and recorded $100,000 interest expense on this Note. The
Note has been classified as a current liability in accordance with ASC 470-10-45 Other Presentation Matters – General Due on Demand
Loan Arrangements.
11. SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Shares 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. The stock certificates for these shares were issued in April 2021.
Warrants
Following is a summary of the activities of warrants that were issued
from equity financing (post-reverse stock split) for the six months ended June 30, 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 June 30, 2021
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
2.71
|
|
Exercisable at June 30, 2021
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
2.71
|
|
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 June 30,
2021, had net operating loss (“NOL”) carry forwards for income taxes of $2.54 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 June 30, 2021, the Company’s PRC subsidiaries had $42.57
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 six months ended June 30, 2021 and 2020, respectively:
|
|
2021
|
|
|
2020
|
|
U.S. statutory rates
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Tax rate difference – current provision
|
|
|
7.0
|
%
|
|
|
10.1
|
%
|
Permanent differences
|
|
|
(5.3
|
)%
|
|
|
12.6
|
%
|
Change in valuation allowance
|
|
|
(28.0
|
)%
|
|
|
(43.7
|
)%
|
Tax benefit per financial statements
|
|
|
(5.3
|
)%
|
|
|
-
|
%
|
The provision for income tax expense for the six months ended June
30, 2021 and 2020 consisted of the following:
|
|
2021
|
|
|
2020
|
|
Income tax benefit – current
|
|
$
|
97,953
|
|
|
$
|
-
|
|
Income tax benefit – deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax benefit
|
|
$
|
97,953
|
|
|
$
|
-
|
|
The following table reconciles the U.S. statutory rates to the Company’s
effective tax rate for the three months ended June 30, 2021 and 2020, respectively:
|
|
2021
|
|
|
2020
|
|
U.S. statutory rates
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Tax rate difference – current provision
|
|
|
6.1
|
%
|
|
|
5.4
|
%
|
Permanent differences
|
|
|
(4.9
|
)%
|
|
|
2.6
|
%
|
Change in valuation allowance
|
|
|
(27.1
|
)%
|
|
|
(29.0
|
)%
|
Tax expense per financial statements
|
|
|
(4.9
|
)%
|
|
|
-
|
%
|
The provision for income tax expense for the three months ended June
30, 2021 and 2020 consisted of the following:
|
|
2021
|
|
|
2020
|
|
Income tax benefit – current
|
|
$
|
103,078
|
|
|
$
|
-
|
|
Income tax benefit – deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax benefit
|
|
$
|
103,078
|
|
|
$
|
-
|
|
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 six months ended June 30, 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
|
|
|
$
|
16.1
|
|
|
|
6.32
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2021
|
|
|
500
|
|
|
$
|
16.1
|
|
|
|
5.82
|
|
Exercisable at June 30, 2021
|
|
|
500
|
|
|
$
|
16.1
|
|
|
|
5.82
|
|
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 six months ended June 30, 2021, the Company transferred
$16,312, which is 10% of Xi’an TCH’s net income to the statutory reverse. During the three months ended June 30, 2021, the
Company transferred $14,774, 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 June 30, 2021 and December 31, 2020:
Name of Chinese Subsidiaries
|
|
Registered
Capital
|
|
|
Maximum
Statutory
Reserve
Amount
|
|
|
Statutory
reserve at
June 30,
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
|
|
|
¥73,806,273 ($11,252,626)
|
|
¥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.
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:
|
|
Six Months Ended
|
|
|
|
June 30,
2021
|
|
Operating lease cost – amortization of ROU
|
|
$
|
29,970
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
3,903
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
2.50 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
5
|
%
|
|
|
Six Months Ended
|
|
|
|
June 30,
2020
|
|
Operating lease cost– amortization of ROU
|
|
$
|
31,848
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
654
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
0.42 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
3
|
%
|
|
|
Three Months
Ended
|
|
|
|
June 30,
2021
|
|
Operating lease cost – amortization of ROU
|
|
$
|
14,981
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
1,989
|
|
|
|
Three Months
Ended
|
|
|
|
June 30,
2020
|
|
Operating lease cost– amortization of ROU
|
|
$
|
15,861
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
267
|
|
The following is a schedule, by years, of maturities of the office
lease liabilities as of June 30, 2021:
|
|
Operating
Leases
|
|
For the years ended June 30, 2022,
|
|
$
|
67,869
|
|
For the years ended June 30, 2023
|
|
|
67,869
|
|
For the years ended June 30, 2024
|
|
|
33,934
|
|
Total undiscounted cash flows
|
|
|
169,672
|
|
Less: imputed interest
|
|
|
(8,161
|
)
|
Present value of lease liabilities
|
|
$
|
161,511
|
|
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.
On May 2, 2021, the Company entered an agreement with an investment
banker (who will serve as the exclusive placement agent or exclusive lead underwriter of the Company) with the intension to raise approximately
$10,000,000 from either a public offering or a private placement. Under the agreement, upon the closing of the financing, the Company
will pay Univest Securities, LLC (the “Underwriter” or “Univest”) a discount equal to eight percent (8%) of the
gross proceeds raised in the offering, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds of the offering,
as well as underwriter warrants to purchase that number of shares of common stock and accompanying Warrants equal to five percent (5%)
of the shares of common stock and Warrants sold in the offering, including upon exercise by the Underwriter of its over-allotment option
(“Underwriter Warrants”). The Underwriter Warrants shall be exercisable at any time, and from time to time, in whole or in
part, during the period commencing 180 days from the date of commencement of sales of the offering, which period shall not extend further
than five years from the date of commencement of sales of the offering in compliance with FINRA Rule 5110(g)(8)(A). After an initial
period of six months from the agreement entering date, this engagement may be terminated at any time by either party upon 10 days written
notice to the other party, effective upon receipt of written notice to that effect by the other party. The Company filed S-1 with the
SEC on July 28, 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 July 14, 2021, Company entered into an Exchange Agreement with
the lender. Pursuant to the Agreement, the Company and Lender partitioned a new Promissory Notes in the original principal amount of
$500,000 from the original Promissory Note entered on December 4, 2020. The Company and Lender exchanged this Partitioned Note for
the delivery of 60,679 shares of the Company’s Common Stock. The Board of directors approved to increase the authorized shares
on May 12, 2021.
On July 27, 2021, the Company filed a certificate of change to
the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada to increase the total number
of the Company’s authorized shares of common stock from 10,000,000 shares to 100,000,000 shares, par value $0.001 per share.
July 27, 2021 is the effective date.