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, ~~2018~~2019

☐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: 000-55802

H/CELL ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

47-4823945

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

~~97 River Road, Flemington, NJ 08822~~3010 LBJ Freeway, Suite 1200 Dallas, TX 75234

(Address of principal executive offices) (zip code)

~~(908) 837-9097~~(972) 888-6009

(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 ☒~~Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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: None.

As of November ~~7, 2018,~~12, 2019, there were ~~7,586,024~~7,694,024 shares of registrant’s common stock outstanding.

H/CELL ENERGY CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Condensed consolidated balance sheets as of September 30, ~~2018~~2019 (unaudited) and December 31, ~~2017~~2018	3

		Condensed consolidated statements of operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 (unaudited)	4

		Condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	5

		Condensed consolidated statements of cash flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 (unaudited)	67

		Notes to condensed consolidated financial statements (unaudited)	~~7-20~~8-23

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~21-26~~24-30

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2631

	ITEM 4.	Controls and Procedures	2631

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2732
	ITEM 1A.	Risk Factors	2732
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2732
	ITEM 3.	Defaults Upon Senior Securities	2732
	ITEM 4.	Mine Safety Disclosures	2732
	ITEM 5.	Other Information	2732
	ITEM 6.	Exhibits	2732

	SIGNATURES		2833

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

H/CELL ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2018 December 31, 2017
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 331,236 $ 455,700
Accounts receivable (net retention) 1,230,621 808,050
Prepaid expenses 23,282 14,669
Costs and earnings in excess of billings 73,180 51,531
Total current assets 1,658,319 1,329,950

Property and equipment, net 362,933 102,573
Security deposits and other non-current assets 20,711 8,416
Deferred tax asset 44,257 44,257
Customer lists, net 88,766 -
Goodwill 1,373,621 -

Total assets $ 3,548,607 $ 1,485,196

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses $ 830,708 $ 631,385
Management fees payable – related party - 31,257
Earn-out payable 186,346 -
Billings in excess of costs and earnings 51,798 87,206
Sales and withholding tax payable 45,154 61,239
Current equipment notes payable 32,538 -
Current capital lease payable 68,240 -
Income tax payable 26,197 98,313
Total current liabilities 1,240,981 909,400

Noncurrent liabilities
Note payable 222,963 -
Capital leases 149,590 -
Equipment notes payable 118,606 -
Convertible note payable – related party, net of discount 14,268 -
Total noncurrent liabilities 505,427 -

Total liabilities 1,746,408 909,400

Commitments and contingencies

Stockholders’ equity
Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding - -
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,586,024 and 7,041,579 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 758 704
Additional paid-in capital 2,967,004 1,335,656
Accumulated deficit (1,096,096 ) (731,754 )
Accumulated other comprehensive loss (69,467 ) (28,810 )
Total stockholders’ equity 1,802,199 $ 575,796

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 3,548,607 $ 1,485,196

	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	242,389		$	359,134
Accounts receivable		1,019,524			1,087,381
Prepaid expenses		19,763			16,282
Current right of use asset		85,807			-
Costs and earnings in excess of billings		3,709			45,478
Total current assets		1,371,192			1,508,275

Property and equipment, net		464,075			476,436
Security deposits and other non-current assets		31,109			32,530
Deferred tax asset		50,000			50,000
Customer lists, net		68,282			83,645
Deferred offering cost		133,797			-
Right of use asset		139,607			-
Goodwill		1,373,621			1,373,621

Total assets	$	3,631,683		$	3,524,507

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	746,081		$	891,354
Current line of credit		303,526			-
Billings in excess of costs and earnings		44,301			195,331
Sales and withholding tax payable		50,072			59,857
Current equipment notes payable		41,358			38,991
Current operating lease liability		85,807			-
Current finance lease payable		73,842			65,265
Current convertible notes payable – related party, net of discounts		257,659			-
Income tax payable		33,134			48,643
Total current liabilities		1,635,780			1,299,441

Noncurrent liabilities
Line of credit		-			28,359
Lease operating liability		141,171			-
Earn out payable		204,383			190,736
Finance leases		268,269			232,876
Equipment notes payable		76,159			121,038
Convertible notes payable – related party, net of discounts		155,442			29,122
Total noncurrent liabilities		845,424			602,131

Total liabilities		2,481,204			1,901,572

Commitments and contingencies

Stockholders’ equity
Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding		-			-
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,694,024 and 7,586,024 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		769			758
Additional paid-in capital		2,950,136			2,983,476
Accumulated deficit		(1,724,028	)		(1,285,764	)
Accumulated other comprehensive loss		(76,398	)		(75,535	)
Total stockholders’ equity		1,150,479			1,622,935

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	3,631,683		$	3,524,507

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

H/CELL ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS – OTHER COMPREHENSIVE INCOME

(UNAUDITED)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017

Revenue
Construction income $ 1,830,992 $ 1,292,905 $ 5,535,352 $ 5,050,155
Related party 8,499 45,666 40,288 85,919
Total revenue 1,839,491 1,338,571 5,575,640 5,136,074

Cost of goods sold
Direct costs 1,438,669 870,369 3,901,125 3,432,098
Direct costs – related party 9,019 37,304 40,636 87,649
Total cost of goods sold 1,447,688 907,673 3,941,761 3,519,747

Gross profit 391,803 430,898 1,633,879 1,616,327

Operating expenses
General and administrative expenses 607,125 437,344 1,850,140 1,379,415
Management fees – related party 19,500 46,000 58,500 138,000
Total operating expenses 626,625 483,344 1,908,640 1,517,415

Income (loss) from operations (234,822 ) (52,446 ) (274,761 ) 98,912
Income tax provision (benefit) - - - -

Income (loss) before other income and expense (234,822 ) (52,446 ) (274,761 ) 98,912

Other expenses
Interest expense 7,544 - 21,636 -
Interest expense – related party 19,877 - 52,768 -
Change in fair value earn-out 4,290 - 11,028 -
Loss on fixed asset disposal 795 - 4,149 -
Total other expenses 28,216 - 78,553 -

Net income (loss) $ (267,328 ) $ (52,446 ) $ (364,342 ) $ 98,912

Other comprehensive income (loss), net

Foreign currency translation adjustment (7,828 ) 5,928 (40,657 ) 24,345

Comprehensive income (loss) $ (275,156 ) $ (46,518 ) $ (404,999 ) $ 123,257

Earnings (loss) per share
Basic $ (0.04 ) $ (0.01 ) $ (0.05 ) $ 0.02
Diluted $ (0.04 ) $ (0.01 ) $ (0.05 ) $ 0.01
Weighted average common shares outstanding
Basic 7,586,024 7,084,436 7,469,307 6,601,873
Diluted 7,586,024 7,084,436 7,469,307 7,526,763

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018

Revenue
Construction income	$	1,701,365		$	1,830,992		$	5,333,559		$	5,535,352
Related party		-			8,499			-			40,288
Total revenue		1,701,365			1,839,491			5,333,559			5,575,640

Cost of goods sold
Direct costs		1,241,630			1,438,669			3,747,390			3,901,125
Direct costs – related party		-			9,019			-			40,636
Total cost of goods sold		1,241,630			1,447,688			3,747,390			3,941,761

Gross profit		459,735			391,803			1,586,169			1,633,879

Operating expenses
General and administrative expenses		555,682			607,125			1,794,191			1,850,140
Management fees – related party		21,500			19,500			60,500			58,500
Total operating expenses		577,182			626,625			1,854,691			1,908,640

Loss from operations		(117,447	)		(234,822	)		(268,522	)		(274,761	)
											-
Other expenses
Interest expense		11,801			7,544			23,892			21,636
Interest expense – related party		64,065			19,877			158,220			52,768
Change in fair value earn-out		4,704			4,290			13,647			11,028
(Gain) loss on fixed asset disposal		(8,614	)		795			(26,017	)		4,149
Total other expenses		71,956			32,506			169,742			78,553

Net loss	$	(189,403	)	$	(267,328	)	$	(438,264	)	$	(364,342	)

Other comprehensive income (loss), net

Foreign currency translation adjustment		(15,236	)		(7,828	)		(863	)		(40,657	)

Comprehensive loss	$	(204,639	)	$	(275,126	)	$	(439,127	)	$	(404,999	)

Earnings (loss) per share
Basic	$	(0.03	)	$	(0.04	)	$	(0.06	)	$	(0.05	)
Diluted	$	(0.03	)	$	(0.04	)	$	(0.06	)	$	(0.05	)
Weighted average common shares outstanding
Basic		7,574,247			7,586,024			7,596,286			7,469,307
Diluted		7,574,247			7,586,024			7,596,286			7,469,307

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

H/CELL ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

(UNAUDITED)

	Common Stock						Preferred Stock				Additional			Accumulated			Accumulated Other			Total
	Number of Shares			Amount			Number of shares		Amount		Paid-In Capital			Income (Deficit)			Comprehensive Income (Loss)			Stockholders’ Equity
Beginning, January 1, 2019		7,586,024		$	758			-	$	-	$	2,983,476		$	(1,285,764	)	$	(75,535	)	$	1,622,935

Stock-based compensation		-			-			-		-		8,562			-			-			8,562

Share donation		35,000			4			-		-		23,446			-			-			23,450

Beneficial conversion feature		-			-			-		-		97,500			-			-			97,500

Foreign currency translation adjustment		-			-			-		-		-			-			18,612			18,612

Debt extinguishment		-			-			-		-		(216,460	)		-			-			(216,460	)

Net loss		-			-			-		-		-			(143,638	)		-			(143,638	)

Ending, March 31, 2019		7,621,024		$	762			-	$	-	$	2,896,524		$	(1,429,402	)	$	(56,923	)	$	1,410,961

Stock-based compensation		-			-			-		-		2,074			-			-			2,074

Foreign currency translation adjustment		-			-			-		-		-			-			(4,239	)		(4,239	)

Net loss		-			-			-		-		-			(105,223	)		-			(105,223	)

Ending, June 30, 2019		7,621,024		$	762			-	$	-	$	2,898,598		$	(1,534,625	)	$	(61,162	)	$	1,303,573

Stock-based compensation		-			-			-		-		4,456			-			-			4,456

Cancelled shares		(35,000	)		(4	)		-		-		(23,450	)		-			-			(23,454	)

Commitment shares		30,000			3			-		-		45,000			-			-			45,003

Equity financing (net proceeds)		78,000			8			-		-		25,532			-			-			25,540

Foreign currency translation adjustment		-			-			-		-		-			-			(15,236	)		(15,236	)

Net loss		-			-			-		-		-			(189,403	)		-			(189,403	)

Ending September 30, 2019		7,694,024		$	769			-	$	-	$	2,950,136		$	(1,724,028	)	$	(76,398	)	$	1,150,479

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

	Common Stock				Preferred Stock				Additional		Accumulated			Accumulated Other			Total
	Number of Shares		Amount		Number of shares		Amount		Paid-In Capital		Income (Deficit)			Comprehensive Income (Loss)			Stockholders’ Equity
Beginning, January 1, 2018		7,041,579	$	704		-		-	$	1,335,656	$	(731,754	)	$	(28,810	)	$	575,796

Issuance of common stock February 2018, PVBJ Acquisition		444,445		44		-		-		1,183,516		-			-			1,183,560

Stock-based compensation		-		-		-		-		17,148		-			-			17,148

Beneficial conversion feature		-		-		-		-		395,000		-			-			395,000

Foreign currency translation adjustment		-		-		-		-		-		-			(10,259	)		(10,259	)

Net loss		-		-		-		-		-		(110,969	)		-			(110,969	)

Ending, March 31, 2018		7,486,024	$	748		-	$	-	$	2,931,320	$	(842,723	)	$	(39,069	)	$	2,050,276

Stock-based compensation		-		-		-		-		17,149		-			-			17,149

Issuance of common stock April 2018, Stock Options		100,000		10		-		-		990		-			-			1,000

Foreign currency translation adjustment		-		-		-		-		-		-			(22,570	)		(22,570	)

Net income		-		-		-		-		-		13,955			-			13,955

Ending, June 30, 2018		7,586,024	$	758		-	$	-	$	2,949,459	$	(828,768	)	$	(61,639	)	$	2,059,810

Stock-based compensation		-		-		-		-		17,545		-			-			17,545

Foreign currency translation adjustment		-		-		-		-		-		-			(7,828	)		(7,828	)

Net loss		-		-		-		-		-		(267,328	)		-			(267,328	)
Ending September 30, 2018		7,586,024	$	758		-	$	-	$	2,967,004	$	(1,096,096	)	$	(69,467	)	$	1,802,199

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

H/CELL ENERGY CORPORATION

~~STATEMENT OF STOCKHOLDERS’ EQUITY~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018~~

Common Stock Preferred Stock Accumulated
Number
of
Shares Amount Number
of
shares Amount Additional
Paid-In
Capital Accumulated Income (Deficit) Other Comprehensive Income (Loss) Total
Stockholders’ Equity
Beginning, January 1, 2018 7,041,579 $ 704 - $ - $ 1,335,656 $ (731,754 ) $ (28,810 ) $ 575,796

Issuance of common stock in February 2018, PVBJ Acquisition 444,445 44 - - 1,183,537 - - 1,183,581

Exercise of Stock Options 100,000 10 - - 990 - - 1,000

Stock-based compensation expense - - - - 51,821 - - 51,821

Beneficial conversion feature - - - - 395,000 - - 395,000

Net loss - - - - - (364,342 ) (40,657 ) (404,999 )

Ending, September 30, 2018 7,586,024 $ 758 - $ - $ 2,967,004 $ (1,096,096 ) $ (69,467 ) $ 1,802,199

~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~

~~H/CELL ENERGY CORPORATION~~

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2019			2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)	$	(364,342	)	$	98,912
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net loss							$	(438,264	)	$	(364,342	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		135,498			23,374			256,864			99,498
Stock-based compensation		51,821			35,041			15,092			51,821
Loss on sale of assets		4,149			(77	)
(Gain) loss on sale of assets								(25,458	)		4,149
Change in fair value contingent consideration		11,028			-			13,647			11,028
Change in operating assets and liabilities:
Change in operating right of use asset								(233,558	)		-
Change in operating lease liability								235,179			-
Accounts and retainage receivable		(456,672	)		(108,014	)		41,908			(456,672	)
Prepaid expenses and other costs		(9,121	)		1,490			(2,852	)		(9,121	)
Costs in excess of billings		(26,786	)		82,431			41,277			(26,786	)
Security deposits		(13,898	)		-
Accounts payable and accrued expenses		311,906			(251,132	)		(132,237	)		311,906
Billings in excess of costs		(30,246	)		(2,576	)		(149,072	)		(30,246	)

Net cash used in operating activities		(386,663	)		(120,551	)		(377,474	)		(408,765	)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets		(13,909	)		(32,577	)		(123,241	)		(13,909	)
Cash acquired in business acquisition		30,408			-			-			30,408
Security deposits								(373	)		(13,898	)
Proceeds from disposition of property and equipment		5,534			11,957			124,779			5,534

Net cash provided by (used in) investing activities		22,033			(20,620	)
Net cash provided by investing activities								1,165			8,135

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of convertible debt		395,000			-			147,500			395,000
Payments of related party interest		(36,000	)		-
Net proceeds from line of credit								263,093			251,065
Repayments on capital leases		(42,123	)		-			(44,113	)		(42,123	)
Repayments on notes payable		(36,229	)		-			(35,671	)		(36,229	)
Proceeds from line of credit		251,065			-
Repayments on long-term debt		(225,903	)		-			-			(225,903	)
Legal fees associated with financing								(90,000	)		-
Gross proceeds from equity financing								26,746			-
Proceeds related to stock option exercises		1,000			1,000			-			1,000

Net cash provided by financing activities		306,810			1,000			267,555			342,810

Net decrease in cash and cash equivalents		(57,820	)		(140,171	)		(108,754	)		(57,820	)

Effect of foreign currency translation on cash		(66,644	)		23,375			(7,991	)		(66,644	)

Cash and cash equivalents, beginning of period		455,700			537,867
Cash and cash equivalents - beginning of period								359,134			455,700

Cash and cash equivalents, end of period	$	331,236		$	421,071
Cash and cash equivalents - end of period							$	242,389		$	331,236

Supplemental disclosure of non-cash investing and financing activities

Common stock issued for acquisition of business	$	1,177,779			-		$	-		$	1,177,779
Fair value of net assets acquired in business combination	$	2,056,344			-		$	-		$	2,056,344
Beneficial conversion feature	$	378,232			-		$	190,000		$	378,232
Vehicle leases							$	120,413		$	-
Stock issued for deferred financing fee							$	45,000		$	-
Reclassification of deferred financing fee to additional paid in capital							$	1,206		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial ~~statements~~statements.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

1.	ORGANIZATION AND LINE OF BUSINESS

H/Cell Energy Corporation (the “Company”) was incorporated in the state of Nevada on August 17, 2015. The Company, based in ~~Flemington, N.J.,~~Dallas, Texas, is a company whose principal operations consist of designing and installing clean energy systems with a focus on hydrogen energy. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”) ~~(see Note 11)~~. Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy systems division to focus on the high growth renewable energy market in Asia-Pacific. The new clean energy division has generated some revenue and has begun to bid a number of projects. On February 1, 2018, the Company acquired PVBJ Inc. (“PVBJ”) for 444,445 shares of the Company’s common stock with a fair value of $1,177,779 and $221,800 in earn-out ~~liability (see Note 12).~~liability. Established in 2008, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into clean energy systems.

The Company has developed a hydrogen energy system for residential and commercial use designed to create electricity. This ~~unique~~ system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. It can be configured as an off grid solution for all electricity needs or it can be connected to the grid to generate energy credits. Its production of electricity is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. ~~GAAP~~GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results ofto be expected for the year ending December 31, ~~2018~~2019 or any other interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, ~~2017,~~2018, included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, ~~2017~~2018 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in 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. Actual results may differ from these estimates under different assumptions or conditions.

Reclassification

Certain prior period amounts have been reclassified to conform to current period presentation.

Accounts Receivable

Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. Accounts are written off as uncollectible after collection efforts have failed. In addition, the Company does not generally charge interest on past-due accounts or require collateral. At September 30, ~~2018~~2019 and December 31 ~~2017,~~2018, there was no allowance for doubtful accounts required.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

~~Property and Equipment, and Depreciation~~

Property and equipment are stated at cost. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvement.

~~Repairs and maintenance that do not improve or extend the lives of the property and equipment are charged to expense as incurred.~~

Goodwill and ~~Identifiable~~Finite-Lived Intangible Assets

Goodwill represents the excess of the aggregate of the following (1) consideration transferred, (2) the fair value of any non-controlling interest in the acquiree, and (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Identifiable intangible assets consist primarily of customer lists and relationships, non-compete agreements and technology based intangibles and other contractual agreements. The Company amortizes finite lived identifiable intangible assets over ~~the shorter of their stated or statutory duration or their estimated useful lives, generally ranging from 3 to 15~~five years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total goodwill and identifiable intangible assets comprised ~~41%~~40% of ~~our~~the Company’s consolidated total assets at each of September 30, ~~2018. There were no intangible assets or goodwill at~~2019 and December 31, ~~2017.~~2018.

The Company uses the acquisition method of accounting for all business combinations and does not amortize ~~goodwill or intangible assets with indefinite useful lives.~~goodwill. Goodwill ~~and intangible assets with indefinite useful lives are~~is tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.

The Company performed its annual impairment test for PVBJ in December of 2018. Based on the results of the qualitative testing, there was no impairment.

As of September 30, 2019, the Company had recorded goodwill in the amount of $1,373,621 related to the PVBJ acquisition. The performance of the Company’s fiscal 2018 impairment analysis did not result in an impairment of the Company’s goodwill.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.

~~Advertising Costs~~

Advertising costs are charged to expense during the period in which they are incurred. Advertising expense for the three months ended September 30, 2018 and 2017 was $1,144 and $336, respectively. For the nine months ended September 30, 2018 and 2017, advertising expense was $3,384 and $2,482, respectively.

Foreign Currency Translation

The Company translates its foreign subsidiary’s assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income (loss) for each ~~period~~period. Items included in the financial statements of each entity in the group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).

The functional and reporting currency of the Company is the United States Dollar (“U.S. Dollar”). The financial records of Pride located in Australia, is maintained in the local currency, the Australian Dollar (AUD$) which is also its functional currency.

.H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

For the three and nine months ended September 30, 2019, the Company recorded other comprehensive loss of $15,236 and $863, respectively, in the condensed consolidated financial statements. For the three and nine months ended September 30, 2018, the Company recorded other comprehensive loss from a translation loss of $7,828 and $40,657, respectively, in the condensed consolidated financial statements.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with ~~Customers”~~Customers (Topic 606)” (“ASU 2014-09”) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under ~~Topic 606,~~ASU 2014-09, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Under ~~Topic 606~~ASU 2014-09 requirements, the Company recognizes revenue from the installation or construction of projects and service or short term projects over time using the cost-based input method. The Company accounts for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. The Company considers the start of a project to be when the above criteria have been met and the Company either has written authorization from the customer to proceed or an executed contract. A detailed breakdown of the five step process is as follows:

Identify the Contract with a Customer

The Company receives almost all of its contracts from only two sources, referrals or government bids. In a referral, a client that the Company has an ongoing business relationship refers the Company to perform services. In a government bid, the Company applies to perform services for public projects. The contracts have a pattern of being stand-alone contracts.

Identify the Performance Obligations in the Contract

The performance obligation of the Company is to perform a contractually agreed upon task for the customer. If the contract is stated to provide only contractual service, then the service is considered the only performance obligation. If the contractual service includes design and or engineering in addition to the contract, it is considered a single performance obligation.

Determine the Transaction Price

The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:

81.

The customer’s written approval of the scope of the change order;

	2.	Current contract language that indicates clear and enforceable entitlement relating to the change order;
	3.	Separate documentation for the change order costs that are identifiable and reasonable; or
	4.	The Company’s favorable experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated

Once the Company receives a contract, a budget of projected costs is generated for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company typically files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.

Allocate the Transaction Price to the Performance Obligations in the Contract

If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)

Recognize Revenue When (or As) the Entity Satisfies a Performance Obligations

The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e. design, engineering, procurement of material, etc.) should not be recognized as the client does not have control of the good/service provided. When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract represent contract assets and are reflected as a current asset in the Company’s balance sheet under the captions “Costs and estimated earnings in excess of billings” and “Unbilled accounts receivable.” Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings in excess of costs and estimated earnings.”

Disaggregated Revenue from service or short term contracts is recognized currently as the work is performed. Time and materials are accordingly charged to the customer at completion of the job. The Company recognizes service or short term contract revenues when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is determinable, and collectability is reasonably assured. Revenue is typically recorded once all performance obligations have been satisfied. Sales are recorded net of discounts and returns, which historically have not been material.

For the three and nine months ended September 30, 2019 and 2018, revenues from contracts with customers summarized by Geography and Revenue Stream were as follows:

	Three Months Ended
	September 30, 2019		September 30, 2018
United States – Service	$	730,419	$	672,989
Australia – Service		379,696		447,047
United States – Contract		-		-
Australia – Contract		591,250		719,455
Total	$	1,701,365	$	1,839,491

	Nine Months Ended
	September 30, 2019		September 30, 2018
United States – Service	$	1,992,444	$	1,746,486
Australia – Service		1,529,652		1,505,660
United States – Contract		160,000		-
Australia – Contract		1,651,463		2,323,494
Total	$	5,333,559	$	5,575,640

Cash and Cash Equivalents

Cash and cash equivalents includes cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of September 30, ~~2018~~2019 or December 31, ~~2017. At times during the three and nine months ended September 30, 2018 and 2017, balances exceeded the FDIC insurance limit of $250,000.~~2018.

Stock-Based Compensation

The Company recognizes expense for its stock-based compensation based on the fair value of the awards at the time they are granted. We estimate the value of stock option awards on the date of grant using the Black-Scholes model. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates. The forfeiture rate is estimated using historical option cancellation information, adjusted for anticipated changes in expected exercise and employment termination behavior. Our outstanding awards do not contain market or performance conditions.

~~Sales and Use Tax~~

The Company collects sales tax in various jurisdictions. Upon collection from customers, it records the amount as a payable to the related jurisdiction. On a periodic basis, it files a sales tax return with the jurisdictions and remits the amount indicated on the return.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

Income Taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to ~~FASB ASC~~Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 740,Income Taxes(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense.

The Company recognizes and measures its unrecognized tax benefits in accordance with ASC 740. Under that guidance, management assesses the likelihood that tax positions will be sustained upon examination based on the facts, circumstances and information, including the technical merits of those positions, available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.

The Company did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized tax benefits.

The federal income tax returns of the Company are subject to examination by the IRS, generally for the three years after they are filed. The Company’s 2018, 2017 ~~2016~~ and ~~2015~~2016 income tax returns are still open for examination by the taxing authorities.

Fair Value of Financial Instruments

Except for the Company’s earn-out liability, the carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:

	●	Level 1—quoted prices in active markets for identical assets and liabilities;

	●	Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and

	●	Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

The table below presents a reconciliation of the fair value of the Company’s contingent earn-out obligations that use significant unobservable inputs (Level 3).

Balance at December 31, 2017 $ -
Earn-out liability from acquisition of PVBJ Inc. 175,318
Payments -
Adjustments to fair value 11,028
Balance at September 30, 2018 $ 186,346

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

Balance at December 31, 2018	$	190,736
Payments		-
Adjustments to fair value		13,647
Balance at September 30, 2019	$	204,383

The Company values earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

Net Income (Loss) Per Common Share

The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of diluted loss per share excludes dilutive securities, ~~for the nine months ended September 30, 2018~~ because their inclusion would be anti-dilutive. ~~Potentially dilutive~~Dilutive securities ~~excluded from the computation of basic and diluted net loss per share~~ for the ~~three months ended September 30, 2018 and 2017~~periods presented are as follows:

September 30, 2018 September 30, 2017

Convertible debt 533,333 -
Options to purchase common stock 980,000 1,050,000
Totals 1,513,333 1,050,000

	September 30, 2019		December 31, 2018

Options to purchase common stock		543,375		131,250
Convertible debt		1,100,000		800,000
Totals		1,643,375		931,250

3.	RELATEDPARTY TRANSACTIONS

The Company’s ~~current~~former office space ~~consists~~during the year ended December 31, 2018 consisted of approximately 800 square feet, which iswas donated to it from one of its executive officers. There iswas no lease agreement and the Company ~~pays~~paid no rent.

~~Effective February 4, 2016, the Company sold 526,316 shares of common stock to Reza Enterprises, Inc., an entity beneficially owned by Rezaul Karim.~~ In ~~connection with, and as a condition of closing, the Company agreed to appoint~~April 2018, Rezaul Karim ~~to its board of directors. Rezaul Karim resigned from the board of directors effective April 1, 2017. On April 1, 2017, the Company entered into~~ a ~~consulting agreement with Rezaul Karim for a period of one year. As such his function will be to promote our products and services. In each of April 2017 and 2018, Rezaul Karim~~former director exercised 100,000 options.

In September 2018, the Company entered into a contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of September 30, 2018, however one change order of $686 was deducted to the cost of the job amount in October 2018. Costs incurred were $9,019 along with revenue of $8,499 for each of the three and nine months ended September 30, 2018.

In June 2016, the Company entered into a contract with Rezaul Karim, one of its former directors, for the installation of an HC-1 system. The system installation was complete ~~pending any change orders~~ as of September 30, ~~2018,~~2018. The system installation generated $8,499 and ~~generated $31,789 and $85,919~~$40,288 of revenue for the three and nine months ended September 30, ~~2018 and 2017, respectively.~~2018. The Company subcontracted the installation of the system to Renewable Energy Holdings LLC (“REH”), a company owned by Mike Strizki, one of the Company’s executive officers. James Strizki, one of the Company’s executive officers, is vice president of operations at REH. ~~Costs incurred~~There was $9,019 and $40,636 of costs for REH were $31,617 and $87,649 for the nine months ended September 30, 2018 and 2017, respectively. No revenue or costs were incurred in the three months ended September 30, 2018. For the three months ended September 30, 2017, the Company incurred revenue of $45,666 and direct costs of $37,304.

In September 2018, the Company entered into a contract with Steve Mullane, the Executive General Manager of Pride, for a solar installation. The system installation was complete as of September 30, 2018, however one change order of $686 will be deducted to the cost of the job amount in October 2018. Costs incurred were $9,019 along with revenue of $8,499 for each of the three and nine months ended September 30, ~~2018.~~2018, respectively.

The Company has entered into agreements to indemnify its directors and executive officers, in addition to the indemnification provided for in the Company’s articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of the Company’s directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at the Company’s request. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

There was $21,500 and $19,500 of management fees expensed for the three months ended September 30, 2019 and 2018, respectively, to Turquino Equity LLC (Turquino”), a significant shareholder wholly-owned by the Chief Executive Officer and Chief Financial Officer, $60,500 and $58,500 for each of the nine months ended September 30, 2019 and 2018, respectively.

On January 2, 2018, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“2018 Debentures”).On February 8, 2019, the Company and the holders of the 2018 Debentures entered into amendments (the “Amendments”) to the 2018 Debentures.The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum from January 2, 2018 through the date of the Amendments, and 10% per annum subsequent to the date of the Amendments, payable monthly in cash, beginning on February 1, 2018 and through the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.50 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.

On February 8, 2019, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (“2019 Debentures”). The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and through the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $97,500 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.

4.	SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. At September 30, 2019 and December 31, 2018, the balance was fully covered under the $250,000 threshold in the United States. In Australia, the balance did not exceed the threshold at September 30, 2019 and exceeded the threshold by $133,578 at December 31, 2018.

Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at September 30, 2019, approximately 22% of the Company’s accounts receivable was due from two unrelated customers at 12% and 10%. At December 31, 2018, approximately 20% of the Company’s accounts receivable was due from two unrelated customers, each at 10%.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

5.	MAJOR CUSTOMERS

During each of the three and nine months ended September 30, 2019, there were two unrelated customers with a concentration of 10% or higher of the Company's revenue, at 16% and 11% and 13% and 10%, respectively. There was one customer with a concentration of 10% or higher, at 20%, for the three months ended September 30, 2018, and three customers for the nine months ended September 30, 2018 at 16%, 14% and 11%.

6.	UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at September 30, 2019 and December 31, 2018:

	September 30, 2019			December 31, 2018
Costs incurred on uncompleted contracts	$	547,935		$	811,173
Estimated earnings		240,403			469,109
Costs and estimated earnings earned on uncompleted contracts		788,338			1,280,282
Billings to date		882,179			1,265,475
Costs and estimated earnings in excess of billings on uncompleted contracts		(93,481	)		14,807
Costs and earnings in excess of billings on completed contracts		53,249			(164,660	)
	$	(40,592	)	$	(149,853	)

Costs in excess of billings	$	3,709		$	45,478
Billings in excess of cost		(44,301	)		(195,331	)
	$	(40,592	)	$	(149,853	)

LEASES

Operating Leases

For leases with a term of 12 months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, and we recognize lease expense for such leases on a straight-line basis over the lease term.

The Company previously entered into two leases for office space in Woombye and Brisbane, Queensland, Australia, both which expired in April 2018. The Company signed new leases in January 2019 for a Dallas, Texas shared office space, which ends in December 2019, and February 2018 for new office space in Kunda Park, Queensland Australia, which started in May 2018 and expires in May 2023. The Company also renewed the Brisbane office space for one year, starting in May 2018.

On March 25, 2019, the Company signed a lease for new office space in Brisbane, which has a fixed 3% increase annually expiring in March 2025 which includes a renewal period of three years that management is reasonably certain will be exercised. The Company analyzed this lease and determined that this agreement meets the definition of a lease under ASU 2016-02 as it provides management with the exclusive right to direct the use of and obtain substantially all of the economic benefits from the identified leased asset, which is the office space. Management also analyzed the terms of this arrangement and concluded it should be classified as an operating lease, as none of the criteria were met for finance lease classification. As there was only one identified asset, no allocation of the lease payments was deemed necessary. Management did not incur any initial direct costs associated with this lease. As of the commencement date, which was March 25, 2019, a right of use asset and lease liability of $130,736 was recorded on the condensed consolidated balance sheet based on the present value of payments in the lease agreement. Per review of the lease agreement, there was no variable terms identified and there is no implicit rate stated. Therefore, the Company determined the present value of the future minimum lease payments based on the incremental borrowing rate of the Company. The incremental borrowing rate was determined to be 10%, as this is the rate which represents the incremental borrowing rate for the Company, on a collateralized basis, in a similar economic environment with similar payment terms.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

On July 1, 2019, the Company signed a lease for the previously month-to-month office space in Downingtown, PA. Per review of the lease, the term is less than 12 months, therefore, the Company has elected to treat this lease as an operating lease and recognize lease expense on a straight-line basis.

The future minimum payments on operating leases for each of the next five years and in the aggregate amount to the following:

2019	$	15,225
2020		62,491
2021		63,615
2022		64,425
2023		38,542
Thereafter		36,937
Total lease payments		281,235
Less: present value discount		(54,257	)
Total operating lease liabilities	$	226,978

The weighted-average remaining term of the Company’s operating leases was 4.5 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liabilities was 9.69% as of September 30, 2019.

Right of use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease right of use asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

In determining the discount rate to use in calculating the present value of lease payments, the Company estimates the rate of interest it would pay on a collateralized loan with the same payment terms as the lease by utilizing bond yields traded in the secondary market to determine the estimated cost of funds for the particular tenor.

Finance Leases

At September 30, 2019, the Company had 13 finance leases with an aggregate net book value of $342,111. The obligations are payable in monthly installments ranging from approximately $503 to $1,578 with interest rates from 3.0% to 5.57% per annum. The leases are secured by the related equipment. Approximate payments to be made on these finance lease obligations are as follows:

2019	$	21,346
2020		85,387
2021		75,741
2022		66,445
2023		68,455
Thereafter		55,686

Finance lease obligation		373,060
Less: amounts representing interest		30,949
Current maturities of capital lease obligations		73,842

Finance lease obligations, non-current	$	268,269

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

DEBT

Long-term debt consisted of the following:

Equipment Notes Payable

	September 30, 2019			December 31, 2018
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020.	$	-		$	18,707
Note payable with monthly payments of $615, including interest at 6.80% per annum through August 2021.		13,220			18,383
Note payable with monthly payments of $1,294, including interest at 14.72% per annum through March 2023.		41,306			50,072
Note payable with monthly payments of $1,063, including interest at 5.76% per annum through April 2021.		11,834			18,539

Note payable with monthly payments of $983, including interest at 4.90% per annum through August 2024.		51,157			-
Note payable with monthly payments of $947 including interest at 6.14% per annum through December 2024.	$	-		$	54,328
Total:	$	117,517		$	160,029
Total current portion:		(41,358	)		(38,991	)
Total non-current portion:	$	76,159		$	121,038

As of September 30, ~~2018 and December 31, 2017, the balances due~~2019, approximate principal payments to Turquino Equity LLC (Turquino”), a significant shareholder, amounted to $0 and $31,257, respectively. These balances represent expenses for management services. There was $19,500 of management fees expensed for the three months ended September 30, 2018 and $58,500 for the nine months ended September 30, 2018. Management fees expensed totaled $47,000 for the three months ended September 30, 2017 and $138,000 for the nine months ended September 30, 2017.be made on these debt obligations are as follows:

Year ending December 31:	Amount
2019 (remainder)	$	8,308
2020		33,561
2021		26,065
2022		19,479
2023		24,283
Thereafter		5,821
Notes payable obligation		117,517

Convertible Note Payable

On January 2, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“Debentures”), convertible into shares of the Company’s common stock at a conversion price of $0.75 per share. The Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “Maturity Date”). Interest on the Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and onthrough the Maturity Date. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock.

In connection with this convertible note payable, the Company recorded a $395,000 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.

4.	~~SIGNIFICANTCONCENTRATIONS OF CREDIT RISK~~

Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. At September 30, 2018 and December 31 2017, the balances exceeded the insured limits by $81,236 and $145,236, respectively.

Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at September 30, 2018, approximately 20% of the Company’s accounts receivable was due from two unrelated customers at 12% and 8%, respectively. At December 31, 2017, approximately 36% of the Company’s accounts receivable was due from three unrelated customers, 14%, 12% and 10%, respectively.

5.	~~MAJOR~~~~CUSTOMERS~~

There was one customer with a concentration of 10% or higher, at 20%, for the three months ended September 30, 2018, and three customers for the nine months ended September 30, 2018 at 16%, 14% and 11%, respectively. There was one customer with a concentration of 10% or higher of the Company’s revenue, at 19%, for the three months ended September 30, 2017, and two customers, at 29% and 14%, for the nine months ended September 30, 2017.

6.	~~PROPERTYAND EQUIPMENT~~

~~At September 30, 2018 and December 31, 2017, property and equipment were comprised of the following:~~

September 30, 2018 December 31, 2017
Furniture and fixtures (5 to 7 years) $ 12,803 $ 6,857
Machinery and equipment (5 to 7 years) 35,565 35,919
Computer and software (3 to 5 years) 120,621 94,761
Auto and truck (5 to 7 years) 783,310 250,044
Leasehold improvements (life of lease) 38,961 40,608
991,260 428,189
Less accumulated depreciation 628,327 325,616
$ 362,933 $ 102,573

Depreciation expense for the three months ended September 30, 2018 and 2017 was $29,105 and $8,454, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $104,624 and $23,374, respectively.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

7.	~~UNCOMPLETEDCONTRACTS~~

~~Costs, estimated earnings~~On February 8, 2019, the Debentures were amended to reduce the interest rate to 10% and ~~billings on uncompleted contracts are summarized as follows at September 30, 2018 and December 31, 2017:~~

September 30, 2018 December 31, 2017
Costs incurred on uncompleted contracts $ 1,871,577 $ 2,485,787
Estimated earnings 550,409 779,598
Costs and estimated earnings on uncompleted contracts 2,421,896 3,265,385
Billings to date 2,467,054 3,553,817
Costs and estimated earnings in excess of billings on uncompleted contracts (45,068 ) (288,432 )
Costs and earnings in excess of billings on completed contracts (66,450 ) (252,757 )
$ 21,382 $ (35,675 )

Costs in excess of billings $ 73,180 $ 51,531
Billings in excess of cost (51,798 ) (87,206 )
$ 21,382 $ (35,675 )

8.	~~COMMITMENTS~~

The Company previously entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both which expired in April 2018. The Company signed a new lease in February of 2018 for new office space in Kunda Park Queensland Australia, starting in May 2018 and expiring in May 2021. The Company also renewedreduce the Brisbane office space for one year starting in May 2018. The Company’s office in Downingtown, Pennsylvania was renewed in January of 2018 for a one-year period. The future minimum payments on the leases for each of the next three and one-half years and in the aggregate amount to the following:

2018 $ 23,979
2019 54,050
2020 39,639
2021 13,213
$ 130,881

Rent expense for the three months ended September 30, 2018 and 2017 was $22,582 and $23,500, respectively. Rent expense for the nine months ended September 30, 2018 and 2017 was $67,355 and $68,500, respectively, and is included in “General and Administrative” expenses on the related statements of operations.

During the three and nine months September 30, 2018, the Company had vehicles leased under four capital leases, with a net book value of $159,226, which expire in September 2023. During the three and nine months ended September 30, 2017, the Company had no capital leases. The obligations are payable in monthly installments ranging from approximately $615 to $2,630 with interest rates from 5.57% to 7.20% per annum. The leases are secured by the related equipment.

~~At September 30, 2018, approximate payments to be made on these capital lease obligations are as follows:~~

2018 $ 26,569
2019 78,209
2020 75,578
2021 44,718
2022 7,512
Thereafter 4,382
Capital lease obligation 236,968
Less: amounts representing interest 19,138
Current maturities of capital lease obligations 68,240
Capital lease obligations, non-current $ 149,590

~~For the three and nine months ended September 30, 2018, interest expense on the capital leases was $2,912 and $7,894, respectively.~~

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

~~DEBT~~

~~Long-term debt consisted of the following:~~

~~Equipment Notes Payable~~

September 30, 2018 December 31, 2017
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. $ 20,235 $     -
Note payable with monthly payments of $1,294.50, including interest at 14.72 per annum through March 2023. $ 56,080 $ -
Note payable with monthly payments of $1,063.45, including interest at 5.76% per annum through April 2021 $ 21,120 $     -
Note payable with monthly payments of $946.84 including interest at 6.14% per annum through December 2024. $ 53,709 $ -
Total non-current portion: $ 151,144 $ -
Total current portion: $ (32,538 ) $ -
Total: $ 118,606 $    -

~~Aggregate annual principal payments in the fiscal years subsequent to December 31 2017, are as follows:~~

Year ending December 31: Amount
2018 (remaining) $ 8,506
2019 40,395
2020 39,679
2021 25,657
2022

22,584

Thereafter 37,377
Notes payable obligation 174,198
Less amounts representing interest (23,055 )
$ 151,144

~~Convertible Note Payable~~

On January 2, 2018, the Company entered into an agreement with two related parties, who are directors of the Company and issued a 12.0% interest bearing convertible debenture for $400,000 due on January 2, 2020, with conversion features commencing immediately following the date of the note. Payments of interest only were due monthly beginning January 2018. The Debentures are convertible into common stock at a conversion price to $0.50 (the “Revised Debentures”), providing the issuance of ~~$0.75 per share at~~an additional 266,667 shares upon conversion. In conjunction with these amendments, the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note ~~payable,~~was re-evaluated in accordance with ASC 470-50 -Debt Modifications and Extinguishments(“ASC 470”), and it was determined that the ~~Company recorded~~change in terms resulted in a ~~$395,000 discount on debt, related~~substantial modification to the beneficial conversion ~~feature~~feature. As a result, the carrying value of the ~~note~~Debentures at the time of the transaction, along with the related beneficial conversion feature, were derecognized and the Revised Debentures were recorded at present value, resulting in a loss on debt extinguishment of $269,793.Of this amount, $53,333 represented the historical beneficial conversion feature and has been treated as a debt discount and is being amortized over the life of the Revised Debentures using the effective interest method.As the holders of the Debentures are related parties to the Company,ASC 470provides for treatment as a capital contribution, whereby the related extinguishment loss will instead be recorded within the Company’s Additional Paid in Capital balance. In connection with the Revised Debentures, the Company incurred $2,500 of legal fees and recorded a $160,000 beneficial conversion feature, both of which are recorded as a discount on debt and amortized over the life of the note using the effective interest method, or until the note is converted or repaid. ~~The Company incurred $5,000 of legal fees for preparation of the financing documents, which has been reflected as an additional debt discount.~~

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

For the three and nine months ended September 30, 2019, the Company incurred interest expense of $75,866 and $182,112, respectively. $41,559 related to the amortization of the 2018 Debentures debt discount and $8,685 for the 2019 Debentures debt discount for the three months ended September 30, 2019 and $99,594 related to the amortization of the 2018 Debentures and $20,981 for the 2019 Debentures for the nine months ended September 30, 2019. $7,778 and $19,113 related to interest for the Thermo credit line for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2018, the Company incurred interest expense of $19,877, of which $7,877 related to the amortization of the discount.

For the nine months ended September 30, 2018, the Company incurred interest expense of $52,768, of which $14,268 related to the amortization of the 2018 Debentures debt discount.$3,003 related to interest for the Thermo credit line for each of the three and nine months ended September 30, 2018.

~~10.~~9.

CONTRACTBACKLOG

AtAs of September 30, 2019, the Company had a contract backlog approximating $312,466, with anticipated direct costs to complete approximating $240,403. At December 31, 2018, the Company had a contract backlog approximating ~~$715,595~~$583,392, with anticipated direct costs to completion approximating ~~$550,409.~~$452,884.

~~11.~~10.

~~ACQUISITION UNDER COMMON CONTROL~~GOODWILL AND OTHER INTANGIBLES

~~On January 31, 2017, the Company entered into~~The tables below present a share exchange agreement (the “Exchange Agreement”) by and among the Company, Pride, Turquino and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (the “Mullane Trust” and together with Turquino, the “Pride Shareholders”). Andrew Hidalgo and Matthew Hidalgo, the Company’s Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino.

~~Pursuant to the Exchange Agreement, the Company acquired all of the issued and outstanding capital stock of Pride from the Pride Shareholders in exchange for an aggregate of 3,800,000 shares~~reconciliation of the Company’s ~~common stock (the “Acquisition Shares”). As a result, the combination~~goodwill and intangibles:

Goodwill

Balance at December 31, 2018	$	1,373,621
Adjustments		-
Balance at September 30, 2019	$	1,373,621

Intangibles – customer list

Balance at December 31, 2018	$	83,645
Amortization		15,363
Balance at September 30, 2019	$	68,282

The customer list original useful life of the ~~Company and Pride pursuant to the Exchange Agreement is considered a business combination of companies under common control~~asset was $102,422. The balance at September 30, 2019 was $68,282 and will be ~~accounted for in a manner similar to a pooling-of-interests.~~amortized at $5,121 every quarter until December 31, 2022. The ~~accompanying financial statements have been retrospectively restated as a result of an acquisition of another company under common control with the Company, which was completed~~remaining $1,707 will be amortized in January ~~2017.~~2023.

~~12.~~

~~BUSINESS ACQUISITION~~

On February 1, 2018, the Company entered into a stock purchase agreement (the “Purchase Agreement”) by and among the Company, PVBJ and Benis Holdings LLC, the sole shareholder of PVBJ (“Benis Holdings”).

Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of PVBJ from Benis Holdings for an aggregate amount equal to (i) $221,800 (the “Cash Purchase Price”) and (ii) 444,445 shares of the Company’s common stock, par value $.0001 per share having a fair value of $1,177,779 (the “Acquisition Shares”). Pursuant to the Purchase Agreement, the Acquisition Shares were issued at closing, and the earn-out will be paid to Benis Holdings from positive earnings before taxes of PVBJ, with Benis Holdings to receive 50% of annual earnings before taxes of PVBJ until such time as Benis Holdings has received the full Cash Purchase Price.

In connection with the acquisition of PVBJ, the Company entered into an employment agreement (the “Employment Agreement”) with Paul V. Benis, Jr. to serve as an Executive Vice President of the Company for a period of three years. Pursuant to the Employment Agreement, Mr. Benis shall receive an annual salary of $150,000 and have oversight of the business operations of PVBJ.

~~The preliminary estimated consideration transferred in the acquisition was as follows:~~

Upfront consideration $ 1,177,779
Liabilities assumed 878,565
Total $ 2,056,343

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)

The estimated fair values of working capital balances, property and equipment, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets and liabilities, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.

~~The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:~~

Cash and cash equivalents $ 30,408
Accounts receivable 277,338
Property and equipment, net 272,554
Customer list 102,422
Goodwill 1,373,621
Total assets acquired 2,056,344
Accounts payable (112,590 )
Debt assumed (590,657 )
Earn-out liability (175,318 )
Total liabilities assumed (878,565 )
Total net assets acquired $ 1,177,779

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

~~A summary of preliminary estimated identifiable intangible assets acquired, preliminary estimated useful lives and amortization method is as follows:~~

Useful Life in Amount Years Amortization Method
Customer List $ 102,422 5 Straight Line
Total $ 102,422

The results of PVBJ’s operations are included in the condensed consolidated statements of operations beginning February 1, 2018. PVBJ’s net loss for three and eight month period ended September 30, 2018 totaled $84,343 and $61,341, respectively. The net loss includes estimated acquired intangible asset amortization of $5,121 for the three month period ended September 30, 2018 and $13,656 for the eight month period ended September 30, 2018.

For the three and nine month period ended September 30, 2018, acquisition related costs for the Company totaled $29,500 and $44,500 and are included in general and administration expenses. The Company may incur additional acquisition related costs during 2018.

~~Pro forma results for H/Cell Energy Corporation giving effect to the PVBJ Inc. acquisition~~

The following pro forma financial information presents the combined results of operations of PVBJ Inc. and the Company for the three and nine month periods ended September 30, 2018 and 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.

~~The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.~~

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2017.

Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
Revenues $ 1,839,491 $ 1,965,079
Net income (loss) (267,328 ) 57,472
Net income (loss) per share:
Basic (0.04 ) 0.01
Diluted (0.04 ) 0.01

Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
Revenues $ 7,499,211 $ 6,809,961
Net income (loss) (352,860 ) 277,215
Net income (loss) per share:
Basic (0.05 ) 0.04
Diluted (0.05 ) 0.04

~~13.~~11.

STOCK OPTIONS AWARDS AND GRANTS

A summary of the stock option activity and related information for the ~~Company’s~~ 2016 Incentive Stock Option Plan from December 31, ~~2017~~2018 to September 30, ~~2018~~2019 is as follows:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value			Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2017		1,050,000		$	0.27		3.35	$	514,182
Outstanding at December 31, 2018												955,000			0.29		2.40		488,000
Grants		30,000			1.00		4.89		-			65,000			0.95		2.63		-
Exercised		(100,000	)		0.01		-		(38,475	)		-			-		-		-
Canceled		-			-		-		-			(21,500	)		0.05		-		-
Outstanding at September 30, 2018		980,000			0.92		3.66		475,707
Exercisable at September 30, 2018		112,500		$	1.13		3.23	$	127,125
Outstanding at September 30, 2019												998,500		$	0.31		4.15		-
Exercisable at September 30, 2019												425,000		$	0.01		1.44	$	176,375

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s weighted average grant date stock price of $0.3958 per share, which would have been received by the option holders had those option holders exercised their options as of that date. ~~It also includes options granted at exercise prices of $2.00, $1.50, and $1.00, which were equal to the closing sales price of the Company’s common stock on the dates of grant.~~

Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value.

The Company accounts for the expected life of options based on the contractual life of options for non-employees. For incentive options granted to employees, the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model.

As of September 30, ~~2018,~~2019, there was ~~$73,216~~$40,635 of unrecognized compensation expense. ~~At September 30, 2017,~~As of December 31, 2018, there was ~~$126,991~~$56,745 of unrecognized compensation expense.

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

~~14.~~12.

SEGMENT INFORMATION

Our business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. The following represents selected information for the Company’s reportable segments at September 30, 2018 and December 31, 2017, and also for the three and nine months ended September 30, 2018 and 2017.

September 30, 2018 December 31, 2017
Assets by Segment
Renewable Systems Integration $ 1,612,793 $ 27,589
Non-renewable Systems Integration 1,935,814 1,457,607
$ 3,548,607 $ 1,485,196

For the Three Months Ended
For the Nine Months Ended
September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Revenue by segment
Renewable Systems integration $ 8,499 $ 45,666 $ 40,288 $ 85,919
Non-renewable system Integration 1,830,992 1,292,905 5,535,352 5,050,155
$ 1,839,491 $ 1,338,571 $ 5,575,640 $ 5,136,074

Cost of sales by segment
Renewable Systems integration $ 9,019 $ 37,304 $ 40,636 $ 87,649
Non-renewable system Integration 1,438,669 870,369 3,901,125 3,432,098
$ 1,447,688 $ 907,673 $ 3,941,761 $ 3,519,747

Operating expenses
Renewable Systems integration $ 123,459 $ 57,447 $ 424,640 $ 206.051
Non-renewable system Integration 503,166 425,897 1,484,000 1.311,364
$ 626,625 $ 483,344 $ 1,908,640 $ 1,517,415
Operating (loss) income by segment
Renewable Systems integration $ (126,461 ) $ (49,085 ) $ (424,988 ) $ (207,781 )
Non-renewable system Integration (108,361 ) (3,361 ) 150,227 306,693
$ (234,822 ) $ (52,446 ) $ (274,761 ) $ 98,912

~~15.~~

~~401(k) PLANS~~

Substantially all of the Company’s employees may elect to defer a portion of their annual compensation in the Company-sponsored 401(k) tax-deferred savings plans. The Company makes matching contributions in these plans. The amount charged to expense for these plans was $5,753 for the three months ended September 30, 2018 and $16,281 for the nine months ended September 30, 2018. There was no expense for the three or nine months ended September 30, 2017.

~~16.~~

~~INCOME TAX~~

For the three and nine months ended September 30, 2018 and 2017, the Company did not record any income tax expense or benefit. No tax benefit has been recorded in relation to the pre-tax loss for the three and nine months ended September 30, 2018 and 2017. A partial valuation allowance of $26,197 is listed on the balance sheet at September 30, 2018 to offset any deferred tax asset related to net operating loss carry forwards attributable to the losses.

	September 30, 2019		December 31, 2018
Assets by Segment
Renewable systems integration	$	1,646,461	$	1,540,423
Non-renewable systems integration		1,985,222		1,984,084
	$	3,631,683	$	3,524,507

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)

The following represents selected information for the Company’s reportable segments for the three and nine months ended September 30, 2019 and 2018.

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
Revenue by segment
Renewable systems integration	$	45,921		$	8,499		$	172,156		$	40,288
Non-renewable system integration		1,655,444			1,830,992			5,161,403			5,535,352
		1,701,365		$	1,839,491		$	5,333,559		$	5,575,640

Cost of sales by segment
Renewable systems integration	$	29,466		$	9,019		$	147,437		$	40,636
Non-renewable system integration		1,212,164			1,438,669			3,599,953			3,901,125
	$	1,241,630		$	1,447,688		$	3,747,390		$	3,941,761

Operating expenses
Renewable systems integration		104,666		$	123,459		$	420,358		$	424,640
Non-renewable system integration		472,516			503,166			1,434,333			1,484,000
	$	577,182		$	626,625		$	1,854,691		$	1,908,640
Operating (loss) income by segment
Renewable systems integration		(88,211	)	$	(126,461	)	$	(395,639	)	$	(424,988	)
Non-renewable system integration		(29,236	)		(108,361	)		127,117			150,227
		(117,447	)	$	(234,822	)	$	(268,522	)	$	(274,761	)

~~17.~~

~~RECENT ACCOUNTING PRONOUNCEMENTS~~

In May 2014, the FASB issued accounting standard update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption was permitted after December 15, 2016, and the standard became effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU No. 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU No. 2016-10), narrow-scope improvements and practical expedients (ASU No. 2016-12) and technical corrections and improvements to ASU 2014-09 (ASU No. 2016-20) in its new revenue standard. The Company has performed a review of the requirements of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company reviewed customer contracts, applied the five-step model of the new standard to its contracts, and compared the results to its current accounting practices. The Company has included disclosures required by the new standard and the adoption has not had a material impact on the financial statements.

During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 did not have a material impact on the Company’s financial position, results of operations or cash flows.

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2016-02 is currently being evaluated by the Company, but is not expected to have a material impact on the Company’s financial position, results of operations or cash flows due to an insignificant number of leases that the Company has entered into.

In August 2016, FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years beginning after December 15, 2017. The Company adopted ASU 2016-15 effective January 1, 2018 and it did not have a material impact on its financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period. The Company adopted ASU 2017-09 effective January 1, 2018 and it did not have a material impact on its financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard will become effective for the Company beginning January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

~~H/CELL ENERGY CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)~~

In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard will become effective for the Company January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

~~18.~~

~~NET INCOME PER SHARE~~

~~The following table sets forth the information needed to compute basic and diluted earnings per share:~~

Nine months ended
September 30, 2017
Net income $ 98,912
Weighted average common shares outstanding 6,601,873
Dilutive securities
Convertible debt -
Options 924,890
Diluted weighted average common shares outstanding 7,526,763
Basic net income per share $ 0.02
Diluted net income per share $ 0.01

For the nine month period ended September 30, 2018 and for the three month periods ended September 30, 2018 and 2017, there are no calculations as there were net losses and certain potential shares of common stock would have been excluded from the calculation of diluted income per share, and therefore, the effect on diluted income per share would have been anti-dilutive.

~~19.~~13.

NOTE PAYABLE

On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions. Pursuant to the terms of the Credit Agreement, the Company is permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as defined in the Credit Agreement). Borrowings under the Credit Agreement may be used for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans to H/Cell. The loan commitment shall expire on August 21, 2020. As of September 30, 2019, the Company was in compliance with these covenants and the facility was increased to $400,000 in August of 2019. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. The Company paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will be paid on the first anniversary. The Company will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears. The Company may prepay the Note at any time and terminate the Credit Agreement. In the event that the Company terminates the Credit Agreement, the Company will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying ~~$350,000~~$400,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24. The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in the Company’s financial condition that could have a material adverse effect on the Company.As of September 30, ~~2018,~~2019, funds totaling ~~$38,296~~$96,474 were available for borrowing under the ~~Thermo~~ Credit Agreement.

~~20.~~

~~SUBSEQUENTEVENTS~~

~~The Company has evaluated events from September 30, 2018 through the date the financial statements were issued. There were no subsequent events that need disclosure.~~

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

14.	EQUITY PURCHASE AGREEMENT

Triton Funds

On March 12, 2019, the Company entered into an equity purchase agreement (the “Equity Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from the Company up to $450,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Equity Purchase Agreement.

Under the Equity Purchase Agreement, the Investor has the right, at any time, to purchase Shares by delivering the Company a purchase notice, specifying the number of Shares to be purchased. The purchase price for the Shares under the Equity Purchase Agreement will be 60% of the lowest closing price of the Company’s common stock in the five consecutive trading days preceding the Investor’s receipt of the Shares subject to such equity purchase.

In addition, the Investor has an obligation, to the extent it has not already made voluntary purchases, to purchase up to (i) $200,000 in Shares within 15 Trading Days (as defined in the Equity Purchase Agreement) after the effective date of the Registration Statement (as defined below) and (ii) $450,000 in Shares within 70 Trading Days after the effective date of the Registration Statement.

The Company has the right to reject any purchase notice from the Investor by delivering written notice of such rejection within one trading day after receipt. If the Company rejects any purchase notice, the Investor has no further obligations to purchase Shares under the Equity Purchase Agreement. The Company may terminate the Equity Purchase Agreement at any time by written notice to the Investor in the event of a material breach of the Equity Purchase Agreement by the Investor. In addition, the Equity Purchase Agreement will automatically terminate on the earliest of: (i) the date that the Investor has purchased $450,000 of Shares; (ii) 70 Trading Days after the effective date of the Registration Statement; or (iii) the date the Registration Statement is no longer effective.

The obligation of the Investor to purchase the Shares is subject to several conditions, including, among other thing, (i) that the Company has an effective registration statement with the SEC registering the Shares for resale, and (ii) that the purchase of the Shares shall not cause the Investor to own more than 9.99% of the outstanding shares of common stock. In connection with the Equity Purchase Agreement, the Company agreed to pay $15,000 of fees to the Investor, of which $10,000 was paid on execution of the Equity Purchase Agreement, and the remaining $5,000 will be paid on the first sale of Shares.

Pursuant to the Registration Rights Agreement, the Company is required to register the Shares on a registration statement (the “Registration Statement”) to be filed with the SEC within 15 calendar days after the Company filed its annual report for the fiscal year ended December 31, 2018. The Company timely filed the Registration Statement with the SEC.

Additionally, on March 12, 2019, the Company agreed to donate 35,000 shares of common stock to the manager of the Investor. The Company recorded value of these shares at the market price and is included in general and administrative expenses.

On June 24, 2019, the Company provided written notice to Investor that the Company elected to terminate the Equity Agreement, effective immediately. On August 30, 2019, the 35,000 donation shares were returned to the Company and canceled.

GHS Investments

On July 9, 2019, the Company entered into an equity financing agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with GHS Investments LLC (“GHS”), pursuant to which GHS has agreed to purchase from the Company up to $3,000,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. Additionally, the Company issued 30,000 shares to GHS as a commitment fee including in the balance sheet under deferred offering cost along with $90,000 in legal fees.

Under the Purchase Agreement, the Company has the right, from time to time at its sole discretion and subject to certain conditions, to direct GHS to purchase shares of common stock on any business day (a “Put”), provided that at least ten trading days has passed since the most recent Put. The purchase price of shares of common stock pursuant to the Purchase Agreement will be 80% of the lowest trading price of the common stock during the 10 trading days prior to the Put (the “Pricing Period”). Such sales of common stock by the Company, if any, may occur from time to time, at the Company’s option, over the 24-month period commencing on July 31, 2019.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

The number of Shares that the Company may direct GHS to purchase per Put is limited by the average daily trading volume of the common stock prior to the Put, as follows:

	i.	If between zero (0) to fifteen thousand (15,000) Shares are traded on average per day during the Pricing Period, the relevant Put shall be capped to fifteen thousand (15,000) Shares;
	ii.	If between fifteen thousand and one (15,001) Shares to thirty thousand (30,000) Shares are traded on average per day, the relevant Put shall be capped to thirty thousand (30,000) Shares;
	iii.	If between thirty thousand and one (30,001) Shares to sixty thousand (60,000) Shares are traded on average per day, the relevant Put shall be capped to sixty thousand (60,000) Shares;
	iv.	If between sixty thousand and one (60,001) Shares to one hundred and fifty thousand (150,000) Shares are traded on average per day, the relevant Put shall be capped to one hundred and fifty thousand (150,000) Shares; and
	v.	If the average daily traded volume for the Pricing Period is equal to or greater than one hundred fifty thousand and one (150,001) Shares, then the relevant Put shall be limited to an amount which equals two times (2x) the average daily volume for the Shares during the Pricing Period.

In all instances, the Company may not sell shares of its common stock to GHS under the Purchase Agreement if it would result in GHS beneficially owning more than 4.99% of the Company’s common stock. In addition, no Put can be made in an amount that exceeds $400,000. The Company has sold an aggregate of 78,000 shares for proceeds of $26,746 during the three months ended September 30, 2019.

15.	RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02 and issued subsequent amendments to the initial guidance thereafter. This ASU requires an entity to recognize a right of use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification of the underlying lease as either finance or operating. Similar modifications have been made to lessor accounting in-line with revenue recognition guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for the Company on January 1, 2019. Entities are required to adopt ASU 2016-02 using a modified retrospective transition method. Full retrospective transition is prohibited. The guidance permits an entity to apply the standard’s transition provisions at either the beginning of the earliest comparative period presented in the financial statements or the beginning of the period of adoption (i.e., on the effective date). The Company adopted the new standard on its effective date.

The new standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize right of use assets or lease liabilities, and this includes not recognizing right of use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient not to separate lease and non-lease components for all of its leases in existence at December 31, 2018, which means all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of the Company’s lease components for balance sheet purposes. For the nine months ended September 30, 2019, the Company recognized additional lease liabilities of $261,047 with corresponding right of use assets of the same amount based on the present value of the remaining minimum rental payments for existing leases on its Condensed Consolidated Balance Sheets. See Note 7, “Leases,” above, for additional lease disclosures.

H/CELL ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test. The amount of the impairment charge to be recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value. The loss to be recognized cannot exceed the amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has elected to early adopt ASU 2017-04 as of January 1, 2018. The Company has applied the guidance related to ASU 2017-04 during its annual impairment test in the fourth quarter of 2018. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the entity initially adopts the amendments in this update. The Company elected to early adopt this standard in performing their 2018 impairment test.

In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new standard will become effective for the Company January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

17.	SUBSEQUENT EVENTS

On October 17, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with FirstFire Global Opportunities Fund LLC (the “Investor”), an unrelated third party, pursuant to which, the Company sold a $110,000 principal amount convertible note (the “Note”) to the Investor for gross proceeds of $100,000, with an original discount issuance of $10,000. The transaction closed on October 23, 2019 upon receipt of the funds from the Investor.

The Note will mature on October 17, 2020 and will bear interest at the rate of 8% per annum, which interest will be payable on the maturity date or any redemption date and may be paid, in certain conditions, through the issuance of common shares, at the discretion of the Company. The Company shall make a monthly principal payment to the Investor of $6,000 on the 17^th day of each month, starting November 17, 2019. The Company also has the right, at any time, to repay all or a part of the Note, on at least one prior business days’ notice, in an amount equal to 115% of the principal being repaid, plus any accrued but unpaid interest on the principal amount being repaid.

The Note will be convertible into the Company’s common stock at a conversion price of $0.50 per share (the “Fixed Conversion Price”) at the discretion of the holder. At no time will the Investor be entitled to convert any portion of Convertible Note to the extent that after such conversion, the Investor (together with its affiliates) would beneficially own more than 4.99% of the Company’s outstanding common stock as of such date. The Note contains standard anti-dilution protection.

The Note includes customary event of default provisions, and provides for a default interest rate of 15%. Upon the occurrence of an event of default, the Investor may require the Company to redeem all or any portion of the Note (including all accrued and unpaid interest), in cash, at a price equal to the product of (A) the amount to be redeemed multiplied by (B) 125%. In addition, upon an event of default, the conversion price would be the lower of (i) the Fixed Conversion Price or (ii) 75% of the lowest closing price of the Common Stock during the 10 trading days prior to the conversion date.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Business Overview

We were formed in August 2015 to expand upon the successful implementation of a hydrogen energy system used to completely power a residence or commercial property with clean energy so that it can run independent of the utility grid and also provide energy to the utility grid for monetary credits. This ~~unique~~ system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. Its production of electricity is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.

There are great benefits to hydrogen energy. The use of hydrogen as an energy source produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the only ~~emissions~~emission from hydrogen ~~are~~is chemically pure ~~water and oxygen.~~water. Hydrogen can be extracted from water using renewable energy from the sun and unlike batteries, hydrogen can be stored indefinitely. There is no drilling, fracking or mining required to produce hydrogen. We believe it is safe and the most abundant and cleanest energy source on the planet. In addition to offering this ~~unique~~ self-sustaining clean energy system using hydrogen and fuel cell technology, we offer a number of renewable energy services, such as audits of energy consumption, review of energy/tax credits available, feasibility studies, solar/battery system installation, zoning/permitting analysis, site design/preparation and restoration, system startup, testing, commissioning, maintenance and interconnection applications.

We have succeeded in developing and installing a hydrogen energy ~~system~~systems that isare combined with renewable solar energy to produce clean electricity. We call the hydrogen energy system the HC-1. The HC-1 system functions as a self-sustaining renewable energy system. It can be configured as an off grid solution for all your electricity needs or it can be connected to the grid to generate energy credits. It is a system comprised of solar, ~~modules, inverters,~~ batteries, a hydrogen generator, a fuel cell and a hydrogen storage tank.

When there is ~~solar power,~~sunlight, the solar ~~modules~~ produce ~~electricity~~renewable energy that charges a bank of ~~batteries through a battery inverter.~~batteries. After the batteries are fully charged, the excess electricity ~~powers~~is then combined with water through a hydrogen generator that ~~electrolyzes water and~~ extracts the hydrogen from the water in a gasified state, which is safely ~~stored in~~transferred to a tank and stored for later use. If the tank is full, excess electricity ~~can be~~is sent from the batteries ~~through the battery inverter~~ to the utility grid, which results in energy credits for the system ~~owner, if applicable.~~owner. The electricity for the end user is always provided by the charged batteries. If there is no solar power to charge the batteries, the system keeps the batteries fully charged by using the hydrogen gas stored in the tank, which processed through a fuel cell, creates the electricity to charge the batteries. As the system is able to produce its own hydrogen gas, which keeps the tank full, it provides a continuous supply of clean energy and sustainability that is independent from the grid. Each HC-1 system is custom designed to accommodate the electrical loads for an end user. The system is completely scalable.

If a customer wishes to connect the system to the electrical grid in order to generate renewable energy credits, we obtain interconnection agreements from the local electric utility company. If the customer obtains authorization for interconnection to the utility grid, once the HC-1 system is operational, the HC-1 system owner can eliminate their electric bill and, if in a permissible state, can begin generating energy credits. In certain states, an end user receives one energy credit for each 1,000 kilowatt hours (kWh) produced through renewal energy. The customer sells these credits to a broker, who in turn sells the credits to a utility company so that the utility company can demonstrate their compliance with the regulatory obligations to reduce greenhouse gas emissions. The price per credit can vary depending on supply and demand. Many other states that may not offer an energy credit program, do offer other cash incentives for renewable energy systems.

On January 31, 2017, we acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy division to focus on the high growth renewable energy market in Asia-Pacific. On February 1, 2018, we acquired PVBJ Inc. (“PVBJ”). Established in 2008, PVBJ is a regionally recognized company that specializes in HVAC and refrigeration for commercial and residential customers. The services offered include design, installation, repair, maintenance and emergency services for environmental systems. PVBJ has a highly trained technical team that is experienced in all aspects of environmental systems. PVBJ covers the U.S. Mid-Atlantic market. PVBJ is also establishing a clean energy division so that it can offer hydrogen energy systems to its existing customer base.

Current Operating Trends

Currently, a number of technicians are licensed to install our HC-1 systems in the Mid-Atlantic region of the U.S. and Australia. In addition to recently establishing a clean energy division, Pride is a highly regarded and established company that designs, installs and maintains a variety of technology products in the security systems market. Pride also provides annual maintenance programs which amount to approximately AUD $2 million per annum. Pride currently generates approximately half of its revenue from government contracts and the other half from the commercial sector. Pride is a certified and licensed security systems integrator for the Queensland Government and has various government contracts in place for installation, maintenance and project services.

PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. The subsidiary has a team of technicians that can install and service a variety of HVAC and refrigeration products. PVBJ is certified and licensed in multiple states and has developed an extensive customer base. PVBJ is now expanding into clean energy systems and employs technicians that are familiar with installing environmental systems requiring electrical, plumbing and gases, which is similar to the installation of an HC-1 system.

We intend to aggressively grow our business, both organically and through strategic acquisitions. Our goal is to acquire companies with the licenses and certifications to operate in various states and countries. This will allow us to expand the geographic areas in which we can install our systems. These acquired companies will also provide us with a consistent revenue stream, a customer base for marketing our systems and technicians that can be trained to install our products and services. Initially, we intend to focus on states or countries whose government supports a regulatory standard requiring its utility companies to increase their production of electricity from renewable energy sources. This overall approach is more cost effective than the protracted nature of opening an office, hiring staff and obtaining certifications to operate in a specific geographic area. As of the date of this quarterly report, we have no written agreements or understandings to acquire any companies and no assurances can be given that we will identify or successfully acquire any other companies.

Results of Operations

For the ~~three months ended~~Three Months Ended September 30, ~~2018~~2019 and ~~2017~~2018

Revenue and Cost of Revenue

For the three months ended September 30, 2019, we had $1,701,365 of revenue and $1,241,630 of cost of revenue. We had $1,839,491 of revenue, of which $8,499 was related party, and $1,447,688 for cost of revenue during the three months ended September 30, 2018, ~~respectively,~~ of which ~~$8,499 and~~ $9,019 ~~respectively,~~ was related party. ~~We had $1,338,571~~

	For the Three Months Ended
	September 30, 2019		September 30, 2018
Revenue by segment
Renewable systems integration	$	45,921	$	8,499
Non-renewable system integration		1,655,444		1,830,992
	$	1,701,365	$	1,839,491

General and Administrative Expenses

During the three months ended September 30, 2019, our general and administrative expenses were $577,182. $104,666 was related to the Renewable Systems Integration segment, including corporate expenses of ~~revenue~~$37,500 for gross payroll, $21,500 of management disbursements, $14,950 of accounting fees, $12,000 of legal fees, $12,000 of investment banking fees, $5,271 in amortization, $5,000 of investor relations, $4,460 of stock-based compensation, $4,365 of dues and ~~$907,673 for cost~~subscription fees, which pertained to transfer agent fees and OTC listing fees, $4,298 of ~~revenue~~liability insurance, $2,910 of payroll taxes and $3,862 of miscellaneous expenses, offset by a credit of $23,450 in share donations.

The Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended September 30, ~~2017, respectively,~~2019 of ~~which $45,666~~$472,516, including management and ~~$37,304, respectively, was related party. The revenue breakdown by segment is~~administrative salaries of $211,482 along with $133,754 of other various employee expenses, such as ~~follows:~~

For the Three Months Ended
September 30, 2018 September 30, 2017
Revenue by segment
Renewable systems integration $ 1,830,992 $ 45,666
Non-renewable system integration 8,499 1,292,905
$ 1,839,491 $ 1,338,571

~~General~~vacation/sick time, meals, training/safety, retirement benefits and ~~Administrative Expenses~~auto allowance. In addition, various business and health insurance of $56,175, $25,636 of facilities rent and maintenance, $22,127 of office, telecommunications and internet and information technology costs, $6,223 of legal and accounting fees, and $17,119 of miscellaneous fees.

During the three months ended September 30, 2018, our general and administrative expenses were $626,625. $123,459 was related to the Renewable Systems Integration segment, including corporate ~~expenses:~~expenses of $37,490 of gross payroll, $19,500 of management disbursements, $17,524 of stock-based compensation, $12,000 of legal fees, $9,435 of dues and subscription fees, which pertained to transfer agent fees and OTC listing fees, $7,500 of accounting fees, $4,301 of liability insurance, $4,000 of investor relations, $2,999 of travel, $2,868 of payroll taxes, and $5,842 of miscellaneous expenses.

The Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended September 30, 2018 of $503,166, including management and administrative salaries of $208,588 along with $109,750 of other various employee expenses, such as vacation and sick time, and auto allowance. In addition, various business and health insurance of $52,056, $37,837 of professional fees related to acquisition costs and other legal fees, $32,598 of office and internet and information technology costs, $21,308 of facilities rent, $5,753 of 401(k) contributions, $4,244 of training, $3,601 of bank and finance charges, $3,323 of safety/environmental, $2,345 of dues and subscriptions, $2,054 of utilities and $19,889 of miscellaneous fees.

~~During~~We incurred $71,956 of other expenses for the three months ended September 30, ~~2017,~~2019, including $64,065 of interest expense – related party, $11,801 of interest expense and $4,704 change in fair value earn-out offset by $8,614 gain on fixed asset disposal.

We incurred $32,506 of other expenses for the three months ended September 30, 2018, including $19,877 of interest expense – related party, $7,544 of interest expense and $4,290 change in fair value earn-out and $795 loss on fixed asset disposal.

As a result of the foregoing, we had net losses of $189,403 and $267,328 for the three months ended September 30, 2019 and 2018, respectively.

For the Nine Months Ended September 30, 2019 and 2018

Revenue and Cost of Revenue

For the nine months ended September 30,2019, we had $5,333,559 of revenue and $3,747,390 of cost of revenue. For the nine months ended September 30, 2018, we had $5,575,640 of revenue, of which $40,288 was related party, and $3,941,761 of cost of revenue, of which $40,636 was related party.

	For the Nine Months Ended
	September 30, 2019		September 30, 2018
Revenue by segment
Renewable systems integration	$	172,156	$	40,288
Non-renewable system integration		5,161,403		5,535,352
	$	5,333,559	$	5,575,640

General and Administrative Expenses

During the nine months ended September 30, 2019, our general and administrative expenses were ~~$483,344. $57,447~~$1,854,691. $420,358 was related to the Renewable Systems Integration segment, including corporate ~~expenses: $16,584~~expenses of ~~stock-based compensation, $16,118~~$112,500 of gross payroll, $83,251 of accounting fees ~~$12,189~~related to audit and consulting costs, $60,500 of management distributions, $46,000 of legal fees, ~~$4,102~~$20,148 of dues and subscription fees, which pertained to transfer agent, EDGAR fees and OTC Market annual listing fees, ~~$3,901~~$20,000 for investment banking services, $15,813 of ~~liability~~amortization of intangible assets, $15,096 of stock-based compensation, $11,840 of directors’ and officers’ insurance, ~~$2,456~~$8,648 of payroll taxes, $6,156 of travel meals and ~~$2,097~~transportation, $5,000 of investor relations and $15,406 of miscellaneous expenses.

The Non-renewable Systems Integration segment incurred general and administrative expenses during the ~~three~~nine months ended September 30, ~~2017~~2019 of ~~$425,897,~~$1,434,333, including management administrative and ~~administrative~~employee salaries of ~~$159,662~~$684,035 along with ~~$94,618~~$380,831 of other various employee expenses, such as ~~vacation and~~ vacation/sick time, ~~and management fees of $46,972. In addition, automobile expenses totaled $48,761, which included repairs, fuel~~meals, training/safety, retirement benefits and auto allowance. ~~Facilities lease for the Pride offices totaled $24,090. Other expenses included insurance~~In addition, $147,565 of ~~$11,977, depreciation~~various insurances including employee health, $80,309 of ~~$8,365, computer expenses~~facilities rent/maintenance and storage expense, $77,465 of ~~$7,805,~~ telecommunications, ~~of $6,861,~~ internet, utilities and office expense, $11,723 in legal/accounting fees, ~~of $5,063~~$8,259 in marketing fees, $7,539 in dues and ~~other~~subscriptions, $5,974 in tools, $3,824 in licenses/permits and $26,809 in miscellaneous ~~fees of $11,723.~~

~~As a result of the foregoing, we had net losses of $267,328 and $52,446 for the three months ended September 30, 2018 and 2017, respectively.~~

~~For the nine months ended September 30, 2018 and 2017~~

~~Revenue and Cost of Revenue~~

For the nine months ended September 30, 2018, we had $5,575,640 of revenue and $3,941,761 of cost of revenue, of which $40,288 and $40,636 respectively, was related party. For the nine months ended September 30, 2017, we had $5,136,074 of revenue and $3,519,747 of cost of revenue, of which $85,919 and $87,649 respectively, was related party. The revenue breakdown by segment is as follows:

For the Nine Months Ended
September 30, 2018 September 30, 2017
Revenue by segment
Renewable Systems integration $ 5,535,352 $ 85,919
Non-renewable system Integration 40,288 5,050,155
$ 5,575,640 $ 5,136,074

~~General and Administrative Expenses~~expenses.

During the nine months ended September 30, 2018, our general and administrative expenses were $1,908,640. $424,640 was related to the Renewable Systems Integration segment, including corporate ~~expenses:~~expenses of $112,490 of gross payroll, $65,460 of accounting fees related to audit and consulting costs, $58,500 of management distributions, $51,821 of stock-based compensation, $51,050 of legal fees, $24,307 of dues and subscription fees, which pertained to transfer agent, EDGAR fees and OTC Market annual listing fees, $13,761 of ~~directors~~directors’ and officers’ insurance, $12,517 of travel meals and transportation, $11,606 of amortization of intangible assets, $8,606 of payroll taxes, $4,000 of investor relations and $10,522 of miscellaneous expenses.

The Non-renewable Systems Integration segment incurred general and administrative expenses during the nine months ended September 30, 2018 of $1,484,000, including management administrative and employee` salaries of $721,717 along with $304,845 of other various employee expenses, such as vacation and sick time, and auto allowance of $42,415. In addition, $127,439 of various insurances including employee health, $77,775 of telecommunications, internet and office expense, $67,355 of facilities rent, $46,060 of legal fees associated with acquisition costs and various other legal expenses, $29,723 in tools, equipment purchases and facilities maintenance, $16,281 of 401(k) costs, $6,055 in safety/environmental, $5,915 in utilities, $3,461 in training, $5,725 of dues and subscriptions, $4,066 in income tax expense, $3,638 of bank charges, $3,344 in advertising and other miscellaneous fees of $18,186.

~~During~~We incurred $169,742 of other expenses for the nine months ended September 30, ~~2017, our general~~2019, including $158,220 of interest expense – related party, $23,892 of interest expense and administrative expenses were $1,517,415. $206,051 was related to the Renewable Systems Integration segment, including corporate expenses: $84,124 of accounting fees related to audit, consulting and Pride acquisition costs, $43,689 of legal fees, $35,041 of stock-based compensation, $20,628 of dues and subscription fees, which pertained to transfer agent, EDGAR fees and OTC Market annual listing fees, $8,761 of travel, directors and officers insurance liability of $6,502 and $7,306 of miscellaneous expenses.$13,647 change in fair value earn-out, offset by $26,017 gain on fixed asset disposal.

~~The Non-renewable Systems Integration segment~~We incurred ~~general and administrative~~$89,581 of other expenses ~~during~~for the nine months ended September 30, ~~2017~~2018, including $52,768 of $1,311,364 including management and administrative salaries of $473,968 along with $310,615 of other various employee expenses, such as vacation and sick time, and management fees of $137,871. In addition, automobile expenses totaled $139,326, which included repairs, fuel and auto allowance. Facilities lease for the Pride offices totaled $68,814. Consulting/dues and subscription fees were $12,817, which pertained to miscellaneous business subscriptions and renewals. Professional fees of $12,405 consisted of legal and accounting fees incurred for tax and human resources advice. Other expenses included insurance of $27,063, telecommunications of $21,381, computer expenses of $20,743, $7,803 of utilities and safety expenses, including an audit of $7,477. We also incurred bad debt expense of $24,288, depreciation of $22,924, interest expense – related party, $21,636 of ~~$6,905 $2,039 of travel~~interest expense, $11,028 change in fair value earn-out and ~~entertainment and other miscellaneous fees of $14,925.~~$4,149 loss on fixed asset disposal.

As a result of the foregoing, we had a net ~~loss~~losses of $438,264 and $364,342 for the nine months ended September 30, 2019 and 2018, ~~compared to net income of $98,912 for the nine months ended September 30, 2017.~~respectively.

Liquidity and Capital Resources

As of September 30, ~~2018,~~2019, we had negative working capital of ~~$417,338~~$264,588 comprised of ~~$1,230,621~~$1,019,524 of accounts receivables, ~~$331,236~~$242,389 of cash and cash equivalents, ~~$73,180~~$85,807 of current right of use assets, $19,763 of prepaid expenses and $3,709 of costs in excess of billings ~~and $23,282 of prepaid expenses,~~ offset by ~~$830,708~~$746,081 of accounts payables and accrued expenses, ~~$186,346~~$303,526 in ~~earn-out payable, $68,240~~line of credit, $257,659 of current ~~capital~~convertible notes payable – related party, net of discount, $85,807 of current operating lease liability, $73,842 of current finance leases payable, ~~$51,798~~$50,072 of sales and withholding tax payable, $44,301 of billings in excess of cost, ~~$45,154~~$33,134 of ~~sales and withholding~~income tax payable ~~$32,538~~and $41,358 of current notes ~~payable, and $26,197 of income tax~~ payable which made up current liabilities at September 30, ~~2018.~~2019. Other non-current assets included $1,373,621 in goodwill, $464,075 of property and equipment, $139,607 of right of use asset, $133,797 in deferred offering cost, $68,282 of customer list, $50,000 of a deferred tax asset, and $31,109 of security deposits. Other non-current liabilities included $268,269 in finance leases, $204,383 of earn out payable, $141,171 in operating lease liability, $155,442 in convertible notes payable – related party, net of discounts and $76,159 of equipment notes payable.

For the nine months ended September 30, 2019, we used $377,474 of cash in operating activities, which represented our net loss of $438,264, $233,558 of change in operating right of use asset, $149,072 of billings in excess of cost, $132,237 of accounts payable and accrued expenses, $25,458 of gain on sale of assets and $2,852 of prepaid expenses, offset by $256,864 of depreciation and amortization, $235,179 of change in operating lease liability, $41,908 of accounts and retainage receivable, $41,277 of costs in excess of billings, $15,092 of stock-based compensation and $13,647 in change in fair value contingent consideration.

For the nine months ended September 30, 2018, we used ~~$386,663~~$408,765 of cash in operating activities, which represented our net loss of $364,342. $311,906 of changes in accounts payable, ~~$135,498~~$99,498 of depreciation and amortization, $51,821 of stock-based compensation $30,246 of billings in excess of cost, ~~$26,786 of costs in excess of billings, $13,898 of security deposits,~~ $11,028 of fair value changes, ~~$9,121 of prepaid expenses~~ and $4,149 loss on fixed asset sales, offset by $456,672 of changes in accounts ~~receivables.~~receivables, $9,121 of prepaid expenses and $26,786 of costs in excess of billings.

For the nine months ended September 30, 2019, we generated $1,165 in investing activities relating to $124,779 of proceeds from the disposition of property and equipment, offset by the purchase of fixed assets of $123,241 and security deposits of $373.

For the nine months ended September 30, 2018, we ~~used $22,033~~generated $8,135 in investing activities relating to the purchase of fixed assets of $13,909 and security deposits of 13,898 offset by $30,408 of cash acquired in a business acquisition and $5,534 of proceeds from the disposition of property and equipment.

For the nine months ended September 30, 2019, we generated $267,555 in financing activities relating to $263,093 of proceeds from line of credit, $147,500 for the issuance of convertible debt and $26,746 in gross proceeds from equity financing, offset by $90,000 in legal fees associated with financing transactions, $44,113 in repayments on capital leases and $35,671 in repayments of notes payable.

For the nine months ended September 30, 2018, we ~~had $306,810~~generated $342,810 of cash provided by financing activities, which represented $395,000 proceeds from the issuance of convertible debt, $251,065 of proceeds from a line of credit and $1,000 from the exercise of stock options, offset by $225,903 of repayments on long term debt, $42,123 in repayments on capital leases and $36,229 of repayments of notes ~~payable and $36,000 in payments of related party interest.~~payable.

For the nine months ended September 30, 2017, we used $120,551 of cash in operating activities, which represented $251,132 of changes in accounts payable, our net income of $98,912. $82,431 of costs in excess of billings, $35,041 of stock-based compensation $23,374 of depreciation and amortization, $2,576 of billings in excess of cost $1,490 of prepaid expenses and $77 gain on fixed asset sales, offset by $108,014 of changes in accounts receivables.

For the nine months ended September 30, 2017, we used $20,620 in investing activities relating to the purchase of fixed assets of $32,577, offset by $11,957 of proceeds from the disposition of property and equipment.

~~For the nine months ended September 30, 2017, we received $1,000 from financing activities, which represented proceeds from the exercise of stock options.~~

In the future we expect to incur expenses related to compliance for being a public company and travel related to visiting potential customer sites. We expect that our general and administrative expenses will increase as we expand our business development, add infrastructure and incur additional costs related to being a public company, including incremental audit fees, investor relations programs and increased professional services.

Our future capital requirements will depend on a number of factors, including the progress of our sales and marketing of our services, the timing and outcome of potential acquisitions, the costs involved in operating as a public reporting company, the status of competitive services, the availability of financing and our success in developing markets for our services. When we enter into ~~contacts~~contracts with customers, they will be required to make payments in tranches, including a payment after a contract is executed but prior to commencement of the project. We believe our existing cash, together with revenue generated by ~~future projects under tranche payment plans,~~operations, will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months.

Other than a line of credit from Thermo Communications Funding, LLC (“Thermo”) and an ~~asset-based lending facility for PVBJ~~equity purchase agreement with GHS Investments LLC (“GHS”) discussed below, we presently do not have any available credit, bank financing or other external sources of liquidity. We ~~have~~did not ~~achieved~~achieve net income from operations ~~as of~~for the three or nine months ended September 30, 2019 or the year ended December 31, 2018 and our operations historically have not been a source of liquidity and we cannot be assured they will be in the near future. We may need to obtain additional capital in order to expand operations and fund our activities. Future financing may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds if required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may be required to delay, reduce the scope of or eliminate our marketing and business development services.

~~Note Payable~~Credit Facility

On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with ~~Thermo Communications Funding, LLC (“Thermo”).~~Thermo. The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, our Chief Executive Officer, personally guaranteed the repayment of the Credit Agreement under certain conditions.

Pursuant to the terms of the Credit Agreement, we are permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as defined in the Credit Agreement). Borrowings under the Credit Agreement may be used for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans.

As of September 30, 2019, we were in compliance with these covenants. The loan commitment was increased in August 2019 to $400,000.

The loan commitment shall expire on August 21, 2020. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. We paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will be paid on the first anniversary. We will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears.

We may prepay the Note at any time and terminate the Credit Agreement. In the event that we terminate the Credit Agreement, we will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying $350,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24.

The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in our financial condition that could have a material adverse effect on us.

As of September 30, 2019, we had outstanding borrowings of $303,526 under the Credit Agreement, the interest rate was 9.5%, andfunds totaling $96,474 were available for borrowing under the Credit Agreement.

2019 Convertible Debenture Financing

On February 8, 2019, we entered into a securities purchase agreement (the “2019 Purchase Agreement”) with two of our directors, pursuant to which we sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (the “2019 Debentures”), convertible into shares of our common stock at a conversion price of $0.50 per share.

The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and on the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock.

2018 Convertible Debenture Financing

On January 2, 2018, we entered into a securities purchase agreement (the ~~“Purchase~~“2018 Purchase Agreement”) with two of our directors, pursuant to which we sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“(the “2018 Debentures”), convertible into shares of our common stock at a conversion price of $0.75 per share.

The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the ~~“Maturity~~“2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and on the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock.

On February 8, 2019, we entered into amendments (the “Amendments”) with the holders of the 2018 Debentures. Pursuant to the Amendments, the conversion price of the 2018 Debentures was reduced from $0.75 to $0.50, and the interest rate on the 2018 Debentures was reduced from 12% to 10%.

Equity Financing Agreement

On July 9, 2019, we entered into an equity financing agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with GHS, pursuant to which GHS has agreed to purchase from us up to $3,000,000 in shares (the “Shares”) of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. Additionally, we issued 30,000 shares to GHS as a commitment fee.

Under the Purchase Agreement, we have the right, from time to time at our sole discretion and subject to certain conditions, to direct GHS to purchase shares of common stock on any business day (a “Put”), provided that at least ten trading days has passed since the most recent Put. The purchase price of shares of common stock pursuant to the Purchase Agreement will be 80% of the lowest trading price of the common stock during the 10 trading days prior to the Put (the “Pricing Period”). Such sales of common stock by us, if any, may occur from time to time, at our option, over the 24-month period commencing on July 31, 2019.

The number of Shares that we may direct GHS to purchase per Put is limited by the average daily trading volume of the common stock prior to the Put, as follows:

	i.	If between zero (0) to fifteen thousand (15,000) Shares are traded on average per day during the Pricing Period, the relevant Put shall be capped to fifteen thousand (15,000) Shares;
	ii.	If between fifteen thousand and one (15,001) Shares to thirty thousand (30,000) Shares are traded on average per day, the relevant Put shall be capped to thirty thousand (30,000) Shares;
	iii.	If between thirty thousand and one (30,001) Shares to sixty thousand (60,000) Shares are traded on average per day, the relevant Put shall be capped to sixty thousand (60,000) Shares;
	iv.	If between sixty thousand and one (60,001) Shares to one hundred and fifty thousand (150,000) Shares are traded on average per day, the relevant Put shall be capped to one hundred and fifty thousand (150,000) Shares; and
	v.	If the average daily traded volume for the Pricing Period is equal to or greater than one hundred fifty thousand and one (150,001) Shares, then the relevant Put shall be limited to an amount which equals two times (2x) the average daily volume for the Shares during the Pricing Period.

In all instances, we may not sell shares of our common stock to GHS under the Purchase Agreement if it would result in GHS beneficially owning more than 4.99% of our common stock. In addition, no Put can be made in an amount that exceeds $400,000.

Convertible Note Financing

On October 17, 2019, we entered into a securities purchase agreement (the “Purchase Agreement”) with FirstFire Global Opportunities Fund LLC (the “Investor”), an unrelated third party, pursuant to which, we sold a $110,000 principal amount convertible note (the “Note”) to the Investor for gross proceeds of $100,000, with an original discount issuance of $10,000 (the “Offering”). The transaction closed on October 23, 2019 upon receipt of the funds from the Investor.

The Note will mature on October 17, 2020 and will bear interest at the rate of 8% per annum, which interest will be payable on the maturity date or any redemption date and may be paid, in certain conditions, through the issuance of common shares, at our discretion. We shall make a monthly principal payment to the Investor of $6,000 on the 17^th day of each month, starting November 17, 2019. We also have the right, at any time, to repay all or a part of the Note, on at least one prior business days’ notice, in an amount equal to 115% of the principal being repaid, plus any accrued but unpaid interest on the principal amount being repaid.

The Note will be convertible into our common stock at a conversion price of $0.50 per share (the “Fixed Conversion Price”) at the discretion of the holder. At no time will the Investor be entitled to convert any portion of Convertible Note to the extent that after such conversion, the Investor (together with its affiliates) would beneficially own more than 4.99% of our outstanding common stock as of such date. The Note contains standard anti-dilution protection.

The Note includes customary event of default provisions, and provides for a default interest rate of 15%. Upon the occurrence of an event of default, the Investor may require us to redeem all or any portion of the Note (including all accrued and unpaid interest), in cash, at a price equal to the product of (A) the amount to be redeemed multiplied by (B) 125%. In addition, upon an event of default, the conversion price would be the lower of (i) the Fixed Conversion Price or (ii) 75% of the lowest closing price of our common stock during the 10 trading days prior to the conversion date.

Critical Accounting Policies

Please refer to Note 2 in the accompanying financial statements.

Recent Accounting Pronouncements

Please refer to Note 1715 in the accompanying financial statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the 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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, ~~2018,~~2019, as a result of the material weaknesses described below, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, 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. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

	a)	Due to our small size, we did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; and
	b)	We lacked sufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements.

We intend to create written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements in the ~~future.~~future when funds permit.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are currently not a party to any material legal proceedings or claims.

Item 1A. Risk Factors

Not required under Regulation S-K for “smaller reporting companies.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~During the three months ended September 30, 2019, we sold an aggregate of 78,000 shares of common stock to GHS Investments LLC pursuant to our equity financing agreement, in exchange for proceeds of $26,746.This transaction was exempt from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.01		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from H/Cell Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2018,~~2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

SIGNATURES

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.

	H/CELL ENERGY CORPORATION

Date: November ~~8, 2018~~12, 2019	By:	/s/ ANDREW HIDALGO
		Andrew Hidalgo
		Chief Executive Officer (Principal Executive Officer)

Date: November ~~8, 2018~~12, 2019	By:	/s/ MATTHEW HIDALGO
		Matthew Hidalgo
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

	September 30, 2018			December 31, 2017
	(Unaudited)			(Audited)
ASSETS
Current assets
Cash and cash equivalents	$	331,236		$	455,700
Accounts receivable (net retention)		1,230,621			808,050
Prepaid expenses		23,282			14,669
Costs and earnings in excess of billings		73,180			51,531
Total current assets		1,658,319			1,329,950

Property and equipment, net		362,933			102,573
Security deposits and other non-current assets		20,711			8,416
Deferred tax asset		44,257			44,257
Customer lists, net		88,766			-
Goodwill		1,373,621			-

Total assets	$	3,548,607		$	1,485,196

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	830,708		$	631,385
Management fees payable – related party		-			31,257
Earn-out payable		186,346			-
Billings in excess of costs and earnings		51,798			87,206
Sales and withholding tax payable		45,154			61,239
Current equipment notes payable		32,538			-
Current capital lease payable		68,240			-
Income tax payable		26,197			98,313
Total current liabilities		1,240,981			909,400

Noncurrent liabilities
Note payable		222,963			-
Capital leases		149,590			-
Equipment notes payable		118,606			-
Convertible note payable – related party, net of discount		14,268			-
Total noncurrent liabilities		505,427			-

Total liabilities		1,746,408			909,400

Commitments and contingencies

Stockholders’ equity
Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding		-			-
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,586,024 and 7,041,579 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		758			704
Additional paid-in capital		2,967,004			1,335,656
Accumulated deficit		(1,096,096	)		(731,754	)
Accumulated other comprehensive loss		(69,467	)		(28,810	)
Total stockholders’ equity		1,802,199		$	575,796

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	3,548,607		$	1,485,196

Balance at December 31, 2017	$	-
Earn-out liability from acquisition of PVBJ Inc.		175,318
Payments		-
Adjustments to fair value		11,028
Balance at September 30, 2018	$	186,346

	September 30, 2018		September 30, 2017

Convertible debt		533,333		-
Options to purchase common stock		980,000		1,050,000
Totals		1,513,333		1,050,000

	September 30, 2018		December 31, 2017
Furniture and fixtures (5 to 7 years)	$	12,803	$	6,857
Machinery and equipment (5 to 7 years)		35,565		35,919
Computer and software (3 to 5 years)		120,621		94,761
Auto and truck (5 to 7 years)		783,310		250,044
Leasehold improvements (life of lease)		38,961		40,608
		991,260		428,189
Less accumulated depreciation		628,327		325,616
	$	362,933	$	102,573

2018	$	26,569
2019		78,209
2020		75,578
2021		44,718
2022		7,512
Thereafter		4,382
Capital lease obligation		236,968
Less: amounts representing interest		19,138
Current maturities of capital lease obligations		68,240
Capital lease obligations, non-current	$	149,590

Year ending December 31:	Amount
2018 (remaining)	$	8,506
2019		40,395
2020		39,679
2021		25,657
2022		22,584
Thereafter		37,377
Notes payable obligation		174,198
Less amounts representing interest		(23,055	)
	$	151,144

Upfront consideration	$	1,177,779
Liabilities assumed		878,565
Total	$	2,056,343

Useful Life in	Amount		Years		Amortization Method
Customer List	$	102,422		5	Straight Line
Total	$	102,422

	Three Months Ended September 30, 2018			Three Months Ended September 30, 2017
Revenues	$	1,839,491		$	1,965,079
Net income (loss)		(267,328	)		57,472
Net income (loss) per share:
Basic		(0.04	)		0.01
Diluted		(0.04	)		0.01

	Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
Revenues	$	7,499,211		$	6,809,961
Net income (loss)		(352,860	)		277,215
Net income (loss) per share:
Basic		(0.05	)		0.04
Diluted		(0.05	)		0.04

	Nine months ended September 30, 2017
Net income	$	98,912
Weighted average common shares outstanding		6,601,873
Dilutive securities
Convertible debt		-
Options		924,890
Diluted weighted average common shares outstanding		7,526,763
Basic net income per share	$	0.02
Diluted net income per share	$	0.01