UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 001-34591
CLEANTECH SOLUTIONSSHARING ECONOMY INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
| NEVADA | 90-0648920 | |
| (State or other jurisdiction of incorporation of organization) | (I.R.S. Employer Identification No.) |
No. 9 Yanyu Middle Road
Qianzhou Village, Huishan District, Wuxi City
Jiangsu Province, China 214181
(Address of principal executive offices)
(86) 51083397559
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 2,561,7039,278,106 shares of common stock are issued and outstanding as of November 14, 2017.13, 2019.
CLEANTECH SOLUTIONSSHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 2019
FORM 10-Q
September 30, 2017
TABLE OF CONTENTS
i
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 FREE. Our SEC filings are available through our website at http://www.cleantechsolutionsinternational.com/sec.php.www.seii.com/investor-relations/sec-filings.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
ii
PART 1I - FINANCIAL INFORMATION
CLEANTECH SOLUTIONSSHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 4,774,697 | $ | 1,481,498 | ||||
| Restricted cash | 229,499 | 551,047 | ||||||
| Notes receivable | 254,059 | 133,913 | ||||||
| Accounts receivable, net of allowance for doubtful accounts | 13,023,448 | 13,922,371 | ||||||
| Inventories, net of reserve for obsolete inventories | 4,033,372 | 2,394,179 | ||||||
| Advances to suppliers | 2,560,713 | 1,116,525 | ||||||
| Deferred tax assets | 403,389 | 386,381 | ||||||
| Receivable from sale of subsidiary | 2,886,350 | 4,838,152 | ||||||
| Prepaid expenses and other | 1,475,104 | 9,074 | ||||||
| Assets of discontinued operations | 380,779 | 1,758,986 | ||||||
| Total current assets | 30,021,410 | 26,592,126 | ||||||
| OTHER ASSETS: | ||||||||
| Equity method investment | 8,906,014 | 8,610,759 | ||||||
| Property and equipment, net | 28,274,949 | 29,878,675 | ||||||
| Intangible assets, net | 5,269,221 | 5,283,695 | ||||||
| Total other assets | 42,450,184 | 43,773,129 | ||||||
| Total assets | $ | 72,471,594 | $ | 70,365,255 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term bank loans | $ | 2,029,465 | $ | 2,159,889 | ||||
| Bank acceptance notes payable | 375,827 | 547,172 | ||||||
| Accounts payable | 2,414,145 | 864,870 | ||||||
| Accrued expenses | 207,303 | 368,395 | ||||||
| Advances from customers | 1,011,384 | 427,446 | ||||||
| Due to related party | 351,430 | - | ||||||
| VAT and service taxes payable | 7,298 | 47,319 | ||||||
| Income taxes payable | 62,104 | 79,467 | ||||||
| Liabilities of discontinued operations | 356,384 | 558,661 | ||||||
| Total current liabilities | 6,815,340 | 5,053,219 | ||||||
| Total liabilities | 6,815,340 | 5,053,219 | ||||||
| Commitments and contingencies (see Note 15) | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock ($0.001 par value; 10,000,000 shares authorized; | ||||||||
| No shares issued and outstanding at September 30, 2017 and December 31, 2016) | - | - | ||||||
| Common stock ($0.001 par value; 12,500,000 shares authorized; 2,111,871 and 1,415,441 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively) | 2,112 | 1,415 | ||||||
| Additional paid-in capital | 38,003,455 | 35,549,542 | ||||||
| Retained earnings | 21,613,265 | 26,531,498 | ||||||
| Statutory reserve | 2,352,592 | 2,352,592 | ||||||
| Accumulated other comprehensive income - foreign currency translation adjustment | 3,684,830 | 876,989 | ||||||
| Total stockholders' equity | 65,656,254 | 65,312,036 | ||||||
| Total liabilities and stockholders' equity | $ | 72,471,594 | $ | 70,365,255 | ||||
See notes to unaudited condensed consolidated financial statements.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE GAIN (LOSS)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUES | $ | 2,629,217 | $ | 3,946,480 | $ | 10,998,438 | $ | 12,390,980 | ||||||||
| COST OF REVENUES | 3,075,290 | 3,452,614 | 10,415,813 | 10,484,928 | ||||||||||||
| GROSS PROFIT (LOSS) | (446,073 | ) | 493,866 | 582,625 | 1,906,052 | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Depreciation | 276,940 | 112,472 | 814,654 | 388,326 | ||||||||||||
| Selling, general and administrative | 3,279,792 | 322,426 | 4,147,652 | 1,189,460 | ||||||||||||
| Research and development | 107,568 | 111,840 | 324,698 | 196,478 | ||||||||||||
| Total operating expenses | 3,664,300 | 546,738 | 5,287,004 | 1,774,264 | ||||||||||||
| (LOSS) INCOME FROM OPERATIONS | (4,110,373 | ) | (52,872 | ) | (4,704,379 | ) | 131,788 | |||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest income | 3,205 | 5,460 | 10,925 | 20,272 | ||||||||||||
| Interest expense | (33,125 | ) | (31,676 | ) | (107,991 | ) | (96,630 | ) | ||||||||
| Loss on equity method investment | (39,060 | ) | - | (81,871 | ) | - | ||||||||||
| Foreign currency transaction gain | - | (1 | ) | - | 168 | |||||||||||
| Other income | 478 | (2 | ) | 47,618 | 391 | |||||||||||
| Total other expense, net | (68,502 | ) | (26,219 | ) | (131,319 | ) | (75,799 | ) | ||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (4,178,875 | ) | (79,091 | ) | (4,835,698 | ) | 55,989 | |||||||||
| Income taxes provision | 113 | 7,103 | 11,196 | 176,518 | ||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS | (4,178,988 | ) | (86,194 | ) | (4,846,894 | ) | (120,529 | ) | ||||||||
| LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | (71,339 | ) | (273,342 | ) | (71,339 | ) | (1,763,282 | ) | ||||||||
| NET LOSS | $ | (4,250,327 | ) | $ | (359,536 | ) | $ | (4,918,233 | ) | $ | (1,883,811 | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| Net loss | $ | (4,250,327 | ) | $ | (359,536 | ) | $ | (4,918,233 | ) | $ | (1,883,811 | ) | ||||
| Other comprehensive gain (loss): | ||||||||||||||||
| Unrealized foreign currency translation gain (loss) | 1,224,249 | (315,181 | ) | 2,807,841 | (2,157,652 | ) | ||||||||||
| Comprehensive loss | $ | (3,026,078 | ) | $ | (674,717 | ) | $ | (2,110,392 | ) | $ | (4,041,463 | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Continuing operations - Basic and diluted | $ | (2.10 | ) | $ | (0.07 | ) | $ | (2.96 | ) | $ | (0.10 | ) | ||||
| Discontinued operations - basic and diluted | (0.04 | ) | (0.21 | ) | (0.04 | ) | (1.54 | ) | ||||||||
| Net loss per common share - basic and diluted | $ | (2.14 | ) | $ | (0.28 | ) | $ | (3.00 | ) | $ | (1.64 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 1,988,794 | 1,297,111 | 1,635,223 | 1,148,390 | ||||||||||||
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 92,864 | $ | 781,740 | ||||
| Restricted cash | 94,881 | 77,473 | ||||||
| Notes receivable | 147,136 | 149,757 | ||||||
| Accounts receivable, net of allowance for doubtful accounts | 475,942 | 4,327,980 | ||||||
| Inventories, net of inventory reserve | 2,052,312 | 6,414,305 | ||||||
| Advances to suppliers | - | 565,295 | ||||||
| Receivable from sale of subsidiary | - | 2,791,590 | ||||||
| Prepaid license fee - related party, net | 165,957 | 663,830 | ||||||
| Prepaid expenses and other | 1,627,660 | 5,235,113 | ||||||
| Assets of discontinued operations | 205,657 | 209,926 | ||||||
| Total current assets | 4,862,409 | 21,217,009 | ||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | 6,045,537 | 21,563,420 | ||||||
| Intangible assets, net | 3,316,483 | 3,562,513 | ||||||
| Total other assets | 9,362,020 | 25,125,933 | ||||||
| Total assets | $ | 14,224,429 | $ | 46,342,942 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term bank loans | $ | 1,554,247 | $ | 2,182,960 | ||||
| Bank acceptance notes payable | 91,084 | 72,698 | ||||||
| Convertible note payable | 838,571 | 710,504 | ||||||
| Accounts payable | 2,464,001 | 4,254,598 | ||||||
| Accrued expenses | 433,638 | 779,948 | ||||||
| Advances from customers | - | 1,073,797 | ||||||
| Due to related parties | 1,745,444 | 1,257,505 | ||||||
| Income taxes payable | 57,889 | 60,065 | ||||||
| Liabilities of discontinued operations | 258,974 | 268,532 | ||||||
| Total current liabilities | 7,443,848 | 10,660,607 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Long-term loan | 119,574 | 244,910 | ||||||
| Total liabilities | 7,563,422 | 10,905,517 | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; Series A Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 and 0 issued and outstanding at September 30, 2019 and December 31, 2018, respectively) | - | - | ||||||
| Common stock ($0.001 par value; 12,500,000 shares authorized; 9,278,106 and 7,449,123 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively) | 9,278 | 7,449 | ||||||
| Additional paid-in capital | 58,301,021 | 58,452,131 | ||||||
Accumulated deficit | (55,594,946 | ) | (27,492,559 | ) | ||||
| Statutory reserve | 2,352,592 | 2,352,592 | ||||||
| Accumulated other comprehensive income - foreign currency translation adjustment | 2,440,621 | 2,657,614 | ||||||
| Total stockholder’s equity | 7,508,566 | 35,977,227 | ||||||
| Non-controlling interest | (847,559 | ) | (539,802 | ) | ||||
| Total stockholders’ equity | 6,661,007 | 35,437,425 | ||||||
| Total liabilities and stockholders’ equity | $ | 14,224,429 | $ | 46,342,942 | ||||
See notes to unaudited condensed consolidated financial statements.
CLEANTECH SOLUTIONSSHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| REVENUES | $ | 1,677,364 | $ | 2,517,201 | $ | 5,244,065 | $ | 7,655,321 | ||||||||
| COST OF REVENUES | 1,874,420 | 4,244,853 | 10,106,431 | 10,462,225 | ||||||||||||
| GROSS LOSS | (197,056 | ) | (1,727,652 | ) | (4,862,366 | ) | (2,806,904 | ) | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Depreciation and amortization | 107,050 | 273,555 | 482,857 | 862,303 | ||||||||||||
| Selling, general and administrative | 801,600 | 5,441,960 | 4,778,058 | 12,863,537 | ||||||||||||
| Research and development | 83,809 | 165,183 | 269,641 | 403,611 | ||||||||||||
| Bad debt expense | (48,889 | ) | (30,000 | ) | 4,307,234 | 1,285,990 | ||||||||||
| Impairment loss | (151,595 | ) | 1,922,674 | 13,355,958 | 1,922,674 | |||||||||||
| Total operating expenses | 791,975 | 7,773,372 | 23,193,748 | 17,338,115 | ||||||||||||
| LOSS FROM OPERATIONS | (989,031 | ) | (9,501,024 | ) | (28,056,114 | ) | (20,145,019 | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest income | 58 | 6,324 | 856 | 15,402 | ||||||||||||
| Interest expense | (173,276 | ) | (118,894 | ) | (345,083 | ) | (241,708 | ) | ||||||||
| Loss on equity method investment | - | (8,892,458 | ) | - | (9,038,303 | ) | ||||||||||
| Foreign currency transaction gain (loss) | (122 | ) | 247 | (1,612 | ) | (1,666 | ) | |||||||||
| Other (loss) income | 49,496 | (67,529 | ) | (7,828 | ) | (68,254 | ) | |||||||||
| Total other expense, net | (123,844 | ) | (9,072,310 | ) | (353,667 | ) | (9,334,529 | ) | ||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES | (1,112,875 | ) | (18,573,334 | ) | (28,409,781 | ) | (29,479,548 | ) | ||||||||
| PROVISIONS FOR INCOME TAXES: | ||||||||||||||||
| Current | - | - | - | - | ||||||||||||
| Deferred | - | - | - | - | ||||||||||||
| Total income taxes provision | - | - | - | - | ||||||||||||
| LOSS FROM CONTINUING OPERATIONS | (1,112,875 | ) | (18,573,334 | ) | (28,409,781 | ) | (29,479,548 | ) | ||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Gain (loss) from discontinued operations, net of income taxes | - | (385 | ) | - | 16,486 | |||||||||||
| GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | - | (385 | ) | - | 16,486 | |||||||||||
| NET LOSS | (1,112,875 | ) | (18,573,719 | ) | (28,409,781 | ) | (29,463,062 | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST | (44,647 | ) | (377,258 | ) | (307,394 | ) | (683,411 | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (1,068,228 | ) | $ | (18,196,461 | ) | (28,102,387 | ) | (28,779,651 | ) | ||||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| Net loss | $ | (1,112,875 | ) | $ | (18,573,719 | ) | (28,409,781 | ) | (29,463,062 | ) | ||||||
| Unrealized foreign currency translation loss | (534,749 | ) | (1,471,792 | ) | (217,356 | ) | (2,374,185 | ) | ||||||||
| Comprehensive loss | $ | (1,647,624 | ) | $ | (20,045,511 | ) | (28,627,137 | ) | (31,837,247 | ) | ||||||
| Net loss attributable to non-controlling interest | $ | (44,647 | ) | $ | (377,258 | ) | (307,394 | ) | (683,411 | ) | ||||||
| Unrealized foreign currency translation gain from non-controlling interest | - | - | (363 | ) | - | |||||||||||
| Comprehensive loss attributable to common stockholders | $ | (1,602,977 | ) | $ | (19,668,253 | ) | (28,319,380 | ) | (31,153,836 | ) | ||||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Continuing operations - basic and diluted | $ | (0.12 | ) | $ | (2.56 | ) | (3.17 | ) | (8.00 | ) | ||||||
| Discontinued operations - basic and diluted | - | - | - | 0.01 | ||||||||||||
| Net loss per common share - basic and diluted | $ | (0.12 | ) | $ | (2.56 | ) | (3.17 | ) | (7.99 | ) | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 9,278,106 | 7,100,416 | 8,866,755 | 3,598,265 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2019 and 2018
(Unaudited)
| Common Stock | Additional | Accumulated Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Income | Interest | Equity | |||||||||||||||||||||||||
| Balance, July 1, 2019 | 9,278,106 | $ | 9,278 | $ | 58,301,021 | $ | (54,526,718 | ) | $ | 2,352,592 | $ | 2,975,370 | $ | (802,912 | ) | $ | 8,308,631 | |||||||||||||||
| Net loss | - | - | - | (1,068,228 | ) | - | - | (44,647 | ) | (1,112,875 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (534,749 | ) | - | (534,749 | ) | ||||||||||||||||||||||
| Balance, September 30, 2019 | 9,278,106 | $ | 9,278 | $ | 58,301,021 | $ | (55,594,946 | ) | $ | 2,352,592 | $ | 2,440,621 | $ | (847,559 | ) | $ | 6,661,007 | |||||||||||||||
| Common Stock | Additional | Accumulated Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Income | Interest | Equity | |||||||||||||||||||||||||
| Balance, July 1, 2018 | 6,037,791 | $ | 6,038 | $ | 55,597,267 | $ | 3,041,539 | $ | 2,352,592 | $ | 4,021,436 | $ | 120,489 | $ | 65,139,361 | |||||||||||||||||
| Common stock issued for services to consultants and service providers | 86,623 | 86 | 43,746 | - | - | - | - | 43,832 | ||||||||||||||||||||||||
| Common stock issued for services to employees and directors | 1,376,890 | 1,377 | 5,198,339 | - | - | - | - | 5,199,716 | ||||||||||||||||||||||||
| Share of reserve arising from acquisition of non-wholly owned subsidiaries | - | - | - | - | - | - | 1,087 | 1,087 | ||||||||||||||||||||||||
| Net loss | - | - | - | (18,196,461 | ) | - | - | (377,258 | ) | (18,573,719 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (1,471,792 | ) | - | (1,471,792 | ) | ||||||||||||||||||||||
| Balance, September 30, 2018 | 7,501,304 | $ | 7,501 | $ | 60,839,352 | $ | (15,154,922 | ) | $ | 2,352,592 | $ | 2,549,644 | $ | (255,682 | ) | $ | 50,338,485 | |||||||||||||||
| Common Stock | Additional | Accumulated Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Income | Interest | Equity | |||||||||||||||||||||||||
| Balance, January 1, 2019 | 7,449,123 | $ | 7,449 | $ | 58,452,131 | $ | (27,492,559 | ) | $ | 2,352,592 | $ | 2,657,614 | $ | (539,802 | ) | $ | 35,437,425 | |||||||||||||||
| Common stock issued for cash | 690,000 | 690 | 199,410 | - | - | - | - | 200,100 | ||||||||||||||||||||||||
| Common stock issued for services to consultants and service providers | 1,349,347 | 1,349 | 287,620 | - | - | - | - | 288,969 | ||||||||||||||||||||||||
| Common stock surrendered for services from consultants and service providers | (562,501 | ) | (562 | ) | (947,386 | ) | - | - | - | - | (947,948 | ) | ||||||||||||||||||||
| Common stock issued upon conversion of debt | 266,667 | 267 | 49,733 | - | - | - | - | 50,000 | ||||||||||||||||||||||||
| Common stock issued for donation | 85,470 | 85 | 259,513 | - | - | - | - | 259,598 | ||||||||||||||||||||||||
| Net loss | - | - | - | (28,102,387 | ) | - | - | (307,394 | ) | (28,409,781 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (216,993 | ) | (363 | ) | (217,356 | ) | |||||||||||||||||||||
| Balance, September 30, 2019 | 9,278,106 | $ | 9,278 | $ | 58,301,021 | $ | (55,594,946 | ) | $ | 2,352,592 | $ | 2,440,621 | $ | (847,559 | ) | $ | 6,661,007 | |||||||||||||||
| Common Stock | Additional | Accumulated Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Income | Interest | Equity | |||||||||||||||||||||||||
| Balance, January 1, 2018 | 2,527,720 | $ | 2,528 | $ | 40,241,172 | $ | 13,624,729 | $ | 2,352,592 | $ | 4,923,829 | $ | 24,230 | $ | 61,169,080 | |||||||||||||||||
| Common stock issued for cash | 69,676 | 70 | 256,340 | - | - | - | - | 256,410 | ||||||||||||||||||||||||
| Common stock issued for services to consultants and service providers | 2,650,774 | 2,650 | 11,634,111 | - | - | - | - | 11,636,761 | ||||||||||||||||||||||||
| Common stock issued for services to employees and directors | 1,627,960 | 1,628 | 6,021,035 | - | - | - | - | 6,022,663 | ||||||||||||||||||||||||
| Common stock issued upon conversion of debt | 200,100 | 200 | 670,135 | - | - | - | - | 670,335 | ||||||||||||||||||||||||
| Common stock issued for acquisition of majority-owned subsidiaries | 425,074 | 425 | 2,016,559 | - | - | - | - | 2,016,984 | ||||||||||||||||||||||||
| Share of reserve arising from acquisition of non-wholly owned subsidiaries | - | - | - | - | - | - | 403,499 | 403,499 | ||||||||||||||||||||||||
| Net loss | - | - | - | (28,779,651 | ) | - | - | (683,411 | ) | (29,463,062 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (2,374,185 | ) | - | (2,374,185 | ) | ||||||||||||||||||||||
| Balance, September 30, 2018 | 7,501,304 | $ | 7,501 | $ | 60,839,352 | $ | (15,154,922 | ) | $ | 2,352,592 | $ | 2,549,644 | $ | (255,682 | ) | $ | 50,338,485 | |||||||||||||||
See notes to unaudited condensed consolidated financial statements.
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (4,918,233 | ) | $ | (1,883,811 | ) | $ | (28,409,781 | ) | $ | (29,463,062 | ) | ||||
| Adjustments to reconcile net loss from operations to net cash | ||||||||||||||||
| used in operating activities: | ||||||||||||||||
| Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities: | ||||||||||||||||
| Depreciation | 2,937,696 | 2,895,246 | 2,097,816 | 3,080,857 | ||||||||||||
| Depreciation - discontinued operations | - | 1,563,725 | ||||||||||||||
| Amortization of intangible assets | 241,464 | 107,918 | 140,325 | 299,373 | ||||||||||||
| Bad debt allowance | 4,307,234 | 1,285,990 | ||||||||||||||
| Bad debt recovery - discontinued operations | - | (16,899 | ) | |||||||||||||
| Impairment loss of intangible asset | - | 1,922,674 | ||||||||||||||
| Impairment loss of property and equipment | 13,355,958 | - | ||||||||||||||
| Loss on equity method investment | 81,871 | - | - | 9,038,303 | ||||||||||||
| Stock-based compensation and fees | 482,243 | 582,740 | ||||||||||||||
| Bad debt expense | 1,892,821 | - | ||||||||||||||
| Stock-based employment compensation | 933 | 879,258 | ||||||||||||||
| Stock-based professional fees | 2,710,195 | 9,132,385 | ||||||||||||||
| Stock-based donation | 259,598 | 241,860 | ||||||||||||||
| Amortization of debt discount | 162,170 | 115,836 | ||||||||||||||
| Amortization of license fee | 497,872 | 210,213 | ||||||||||||||
| Write-off of inventory | 3,609,828 | - | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Notes receivable | (111,669 | ) | 13,679 | (2,915 | ) | 382,776 | ||||||||||
| Restricted cash | - | (4,038 | ) | |||||||||||||
| Accounts receivable | (415,467 | ) | (1,032,188 | ) | 2,336,569 | 2,449,872 | ||||||||||
| Inventories | (1,499,147 | ) | (1,167,953 | ) | 685,905 | (1,011,749 | ) | |||||||||
| Prepaid and other current assets | 929,997 | (675,868 | ) | 423,275 | (1,021,180 | ) | ||||||||||
| Advances to suppliers | (1,363,517 | ) | (68,597 | ) | 566,687 | 720,730 | ||||||||||
| Assets of discontinued operations | 116,061 | 1,575,256 | (3,467 | ) | 200,197 | |||||||||||
| Accounts payable | 1,506,286 | 201,300 | (1,717,029 | ) | (434,324 | ) | ||||||||||
| Accrued expenses | (166,965 | ) | (317,968 | ) | (333,637 | ) | 142,124 | |||||||||
| VAT and service taxes payable | (41,153 | ) | (73,542 | ) | ||||||||||||
| Income taxes payable | (20,390 | ) | (319,637 | ) | ||||||||||||
| Advances from customers | 552,352 | 158,070 | (1,076,442 | ) | (1,226,059 | ) | ||||||||||
| Liabilities of discontinued operations | (221,741 | ) | (6,163,598 | ) | 175 | (132,916 | ) | |||||||||
| Net cash used in operating activities | (17,491 | ) | (4,609,266 | ) | (388,731 | ) | (3,203,741 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of patent | - | (2,431,892 | ) | |||||||||||||
| Purchase of property and equipment | (86,402 | ) | (14,290 | ) | (99,941 | ) | (74,466 | ) | ||||||||
| Proceed received from sale of subsidiary in cash | 2,115,842 | - | ||||||||||||||
| Proceed received from acquisition | - | 2,341 | ||||||||||||||
| Net cash provided by (used in) investing activities | 2,029,440 | (2,446,182 | ) | |||||||||||||
| Net cash used in investing activities | (99,941 | ) | (72,125 | ) | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from bank loans | 1,248,932 | 2,963,868 | ||||||||||||||
| Repayments of bank loans | (1,469,332 | ) | (3,039,865 | ) | ||||||||||||
| Decrease in restricted cash | 337,947 | 443,857 | ||||||||||||||
| Increase in restricted cash - discontinued operations | - | (71,473 | ) | |||||||||||||
| Decrease in bank acceptance notes payable | (191,014 | ) | (440,780 | ) | ||||||||||||
| Proceed from convertible note | - | 900,000 | ||||||||||||||
| Offering costs paid | - | (195,018 | ) | |||||||||||||
| Proceeds from bank loan | 874,521 | 1,856,198 | ||||||||||||||
| Repayments of bank loan | (1,505,383 | ) | (1,303,941 | ) | ||||||||||||
| Increase (decrease) in bank acceptance notes payable | 21,863 | (268,458 | ) | |||||||||||||
| Advance from related party | 351,430 | - | 519,543 | 1,810,815 | ||||||||||||
| Repayment of related party advances | (31,604 | ) | - | |||||||||||||
| Proceeds from sale of common stock, net | 860,000 | 753,400 | 200,100 | 256,410 | ||||||||||||
| Net cash provided by financing activities | 1,137,963 | 609,007 | 79,040 | 3,056,006 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 143,287 | (430,689 | ) | |||||||||||||
| Effect of exchange rate changes | (261,836 | ) | (274,378 | ) | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 3,293,199 | (6,877,130 | ) | |||||||||||||
| Net change in cash, cash equivalents and restricted cash | (671,468 | ) | (494,238 | ) | ||||||||||||
| Cash and cash equivalents - beginning of period | 1,481,498 | 18,790,370 | ||||||||||||||
| Cash, cash equivalents and restricted cash - beginning of period | 859,213 | 1,292,428 | ||||||||||||||
| Cash and cash equivalents - end of period | $ | 4,774,697 | $ | 11,913,240 | ||||||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | 187,745 | $ | 798,190 | ||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
| Cash paid in continuing operations for: | ||||||||||||||||
| Interest | $ | 107,991 | $ | 165,515 | $ | 345,083 | $ | 241,708 | ||||||||
| Income taxes | $ | 12,808 | $ | 164,182 | $ | - | $ | - | ||||||||
| Cash paid in discontinued operations for: | ||||||||||||||||
| Interest | $ | - | $ | - | $ | - | $ | - | ||||||||
| Income taxes | $ | - | $ | - | $ | - | $ | - | ||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||
| Stock issued for future services | $ | 1,083,967 | $ | 76,340 | ||||||||||||
| Stock issued for accrued liabilities | $ | 28,400 | $ | 54,000 | ||||||||||||
| Increase in prepaid expenses and other from sale of equipment | $ | 1,306,677 | $ | - | ||||||||||||
| Stock issued for future services to consultants and vendors | $ | 111,280 | $ | 6,335,098 | ||||||||||||
| Stock issued for future services to employees and directors | $ | - | $ | 496,654 | ||||||||||||
| Stock issued for repayment of convertible note | $ | - | $ | 670,335 | ||||||||||||
| Stock issued for convertible note | $ | - | $ | - | ||||||||||||
| Stock issued for acquisition of non-wholly owned subsidiaries | $ | - | $ | 976,984 | ||||||||||||
| Stock issued for redemption of convertible note and accrued interest | $ | 50,000 | $ | - | ||||||||||||
| Stock issued for prepayment of license fee – related party | $ | - | $ | 829,787 | ||||||||||||
| Stock issued for prepayment of rental & management fee | - | $ | 1,048,659 | |||||||||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||||||||||
| Cash and cash equivalents at beginning of period | $ | 781,740 | $ | 1,019,437 | ||||||||||||
| Restricted cash at beginning of period | 77,473 | 272,991 | ||||||||||||||
| Total cash, cash equivalents and restricted cash at beginning of period | $ | 859,213 | $ | 1,292,428 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 92,864 | $ | 707,101 | ||||||||||||
| Restricted cash at end of period | 94,881 | 91,089 | ||||||||||||||
| Total cash, cash equivalents and restricted cash at end of period | $ | 187,745 | $ | 798,190 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
CLEANTECH SOLUTIONSSHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20172019
(UNAUDITED)(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2019. The consolidated balance sheet as of December 31, 2018 contained herein has been derived from the audited consolidated financial statements as of December 31, 2018, but does not include all disclosures required by the generally accepted accounting principles in the U.S. (“U.S. GAAP”).
NOTE 2 – DESCRIPTION OF BUSINESS AND ORGANIZATION
Cleantech SolutionsSharing Economy International Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’sCompany changed its corporate name was changed to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into a Nevada corporation. On January 8, 2018, the Company changed its corporate name to Sharing Economy International Inc.
Through its affiliated companies, and subsidiaries, the Company manufactures and sells textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and, until December 30, 2016, Fulland owned 100% of Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind”). Green Power is and Fulland Wind was a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Heavy Industries, Co., Ltd. (“Heavy Industries”), formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd., and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of, and based in, the PRC. Heavy Industries and Dyeing are sometimes collectively referred to as the “Huayang Companies.”
Fulland was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and his wife, Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Dyeing, which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for the textile industry. The Company refers to this segment as the dyeing and finishing equipment segment. On December 26, 2016, Dyeing and an unrelated individual formed Wuxi Shengxin New Energy Engineering Co., Ltd. (“Shengxin”), a limited liability company organized under the laws of the PRC in which Dyeing has a 30% equity interest and the unrelated third party holds a 70% interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. AtIn April 2018, Shengxin secured and invested in a large solar PV project in GuiZhou province. Shengxin paid RMB40 million for the project rights and also engaged a local contractor to proceed with building the project. However, on June 1, 2018, the Chinese government halted installation of new solar farms for the remainder of the year and reduced subsidies for projects already under construction. In September 30, 2017,2018, due to significant doubt about the status of this project and recoverability of the Company’s investment, the Company fully impaired the value of its investment in Shengxin had not yet commenced operations.(see Note 5).
Fulland Wind was formed on August 27, 2008. In 2009, the Company began to produce and sell forged products through Fulland Wind. Through Fulland Wind, the Company manufactured and sold forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power and other industries, including large-scale equipment used in the manufacturing process for the various industries. The Company refersreferred to this segment of its business as the forged rolled rings and related components segment. On December 30, 2016, Fulland sold the stock of Fulland Wind and accordingly, the forged rolled rings and related components business is reflected as a discontinued operations for all periods presented.Wind.
Beginning in February 2015, Heavy Industries began to produce equipment for the petroleum and chemical industries. The Company referred to this segment of its business as the petroleum and chemical equipment segment. Because of a significant decline in revenues from this segment, the Company determined it would not continue to operate in this segment and accordingly, the petroleum and chemical equipment segment is reflected as a discontinued operations for all periods presented (See Note 3)5). As a result of the discontinuation of the forged rolled rings and the petroleum and chemical equipment business, the Company’s business is limited toprimarily consists of the dyeing and finishing equipment business as its soleprimary continuing operations at September 30, 2017 andsince December 31, 2016.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
The Company'sCompany’s latest business initiatives are focused on targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models. In connection with the new business initiatives, recently, the Company formed or acquired the following formed wholly-owned subsidiaries:
| ● | Vantage Ultimate Limited (“Vantage”), a company incorporated under the laws of British Virgin Islands on February 1, 2017 and is wholly-owned by the | |
| ● | Sharing Economy Investment Limited (“ |
| ● | EC | |
| ● | EC Rental Limited (“EC Rental”), a company incorporated under the laws of British Virgin Islands on May 22, 2017 and is wholly-owned by Vantage. |
| ● | EC |
| ● |
| ● | Global Bike Share (Mobile App) Limited, a company incorporated under the laws of British Virgin Islands on May 23, 2017 and is |
| ● | EC Power (Global) Technology Limited (“EC Power”), a company incorporated under the laws of British Virgin Islands on May 26, 2017 and is wholly-owned by EC |
| ● | EC Power (HK) Company Limited, a company incorporated under the laws of Hong Kong on June 23, 2017 and is wholly-owned by EC | |
| Power. | ||
| ● | EC Manpower Limited, a company incorporated under the laws of Hong Kong on July 3, 2017 and is wholly-owned by Vantage. | |
| ● | EC Technology & Innovations Limited (“EC Technology”), a company incorporated under the laws of British Virgin Islands on September 1, 2017 and is wholly-owned by Vantage. | |
| ● | Inspirit Studio Limited (“Inspirit Studios”), a company incorporated under the laws of Hong Kong on August 24, 2015, and 51% of its shareholding was acquired by EC Technology on December 8, 2017. | |
| ● | EC Creative Limited (“EC Creative”), a company incorporated under the laws of British Virgin Islands on January 9, 2018 and is wholly-owned by Vantage. | |
| ● | 3D Discovery Co. Limited (“3D Discovery”), a company incorporated under the laws of Hong Kong on February 24, 2015, and 60% of its shareholdings was acquired by EC Technology on January 19, 2018. | |
| ● | Sharing Film International Limited, a company incorporated under the laws of Hong Kong on January 22, 2018 and is wholly-owned by EC Creative. | |
| ● | AnyWorkspace Limited (“AnyWorkspace”), a company incorporated under the laws of Hong Kong on November 12, 2015, and 80% of its shareholding was acquired by Sharing Economy on January 30, 2018. | |
| ● | Xiamen Great Media Company Limited (“Xiamen Great Media”), a company incorporated under the laws of the PRC on September 5, 2018 and is wholly-owned by EC Advertising. |
NOTE 3 – Reverse split; change in authorized common stockGOING CONCERN UNCERTAINTIES
On February 24, 2017, the Company filed a certificate of change with the State of Nevada which effected a one-for-four reverse split, which became effective in the marketplace on March 20, 2017, and a reduction in the Company’s authorized common stock from 50,000,000 shares to 12,500,000 shares. These consolidated financial statements have been retroactively restated to reflect this reverse split.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going concern
Theseunaudited condensed consolidatedfinancial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had a loss from continuing operations of $4,178,988 and $4,846,894approximately $28,410,000 for the three and nine months ended September 30, 2017, respectively. On December 26, 2016,2019. The net cash used in operations was approximately $389,000 for the Company invested approximately $8,611,000 for a 30% interest in Shengxin, a newly-formed companynine months ended September 30, 2019. Additionally, during the nine months ended September 30, 2019, revenues, substantially all of which plans to develop, construct and maintain solar farms in China, which may require additional investments by the Company. In addition, the Company has formed several new subsidiaries and is in the process of entering into new business segments. The current cash balance cannot be projected to cover the additional investments if neededare derived from the Company for its ownership interest in Shengxin,manufacture and sales of textile dyeing and finishing equipment, decreased by 31.5% as compared to pay operating expenses arising from normal business operations, and to develop new business segments for the next twelvenine months from the issuance date of this report.ended September 30, 2018. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern. Management cannot provide assurance that the Company will ultimately achieve profitable operations, or raise additional debt and/or equity capital. Management believes that the Company’sits capital resources are not currently adequate to continue operating and maintaining its business strategy for twelve months from the next twelve months.
date of this report. The Company may seek to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of equity and from bank loans, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations.
Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and or classification of recorded asset amounts and or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
BasisListing status
On November 26, 2018, Sharing Economy International Inc. (the “Company”) received a staff determination notice from The Nasdaq Stock Market (“Nasdaq”) informing the Company that as a result of presentation; management’s responsibilityits failure to comply with Nasdaq’s shareholder approval requirements set forth in Listing Rule 5635(c) (the “Rule”), the staff determined to deny the Company’s request for preparationcontinued listing based on a plan of financial statementscompliance submitted on October 26, 2018. The Company’s common stock was delisted from Nasdaq at the open of trading on December 5, 2018. The Company’s common stock is currently trading on the OTC Markets under the symbol “SEII”.
Principles of consolidation
The Company’s unaudited condensed consolidated financial statements include the financial statements of its wholly-owned and majority owned subsidiaries, as well as the financial statements of the Huayang Companies, including Dyeing, which conducts the Company’s continuing operations, and Heavy Industries, which operated discontinued operations. All significant intercompany accounts and transactions have been eliminated in consolidation.
On December 30, 2016, the Company sold and transferred its 100% interest in Fulland Wind to an unrelated party and discontinued the Company’s forged rolled rings and related components business.party. Additionally, the Company’s management decided to discontinue its petroleum and chemical equipment segment due to significant declines in revenues and the loss of its major customer.customers. As such, forged rolled rings and related components segment ’s and petroleum and chemical segment’s assets and liabilities have been classified on the consolidated balance sheets as assets and liabilities of discontinued operations as of September 30, 20172019 and December 31, 2016.2018. The operating results of the forged rolled rings and related components and petroleum and chemical segmentssegment have been classified as discontinued operations in our unaudited condensed consolidated statements of operations for all periods presented. Unless otherwise indicated, all disclosures and amounts in the notes to the unaudited condensed consolidated financial statements are related to the Company’s continuing operations.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 17, 2017. The consolidated balance sheet as of December 31, 2016 contained herein has been derived from the audited consolidated financial statements as of December 31, 2016, but does not include all disclosures required by the generally accepted accounting principles in the U.S. (“U.S. GAAP”).
Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary. The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s WFOEwholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Heavy Industries is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Heavy Industries:
Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related components (the “Services”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Chinese Yuan or Renminbi (“RMB”) to Fulland that are equal to all of the Huayang Companies’ profits for such quarter. To date, no such payments have been made and all profits were reinvested in the Company’s operations. The agreements will remain effective unless terminated by the parties in accordance with the agreements.
Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies’ shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of this agreement, with the extended term to be mutually agreed upon by the parties.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Equity Pledge Agreement. Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.
Option Agreement. Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.
Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidationthe Company to consolidate the Huayang Companies in its financial statements as if they are wholly-owned subsidiaries of the Company’s and the Huayang Companies’ financial statements.Company.
Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates duringin the three and nine months ended September 30, 20172019 and 20162018 include the allowance for doubtful accounts on accounts and other receivables, the allowance for obsolete inventory reserve, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets, and valuation of deferred tax assets, the fair value of equity method investment, accruals for taxes due, and the value of stock-based compensation.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, theThe Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash with various financial institutions mainly in the PRC, Hong Kong and the U.S. AtAs of September 30, 20172019 and December 31, 2016,2018, cash balances held in PRC and Hong Kong banks of $4,766,642$92,864 and $1,480,941,$774,316, respectively, are uninsured. The funds are primarily held in banks.
Fair value of financial instruments
The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The following table presents information about equipment held for sale – discontinued operations measured at fair value on a nonrecurring basis at December 31, 2016. At September 30, 2017, the Company did not have any asset measured at fair value.
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2016 | |||||||||||||
| Equipment held for sale – discontinued operations | $ | - | $ | - | $ | 1,147,035 | $ | 1,147,035 | ||||||||
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, deferred tax assets, receivable from sale of subsidiary, prepaid expenses and other, assets of discontinued operations, short-term bank loans, bank acceptance notes payable, convertible note payable, accounts payable, accrued liabilities,expenses, advances from customers, value added taxesamounts due to related parties, and service taxes payable, income taxes payable and liabilities of discontinued operations approximate their fair market value based on the short-term maturity of these instruments.instruments .
ASC Topic 825-10 “Financial Instruments” allows entitiesTransactions involving related parties cannot be presumed to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be electedcarried out on an instrument-by-instrumentarm’s-length basis, andas the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is irrevocable, unless a new election date occurs. Ifnot, however, practical to determine the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect of amounts due from/to apply the fair value optionrelated parties due to any outstanding instruments.their related party nature.
Concentrations of credit risk
The Company’s operations are carried out in the PRC.PRC and Hong Kong. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and Hong Kong, and by the general state of the PRC’s economy.economies in the PRC and Hong Kong. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. 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.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC and Hong Kong, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
At September 30, 2017 and December 31, 2016, the Company’s cash balances by geographic area were as follows:
| Country: | September 30, 2017 | December 31, 2016 | ||||||||||||||
| United States | $ | 8,055 | 0.17 | % | $ | 557 | * | |||||||||
| China | 4,766,642 | 99.83 | % | 1,480,941 | 99.96 | % | ||||||||||
| Total cash and cash equivalents | $ | 4,774,697 | 100.0 | % | $ | 1,481,498 | 100.0 | % | ||||||||
* Less than 0.1%
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Restricted cash
Restricted cash mainly consists of cash deposits held by various banks to secure bank acceptance notes payable. The Company’s restricted cash totaled $229,499 and $551,047 at September 30, 2017 and December 31, 2016, respectively.
Notes receivable
Notes receivable represents trade accounts receivable due from customers where the customers’ banks have guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $254,059 and $133,913 at September 30, 2017 and December 31, 2016, respectively.
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowancesallowance for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 20172019 and December 31, 2016,2018, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $3,813,179$10,632,575 and $1,797,476,$9,527,060, respectively.
For the nine months ended September 30, 2019 and 2018, bad debt expense amounted to $4,307,234, and $1,285,990, respectively.
Inventories
Inventories, consisting of raw materials, work in processwork-in-process and finished goods related to the Company’s products are stated at the lower of cost or market value utilizing the weighted average method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $22,109$4,643,524 and $21,177 at$1,212,706 as of September 30, 20172019 and December 31, 2016,2018, respectively.
Advances to suppliers
Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $2,560,713 and $1,116,525 at September 30, 2017 and December 31, 2016, respectively.
Equity method investment
Investments in which the Company has the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in the long term assets on the consolidated balance sheets. Under this method of accounting, the Company’s share of the net earnings or losses of the investee is presented below the income tax line on the consolidated statements of operations. The Company evaluates its equity method investment whenever events or changes in circumstance indicate that the carrying amounts of such investment may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in the current period. (See Note 6).
Equipment held for sale
Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At December 31, 2016, the Company reflected certain manufacturing equipment that was previously used in the petroleum and chemical equipment segment as part of assets of discontinued operations as equipment held for sale, which was included in the assets of discontinued operations on the accompanying consolidated balance sheets. This equipment was sold in March 2017 to a third party.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Property and equipment
Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the statements of operations in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Impairment loss has been recorded in current period
ImpairmentFor the three months ended September 30, 2019 and 2018, depreciation expense amounted to $709,120 and $979,203, respectively, of long-lived assetswhich $598,502 and $705,648, respectively, was included in cost of revenues, and the remainder was included in operating expenses.
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. DuringFor the nine months ended September 30, 20172019 and 2016,2018, depreciation expense amounted to $2,097,816 and $3,080,857, respectively, of which $1,614,959 and $2,218,554, respectively, was included in cost of revenues, and the Company did not record any impairment charges.remainder was included in operating expenses.
Advances from customers
Advances from customers at September 30, 2017 and December 31, 2016 amounted to $1,011,384 and $427,446, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue when customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
Revenue recognition
Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured.
The Company recognizes revenues from the sale of equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. Based on historical experience, warranty service calls and any related labor costs have been minimal.
All other product sales with customer specific acceptance provisions are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
The Company recognizes revenue from the rental of batteries when earned.
Income taxes
The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the Company’s financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2017 and December 31, 2016,2019, the Company had no uncertain tax positions,conducted an impairment assessment on property and will continueequipment. Accordingly, the Company recorded an impairment loss of $13,355,958 on certain equipment and buildings for the nine months ended September 30, 2019. For the nine months ended September 30, 2018, the impairment loss was $0.
Equity method investment
Investments in which the Company has the ability to evaluateexercise significant influence, but do not control, are accounted for uncertain positionsunder the equity method of accounting and are included in the future.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)long-term assets on the consolidated balance sheets. Under this method of accounting, the Company’s share of the net earnings or losses of the investee is presented under other income (expense) on the consolidated statements of operations. The Company evaluates its equity method investment whenever events or changes in circumstance indicate that the carrying amounts of such investment may be impaired. A loss would be recorded if a decline in the value of an equity method investment is determined to be other than temporary (see Note 7).
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately if fully vested and non-forfeitable. The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
PursuantAdditionally, effective January 1, 2017, the Company adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Improvements to ASC Topic 505-50,Employee Share-Based Payment Accounting. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based paymentspayment awards, either to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognizedrecognize forfeitures as they occur or estimate forfeitures over the vesting period of the award or on issuance if fully-vested and non-forfeitable. Until the measurement date is reached, the total amount of compensation expense remains uncertain.award. The Company records compensation expense basedhas elected to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the fair valueCompany’s consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the award ataccounting for nonemployee share-based payment transactions by expanding the reporting date.scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The awards to consultantsCompany early adopted ASU No. 2018-07 in the fourth quarter of 2018 and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.there was no cumulative effect of adoption.
Shipping costs
Shipping costs are included in selling expenses, general and administrative and totaled $29,259 and $23,811 for the three months ended September 30, 2017 and 2016, respectively. Shipping costs totaled $88,491 and $81,549 for the nine months ended September 30, 2017 and 2016, respectively.
Employee benefits
The Company’s operations and employees are all located in the PRC.PRC and Hong Kong. The Company makes mandatory contributions to the PRC government’sand Hong Kong governments’ health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws.laws and law of Mandatory Provident Fund in Hong Kong. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs incurred. Employee benefit costs totaled $31,412$180,256 and $23,955 for the three months ended September 30, 2017 and 2016, respectively. Employee benefit costs totaled $106,118 and $76,789$196,299 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Research and development
Research and development costs are expensed as incurred. The costs primarily consist of raw materials and salaries incurred for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $107,568 and $111,840 for the three months ended September 30, 2017 and 2016, respectively. Research and development costs totaled $324,698 and $196,478 for the nine months ended September 30, 2017 and 2016, respectively.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is RMBthe Chinese Renminbi (“RMB”) or Hong Kong dollars (HKD). For the subsidiaries and affiliates, whose functional currencies are the RMB or HKD, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income (loss). Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assetsloss. The cumulative translation adjustment and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise fromeffect of exchange rate fluctuationschanges on transactions denominated in a currency other thancash for the functional currency are included in the results of operations as incurred.nine months ended September 30, 2019 and 2018 was $(261,836) and $(274,378), respectively.
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. The Company did not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
For operating subsidiaries and VIE’sVIEs located in the People’s Republic of China (“PRC”), asset and liability accounts atas of September 30, 20172019 and December 31, 20162018 were translated at 6.65207.1363 RMB to $1.00 and at 6.94486.8778 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. For operating subsidiaries in HonkHong Kong, asset and liability accounts atas of September 30, 20172019 and December 31, 2018 were translated at 7.87.8396 and 7.8305 HKD to $1.00, respectively, which were the exchange rates on the balance sheet date. For operating subsidiaries and VIE’sVIEs located in the PRC, the average translation rates applied to the statements of operations for the nine months ended September 30, 20172019 and 20162018 were 6.80586.8609 RMB and 6.57926.5187 RMB to $1.00, respectively. For operating subsidiaries located in Hong Kong, the average translation rates applied to the statements of operations for the nine months ended September 30, 2017 was2019 and December 31, 2018 were 7.8 HKD and 7.8 HKD to $1.00. The Company did not have operations in Hong Kong during the 2016 periods. Equity accounts were stated at their historical rate. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.
Loss per share of common stock
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company did not have any common stock equivalents andor potentially dilutive common stock outstanding during the three and nine months ended September 30, 20172019 and 2016.2018. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The following table presents a reconciliation of basic and diluted net loss per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Net loss for basic and diluted net loss per common share | $ | (4,250,327 | ) | $ | (359,536 | ) | $ | (4,918,233 | ) | $ | (1,883,811 | ) | ||||||||||||||||||||
| Net loss for basic and diluted attributable to common shareholders | $ | (1,068,228 | ) | $ | (18,196,461 | ) | $ | (28,102,387 | ) | $ | (28,779,651 | ) | ||||||||||||||||||||
| From continuing operations | (4,178,988 | ) | (86,194 | ) | (4,846,894 | ) | (120,529 | ) | (1,068,228 | ) | (18,196,076 | ) | (28,102,387 | ) | (28,796,137 | ) | ||||||||||||||||
| From discontinued operations | $ | (71,339 | ) | $ | (273,342 | ) | $ | (71,339 | ) | $ | (1,763,282 | ) | - | (385 | ) | - | 16,486 | |||||||||||||||
| Weighted average common stock outstanding - basic and diluted | 1,988,794 | 1,297,111 | 1,635,223 | 1,148,390 | ||||||||||||||||||||||||||||
| Weighted average common stock outstanding – basic and diluted | 9,278,106 | 7,100,416 | 8,866,755 | 3,598,265 | ||||||||||||||||||||||||||||
| Net loss per share of common stock | ||||||||||||||||||||||||||||||||
| From continuing operations – basic and diluted | $ | (2.10 | ) | $ | (0.07 | ) | $ | (2.96 | ) | $ | (0.10 | ) | $ | (0.12 | ) | $ | (2.56 | ) | $ | (3.17 | ) | $ | (8.00 | ) | ||||||||
| From discontinued operations – basic and diluted | (0.04 | ) | (0.21 | ) | (0.04 | ) | (1.54 | ) | - | (0.00 | ) | - | 0.01 | |||||||||||||||||||
| Net loss per common share - basic and diluted | $ | (2.14 | ) | $ | (0.28 | ) | $ | (3.00 | ) | $ | (1.64 | ) | ||||||||||||||||||||
| Net loss per common share – basic and diluted | $ | (0.12 | ) | $ | (2.56 | ) | $ | (3.17 | ) | $ | (7.99 | ) | ||||||||||||||||||||
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.
Comprehensive gain (loss)loss
Comprehensive gain (loss)loss is comprised of net loss 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. For the Company, comprehensive gain (loss)loss for the three and nine months ended September 30, 20172019 and 20162018 included net loss and unrealized (loss) gain from foreign currency translation adjustments.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Reclassification
Certain reclassifications have been made in prior year’speriod’s consolidated financial statements to conform to the current year’s financial presentation. The reclassifications have no effect on previously reported net loss and related to the reclassification of discontinued operations.loss.
Reverse stock split
The Company effected a one-for-four reverse stock split of its common stock on March 20, 2017. All share and per share information has been retroactively adjusted to reflect this reverse stock split.
Recent accounting pronouncements
In January 2017,February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2017-01, Business CombinationsASU 2016-02, “Leases (Topic 805): Clarifying842)”. Under ASU 2016-02, lessees will be required to recognize all leases (with the Definitionexception of short-term leases) at the commencement date including a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use (ROU) asset, which is an asset that represents the lessee’s right to use, or control the use of, a Business, in an effort to clarifyspecified asset for the definitionlease term. Leases with a term of a business with the objective of adding guidance to assist entities with evaluating whether transactions shouldtwelve months or less will be accounted for as acquisitions (or disposals) of assets or businesses.similar to existing guidance for operating leases. In December 2017, January 2018, July 2018, December 2018 and March 2019, the FASB issued ASU 2017-13, ASU 2018-01, ASU 2018-10 & 11, ASU 2018-20 and ASU 2019-01, respectively, which contain modifications and improvements to ASU 2016-02. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under the Optional Transition Method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of thisretained earnings in the period of adoption. On January 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective approach and elected to utilize the Optional Transition Method. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease. The adoption did not impact the Company’s previously reported consolidated financial statements nor did it result in a cumulative effect adjustment to retained earnings as of January 1, 2019.
In June 2018, the FASB issued ASU are effective2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment. ASU 2018-07 aligns the accounting for fiscal years beginning after December 15, 2017,share based payments granted to non-employees with that of share based payments granted to employees. The Company early adopted ASU No. 2018-07 in the fourth quarter of 2018 and interim periods within those fiscal years.there was no cumulative effect of adoption. The adoption of this guidance isASU did not expected to have a material impact on the Company’sour financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition,position, results of operations, cash flows, or disclosures.presentation thereof.
NOTE 35 –DISCONTINUED OPERATIONS
Pursuant to an agreement dated December 23, 2016, the Company, through its wholly-owned subsidiary Fulland, sold 100% of the stock of Fulland Wind to a third party for a sales price of RMB48RMB 48 million (approximately $6.9 million). The Company’s forging and related components business was conducted through Fulland Wind. The purchase price is payable in three installments. The Company received the first installment of RMB 14,400,000 (approximately $2.1 million) on December 28, 2016, and received the second installment of RMB14,400,000RMB 14,400,000 (approximately $2.1 million) on April 10, 2017. The Company delivered Fulland Wind’s business license, seals, books and records, business contracts and personnel roster to the third party buyer on December 30, 2016, effectively the sale date. If the equity transfer registration formalities are completed within one year without any third party claims on the equity transfer, a final payment of RMB 19,200,000 (approximately $2.7 million) iswas due 25 working days after the expiration of such period. ThePursuant to extension agreement dated December 31, 2018, the Company expectsagreed the above third party buyer could paid off the final payment to be received within one year. As a result of RMB 19,200,000 (approximately $2.7 million) by December 31, 2019. During the sale,nine months ended September 30, 2019, the forged rolled ringsCompany believed that the final payment of RMB 19,200,000 (approximately $2.7 million) is uncollectible and related components businessthe write off of such receivable is treated as a discontinued operation.included in bad debt expense.
Additionally, in December 2016, the Company’s management decided to discontinue its petroleum and chemical equipment segment under Heavy Industries due to significant decline in revenues and the loss of its major customer.customers. Accordingly, the petroleum and chemical equipment segment business is treated as a discontinued operation.
Pursuant to ASC Topic 205-20, PresentationThe results of Financial Statements - Discontinued Operations, the business of the forging and related components segment andoperations from petroleum and chemical equipment segment are consideredof Heavy Industries for the three and nine months ended September 30, 2019 and 2018 have been classified to the loss from discontinued operations because: (a)line on the accompanying unaudited condensed consolidated statements of operations and cash flows of the forging and related components segment and petroleum and chemical equipment segment were eliminated from the Company’s operations; and (b) the Company has no interest in the divested operations.
Contemporaneously with the sale of the Fulland Wind stock, pursuant to an agreement dated December 23, 2016, Heavy Industries entered into a lease with the buyer for a factory building owned by Heavy Industries at an annual rental of RMB 680,566 (approximately $98,000). The lease has a ten-year term, commencing January 1, 2017. The first year’s rent is payable in two installments, the first installment, equals to 30% of the annual rental, being due on signing the lease, which has been paid as of September 30, 2017.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)comprehensive loss presented herein.
The assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of September 30, 20172019 and December 31, 20162018, and for the three and nine months ended September 30, 20172019 and 2016 are2018 is set forth below.
| September 30, 2019 | December 31, 2018 | |||||||||||||||
| September 30, 2017 | December 31, 2016 | (unaudited) | (audited) | |||||||||||||
| Assets: | Assets: | Assets: | ||||||||||||||
| Current assets: | Current assets: | |||||||||||||||
| Accounts receivable, net | $ | 33,738 | $ | 78,407 | $ | 9,246 | $ | 9,593 | ||||||||
| Inventories, net of reserve for obsolete inventories | - | 31,019 | ||||||||||||||
| Advances to suppliers | 141,442 | 200,275 | ||||||||||||||
| Equipment held for sale | - | 1,147,035 | ||||||||||||||
| Prepaid expenses and other | 205,599 | 302,250 | 196,411 | 200,333 | ||||||||||||
| Total current assets | 380,779 | 1,758,986 | 205,657 | 209,926 | ||||||||||||
| Total assets | $ | 380,779 | $ | 1,758,986 | $ | 205,657 | $ | 209,926 | ||||||||
| Liabilities: | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 356,384 | $ | 458,433 | $ | 233,938 | $ | 242,555 | ||||||||
| Advances from customers | - | - | ||||||||||||||
| Accrued expenses and other liabilities | - | 45,280 | 25,036 | 25,977 | ||||||||||||
| Advances from customers | - | 54,948 | ||||||||||||||
| Total current liabilities | 356,384 | 558,661 | 258,974 | 268,532 | ||||||||||||
| Total liabilities | $ | 356,384 | $ | 558,661 | $ | 258,974 | $ | 268,532 | ||||||||
The summarized operating result of discontinued operations included in the Company’s unaudited condensed consolidated statements of operations is as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | - | $ | 31,113 | $ | - | $ | 567,379 | ||||||||
| Cost of revenues | 31,652 | 17,678 | 31,652 | 1,547,120 | ||||||||||||
| Gross profit (loss) | (31,652 | ) | 13,435 | (31,652 | ) | (979,741 | ) | |||||||||
| Operating expenses | (39,687 | ) | (268,628 | ) | (39,687 | ) | (726,995 | ) | ||||||||
| Loss from operations | (71,339 | ) | (255,193 | ) | (71,339 | ) | (1,706,736 | ) | ||||||||
| Other expense, net | - | (18,149 | ) | - | (56,546 | ) | ||||||||||
| Loss from discontinued operations before income taxes | (71,339 | ) | (273,342 | ) | (71,339 | ) | (1,763,282 | ) | ||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Loss from discontinued operations, net of income taxes | $ | (71,339 | ) | $ | (273,342 | ) | $ | (71,339 | ) | $ | (1,763,282 | ) | ||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating (expense) income: | ||||||||||||||||
| Other operating income – bad debt recovery | - | (385 | ) | - | 16,486 | |||||||||||
| Total operating (loss) income | - | (385 | ) | - | 16,486 | |||||||||||
| (Loss) income from operations | - | (385 | ) | - | 16,486 | |||||||||||
| Other income, net | - | - | - | - | ||||||||||||
| (Loss) income from discontinued operations, net of income taxes | $ | - | $ | (385 | ) | $ | - | $ | 16,486 | |||||||
NOTE 46 –ACCOUNTS RECEIVABLEINVENTORIES
AtAs of September 30, 20172019 and December 31, 2016, accounts receivable consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Accounts receivable | $ | 16,836,627 | $ | 15,719,847 | ||||
| Less: allowance for doubtful accounts | (3,813,179 | ) | (1,797,476 | ) | ||||
| $ | 13,023,448 | $ | 13,922,371 | |||||
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
NOTE 5 – INVENTORIES
At September 30, 2017 and December 31, 2016,2018, inventories consisted of the following:
| September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
| Raw materials | $ | 963,097 | $ | 1,003,359 | $ | 769,294 | $ | 1,207,334 | ||||||||
| Work-in-process | 1,887,708 | 639,345 | 379,747 | 872,376 | ||||||||||||
| Finished goods | 1,204,676 | 772,652 | 5,546,795 | 5,547,301 | ||||||||||||
| 4,055,481 | 2,415,356 | 6,695,836 | 7,627,011 | |||||||||||||
| Less: reserve for obsolete inventories | (22,109 | ) | (21,177 | ) | ||||||||||||
| Less: inventory reserve | (4,643,524 | ) | (1,212,706 | ) | ||||||||||||
| $ | 4,033,372 | $ | 2,394,179 | $ | 2,052,312 | $ | 6,414,305 | |||||||||
The Company establishes a reserve to mark down its inventories for estimated unmarketable inventories equal to the difference between the cost of inventories and the estimated net realizable value based on assumptions about the usability of the inventories, future demand and market conditions. For the nine months ended September 30, 2019 and 2018, the Company increased its inventory reserve for $3,430,818 and $0, respectively.
NOTE 67 –EQUITY METHOD INVESTMENT
On December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin pursuant to an agreement dated December 23, 2016. The agreement sets forth general terms relating to the proposed business, but does not set forth specific funding obligations for either party. Dyeing has agreed to invest RMB 60,000,000 (approximately $8,705,000)$8.9 million) and to date, hashad invested RMB 59.8 million (approximately $8,676,000)$8.9 million as of September 30, 2019), for which it received a 30% interest, in Shengxin.and Mr. Xue has a commitment to invest RMB 140,000,000 (approximately $20.3$20.9 million), of which Mr. Xue has contributed RMB 20,000,00060,000,000 (approximately $2.9$8.9 million), for which Mr. Xue received a 70% interest in Shengxin. Shengxin’s registered capital is RMB 200 million (approximately $29.0$29.8 million). Mr. Xue hashad advised Dyeing that he anticipatesanticipated that he will fund the remaining RMB 120,000,00080,000,000 (approximately $17.4$11.9 million) of his commitment during 2018. IfSince Mr. Xue doesdid not make this payment by the end of 2017, Dyeing will havehas the right to amend the contract, and both parties willmay adjust each side’s equity interest to reflect the amount of capital each side has actually invested.
In April 2018, Shengxin intendssecured and invested in a large solar PV project in GuiZhou province. Shengxin paid RMB 40 million for the project rights and also engaged a local contractor to develop, construct and maintain photovoltaic power generation projects, known asproceed with building the project. However, on June 1, 2018, the Chinese government halted installation of new solar farms in China, mainly infor the provinces of GuiZhou and YunNan. As of September 30, 2017, Shengxin had not yet commenced operations.
The solar farm industry in China is subject to significant government regulation. In order to construct and operate solar farms in China, it is necessary to obtain a permit for a specific location, to obtain leasehold rights to a significant amount of contiguous land parcels in provinces where there is significant sunlight for mostremainder of the year to support aand reduced subsidies for projects already under construction. Accordingly, there is no guarantee that the Chinese government will invest in new solar farm and to have an agreement to connect withor provide the local grid. The development of solar farms requires significant funding, which, if financing is not available, would have to be provided by Dyeing and Mr. Xue. There are no agreements relating to the funding obligations of either Dyeing or Mr. Xue with respect to any specific project. Shengxin anticipates that to the extent that it obtains permits for solar farms, it will form a new subsidiary for the sole purpose of obtaining the permit for a specific location and constructing the solar farm at that location. The nature of the parties’ respective investments and the respective equity interest in any solar farm project will be determined on a case-by-case basis. To the extent that Mr. Xue develops the project, he may receive an equity interest in the project greater than the percentage of his equity interest in Shengxin, with the specific amount being subject to mutual agreement of the parties.
The Company’s investment in Shengxin is subject to a high degree of risk. The Company cannot give any assurance that Shengxin will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably or that Dyeing will have the resources to provide any funds that may be required in ordersubsidies needed to fund any solar farm projects for which Shengxin may obtain permits. There may be aprojects. In September 2018, due to significant delay betweendoubt about the time funds are advanced for anystatus of this project and recoverability of our investment, the realization of revenue or cash flow from any project.
The Company treatsfully impaired the equity investment in the consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the costvalue of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment. For the three and nine months ended September 30, 2017, the Company’s share of Shengxin’s net loss was $39,060 and $81,871, respectively, which was included in loss on equity method investment in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.Shengxin.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:
| September 30, 2017 | December 31, 2016 | |||||||
| Current assets | $ | 11,706,942 | $ | 11,486,018 | ||||
| Noncurrent assets | 5,318 | - | ||||||
| Current liabilities | - | - | ||||||
| Noncurrent liabilities | - | - | ||||||
| Equity | $ | 11,712,260 | $ | 11,486,018 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
| Loss from operations | (133,339 | ) | - | (283,275 | ) | - | ||||||||||
| Net loss | $ | (130,200 | ) | $ | - | $ | (272,903 | ) | $ | - | ||||||
NOTE 7 – PROPERTY AND EQUIPMENT
At September 30, 2017 and December 31, 2016, property and equipment consisted of the following:
| Useful life | September 30, 2017 | December 31, 2016 | ||||||||
| Office equipment and furniture | 5 years | $ | 69,575 | $ | 65,209 | |||||
| Manufacturing equipment | 5 -10 years | 33,671,962 | 32,240,010 | |||||||
| Vehicles | 5 years | 249,628 | 169,773 | |||||||
| Building and building improvements | 5 - 20 years | 22,066,046 | 21,135,718 | |||||||
| 56,057,211 | 53,610,710 | |||||||||
| Less: accumulated depreciation | (27,782,262 | ) | (23,732,035 | ) | ||||||
| $ | 28,274,949 | $ | 29,878,675 | |||||||
For the three months ended September 30, 20172019 and 2016, depreciation expense amounted to $998,3942018, the Company recorded a loss on equity method investment of $0 and $1,070,931, respectively, of which approximately $721,042 and $958,920, respectively, was included in cost of revenues, and the remainder was included in operating expenses.$8,892,458, respectively. For the nine months ended September 30, 20172019 and 2016, depreciation expense amounted to $2,937,6962018, the Company recorded a loss on equity method investment of $0 and $2,895,246, respectively, of which approximately $2,123,042 and $2,506,920, respectively, was included in cost of revenues, and the remainder was included in operating expenses.$9,038,303, respectively.
NOTE 8 –INTANGIBLE ASSETS
NOTE 8 – INTANGIBLE ASSETS
AtAs of September 30, 20172019 and December 31, 2016,2018, intangible assets consisted of the following:
| Useful life | September 30, 2017 | December 31, 2016 | ||||||||
| Land use rights | 45 - 50 years | $ | 4,059,049 | $ | 3,887,915 | |||||
| Patent use rights | 10 years | 2,405,292 | 2,303,882 | |||||||
| 6,464,341 | 6,191,797 | |||||||||
| Less: accumulated amortization | (1,195,120 | ) | (908,102 | ) | ||||||
| $ | 5,269,221 | $ | 5,283,695 | |||||||
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
| Useful life | September 30, 2019 | December 31, 2018 | |||||||||
| Land use rights | 45 - 50 years | $ | 3,783,611 | $ | 3,925,789 | ||||||
| Other intangible assets | 3 - 5 years | 843,218 | 845,180 | ||||||||
| Goodwill | - | 27,353 | 27,421 | ||||||||
| 4,654,182 | 4,798,390 | ||||||||||
| Less: accumulated amortization | (1,337,699 | ) | (1,235,877 | ) | |||||||
| $ | 3,316,483 | $ | 3,562,513 | ||||||||
Amortization of intangible assets attributable to future periods is as follows:
| Twelve-month periods ending September 30: | Amount | |||||||
| 2018 | $ | 323,129 | ||||||
| 2019 | 323,129 | |||||||
| Year ending September 30: | Amount | |||||||
| 2020 | 323,129 | $ | 352,034 | |||||
| 2021 | 323,129 | 307,588 | ||||||
| 2022 | 323,129 | 100,648 | ||||||
| 2023 | 94,710 | |||||||
| 2024 | 82,836 | |||||||
| Thereafter | 3,653,576 | 2,351,314 | ||||||
| $ | 5,269,221 | $ | 3,289,130 | |||||
There is no private ownership of land in China.the PRC. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right.
In August 2016,January 2018, in connection with the acquisition of 3D Discovery, the Company purchasedacquired their technologies valued at $754,159. The technology of 3D Discovery covers a patent technology use right3D virtual tour solution for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment.the property industry. The Company amortizes the exclusive patent use rightthis technology over thea term of the patent.five years.
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For the three months ended September 30, 20172019 and 2016,2018, amortization of intangible assets amounted to $82,104$30,062 and $62,692,$99,177, respectively.
For the nine months ended September 30, 20172019 and 2016,2018, amortization of intangible assets amounted to $241,464$140,325 and $107,918,$299,373, respectively.
NOTE 9 –SHORT-TERM BANK LOANS
Short-term bank loans represent amounts due to various banks that are due within one year. These loans can be renewed with these banks upon maturities. AtAs of September 30, 20172019 and December 31, 2016,2018, short-term bank loans consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 5, 2017 with annual interest rate of 10.56% and repaid on May 26, 2017 | $ | - | $ | 719,963 | ||||
| Loan from Bank of Communications, due on September 5, 2017 with annual interest rate of 5.62% and repaid on September 5, 2017 | - | 719,963 | ||||||
| Loan from Bank of China, due on December 6, 2017 with annual interest rate of 6.09% at September 30, 2017 and December 31, 2016, secured by certain assets of the Company | 375,827 | 359,982 | ||||||
| Loan from Bank of China, due on December 8, 2017 with annual interest rate of 6.09% at September 30, 2017 and December 31, 2016, secured by certain assets of the Company | 375,827 | 359,981 | ||||||
| Loan from Bank of Wuxi Nongshuang, due on April 25, 2018 with annual interest rate of 5.87% at September 30, 2017, secured by certain assets of the Company | 676,488 | - | ||||||
| Loan from Bank of Communication, due on September 25, 2018 with annual interest rate of 5.85% at September 30, 2017, secured by certain assets of the Company | 601,323 | - | ||||||
| Total short-term bank loans | $ | 2,029,465 | $ | 2,159,889 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| Loan from Bank of China, due on November 20, 2019 with annual interest rate of 4.60%, secured by certain assets of the Company and guaranteed by the Company’s CEO, Jianhua Wu, and Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO | $ | - | $ | 363,488 | ||||
| Loan from Bank of China, due on November 25, 2019 with annual interest rate of 4.60%, secured by certain assets of the Company and guaranteed by the Company’s CEO, Jianhua Wu, and Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO | 350,324 | 363,488 | ||||||
| Loan from Bank of Wuxi Nongshuang, due on February 22, 2019 with annual interest rate of 5.87%, secured by certain assets of the Company | - | 654,279 | ||||||
| Loan from Bank of Wuxi Nongshuang, due on November 6, 2019 with annual interest rate of 5.87%, secured by certain assets of the Company | 630,583 | - | ||||||
| Loan from Bank of Communication, due on September 25, 2019 with annual interest rate of 4.35%, secured by certain assets of the Company | - | 581,582 | ||||||
| Loan from Bank of Communication, due on September 20, 2020 with annual interest rate of 3.915%, secured by certain assets of the Company | 420,390 | - | ||||||
| Current portion of loan from Zhongli International Finance Corporation, credit line of RMB 4,500,000 (approximately $630,583), with a security deposit of RMB 900,000 (approximately $126,117) which will be returned in 36 months, monthly installment of RMB 210,000 (approximately $29,427) in the 1st – 12th month; RMB 138,000 (approximately $19,338) in the 13th - 24th month; RMB 98,000 (approximately $13,733) in the 25th – 36th month; secured by certain assets of the Company * | 152,950 | 220,123 | ||||||
| Total short-term bank loans | $ | 1,554,247 | $ | 2,182,960 | ||||
| * | Long-term Loans represent amounts due to Zhongli International Finance Corporation that is due more than one year. Long-term loan amounts to $119,574 and $244,910 as of September 30, 2019 and December 31, 2018, respectively. |
Minimum 36-month installments for the loan from Zhongli International Finance Corporation under the loan agreement are as follows:
| 12-month periods ending September 30, | Amount | |||
| 2020 | $ | 232,055 | ||
| 2021 | 164,792 | |||
| 2022 | - | |||
| Total minimum loan payments | 396,847 | |||
| Less: amount representing interest | (56,103 | ) | ||
| Less: security deposit due | (68,220 | ) | ||
| Present value of net minimum loan payment | 272,524 | |||
| Less: current portion | (152,950 | ) | ||
| Long-term portion | $ | 119,574 | ||
Interest related to the short-term bank loans, which was $33,125$35,605 and $31,676$26,892 for the three months ended September 30, 20172019 and 2016,2018, and $107,991$116,597 and $96,630$88,372 for the nine months ended September 30, 20172019 and 2016,2018, respectively, is included in interest expense on the accompanying unaudited condensed consolidated statements of operations and comprehensive gain (loss).
loss.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
NOTE 10 – BANK ACCEPTANCE NOTESCONVERTIBLE NOTE PAYABLE
Bank acceptance notesSecurities purchase agreement and related convertible note and warrants
On May 2, 2018, pursuant to a securities purchase agreement, the Company closed a private placement of securities with Iliad Research and Trading, L.P. (the “Investor”) pursuant to which the Investor purchased a Convertible Promissory Note (the “Iliad Note”) in the original principal amount of $900,000, convertible into shares of common stock of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in the Iliad Note, and a two year Warrant to purchase 134,328 shares of Common Stock at an exercise price of $7.18 per share (the “Warrant”). In connection with the Iliad Note, the Company paid an original issue discount of $150,000 and paid issuance costs of $45,018 which will be reflected as a debt discount and amortized over the Iliad Note term. The Iliad Note bears interest at 10% per annum, is unsecured, and is due on the date that is fifteen months from May 2, 2018 . The warrants shall expire on the last calendar day of the month in which the second anniversary of the Issue Date occurs. On November 8, 2018, the Company converted an aggregate of $27,811 and $47,189 outstanding principal and interest of the Iliad Note, respectively, into a total of 36,621 shares of its common stock. On January 11, 2019, the Company converted an aggregate of $34,103 and $15,897 outstanding principal and interest of the Iliad Note, respectively, into 266,667 shares of its common stock.
The Investor has the right at any time after May 2, 2018 until the outstanding balance has been paid in full to convert all or any part of the outstanding balance into shares of common stock of the Company at conversion price of $6.70 per share (the “Lender Conversion Price”). The Lender Conversion Price is subject to certain adjustments set forth in the Iliad Note. The conversion price for each Redemption Conversion (the “Redemption Conversion Price”) shall be the lesser of (a) the Lender Conversion Price, and (b) the Market Price; provided, however, in no event shall the Redemption Conversion Price be less than $2.00 per share (“Conversion Price Floor”) unless the Company waive the Conversion Price Floor.
This debt instrument includes embedded components including a put option. The Company evaluated these embedded components to determine whether they are embedded derivatives within the scope of ASC 815 that should be separately carried at fair value. ASC 815-15-25-1 provides guidance on when an embedded component should be separated from its host instrument and accounted for separately as a derivative. Based on this analysis, the Company believes that the put option is clearly and closely related to the debt instrument and does not meet the definition of a derivative. Accordingly, in connection with this Iliad Note, the Company recorded a debt discount for (a) the original issue discount of $150,000 (b) the relative fair value of the warrants issued of $152,490 and (c) legal fees and other fees paid in connection with the Iliad Note aggregating $45,018. There is no beneficial conversion feature on this Iliad Note. The debt discount shall be accreted on a straight line basis over the term of this Iliad Note.
The convertible note payable represent amounts due to banks which are collateralized. All bank acceptance notes payable are securedhas been extended longer period agreed by the Company’s restricted cash which are deposits with various lenders. Atboth parties.
As of September 30, 20172019 and December 31, 2016, the Company’s bank acceptance notes payables2018, convertible debt consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due and paid on January 29, 2017, collateralized by 100% of restricted cash deposited | $ | - | $ | 71,996 | ||||
| Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due and paid on May 9, 2017, collateralized by 100% of restricted cash deposited | - | 431,978 | ||||||
| Bank of China, non-interest bearing, due and paid on January 6, 2017, collateralized by 100% of restricted cash deposited | - | 43,198 | ||||||
| Bank of Communication, non-interest bearing, due on November 8, 2017, collateralized by 100% of restricted cash deposited | 75,165 | - | ||||||
| Bank of Communication, non-interest bearing, due on March 24, 2018, collateralized by 100% of restricted cash deposited | 300,662 | - | ||||||
| Total | $ | 375,827 | $ | 547,172 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| Principal | $ | 838,571 | $ | 872,674 | ||||
| Unamortized discount | - | (162,170 | ) | |||||
| Convertible debt, net | $ | 838,571 | $ | 710,504 | ||||
For the nine months ended September 30, 2019, amortization of debt discount and interest expenses amounted to $162,170 and $67,500, respectively.
For the nine months ended September 30, 2018, amortization of debt discount and interest expenses amounted to $115,836 and $37,500, respectively.
As of September 30, 2019 and December 31, 2018, accrued interest amounted to $63,603 and $13,187, respectively.
NOTE 11 –11– RELATED PARTY TRANSACTIONS
Due to related partyLicense Agreement with ECrent Capital Holdings Limited
From time to time, the Company receive advances from YSK 1860 Ltd., which is a principal shareholder of the Company for working capital purposes. These advanced and non-interest bearing and are payable on demand. At September 30, 2017 and December 31, 2016, amounts due to this related party amounted to $351,430 and $0, respectively.
Exclusivity agreement
On June 11, 2017, the Company entered into an Exclusivity Agreement (the “Exclusivity Agreement”) with ECrent Capital Holdings Limited (“ECrent”) the terms of which became effective on the same day. Pursuant to the Exclusivity Agreement, the Company and ECrent agreed to engage in exclusive discussions regarding a potential acquisition by the Company of ECrent and/or any of its subsidiaries or otherwise all or part of ECrent’s business and potential business cooperation between the two companies (collectively, the “Potential Transactions”) for a period of three months commencing from the date of the Exclusivity Agreement (the “Exclusive Period”). Ms. Deborah Yuen, an former affiliate of Chan Tin Chi Family Company Limited (formerly known as YSK 1860 Ltd.Co., Limited), which is a principalmajor shareholder of the Company, controls ECrent Holdings Limited, which is the majority shareholder ofcontrolled ECrent. ECrent agreed that, during the Exclusive Period, neither ECrent nor its agents, representatives or advisors will contact, solicit, discuss or negotiate with any third party with respect to any transaction relating to a transfer or pledge of securities of ECrent and/or its subsidiaries, a sale of ECrent’s business, a business cooperation or any other matters that may adversely affect the Potential Transactions or the parties’ discussion related thereto.
NOTE 12 – ACCRUED EXPENSES
At The exclusivity period has been further extended to a period of 18 months commencing from June 20, 2018 pursuant to three amendment agreements dated September 30,11, 2017, January 23, 2018 and December 31, 2016, accrued expenses consisted ofJune 20, 2018. On January 25, 2019, Sharing Economy International, Inc. terminated the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Accrued salaries and related benefits | $ | 125,886 | $ | 143,622 | ||||
| Other payables | 81,417 | 224,773 | ||||||
| $ | 207,303 | $ | 368,395 | |||||
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30,Exclusivity Agreement entered into with ECrent Capital Holdings Limited on June 11, 2017,
(UNAUDITED)
NOTE 13 – STOCKHOLDERS’ EQUITY
Common stock issued for services as amended.
On May 8, 2017,2018, amended on May 24, 2018 and amended on August 30, 2018, Sharing Economy entered into a License Agreement (the “Agreement”) with ECrent. In accordance with the terms of the Amendment, ECrent shall grant the Company issued 15,000an exclusive license to utilize certain software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in Taiwan, Thailand, India, Indonesia, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Japan, and Korea until December 31, 2019. In consideration for the license, the Company granted ECrent 250,000 shares of common stock (the “Consideration Shares”), at an issue price of $1,040,000, or $4.16 per share, (based on the quoted market price of the Company’s common stock on the amended Agreement date of May 24, 2018). Pursuant to the terms of the Agreement, ECrent shall provide a guarantee on revenue and profit of $13,000,000 and $2,522,000, respectively. The Consideration Shares shall be reduced on a pro rata basis if there is a shortfall in the guaranteed revenue and/or profit. In connection with this agreement, during the three and nine months ended September 30, 2019, the Company recorded license fee expense of $165,958 and $497,872, respectively, which is included in cost of sales, and as of September 30, 2019, recorded a prepaid license fee – related party of $165,957 which will be amortized over the remaining license period.
Due to related parties
Mr. Chan Tin Chi owns 99% of the issued and outstanding ordinary shares of Chan Tin Chi Family Company Limited (formerly known as YSK 1860 Co., Limited). From time to time, during 2018 and 2019, the Company receive advances from Mr. Chan Tin Chi and Chan Tin Chi Family Company Limited, who is the major shareholder of the Company, for working capital purposes. These advances are non-interest bearing and are payable on demand. During the nine months ended September 30, 2019 and 2018, the Company received advances from Mr. Chan Tin Chi and Chan Tin Chi Family Company Limited for working capital totaled $519,543 and $580,046, respectively, and repaid to Mr. Chan Tin Chi and Chan Tin Chi Family Company Limited a total of $31,604 and $0, respectively. At September 30, 2019 and December 31, 2018, amounts due to Mr. Chan Tin Chi and Chan Tin Chi Family Company Limited amounted to $1,745,444 and $1,257,505, respectively.
Bank loans guaranteed by related parties
The Company obtains two bank loans from Bank of China, due on November 20, 2019 and November 25, 2019, respectively. These loans are guaranteed by Jianhua Wu, CEO, and Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO (see Note 9).
NOTE 12 – STOCKHOLDERS’ EQUITY
Common stock issued for cash
In March 2019, pursuant to its 2016 long-term incentive plana stock purchase agreement, the Company sold 690,000 shares of common stock to an investor at a purchase price of $0.29 per share for legal services.net cash proceed a total of $200,100. The Company did not engage a placement agent with respect to these sales.
Common stock issued for services and common stock surrendered
During the nine months ended September 30, 2019, pursuant to consulting and service agreements, the Company issued an aggregate of 1,349,347 shares of common stock to twenty four consultants and vendors for the services rendered and to be rendered. These shares were valued at $50,400, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with this issuance, the Company reduced accounts payable by $28,400 and recorded stock-based professional fees of $22,000 during the nine months ended September 30, 2017.
On May 18, 2017, pursuant to a seven month consulting agreement, the Company issued 25,000 shares of its common stock to a consultant for business development services provided and to be provided through December 31, 2017. These shares were valued at $84,000, the fair market value on the grant date using the reported closing share price on the date of grant. Pursuant to this consulting agreement, on September 30, 2017, the Company issued an additional 25,000 share of common stock to this consultant. These shares were valued at $81,500, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with these issuances, the Company recorded stock-based professional fees of $100,300 and prepaid expenses of $65,200 which is amortized over the remaining service period.
On June 22, 2017, pursuant to a one-year consulting agreement effective May 16, 2017, the Company issued 65,200 shares of common stock to a consultant for business development services rendered and to be rendered. These shares were valued at $283,620, or $4.35 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, the Company recorded stock-based professional fees of $106,357 and prepaid expenses of $141,811 which is amortized over the remaining service period. Additionally, pursuant to this consulting agreement, the Company will issue an additional 20,000 share of common stock to this consultant before November 1, 2017. The initial fair value of these shares were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasuredmeasured using the then-current fair value of the Company’s common stock. Forstock at reporting date. During the nine months ended September 30, 2017,2019, the Company recorded stock-based professional fees of $25,200 related to these issuable shares and as of September 30, 2017, there was $42,000 of unamortized stock-based professional fees to be recognized through May 2018.
On July 19, 2017, pursuant to one-year consulting agreements effective July 19, 2017, the Company issued an aggregate of 120,000 shares of common stock to two consultants (60,000 shares each) for business development services to be rendered. These shares were valued at $498,000, or $4.15 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, the Company recorded stock-based professional fees of $103,750 and prepaid expenses of $394,250 which is amortized over the remaining service period. Additionally, pursuant to these consulting agreements, the Company will issue an additional 40,000 share of common stock to these consultants (20,000 shares each) before November 1, 2017. The initial fair value of thesethe above mentioned shares were valued atissued and the fair marketchange in value onof the contract date using the reported closing share price on the date of grant.shares to be issued was $288,969. The Company will recognizerecognizes stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock.consultant or vendor. For the nine months ended September 30, 2017,2019, the Company recorded stock-based professional fees of $28.000 related to these issuable sharesconsulting and as of September 30, 2017, there was $106,400 of unamortized stock-based professionalservice fees to be recognized through July 2018.
On July 31, 2017, pursuant to a one-year consulting agreements effective July 1, 2017, the Company issued 8,000 sharesservice provider and employees of common stock to a consultant for investor relations services to be rendered. These shares were valued at $32,560, or $4.07 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in$2,710,195. In connection with the issuance/future issuance of these shares to consultants and vendors, the Company recorded stock-based professional fees of $8,140 and prepaid expenses of $24,420$1,026,124 which iswill be amortized over the remaining service period.
On July 31, 2017, pursuant to a one-year consulting agreements effective July 1, 2017, the Company issued 23,230 shares of common stock to a consultant for accounting services rendered and to be rendered. These shares were valued at $85,111, or $4.07 per share, the fair market value on the grant date using the reported closing share price on the date of grant. ForDuring the nine months ended September 30, 2017, in connection with the issuance of these shares,2019, the Company recorded stock-based professional feesterminated the consulting agreements of $30,713eleven consultants. The consultants surrendered an aggregate of 562,501 shares issued in prior periods. In addition, the Company also mutually agreed or terminated the consulting and prepaid expensesservice agreements of $54,398 which is amortized overthree consultants and vendors. Both parties forgo their respective rights as stated in the remaining service period.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)agreements; and the Company has no obligation to issue in aggregate of 223,135 shares in effect. As a result of the above mentioned transactions, the Company reversed the fair value of $947,948 recognized in stockholders’ equity in prior periods.
On August 21, 2017, pursuant to one-year consulting agreements effective August 21, 2017,Common stock issued for debt conversion
In January 2019, the Company issued an aggregate of 125,000266,667 shares of its common stock upon conversion of debt (note 10).
Shares issued for donation
In February 2019, the Company issued 85,470 shares as donation to two consultants (65,000Hong Kong Baptist University (“HKBU”). The Foundation would use the funds raised from the donation to support the delivery of education, operation, facilities enhancement and 60,000 shares, respectively) for business development services to be rendered.study of the Academy of Film of HKBU. These shares were valued at $403,750,$259,598, or $3.23$3.04 per share, the fair market value on the grant date using the reported closing share price on the date of grant. Forshare. In connection with this donation, during the nine months ended September 30, 2017, in connection with the issuance of these shares,2019, the Company recorded stock-based professional feesdonation expense of $44,749 and prepaid expenses of $359,001$259,598, which is amortized over the remaining service period. Additionally, pursuant to these consulting agreements, the Company will issue an additional 35,000 share of common stock to these consultants (17,000 and 18,000, respectively) before November 21, 2017. The initial fair value of these shares was were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock. For the nine months ended September 30, 2017, the Company recorded stock-based professional fees of $13,034 related to these issuable shares and as of September 30, 2017, there was $104,566 of unamortized stock-based professional fees to be recognized through July 2018.included in operating expenses.
Common stock sold for cash
In June 2017, pursuant to stock purchase agreements, the Company sold an aggregate of 290,000 shares of common stock to three investors at a purchase price of $3.00 per share for net cash proceeds a total of $860,000. The Company did not engage a placement agent with respect to these sales.
NOTE 14 – STATUTORY RESERVE
The Company is required to make appropriations to statutory reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. The profit must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. This statutory reserve is not distributable in the form of cash dividends. As of September 30, 2017 and December 31, 2016, the Company appropriated the required 50% of its registered capital to statutory reserve for Dyeing and Heavy Industries. Accordingly, no additional statutory reserve for Dyeing and Heavy Industries are required for the nine months ended September 30, 2017. Green Power had net losses since its establishment. No appropriation to statutory reserves for it was required as it incurred recurring net loss.
NOTE 1513 – SEGMENT INFORMATION
During the three and nine months ended September 30, 2016,2019 and 2018, the Company operated in threetwo reportable business segments - (1) the manufacture of textile dyeing and finishing equipment segment, and (2) the manufactureSharing Economy Segment which targets the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of forged rolled rings and related components segment, and (3) the manufacture of petroleum and chemical equipment segment.sharing through economical rental business models. The Company’s reportable segments were strategic business units that offered different products. They were managed separately based on the fundamental differences in their operations. All ofoperations and locations. During the three and nine months ended September 30, 2019 and 2018, the Company’s dyeing and finishing equipment operations arewere conducted in the PRC. Because of significant declinesThe Sharing Economy Segment is based in revenues from the forged rolled rings and related components segment and petroleum and chemical equipment segment, the Company discontinuedHong Kong.
Information with respect to these segments and sold the forged rolled rings and related components segment in the fourth quarter of 2016. Pursuant to ASC Topic 205-20, Presentation of Financial Statements-Discontinued Operations, thereportable business of forged rolled rings and related components segment, and petroleum and chemical equipment segment are considered as discontinued operations because: (a) the operations and cash flows of these segments were eliminated from the Company’s operations; and (b) the Company would not have ability to influence the operation or financial policies of the forged rolled rings and related components segment subsequent to the sale. The results of operation of the forged rolled rings and related components and the petroleum and chemical equipment segments have been presented as discontinued operations for the three and nine months ended September 30, 2016.2019 and 2018 was as follows:
| For the Three Months ended September 30, | For the Nine Months ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues: | ||||||||||||||||
| Dyeing and finishing equipment | $ | 1,676,831 | $ | 2,444,437 | $ | 5,216,740 | $ | 7,499,362 | ||||||||
| Sharing economy | 533 | 72,764 | 27,325 | 155,959 | ||||||||||||
| 1,677,364 | 2,517,201 | 5,244,065 | 7,655,321 | |||||||||||||
| Depreciation: | ||||||||||||||||
| Dyeing and finishing equipment | 696,819 | 974,745 | 2,081,089 | 3,067,647 | ||||||||||||
| Sharing economy | 12,301 | 4,458 | 16,727 | 13,210 | ||||||||||||
| 709,120 | 979,203 | 2,097,816 | 3,080,857 | |||||||||||||
| Interest expense | ||||||||||||||||
| Dyeing and finishing equipment | 35,605 | 26,892 | 116,597 | 88,372 | ||||||||||||
| Sharing economy | 137,668 | 92,002 | 228,483 | 153,336 | ||||||||||||
| Other | 3 | - | 3 | - | ||||||||||||
| 173,273 | 118,894 | 345,080 | 241,708 | |||||||||||||
| Net loss | ||||||||||||||||
| Dyeing and finishing equipment | (311,457 | ) | (13,293,023 | ) | (23,833,748 | ) | (17,364,755 | ) | ||||||||
| Sharing economy | (261,178 | ) | (4,319,404 | ) | (1,374,469 | ) | (8,049,373 | ) | ||||||||
| Discontinued segments | - | (385 | ) | - | 16,486 | |||||||||||
| Other | (540,240 | ) | (960,907 | ) | (3,201,564 | ) | (4,065,420 | ) | ||||||||
| $ | (1,112,875 | ) | $ | (18,573,719 | ) | $ | (28,409,781 | ) | $ | (29,463,062 | ) | |||||
NOTE 14 –CONCENTRATIONS
At September 30, 2017Customers
Five customers accounted for approximately 80% (34%, 16%, 14%, 8% and December 31, 2016, all remaining identifiable long-lived tangible assets belong to8%) of the Company’s continuing operations,revenues for the textile dyeing and finishing equipment segment and are located in China.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
NOTE 16 – CONCENTRATIONS
Customers
For the ninethree months ended September 30, 2017, one customer2019 and three customers accounted for 10%approximately 45% (18%, 16% and 11%) of total revenues. No customerthe Company’s revenues for the three months ended September 30, 2018.
Five customers accounted for approximately 43% (11%, 10%, 8%, 7% and 7%) of totalthe Company’s revenues for the nine months ended September 30, 2016. No customer2019 and three customers accounted for 10% or moreapproximately 45% (18%, 16% and 11%) of the Company’s revenues for the nine months ended September 30, 2018.
The total outstanding accounts receivable atbalance of Customer A, B, C, D, and E are $260,079, $168,154, $70,064, $472,233 and $29,427 respectively as of September 30, 2017. One customer2019.
Suppliers
Three suppliers accounted for approximately 73% (46%,16%, 11%) of the Company’s total outstanding accounts receivable at December 31, 2016inventories purchases for the three months ended September 30, 2019 and four suppliers accounted for approximately 74% (22%, 22%, 18% and 12%) of the Company’s revenues for the three months ended September 30, 2018.
Suppliers
The following table sets forth information as to each supplier thatTwo suppliers accounted for 10% or moreapproximately 40% (20% and 20%) of the Company’s inventories purchases for the nine months ended September 30, 20172019 and 2016.
| Nine Months Ended September 30, | ||||||||
| Supplier | 2017 | 2016 | ||||||
| A | 22 | % | * | |||||
| B | 12 | % | * | |||||
| C | - | 23 | % | |||||
| D | - | 12 | % | |||||
| E | * | 10 | % | |||||
* Less than 10%.four suppliers accounted for approximately 76% (14%, 29%, 18% and 15%) of the Company’s revenues for the nine months ended September 30, 2018.
One largest suppliers (who accounted for 10% or more of the Company’sThe total outstanding accounts payable atbalance of Supplier A, B and C are $278,918, $69,604 and $310,659 respectively as of September 30, 2017) accounted for 13% of the Company’s total outstanding accounts payable at September 30, 2017. No suppliers accounted for 10% or more of the Company’s total outstanding accounts payable at December 31, 2016.2019.
NOTE 1715 –COMMITMENT AND CONTINGENCIES
Equity investment commitmentLitigation:
On December 26, 2016, Dyeing made an equity investment with one unrelated companyApril 25, 2019, ECPower (HK) Company Limited (“EC Power”), a subsidiary of SEII, filed a claim against The Dairy Farm Limited (“Dairy Farm”) in Shengxin, a newly-formed entity which plansrespect of the cooperation agreement between the two parties for the battery rental business at 7-Eleven outlets in Hong Kong during the period from September 2017 to develop, construct and maintain photovoltaic power generation projects in China. Shengxin’s total registered capitalFebruary 2018. The claim is RMB 200 million (approximately $29.0 million). Dyeing has agreed to invest RMB 60,000,000 (approximately $8,705,000) for a 30% equitytotal compensation of HK$1,395,000 (approximately $178,846) which comprises of (i) HK$45,000 (approximately $5,769) as compensation for interest and administration cost incurred as a result of Dairy Farm’s delay in Shengxinpayment of EC Power’s share of the rental income, and had invested RMB 59,800,000(ii) HK$1,350,000 (approximately $8,676,000)$173,077) as compensation for Dairy Farm’s early termination of September 30, 2017. Mr. Xue has a commitment to invest RMB 140,000,000 (approximately $20.3 million) for a 70% interest. Mr. Xue contributed RMB 20,000,000 (approximately $2.9 million), and he advised Dyeing that he anticipates that he will fund the balancecooperation agreement without any valid proof of his commitment during 2018. If Mr. Xue does not make this payment byfault on the endpart of 2017, Dyeing will have the right to amend the contract, and both parties will adjust each sides’ equity interest to reflect the amount of capital each side has actually invested. As of September 30, 2017, Shengxin had not commenced operations.
LitigationEC Power.
From time to time the Company may become a party to litigation in the normal course of business. Management believes that there are no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Transfer agreement
On August 4, 2017, the Company’s wholly-owned subsidiary, EC Power (Global) Technology Limited (“EC Power”), entered into a Transfer Agreement (the “Transfer Agreement”) with ECoin Global Limited (“ECoin”), to purchase ECoin Redemption Codes (the “Codes”) produced by ECoin for total future consideration of $20,000,000 (the “Transfer Consideration”). In accordance with the Agreement, EC Power will market the Codes, which contain a value that enables subscribers to upload certain number of items onto ECrent’s website for rental. The Codes have a validity period of four years, and will not expire until August 3, 2021 (the “Expiry Date”). The Transfer Consideration will be paid by EC Power to ECoin in installments, with each installment payable not later than thirty days after the end of December 31stin each calendar year.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
Each installment will represent an amount equal to 50% of the net sale proceeds of the Codes sold during each calendar year. The aggregate of installments shall not exceed the Transfer Consideration. Any balance outstanding of the Transfer Consideration at the Expiry Date will be paid and discharged by the issuance and delivery to ECoin of common stock of the Company in accordance with the terms of the Agreement. The number of shares to be issued or delivered shall be an amount equal to (i) the balance due; divided by (ii) the VWAP of the shares for the period of twenty trading days immediately preceding the Expiry Date, provided always that in no circumstances shall shares be issued or delivered hereunder to the ECoin in excess of 19% of the issued and outstanding ordinary Shares of the Company. As of the date of this report, EC Power has not taken possession of any redemption codes and as of September 30, 2017, EC Power has not sold any redemption codes.
NOTE 1816 –RESTRICTED NET ASSETS
Regulations in the PRC permit payments of dividends by the Company’s PRC subsidiary and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIEs and subsidiary. Heavy Industries and Dyeing had reached the cumulative limit as of MarchDecember 31, 2017.2018. The statutory reserve funds are not distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIEs and its PRC subsidiary are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or advances.
As of September 30, 20172019 and December 31, 2016,2018, substantially all of the Company’s net assets are attributable to the PRC VIEs and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at(liabilities) as of September 30, 20172019 and December 31, 20162018 were approximately $56,037,000($5,145,000) and $57,324,000,$21,923,000, respectively.
NOTE 1917 –SUBSEQUENT EVENTS
Common stockIn accordance with ASC Topic 855, “Subsequent Events ”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, for services
the Company has evaluated all events or transactions that occurred after September 30, 2019 up through the filing date the Company issued the unaudited condensed consolidated financial statements. During the period, the Company had the following material subsequent events:On October 3, 2017, pursuantNovember 4, 2019, the Company held its 2019 annual meeting of stockholders. The matters voted upon were the election of directors, approval of an amendment to a two-year consulting agreement between the Company’s wholly-owned subsidiary, EC Manpower Limited2016 Long-Term Inventive Plan, and an individual for investor relation servicesapproval to be rendered, the Company agreed to pay this consultant $202,000 per year to be paid by the issuance of an aggregate of 134,688 shares as follows: 33,672 shares were issued in October 2017. 33,672 during the sixth month from the agreement date, 33,672 shares during the 12th month from the agreement date, and 33,672 shares during the 18th month from the agreement date. The initial 33,672 shares were valued at $112,801, or $3.35 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $112,801 over the service period. Additionally, pursuant to this consulting agreement, the Company will issue an additional 101,016 share of common stock to this consultant as outlined above,provided that this Agreement is not terminated prior to date of the issuance of these shares. The initial fair value of these shares were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock. If, on the first date when the restrictive legend on the certificate of each lot of the Shares issued to the Consultant pursuant this agreement is removed and such lot of Shares becomes freely tradeable in the NASDAQ Capital Market without restriction, the closing price of the shares drops below the issue price, the Company will compensate the Consultant for the drop in value of such lot of shares, which will be calculated by multiplyingincrease the number of shares by the difference between the closing price and the issue price ("Shortfall"). The Company will pay for the Shortfall annually by causing the Company to issue shares at the average closing price of the 5 trading days immediately before the first and second anniversary date of the date of this agreement, provided that the maximum number of shares issued for the Shortfall shall not exceed 13,500 Shares per year of services.authorized shares.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
On October 9, 2017, pursuant to a two-year consulting agreement between the Company’s wholly-owned subsidiary, EC Advertising Limited and an individual, the Company issued 65,089 shares of common stock to a consultant for advertising and marketing services to be rendered. These shares were valued at $216,095, or $3.32 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $216,095 over the service period. Additionally, pursuant to this consulting agreement, the Company will issue an additional 65,089 share of common stock to this consultant before April 9, 2018,provided that this Agreement is not terminated prior to date of the issuance of these shares. The initial fair value of these shares were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock. If, on the first date when the restrictive legend on the certificate of each lot of the shares issued to the Consultant pursuant this agreement is removed and such lot of shares becomes freely tradeable in the NASDAQ Capital Market without restriction, the closing price of the shares drops below the issue price, the Company will compensate the Consultant for the drop in value of such lot of shares, which will be calculated by multiplying the number of Shares by the difference between the closing price and the issue price ("Shortfall"). The Company will pay for all the Shortfalls, within the first 3 months of the second year of Services, by causing the Company to issue shares at the average closing price of the 5 trading days immediately before the shares are issued pursuant to this agreement, provided that the maximum number of shares issued for the Shortfall shall not exceed 26,036 Shares. Additionally, the Company shall, within one month from the date of this Agreement, issue such number of ordinary shares ofEC Advertising Limitedto the Consultant (or his nominee) so that he (or his nominee) will hold 15% ofEC Advertising Limitedissued share capital as enlarged by the share issue pursuant to this agreement. Additionally, within one month after the Consultant achieves all the performance targets as outlined in the agreement,EC Advertising Limitedshall issue, or shall cause its major shareholder to transfer, such number ofEC Advertising Limited's ordinary shares to the Consultant (or its nominee)so that he (and his nominee) will, together with the 15% issued share capital discussed above, hold a total of 49% ofEC Advertising Limited’s issued share capital as enlarged by the share issue or after the transfer (as the case may be).Performance targets include the achievement by the Company of total revenue of $10,000,000 and profit after tax of $4,000,000 during the term of the agreement.
On October 9, 2017, pursuant to a consulting agreement, the Company agreed to issue 7,615 shares of its common stock to an entity for development services rendered. Such shares were issued in November 2017 upon completion of the services rendered. These shares were valued at $25,282, or $3.32 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $25,282.
On October 19, 2017, pursuant to a one-year consulting agreement effective May 16, 2017, the Company issued 20,000 shares of common stock to a consultant for business development services rendered and to be rendered (see note 13). These shares were valued at $99,400, or $4.97 per share, the fair market value on the issue date using the reported closing share price on the date of issue. The initial fair value of these shares were valued at the fair market value on the contract date using the reported closing share price on the date of grant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares were remeasured using the then-current fair value of the Company’s common stock. The Company recognizes stock-based professional fees over the period during which the services are rendered by such consultant.
On October 23, 2017, pursuant to a consulting agreement, the Company agreed to issue 6,000 shares of its common stock to an entity for public relations services rendered. These shares were valued at $28,920, or $4.82 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $28,920.
In November 2017, pursuant to one-year consulting agreements effective July 19, 2017 (see Note 13), the Company issued an aggregate of 40,000 shares of common stock to two consultants (20,000 shares each) for business development services to be rendered. The initial fair value of these shares was were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares were remeasured using the then-current fair value of the Company’s common stock.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2017
(UNAUDITED)
On November 1, 2017, pursuant to one-year consulting agreements effective November 1, 2017, the Company issued an aggregate of 100,000 shares of common stock to two entities (50,000 shares each) for business development services to be rendered. These shares were valued at $435,000, or $4.35 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $435,000 over the service period. Additionally, pursuant to these consulting agreements, the Company will issue an additional 24,052 share of common stock to these consultants (12,000 and 12,052 shares, respectively) during the 6th month of this agreement, provided that these agreements are not terminated prior to the issuance of such shares. The initial fair value of these shares was were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock.
On November 1, 2017, pursuant to one-year consulting agreements effective November 1, 2017, the Company issued an aggregate of 58,000 shares of common stock to two individuals (38,000 and 20,000 shares, respectively) for business development services to be rendered. These shares were valued at $252,300, or $4.35 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $252,300 over the service period. Additionally, pursuant to these consulting agreements, the Company will issue an additional 17,948 share of common stock to these consultants (11,148 and 6,800 shares, respectively) during the 6th month of this agreement, provided that these agreements are not terminated prior to the issuance of such shares. The initial fair value of these shares was were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock.
On November 3, 2017, pursuant to a two-year consulting agreement effective November 6, 2017, the Company issued 33,983 shares of common stock to an individual for business development services to be rendered. These shares were valued at $144,088, or $4.24 per share, the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance of these shares, the Company shall record stock-based professional fees of $144,088 over the service period. Additionally, pursuant to this consulting agreement, the Company will issue an additional 33,983 share of common stock to this consultant during the 6th month of this agreement, provided that this agreement is not terminated prior to the issuance of such shares. The initial fair value of these shares was were valued at the fair market value on the contract date using the reported closing share price on the date of grant. The Company will recognize stock-based professional fees over the period during which the services are rendered by such consultant. At the end of each financial reporting period prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s common stock.
Note purchase agreement
On October 9, 2017, the Company entered into a Note Purchase Agreement (the “NPA”) with Chong Ou Holdings Group Company Limited, a BVI company (the “Investor”) pursuant to which the Investor purchased a note for $670,000, bearing two percent (2%) interest per annum (the “Note”). The Note automatically converts into shares of common stock of the Company at a conversion price equal to $3.35 per share on January 8, 2018. The Company shall have the option, in its sole and absolute discretion, to repay the Outstanding Amount in full on or before the Conversion Date.
Acquisition of Inspirit Studio
On October 27, 2017, the Company’s wholly-owned subsidiary, EC Technology & Innovations Limited (“ECTI”), entered into a Sale and Purchase Agreement (the “Agreement”) with the shareholder of Inspirit Studio (“Inspirit”), to acquire 51% ownership of Inspirit. ECTI will acquire 51% of Inspirit for consideration of HK$3.0 million, which shall be satisfied by the allotment and issuance of 85,473 shares of the Company. In connection with the acquisition, the Company shall issue 85,473 restricted shares of its common stock valued at $4.30 per share on the acquisition-date fair value of our common stock based on the quoted trading price of the Company’s common stock. Inspirit has been engaging in developing a mobile app platform which provides instant errand services in a peer to peer model. The Company is currently analyzing the fair value of the assets acquired and liabilities assumed to determine the purchase price allocation.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Historically, our primary operations involved the design, manufacture and distribution of a line of proprietary high and low temperature dyeing and finishing machinery to the textile industry. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets.
We design and produce airflow dyeing machines, which use air instead of water. Water is used in the traditional dyeing process. We believe that our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions. WithHistorically, the ChinaChinese government’s mandate to phase out older machinery in China’s textile industry that does not meet the new environmental standards althoughhas benefitted us. However, in recent years, challenging economic conditions, increases in raw materials prices and the Chinese government’s more aggressive stance toward shutting down factories, including textile manufacturers, that are not compliant with emission standards, have adversely impacted our revenue from this segment declineddyeing and finishing businesses. Due to rising production costs, many other textile manufacturers are closing or relocating to other countries outside of China in 2016, in the long-term we expect to increase our revenue from this segment. Our new after-treatment drying and compacting machine is used in the final finishing of knitted material, such as cotton, and is designed to improve the softness, reduce shrinkage and ensure better dimensional stability. We developed a new garment washing machine for denim. It is made of stainless steel and customized for use by Chinese jeans manufacturers, the machine is capable of stone wash, enzyme wash and other water washing techniques.Southeast Asia.
The current focus for the dyeing machine business is on investing in research and developmentIn an effort to improve our competitive position. Inproduct offering and appeal to textile manufacturers outside of our current customer base in China, we have developed prototypes of next generation dyeing and finishing equipment utilizing a patent we purchased in August 2016 we purchased the technology use right for a patent that covers ozone-ultrasonic textile dyeing equipment. Due to the challenging conditions facing our customers, increasing raw materials prices and labor costs, we have not recorded any revenues from this patent and believe it is unlikely to yield significant value to the Company. As a result, we recorded a $1.9 million impairment loss on this asset during the third quarter of 2018.
We believeare also diversifying our manufacturing operations to target other industries outside of the textile industry and are constructing a mobile phone cover production line. As of the date of this annual report, the line is nearly completed and we expect to begin production in the first half of 2019. We are actively exploring other new patent technology will allow usventures and opportunities that could contribute to develop next generation dyeing and finishing equipment that will appeal to textile manufacturersour business in China as well as Southeast Asia.the future. We expect our revenue from dyeing and finishing equipment segment will remain at or about its current quarterly level in the near future, although declines are possible.
On December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin, in which Dyeing has a 30% equity interest and the unrelated third party holds a 70% interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. In April 2018, Shengxin secured and invested in a large solar PV project in GuiZhou province. Shengxin paid RMB40 million for the project rights and also engaged a local contractor to proceed with building the project. However, on June 1, 2018, the Chinese government halted installation of new solar farms for the remainder of the year and reduced subsidies for projects already under construction. Accordingly, there is no guarantee that the Chinese government will invest in new solar farm or provide the subsidies needed to fund projects.
Our investment in Shengxin is subject to a high degree of risk. We cannot give any assurance that Shengxin will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably or that Dyeing will have the resources to provide any funds that may be required in order to fund any solar farm projects for which Shengxin may obtain permits. There may be a significant delay between the time funds are advanced for any project and the realization of revenue or cash flow from any project. In September 2018, due to significant doubt about the status of this project and recoverability of the Company’s investment, we fully impaired the value of its investment in Shengxin in the amount of approximately $8.7 million (equivalent to RMB 59.8 million).
Through December 30, 2016, we operated in the forged rolled rings and related components segment, in which we manufactured and sold precision forged rolled rings, shafts, flanges, and other forged components for the energy industry including wind power and other industries.industries, On December 30, 2016, we sold 100% of the stock in Fulland Wind, the subsidiary that operated our forged rolled rings and related components business, to a non-affiliated third party, as a result of which the forged rolled rings and related components business is reflected as discontinued operations for all periods presented. As of June 30, 2017, the Company received RMB 28,800,000 (approximately $4.2 million) proceeds in cash from the buyer, and the balance of receivable from sale of Fulland is $2,831,441.party.
Additionally, during the three and six months ended June 30, 2016, we operated a petroleum and chemical equipment segment, in which we manufactured and sold petroleum and chemical equipment. Because of a significant decline in revenues from this segment, we determined that we would not continue to operate in this segment and accordingly, the petroleum and chemical equipment segment is reflected as discontinued operations for all periods presented.
Recently, difficult economic conditions, a continuing decline in oil prices and limited availability of credit in China and trade tensions with the US presented numerous challenges for our dyeing machine business. Additionally, apparel factories and other factories have been shut down throughout the last year by China’s environmental bureau, which has been cutting electricity and gas supply to determine who’s been following China’s environmental laws and who hasn’t. In the past year, reports estimate that China has dispatched inspectors in as many as 30 provinces around the country and 80,000 factories—roughly 40 percent of the factories in China—have been fined, charged or closed because of their emissions. As a result, we experienced softer demand for our low-emission airflow dyeing machines as many of our potential customers already upgraded to newer models and we believe that much of our remaining potential customer base does not have the ability to make significant capital expenditures at this time. As a result, if we are to sell our products to the smaller textile manufacturers, it may be necessary for us to design and market a cheaper machine that meets the Chinese government requirements or reduce prices which would impact both revenues and gross margin.
Our ability to generate revenue fromexpand our dyeing machine operations and increase our revenue is largely affected by the PRC government’s policy on such matters as the availability of credit, which affects all of our operations, and its policies relating to the textile industry, environmentenvironmental issues and alternative energy as well as the competitiveness of Chinese textile manufacturesmanufacturers at a time when consumers are looking for lower prices and manufacturesmanufacturers are looking to produce in countries witha country that has lower labor costs than China, all of which affects the market for our dyeing and finishing equipment. Our dyeing machine business is also affected by general economic conditions and we cannot assure you that we will be able to increase our dyeing machine business revenues in the near future, if at all. For example, tariffs levied on Chinese textile manufacturers by the US have a negative impact on our customers and limit their ability to purchase equipment from us. Because of the nature of our products, our customers’ projectionprojections of future economic conditions are an integral part of their decisions as to whether to purchase capital equipment at this time or defer such purchases until a future date.
Our latestGiven the headwinds affecting our manufacturing business, initiativeswe continued to pursue what we believe are focused on targetinghigh growth opportunities for the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.
Recent developments
Beginning in the second quarter of 2017, we establishedCompany, particularly our new business divisions to focusfocused on the development of sharing economy platforms and related rental businesses. Cleantech Solutions believes a true peer-to-peerbusinesses within the company. These initiatives are still in an early stage and are dependent in large part on availability of capital to fund their future growth. We did not generate significant revenues from our sharing economy based on rentals will take significant market sharebusiness initiatives in both2018 or during the business and consumer markets over the next few years. We have been exploring possible merger and acquisition opportunities that can bring to market more user-friendly platforms and convenient channels that allow people to rent what they need and make their lives easier.nine months ended September 30, 2019.
Recent developments
We plan to launch a global bike sharing app service and join together with sharing bike operators in Hong Kong andInspirit Studio
During the U.S.. Our one-stop solution allows consumers to locate and pay for sharing bikes using a single platform, without having to download separate apps and create separate payment accounts for each individual bike-sharing operator. In September 2017, our wholly-owned subsidiary EC Power (HK) commenced offering a mobile power charger rental service through major convenience store networks in over 700 store locations in Hong Kong and over 40 locations in Macau. The rental service allows customers to rent and return mobile power chargers at any ofperiod, BuddiGo, the convenience stores carrying the service. We currently have over 20,000 mobile chargers available for rent and are preparing to expand this business into other retail outlets and other new regions around the world. We are also considering the acquisition of a battery production company in order to ensure appropriate quality, safety and availability of products to meet market demand. Our wholly-owned subsidiary, EC Technology & Innovations Limited ("ECTI"), recently acquired a 51% interest in Inspirit Studio, which develops and runs a sharing economy mobile platform called Anyway that allows peopledeveloped by Inspirit Studio Limited (“Inspirit Studio”), continuously promoted its service to the local market in Hong Kong. BuddiGo offers a wide range of errand services. Currently, about 80 percent of the orders received are for on-demand urgent delivery of items such as documents, flowers and cakes. Food delivery services are also available. During the period from September 2018 to September 30, 2019, over 1,200 individuals have officially registered as sell-side buddies, who completed over 600 delivery orders from September 2018 to September 30, 2019, majority orders were happened in the third quarter of year 2018. In addition, BuddiGo has signed up with a number of local business partners to provide courierongoing delivery services during their commuting times.for these clients. BuddiGo’s goal is to connect with the community and deliver localized content featuring BuddiGo’s core features and advantages. BuddiGo is actively seeking strategic investors or collaborative parties who are enthusiastic about its business model and can help achieve its business targets and expand into different countries.
In August 2017, we signed an agreement with ECoin GlobalAnyWorkspace Limited ("ECoin") for the future purchase of ECoin redemption codes with an aggregate value of $50 million for total consideration of $20 million. We plan to resell the redemption codes in the form of ECrent gift cards at global locales through reseller channels, such as convenience stores. We are working with InComm, a global pre-payment network and solution provider, to sell the redemption codes with face values of HK$100, HK$300 and HK$500 at major convenience store networks in Hong Kong and Macau with other international locations to follow. In September 2017, we entered into exclusive discussions with ECoin Development Limited ("ECoin"), a private company incorporated in the British Virgin Islands, regarding the development and operation of a cryptocurrency system to support the development of a sharing economy ecosystem based on blockchain solutions.
Anyworkspace, our coworking business unit, is focused on enlarging its exposure to the general public. AnyWorkspace started showing positive traction in India as space providers from New Delhi and Gurgaon have signed partnership agreements with us. We are currently engaged in exclusive discussions with ECrent Capital Holdings Limited ("ECrent"), a private company incorporatedrevamping AnyWorkspace’s corporate website, www.anyworkspace.com. AnyWorkspace will also focus on digital marketing activities for its market expansion plans when there is available cash flow or funds from investors.
Given the existing coworking spaces providers marketing their available spaces and managing individual online business platform themselves, we expect our current global online platform will take years to materialize its worldwide customer base. Therefore, the intangible asset amounted to $0.6 million (equivalent to HK$4.97 million) representing the online platform acquired has been fully impaired in the British Virgin Islands focusing on developing and operating a global rental platform to promote sharing economy across 30 countries and regions. In addition, our wholly-owned subsidiary, Sharing Economy Investment Limited ("SEI"), is in exclusive discussions regarding the potential acquisitionlast quarter of a 51% interest in 2018.
3D Discovery Co. Limited ("
3D Discovery"), a digital marketing servicesDiscovery, an IT service provider which provides various solution such asthat develops virtual tours for the real estate, hospitality and interior design industries. 3D scanningDiscovery’s space capturing and modeling websitetechnology is already used by some of Hong Kong’s leading property agencies to provide their clients with a truly immersive, first-hand experience of a physical space while saving them time and mobile app development, video production, graphic design, etc.money. According to its clients.Goldman Sachs, the Real Estate virtual reality (“VR”) industry is predicted to reach $2.6 billion in 2025, supported by a potential user base of over 1.4 million registered real estate agents in some of the world’s largest markets. Apart from its existing business,profitable operations, 3D Discovery plans to developis developing a mobile app, Autocap, which allows users to create an interactive virtual tour of a physical space by using a mobile phone camera.
3D Discovery successfully completed a number of projects during the year. First, its “3D Virtual Tours in Hong Kong” generated about 1,371,000 impressions in 2018. In addition, 3D Discovery partnered with Midland Realty, one of the largest real estate agencies in Hong Kong, to establish the “Creation 200 3D Virtual Tours.”.
EC Advertising Limited
Following the acquisition of BuddiGo, AnyWorkspace and 3D Discovery by the Company during the period between late 2017 and the first half year of 2018, EC Advertising Limited (“EC Advertising”) has been developing opportunities for these three platforms to attract advertisers.
During the period, we established a wholly-owned subsidiary in Xiamen, Fujian Province of Mainland China, which is intended to cover our advertising business in this region. We started meeting with a number of potential clients there and anticipate that this advertising company will confirm with them several marketing campaigns. In order to maximize our exposure to the potential clients in Mainland China, we are developing a strategic media plan which will cover major cities in Mainland China such as Beijing, Shanghai, Guangzhou and Shenzhen. Major banks, real estate developers and consumer products manufacturers and retailers are our target clients. More importantly, our presence in Mainland China can facilitate the rollout of franchise programs of our business units, which is one of the revenue drivers for the Company.
ECrent Platform Business
Asia Region:
In 2018, our subsidiary SEIL entered into a license agreement with ECRENT, regarding the grant of an exclusive and sublicensable license from ECRENT to SEII to utilize certain software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in Taiwan, Thailand, India, Indonesia, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Japan, and Korea. According to the latest amendment, ECRENT will guarantee that the operation of its related websites, mobile applications and business services will contribute revenue of $13,000,000 (increased from $10,000,000 according to the previously amended agreement) and gross profit of $2,522,000 (up from $1,940,000 as stated on the previously amended agreement) from the closing date of the License Agreement through December 31, 2019 (extended from September 30, 2019 per the previously amended agreement).
In August 2018, SEIL has entered into a License Agreement with PTI Corporation (“PTI”), that sublicenses SEIL’s exclusive license with ECRENT to utilize certain software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in South Korea. In return, PTI shall pay to SEIL $230,000 (“Consideration”). The License Agreement will be effective on September 1, 2018 through December 31, 2019. In addition, if the aggregate revenue during the period exceeds the Consideration, SEIL shall receive 30% of the difference between the aggregate revenue and the Consideration. During the third quarter of 2018, PTI commenced prelaunch activities to develop the platform.
Europe Region:
In August 2018, our subsidiary SEIL entered into a License Agreement with ECRENT regarding the grant of an exclusive and sublicensable license from ECRENT to SEII to utilize certain software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in United Kingdom, Germany, France, Poland, Switzerland, Netherlands, Denmark, Russia, Italy, Spain, Portugal and Greece. In return, SEII shall issue to ECRENT 360,000 shares of restricted common stock. Closing of this transaction was conditioned on various conditions, including receipt of all necessary regulatory approvals. On October 9, 2018, the agreement was terminated by the parties, who have agreed to forego their respective rights under the agreement.
Going forward, Cleantech Solutionswe will continue targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.
Inventory and Raw Materials
A major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these fluctuations have been significant. In times of increasing prices, we need to try to establish the price at which we purchase raw materials in order to avoid increases in costs which we cannot recoup through increases in sales prices. Similarly, in times of decreasing prices, we may have purchased metals at prices which are high in terms of the price at which we can sell our products, which also can impair our margins. Two major suppliers provided approximately 40% of our purchases of inventories for the nine months ended September 30, 2019. Four major suppliers provided 77% of our purchases of inventories for the nine months ended September 30, 2018.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes the fair value of equity method investment, the fair value of assets held for sale and the valuation of equity transactions.
We base our estimates on historical experience and on various other assumptions that we 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 sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.
Variable Interest Entities
Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements the financial statements of variable interest entities (“VIEs”). The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.
Dyeing isand Heavy Industries are considered a VIE,VIEs, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with the Dyeing pursuant to which we shall receive 100% of Dyeing’s net income. In accordance with these agreements, Dyeing shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, Green Power, and Green Power shall supply the technology and administrative services needed to service Dyeing.
The accounts of the Dyeing and Heavy Industries are consolidated in the accompanying financial statements. As a VIE, Dyeing’sDyeing and Heavy Industries’s sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of the Huayang Companies’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Dyeing that require consolidation of the Dyeing’s financial statements with our financial statements.
Accounts Receivable
We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
As a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or marketnet realizable value utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.
Advances to Suppliers
Advances to suppliers represent the advance payments for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:
| Useful Life | ||
| Building and building improvements | 5 – 20 Years | |
| Manufacturing equipment | 5 – 10 Years | |
| Office equipment and furniture | 5 Years | |
| Vehicles | 5 Years |
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the statements of income and comprehensive income in the year of disposition.
We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Land Use Rights
There is no private ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual or company. The government grants a land use right that permits the holder of the land use right to use the land for a specified period. Our land use rights were granted with a term of 45 or 50 years. Any transfer of the land use right requires government approval. We have recorded as an intangible asset the costs paid to acquire a land use right. The land use rights are amortized on the straight-line method over the land use right terms.
Patent Use Rights
In August 2016, we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment. We amortize the exclusive patent use right over the term of the patent.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured.
We recognize revenues from the sale of dyeing and finishing equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the nine months ended September 30, 2017 and 2016, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal.
All other product sales with customer specific acceptance provisions are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
Income Taxes
We are governed by the income tax laws of the PRC and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.
Stock-based Compensation
Stock basedStock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately if the award is non-forfeitable. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
PursuantAdditionally, effective January 1, 2017, the Company adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s consolidated financial statements and related disclosures.
Through September 30, 2018, pursuant to ASC Topic 505-50 for– “Equity-Based Payments to Non-Employees”, all share-based payments to consultants and other third-parties,non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense is determined at the “measurement date.” The expense is recognized over the service period of servicesthe consulting arrangement or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based onuntil performance conditions are expected to be met. The Company periodically reassessed the fair value of non-employee share based payments until service conditions are met, which generally aligns with the award atvesting period of the reporting date.equity instrument, and the Company adjusts the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The awards to consultantsCompany early adopted ASU No. 2018-07 in the fourth quarter of 2018 and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.there was no cumulative effect of adoption.
Currency Exchange Rates
Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiarysubsidiaries and VIEs is the RMB. AllRMB and Hong Kong Dollar. Substantially all of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiary. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB.RMB and the Hong Kong dollar. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB or HKD against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB or HKD against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.
Recent Accounting Pronouncements
In January 2017,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2017-01, Business CombinationsASU 2016-02, “Leases (Topic 805): Clarifying842)”. Under ASU 2016-02, lessees will be required to recognize all leases (with the Definitionexception of short-term leases) at the commencement date including a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use (ROU) asset, which is an asset that represents the lessee’s right to use, or control the use of, a Business, in an effort to clarifyspecified asset for the definitionlease term. Leases with a term of a business with the objective of adding guidance to assist entities with evaluating whether transactions shouldtwelve months or less will be accounted for as acquisitions (or disposals) of assets or businesses.similar to existing guidance for operating leases. In December 2017, January 2018, July 2018, December 2018 and March 2019, the FASB issued ASU 2017-13, ASU 2018-01, ASU 2018-10 & 11, ASU 2018-20 and ASU 2019-01, respectively, which contain modifications and improvements to ASU 2016-02. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under the Optional Transition Method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of thisretained earnings in the period of adoption. On January 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective approach and elected to utilize the Optional Transition Method. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease. The adoption did not impact the Company’s previously reported consolidated financial statements nor did it result in a cumulative effect adjustment to retained earnings as of January 1, 2019.
In June 2018, the FASB issued ASU are effective2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment. ASU 2018-07 aligns the accounting for fiscal years beginning after December 15, 2017,share based payments granted to non-employees with that of share based payments granted to employees. The Company early adopted ASU No. 2018-07 in the fourth quarter of 2018 and interim periods within those fiscal years.there was no cumulative effect of adoption. The adoption of this guidance isASU did not expected to have a material impact on our financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our consolidated financial condition,position, results of operations, cash flows, or disclosures.presentation thereof.
RESULTS OF OPERATIONS
Three and Nine Months Endedmonths ended September 30, 20172019 and 20162018
The following table sets forth the results of our operations for the three and nine months ended September 30, 20172019 and 20162018 indicated as a percentage of revenues (dollars in thousands):
| Three Months Ended September 30, | Three Months ended September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Dollars | Percentage | Dollars | Percentage | Dollars | Percentage | Dollars | Percentage | |||||||||||||||||||||||||
| Revenues | $ | 2,629 | 100.0 | % | $ | 3,946 | 100.0 | % | $ | 1,677 | 100.0 | % | $ | 2,517 | 100.0 | % | ||||||||||||||||
| Cost of revenues | 3,075 | 117.0 | % | 3,453 | 87.5 | % | 1,874 | 112.0 | % | 4,245 | 168.6 | % | ||||||||||||||||||||
| Gross profit (loss) | (446 | ) | (17.0 | )% | 494 | 12.5 | % | |||||||||||||||||||||||||
| Gross loss | (197 | ) | (11.7 | )% | (1,728 | ) | (68.6 | )% | ||||||||||||||||||||||||
| Operating expenses | 3,664 | 139.4 | % | 547 | 13.9 | % | 885 | 52.8 | % | 7,773 | 308.8 | % | ||||||||||||||||||||
| Loss from operations | (4,110 | ) | (156.3 | )% | (53 | ) | (1.3 | )% | (989 | ) | (59.0 | )% | (9,501 | ) | (377.4 | )% | ||||||||||||||||
| Other expense, net | (69 | ) | (2.6 | )% | (26 | ) | (0.7 | )% | (124 | ) | (7.4 | )% | (9,072 | ) | (360.4 | )% | ||||||||||||||||
| Loss from continuing operations before provision for income taxes | (4,179 | ) | (158.9 | )% | (79 | ) | (2.0 | )% | (1,113 | ) | (66.4 | )% | (18,573 | ) | (737.8 | )% | ||||||||||||||||
| Provision for income taxes | - | - | % | 7 | 0.2 | % | - | - | % | - | - | % | ||||||||||||||||||||
| Loss from continuing operations | (4,179 | ) | (158.9 | )% | (86 | ) | (2.2 | )% | (1,113 | ) | (66.4 | )% | (18,573 | ) | (737.8 | )% | ||||||||||||||||
| Loss from discontinued operations, net of income taxes | (71 | ) | (2.7 | )% | (273 | ) | (6.9 | )% | - | - | % | (1 | ) | (0.0 | )% | |||||||||||||||||
| Net loss | (4,250 | ) | (161.7 | )% | (360 | ) | (9.1 | )% | (1,113 | ) | (66.4 | )% | (18,574 | ) | (737.8 | )% | ||||||||||||||||
| Other comprehensive gain (loss): | ||||||||||||||||||||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 1,224 | 46.6 | % | (315 | ) | (8.0 | )% | (535 | ) | (31.9 | )% | (1,472 | ) | (58.5 | )% | |||||||||||||||||
| Comprehensive loss | $ | (3,026 | ) | (115.1 | )% | $ | (675 | ) | (17.1 | )% | $ | (1,648 | ) | (98.3 | )% | $ | (20,046 | ) | (796.3 | )% | ||||||||||||
The following table sets forth the results of our operations for the nine months ended September 30, 2017 and 2016 indicated as a percentage of revenues (dollars in thousands):
| Nine Months ended September 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Dollars | Percentage | Dollars | Percentage | |||||||||||||
| Revenues | $ | 5,244 | 100.0 | % | $ | 7,655 | 100.0 | % | ||||||||
| Cost of revenues | 10,106 | 192.7 | % | 10,462 | 136.7 | % | ||||||||||
| Gross loss | (4,862 | ) | (92.7 | )% | (2,807 | ) | (36.7 | )% | ||||||||
| Operating expenses | 23,287 | 444.1 | % | 17,338 | 226.5 | % | ||||||||||
| Loss from operations | (28,056 | ) | (535.0 | )% | (20,145 | ) | (263.2 | )% | ||||||||
| Other expense, net | (354 | ) | (6.8 | )% | (9,335 | ) | (121.9 | )% | ||||||||
| Loss from continuing operations before provision for income taxes | (28,410 | ) | (541.8 | )% | (29,480 | ) | (385.1 | )% | ||||||||
| Provision for income taxes | - | - | - | - | % | |||||||||||
| Loss from continuing operations | (28,410 | ) | (541.8 | )% | (29,480 | ) | (385.1 | )% | ||||||||
| Gain from discontinued operations, net of income taxes | - | - | 16 | 0.2 | % | |||||||||||
| Net loss | (28,410 | ) | (541.8 | )% | (29,463 | ) | (384.9 | )% | ||||||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation adjustment | (217 | ) | (4.1 | )% | (2,374 | ) | (31.0 | )% | ||||||||
| Comprehensive loss | $ | (28,627 | ) | (545.9 | )% | $ | (31,837 | ) | (415.9 | )% | ||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Dollars | Percentage | Dollars | Percentage | |||||||||||||
| Revenues | $ | 10,998 | 100.0 | % | $ | 12,391 | 100.0 | % | ||||||||
| Cost of revenues | 10,416 | 94.7 | % | 10,485 | 84.6 | % | ||||||||||
| Gross profit | 583 | 5.3 | % | 1,906 | 15.4 | % | ||||||||||
| Operating expenses | 5,287 | 48.1 | % | 1,774 | 14.3 | % | ||||||||||
| (Loss) income from operations | (4,704 | ) | (42.8 | )% | 132 | 1.1 | % | |||||||||
| Other expense, net | (131 | ) | (1.2 | )% | (76 | ) | (0.6 | )% | ||||||||
| (Loss) income from continuing operations before provision for income taxes | (4,836 | ) | (44.0 | )% | 56 | 0.5 | % | |||||||||
| Provision for income taxes | 11 | 0.1 | % | 177 | 1.4 | % | ||||||||||
| Loss from continuing operations | (4,847 | ) | (44.1 | )% | (121 | ) | (1.0 | )% | ||||||||
| Loss from discontinued operations, net of income taxes | (71 | ) | (0.6 | )% | (1,763 | ) | (14.2 | )% | ||||||||
| Net loss | (4,918 | ) | (44.7 | )% | (1,884 | ) | (15.2 | )% | ||||||||
| Other comprehensive gain (loss): | ||||||||||||||||
| Foreign currency translation adjustment | 2,808 | 25.5 | % | (2,158 | ) | (17.4 | )% | |||||||||
| Comprehensive loss | $ | (2,110 | ) | (19.2 | )% | $ | (4,041 | ) | (32.6 | )% | ||||||
Revenues.For the three months ended September 30, 2017,2019, revenues from the sale of dyeing and finishing equipment was $2,605,000decreased by approximately $840,000, or 33.4%, as compared to $3,946,000 for the three months ended September 30, 2016, a decrease of $1,341,000, or 34%.2018. For the nine months ended September 30, 2017,2019, revenues from the sale of dyeing and finishing equipment was $10,974,000decreased by approximately $2,411,000, or 31.5%, as compared to $12,391,000 for the nine months ended September 30, 2016,2018. We experienced an anticipated slowdown in sales of our low-emission airflow dyeing machines as many customers had replaced older dyeing equipment with our low-emission airflow dyeing machine, and we believe that orders for new low-emission airflow dyeing machines have slowed down in 2018 and 2017 because the remaining potential customer base included many companies that did not have the ability to make the significant capital expenditures necessary to upgrade their equipment. Additionally, the textile industry in China has been facing significant headwinds recently. Difficult economic conditions, a decreasecontinuing decline in oil prices and limited availability of $1,417,000,credit in China, presented numerous challenges for our dyeing machine business. Additionally, apparel factories and other factories have been shut down throughout the last year by China’s environmental bureau, which has been cutting electricity and gas supply to determine compliance with China’s environmental laws. Accordingly, our revenues decreased in the 2019 period as compared to the 2018 period. We expect that our revenues from dyeing and finishing equipment segment will remain at or 11.4%. about its current level in the near future, although declines are possible.
During the three and nonenine months ended September 30, 2017,2019, we recorded revenuerecognized revenues from our sharing economy business of $24,181$533 and $24,181, respectively, from$27,325 compared to approximately $73,000 and $156,000 for the rental of mobile power chargers through major convenience store networks in Hong Kongthree and Macau.nine months ended September 30, 2018, respectively.
Cost of revenues.Cost of revenues includes the cost of raw materials, labor, depreciation and other fixed and variable overhead costs. For the three months ended September 30, 2017,2019, cost of revenues was $3,075,000approximately $1,874,000 as compared to $3,453,000approximately $4,245,000 for the three months ended September 30, 2016,2018, a decrease of $377,000,$2,371,000, or 10.9%55.9%. For the nine months ended September 30, 2017,2019, cost of revenues was $10,416,000approximately $10,106,000 as compared to $10,485,000approximately $10,462,000 for the nine months ended September 30, 2016,2018, a decrease of $69,000,$356,000, or 0.7%3.4%. The changes in our cost of revenues for the three and nine month periods ended September 30, 2017 as compared to the comparable 2016 periods was primarily attributable to a decrease in our revenues and an increase in our unit costs resulting from the increase in our raw material cost.
Gross profit (loss)loss and gross margin.Our gross loss was $446,000approximately $(197,000) for the three months ended September 30, 20172019 as compared to gross profitloss of $494,000approximately $(1,728,000) for the three months ended September 30, 2016,2018, representing gross margins (loss) of (17.0)%(11.7%) and 12.5%(68.6%), respectively, and ouran increase period over period. Our gross profitloss was $583,000approximately $(4,862,000) for the nine months ended September 30, 20172019 as compared to $1,906,000gross loss of approximately $(2,807,000) for the nine months ended September 30, 2016,2018, representing gross margins of 5.3%(92.7)% and 15.4%(36.7)%, respectively, a decrease period over period. The decrease in our gross marginsmargin for the nine months ended September 30, 2019 was primarily attributed to the reduced scale of operations resulting from lower revenues, which is reflected in the allocation of fixed costs, mainly consisting of depreciation, to cost of revenues, and an increase in labor and raw material costs. We expect that our gross margins will remain at its current levels although a decrease is possible as we try to market our equipment tocosts, and the smaller textile manufacturers.increase in impairment loss on inventory.
Operating expenses.For the three months ended September 30, 2017,2019, operating expenses were $3,664,000approximately $792,000 as compared to $547,000approximately $7,773,000 for the three months ended September 30, 2016, an increase2018, a decrease of $3,118,000,approximately $6,981,000, or 570.2%88.6%. For the nine months ended September 30, 2017,2019, operating expenses were $5,287,000approximately $23,194,000 as compared to $1,774,000approximately $17,338,000 for the nine months ended September 30, 2016,2018, an increase of $3,513,000,$5,856,000, or 198.0%, and34.3%. Changes in operating expenses consisted of the following:
Depreciation.Depreciation was $998,000approximately $709,000 and $1,071,000$979,000 for the three months ended September 30, 20172019 and 2016,2018, respectively. Depreciation was $2,938,000approximately $2,098,000 and $2,895,000$3,081,000 for the nine months ended September 30, 20172019 and 2016,2018, respectively. Depreciation
Selling, general and administrative expenses. Selling, general and administrative expenses totaled approximately $802,000 and $4,778,000 for the three and nine months ended September 30, 2017 and 2016 was included in the following categories (dollars in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Cost of revenues | $ | 721 | $ | 959 | $ | 2,123 | $ | 2,507 | ||||||||
| Operating expenses | 277 | 112 | 815 | 388 | ||||||||||||
| Total | $ | 998 | $ | 1,071 | $ | 2,938 | $ | 2,895 | ||||||||
The decrease in depreciation expense for cost of revenues for the three and nine months ended September 30, 20172019, as compared to the threeapproximately $5,442,000 and nine months ended September 30, 2016 was mainly attributable to the reduction of manufacturing equipment used in our manufacturing of inventories due to the sales of manufacturing equipment.
In the fourth quarter of 2016, we completed our office building improvement and started to amortize the improvement cost in December 2016. The increase in depreciation expense for operating expenses$12,864,000 for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016 was primarily attributable to the increased depreciation amount from the office building improvements.
Selling, general and administrative expenses. Selling, general and administrative expenses totaled $3,280,000 and $4,148,000 for the three and nine months ended September 30, 2017, as compared to $322,0002018, a decrease of approximately $4,640,000, or 83.6% and $1,189,000 for the three and nine months ended September 30, 2016, an increase of $2,957,000,$8,086,000, or 917.2% and $2,958,000, or 248.7%, respectively.
164.1%. Selling, general and administrative expenses for the three and nine months ended September 30, 20172019 and 20162018 consisted of the following (dollars in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Professional fees | $ | 492 | $ | 113 | $ | 787 | $ | 667 | $ | 517 | $ | 4,612 | $ | 3,370 | $ | 10,042 | ||||||||||||||||
| Payroll and related benefits | 169 | 51 | 403 | 159 | 171 | 182 | 587 | 1,591 | ||||||||||||||||||||||||
| Travel and entertainment | 44 | 45 | 122 | 96 | 22 | 48 | 130 | 156 | ||||||||||||||||||||||||
| Shipping | 29 | 24 | 88 | 82 | 28 | 22 | 42 | 44 | ||||||||||||||||||||||||
| Intangible amortization | 82 | 44 | 241 | 50 | ||||||||||||||||||||||||||||
| Bad debt expense | 2,396 | - | 2,396 | - | ||||||||||||||||||||||||||||
| Other | 68 | 45 | 111 | 135 | 156 | 578 | 743 | 1,031 | ||||||||||||||||||||||||
| Total | $ | 3,280 | $ | 322 | $ | 4,148 | $ | 1,189 | $ | 894 | $ | 5,442 | $ | 4,871 | $ | 12,864 | ||||||||||||||||
| ● | Professional fees for the three and nine months ended September 30, |
| ● | Payroll and related benefits for the three and nine months ended September 30, |
| ● | Travel and entertainment expense for the three |
| ● | Shipping expense |
| ● | Other selling, general and administrative expenses for the three and nine months ended September 30, |
Research and development expensesexpenses.. Research and development expenses were $108,000approximately $84,000 and $325,000$270,000 for the three and nine months ended September 30, 2017,2019, as compared to $112,000approximately $165,000 and $196,000$404,000 for the three and nine months ended September 30, 2016,2018, respectively.
Bad debt expense. Bad debt expense was approximately $(49,000) for the three months ended September 30, 2019, as compared to approximately $(30,000) for the three months ended September 30, 2018, a decrease of $4,000 or 3.8%, and an increase of $128,000, or 65.3%, respectively. The increase inapproximately $19,000. Bad debt expense was approximately $4,307,000 for the nine months ended September 30, 20172019, as compared to approximately $1,286,000 for the nine months ended September 30, 2018, an increase of approximately $3,021,000, respectively. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection history, the write off of uncollectible receivables against the existing reserve, and recent economic events. The increase in bad debt expense, was primarily attributable to the increase in research and development activities related to the developmentwrite off of new dyeing and finishing products.receivable from sale of subsidiary.
(Loss) incomeImpairment expense. At September 30, 2019, the Company conducted an impairment assessment on property and equipment based on the guidelines established in ASC Topic 360. Upon completion of the impairment analysis, the Company recorded impairment charges of approximately $13,356,000 for the nine months ended September 30, 2019.
Loss from operations.As a result of the factors described above, for the three and nine months ended September 30, 2017,2019, loss from operations amounted to $4,110,000approximately $989,000 and $4,704,000,$28,056,000, as compared to loss from operations of $53,000approximately $9,501,000 and income from operations of $132,000$20,145,000 for the three and nine months ended September 30, 2016,2018, respectively.
Other income (expense).Other income (expense) includes interest income, interest expense, foreign currency transaction gain (loss), loss on equity method investment, foreign currency transaction gain, and other income.loss. For the three and nine months ended September 30, 2017,2019, total other expense, net, amounted to $69,000approximately $124,000 and $354,000 as compared to $26,000, for the three months ended September 30, 2016, an increase of $42,000, or 161.3%. For the nine months ended September 30, 2017, total other expense, net, amounted to $131,000 as compared to $76,000 for the nine months ended September 30, 2016, an increase of $56,000, or 73.2%. The increase was attributable losses incurred in the 2017 periods related to our equity method investment. We did not have these losses in the 2016 periods.
Income tax provision. Income tax expense was $113approximately $9,072,000 and $11,000$9,335,000 for the three and nine months ended September 30, 2017, as compared2018, a decrease of approximately $8,948,000 and $8,981,000, or 99.7% and 96.2% respectively. The decrease in other expense, net, was primarily attributable to $7,000losses incurred in the three and $177,000nine months ended September 30, 2019 related to our equity method investment.
Income tax provision. Income tax expense was $0 for the three and nine months ended September 30, 2016, a decrease of $7,0002019 and $165,000, or 98.4% and 93.7%, respectively. The decrease in income tax expense was primarily attributable to the decrease in taxable income generated by our operating entities in the three and nine months ended September 30, 2017 as compared to the comparable period of 2016.2018.
Loss from continuing operations.As a result of the foregoing, our loss from continuing operations was $4,179,000,$1,113,000, or $(2.10)$(0.12) per share (basic and diluted), for the three months ended September 30, 2017,2019, as compared with loss from continuing operations of $86,000,approximately $18,573,000, or $(0.02)$(2.56) per share (basic and diluted), for the three months ended September 30, 2016,2018, a change of $4,093,000,$17,460,000, or 4,748.4%94.0%. Our loss from continuing operations was $4,847,000,approximately $28,410,000, or $(2.96) per share (basic and diluted) for the nine months ended September 30, 2017, as compared with $121,000, or $(0.03)$(3.17) per share (basic and diluted), for the nine months ended September 30, 2016,2019, as compared with loss from continuing operations of approximately $29,480,000, or $(7.99) per share (basic and diluted), for the nine months ended September 30, 2018, a change of $4,726,000,approximately $1,070,000, or 3,921.4%3.63%.
Loss from discontinued operations, net of income taxes.We have loss from discontinued operations of $71,000, or $(0.04) per share (basic and diluted), in the three and nine months ended September 30, 2017. Our loss from discontinued operations was $273,000,$0, or $(0.05)$(0.00) per share (basic and diluted), for the three months ended September 30, 2016. Our2019, as compared with a loss from discontinued operations of $385, or $(0.00) per share (basic and diluted), for the three months ended September 30, 2018, a change of $385. Our gain from discontinued operations was $1,763,000,$0, or $(0.38)$0.00 per share (basic and diluted), for the nine months ended September 30, 2016.2019, as compared with a gain from discontinued operations of approximately $16,000 or $0.01 per share (basic and diluted), for the nine months ended September 30, 2018, a change of approximately $16,000.
The summarized operating resultsresult of discontinued operations included our consolidated statements of operations is as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | - | $ | 31,113 | $ | - | $ | 567,379 | ||||||||
| Cost of revenues | 31,652 | 17,678 | 31,652 | 1,547,120 | ||||||||||||
| Gross loss | (31,652 | ) | 13,435 | (31,652 | ) | (979,741 | ) | |||||||||
| Operating expenses | 39,687 | 268,498 | 39,687 | 726,865 | ||||||||||||
| Loss from operations | (39,687 | ) | (255,063 | ) | (39,687 | ) | (1,706,606 | ) | ||||||||
| Other expense, net | - | (18,281 | ) | - | (56,678 | ) | ||||||||||
| Loss from discontinued operations before income taxes | (71,339 | ) | (273,344 | ) | (71,339 | ) | (1,763,284 | ) | ||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Loss from discontinued operations, net of income taxes | $ | (71,339 | ) | $ | (273,344 | ) | $ | (71,339 | ) | $ | (1,763,284 | ) | ||||
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | ||||||||
| Gain from operations – bad debt recovery | - | (385 | ) | - | 16,486 | |||||||||||
| Other expense, net | - | - | - | - | ||||||||||||
| Gain from discontinued operations before income taxes | - | (385 | ) | - | 16,486 | |||||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Gain (loss) from discontinued operations, net of income taxes | - | (385 | ) | - | 16,486 | |||||||||||
| Gain on disposal of discontinued operations | - | - | - | - | ||||||||||||
| Gain (loss) from discontinued operations, net of income taxes | $ | - | (385 | ) | $ | - | $ | 16,486 | ||||||||
Net loss.As a result of the foregoing, our net loss was $4,250,000,approximately $1,113,000, or $(2.14)$(0.12) per share (basic and diluted), for the three months ended September 30, 2017,2019, as compared withto a net loss $360,000,of approximately $18,574,000, or $(0.07)$(2.56) per share (basic and diluted), for the three months ended September 30, 2016,2018, a change of $3,891,000,approximately $17,461,000, or 1,082.2%94.0%. Our net loss was $4,918,000,approximately $28,410,000, or $(3.00)$(3.17) per share (basic and diluted), for the nine months ended September 30, 2017,2019, as compared withto a net loss $1,884,000,of approximately $29,463,000, or $(1.64)$(7.99) per share (basic and diluted), for the nine months ended September 30, 2016,2018, a change of $3,034,000,approximately $1,053,000, or 161.1%96.4%.
Foreign currency translation gain. gain (loss).The functional currency of our subsidiaries and variable interest entities operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain (loss) of $1,224,000approximately $(535,000) and loss of $315,000$(217,000) for the three and nine months ended September 30, 2017,2019, as compared to a foreign currency translation gain(loss) of $2,808,000approximately $(1,472,000) and loss of $2,158,000$(2,374,000) for the three and nine months ended September 30, 2016,2018, respectively. This non-cash gain or loss(loss) had the effect of increasing/decreasing (increasing) our reported comprehensive gain/loss.
Comprehensive loss.As a result of our foreign currency translation gain,loss, we had comprehensive loss for the three months ended September 30, 20172019 of $3,026,000,approximately $1,648,000, compared to comprehensive loss of $675,000approximately $20,046,000 for the three months ended September 30, 2016.2018. We had comprehensive loss for the nine months ended September 30, 20172019 of $2,110,000,approximately $28,627,000, compared to comprehensive loss of $4,041,000approximately $31,837,000 for the nine months ended September 30, 2016.2018.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 20172019 and December 31, 2016,2018, we had cash balances of $4,775,000approximately $93,000 and $1,481,000,$782,000, respectively. These funds are located in financial institutions located as follows (dollars in thousands):Hong Kong, China and United States.
| Country: | September 30, 2017 | December 31, 2016 | ||||||||||||||
| United States | $ | 8 | 0.17 | % | $ | 1 | * | |||||||||
| China | 4,767 | 99.83 | % | 1,480 | 99.96 | % | ||||||||||
| Total cash and cash equivalents | $ | 4,775 | 100.0 | % | $ | 1,481 | 100.0 | % | ||||||||
* Less than 0.1%
The following table sets forth a summary of changes in our working capital from December 31, 20162018 to September 30, 20172019 (dollars in thousands):
| September 30, 2017 | December 31, 2016 | Change | Percentage Change | September 30, 2019 | December 31, 2018 | Change in Working Capital | Percentage Change | |||||||||||||||||||||||||
| Working capital: | ||||||||||||||||||||||||||||||||
| Total current assets | $ | 30,021 | $ | 26,592 | $ | 3,429 | 12.9 | % | $ | 4,862 | $ | 21,217 | $ | (16,355 | ) | (77.1 | )% | |||||||||||||||
| Total current liabilities | 6,815 | 5,053 | (1,762 | ) | 34.9 | % | 7,443 | 10,661 | (3,218 | ) | (30.2 | )% | ||||||||||||||||||||
| Working capital | $ | 23,206 | $ | 21,539 | $ | 1,667 | 7.7 | % | $ | (2,581 | ) | $ | 10,556 | $ | (13,137 | ) | (124.5 | )% | ||||||||||||||
Our working capital increaseddecreased by $1,667,000approximately $13,137,000 to $23,206,000approximately ($2,581,000) at September 30, 20172019 from $21,539,000approximately $10,556,000 at December 31, 2016.2018. This increasedecrease in working capital is primarily attributable to:
| ● | ||
| ● | An increase in | |
| ● | An increase in | |
| ● | An increase in | |
| ● | A decrease in | |
Offset by:
| ● | A decrease in accounts receivable, net of allowance for doubtful accounts of | |
| ● | A decrease in | |
| ● | A decrease in cash and cash equivalent of approximately $689,000; | |
| ● | A decrease in notes receivable | |
| ● | A decrease in inventories, net of inventory reserve of approximately $4,362,000; | |
| ● | A decrease in prepaid license fee – related party, net of approximately $498,000; | |
| ● | A decrease in prepaid expenses and other current assets of approximately $3,607,000; |
Offset by:
| ● | A decrease in liabilities of discontinued operations related to the sale of our subsidiary of | |
| ● | An increase in restricted cash of approximately $17,000; | |
| ● | A decrease in short-term bank loans of approximately $629,000; | |
| ● | A decrease in accounts payable of | |
| ● | A decrease in accrued expenses of approximately $346,000; and | |
| ● |
Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, as explained in more details underForeign currency translation gain or loss, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.
Net cash flow used in operating activities was $17,000approximately $389,000 for the nine months ended September 30, 20172019 as compared to $4,609,000net cash flow used in operating activities of $3,204,000 for the nineninea months ended September 30, 2016,2018, a changedecrease of $4,592,000.approximately $2,815,000.
| ● | Net cash flow used in operating activities for the nine months ended September 30, 2019 primarily reflected our net loss of approximately $28,410,000, and add-back of non-cash items primarily consisting of depreciation of approximately $2,098,000, amortization of intangible assets of approximately $140,000, allowance for doubtful accounts of approximately $4,307,000, impairment loss of property and equipment of approximately 13,356,000, stock-based employment compensation of approximately $1,000, stock-based professional fees of approximately $2,710,000, stock-based donation of approximately $260,000, amortization of debt discount of approximately $162,000, amortization of license fee of approximately $498,000, inventory reserve of approximately $3,610,000 and changes in operating assets and liabilities primarily consisting of an increase in assets of discontinued operations of approximately $3,000, a decrease in accrued expenses of approximately $334,000 and a decrease in advances from customers of approximately $1,076,000, a decrease in notes receivable of approximately $3,000 and a decrease in accounts payable of approximately $1,717,000, offset by a decrease in notes receivable of approximately $3,000, a decrease in accounts receivable of approximately $2,337,000, a decrease in inventories of approximately $686,000, a decrease in prepaid and other current assets of $423,000, a decrease in advances to suppliers of approximately $567,000 , a decrease in accounts payable of approximately $1,717,000. |
| ● | Net cash flow used in operating activities for the nine months ended September 30, |
Net cash flow used in investing activities was approximately $100,000 for the nine months ended September 30, 2019 as compared to net cash flow used in investing activities of approximately $72,000 for the nine months ended September 30, 2018. For the nine months ended September 30, 2017,2019, net cash flow provided by investing activities of $2,029,000, which reflects theused in purchase of property and equipment of $86,000 and proceeds received from sale of subsidiary in cash of $2,116,000.approximately $100,000. For the nine months ended September 30, 2016,2018, net cash flow used in investing activities reflects the purchase of patent of $2,432,000 and the purchase of property and equipment of $14,000.approximately $74,000, offset by cash received from the purchase subsidiary operations of approximately $2,000.
Net cash flow provided by financing activities was $1,138,000approximately $79,000 for the nine months ended September 30, 20172019 as compared to $609,000approximately $3,056,000 for the nine months ended September 30, 2016.2018. During the nine months ended September 30, 2017, we received proceeds from sale of common stock of $860,000, proceeds from bank loans of $1,249,000 and proceeds from related party advances of $350,000, offset by repayment of bank loans of $1,469,000. During the nine months ended September 30, 2016,2019, we received proceeds from bank loans of approximately $3.0 million,$875,000, proceeds for the increase in bank acceptance notes payable of approximately $22,000, advance from the decrease in restricted cashrelated party of $444,000,approximately $520,000 and proceeds from sale of common stock of $753,000,approximately $200,100, offset by repayments for bank loans of approximately $3.0 million,$1,505,000 and payments for the decrease in related party advances of approximately $32,000. During the nine months ended September 30, 2018, we received proceeds from convertible note of $900,000 and deducted offering costs paid by $195,000, we also received proceeds from bank loan of $1,856,000, advance from related party of $1,811,000 and proceeds from sale of common stock of $256,000, offset by repayments for bank loan of $1,304,000 and payments for the decrease in bank acceptance notes payable of $441,000, and payments for increase in restricted cash – discontinued operations of $71,000.$268,000.
We have historically funded our capital expenditures through cash flow provided by operations and bank loans. As of September 30, 2017, we have contractual commitments of RMB 0.2 million (approximately $29,000) related to an equity investment commitment. We intend to fund the cost with cash flow from our operations and by obtaining financing mainly from local banking institutions with which we have done business in the past. We believe that the relationships with local banks are in good standing and we have not encountered difficulties in obtaining needed borrowings from local banks.
We may seek to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of equity and from bank loans, there is no assurance that we will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the next 12 months, management expects that we will need to curtail or cease operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and or classification of recorded asset amounts and or classification of liabilities that might be necessary should we be unable to continue as a going concern.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 20172019 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5+years | Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | ||||||||||||||||||||||||||||||
| Bank loans (1) | $ | 2,029 | $ | 2,029 | $ | - | $ | - | $ | - | $ | 1,674 | $ | 1,554 | $ | 120 | $ | - | $ | - | ||||||||||||||||||||
| Bank acceptance notes payable | 376 | 376 | - | - | - | 91 | 91 | - | - | - | ||||||||||||||||||||||||||||||
| Equity method investment commitment | 29 | 29 | - | - | - | |||||||||||||||||||||||||||||||||||
| Total | $ | 2,434 | $ | 2,434 | $ | - | $ | - | $ | - | $ | 1,765 | $ | 1,645 | $ | 120 | $ | - | $ | - | ||||||||||||||||||||
| (1) | Bank loans consisted of |
Off-balance Sheet Arrangements
Except as discussed below, weWe have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Foreign Currency Exchange Rate Risk
We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the threenine months ended September 30, 20172019 and 2016,2018, we had unrealized foreign currency translation gain of $1,224,000 and an unrealized foreign currency translation loss of $315,000,approximately $217,000 and $2,374,000, respectively, because of changes in the exchange rate. For the nine months ended September 30, 2017 and 2016, we had unrealized foreign currency translation gain of $2,808,000 and an unrealized foreign currency translation loss of $2,158,000, respectively, because of changes in the exchange rate.
Inflation
The effect of inflation on our revenue and operating results was not significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Wanfen Xu, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017.2019.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, Mr. Wu and Ms. Xu concluded that, because our internal controls over financial reporting are not effective, as described below, our disclosure controls and procedures were not effective as of September 30, 2017.2019.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). As reported in our Form 10-K for the year ended December 31, 2016, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 and, during our assessment,Our management identified significant deficienciesmaterial weaknesses related to (i) the U.S. GAAP expertise of our internal accounting staff and recently elected chief financial officer, (ii) our internal audit functions and (iii) a lackLack of segregation of duties within accounting functions. Although management believes that these deficiencies do not amountfunctions, (ii) Lack of accounting expertise in US GAAP, and (iii) Insufficient written policies and procedures for accounting and financial reporting with respect to a material weakness, ourthe requirements and application of both US GAAP and SEC guidelines. Our internal controls over financial reporting were not effective at December 31, 2016.September 30, 2019.
We currently have no plans to expand our company-wide Enterprise Resource Planning (“ERP”) system during the remainder of 2017. We2019 and have not implemented further ERP modules to manage inventory and to expand existing ERP systems to other areas of our factory. Due to our working capital requirements and the lack of local professionals with the necessary experience to implementin implementing the ERP system, we postponed the hiring of professional staff.staff to implement ERP system. We have found that engaging professionals who are based outside of Wuxi is very costly. Wecostly and we have not been able to find qualified personnel in the Wuxi area.
Due to our size and nature, particularly in view of the reduced scope of our operations, segregation of all conflicting duties may not always be possible and may not be economically feasible.feasible, and we continue to rely on third parties for a significant portion of the preparation of our financial statements. As a result, we have not been able to take steps to improve our internal controls over financial reporting during the nine months ended September 30, 2017.reporting. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
In light of this significant deficiency,these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the threenine months ended September 30, 20172019 included in this quarterly reportQuarterly Report on Form 10-Q were fairly stated in accordance with the U.S. GAAP. Accordingly, management believes that despite our significant deficiency,material weaknesses, our consolidated financial statements for the threenine months ended September 30, 20172019 are fairly stated, in all material respects, in accordance with the U.S. GAAP.
Changes in Internal Controls over Financial Reporting
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 19, 2017, pursuant to one-year consulting agreements effective July 19, 2017, we issued an aggregate of 120,000 shares of common stock to two consultants (60,000 shares each) for business development services to be rendered. These shares were valued at $498,000, or $4.15 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, we recorded stock-based professional fees of $103,750 and prepaid expenses of $394,250 which are amortized over the remaining service period.
On July 31, 2017, pursuant to a one-year consulting agreements effective July 1, 2017, we issued 8,000 shares of common stock to a consultant for investor relations services to be rendered. These shares were valued at $32,560, or $4.07 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, we recorded stock-based professional fees of $8,140 and prepaid expenses of $24,420 which are amortized over the remaining service period.
On July 31, 2017, pursuant to a one-year consulting agreement effective July 1, 2017, we issued 23,230 shares of common stock to a consultant for accounting services rendered and to be rendered in the future. These shares were valued at $85,111, or $4.07 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, we recorded stock-based professional fees of $30,713 and prepaid expenses of $54,398 which are amortized over the remaining service period.
On August 21, 2017, pursuant to one-year consulting agreements effective August 21, 2017, the Company issued an aggregate of 125,000 shares of common stock to two consultants (65,000 and 60,000 shares, respectively) for business development services to be rendered. These shares were valued at $403,750, or $3.23 per share, the fair market value on the grant date using the reported closing share price on the date of grant. For the nine months ended September 30, 2017, in connection with the issuance of these shares, we recorded stock-based professional fees of $44,749 and prepaid expenses of $359,001 which are amortized over the remaining service period.
The above securities were issued in reliance upon the exemptions provided by Section 4(a) (2) under the Securities Act of 1933, as amended.
ITEM 6.5. EXHIBITS
* Filed herein
| * | Filed herein |
37
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November | By: | /s/ Jianhua Wu |
| Jianhua Wu, Chief Executive Officer and | ||
| Principal Executive Officer | ||
| Date: November | By: | /s/ Wanfen Xu |
| Wanfen Xu, Chief Financial Officer and | ||
| Principal Accounting Officer |
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