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 June 30, 2015
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to __________
COMMISSION
FILE NUMBER: 001-34591
CLEANTECH
SOLUTIONS INTERNATIONAL, INC.
(Exact
name of Registrant as specified in its charter)
NEVADA |
|
90-0648920 |
(State or other jurisdiction
of incorporation of organization) |
|
(I.R.S. Employer
Identification No.) |
No.
9 Yanyu Middle Road
Qianzhou
Village, Huishan District, Wuxi City
Jiangsu
Province, China 214181
(Address
of principal executive offices)
(86) 51083397559
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
Non-accelerated
filer
|
☐ |
Smaller
reporting company |
☒ |
(Do not check if smaller reporting company) |
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐
No ☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 3,943,986
shares of common stock are issued and outstanding as of August 14, 2015.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM
10-Q
June
30, 2015
TABLE
OF CONTENTS
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Page No. |
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PART I. - FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014 |
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3 |
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Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 |
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4 |
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Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements. |
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6 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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22 |
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Item 3 |
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Quantitative and Qualitative Disclosures About Market Risk. |
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35 |
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Item 4 |
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Controls and Procedures. |
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35 |
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PART II - OTHER INFORMATION |
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Item 6. |
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Exhibits. |
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36 |
FORWARD
LOOKING STATEMENTS
This
report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words
such as “expects,” “anticipates,” “intends,” “plans,” “believes,”
“seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking
statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this
report. Additionally, statements concerning future matters are forward-looking statements.
Although
forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based
on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties
and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those
specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports
that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as
of the date of this report.
We
file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials
we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional
information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We
undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks
and factors that may affect our business, financial condition, results of operations and prospects.
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
June 30, 2015 | | |
December 31, 2014 | |
ASSETS | |
(Unaudited) | | |
| |
| |
| | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash and cash equivalents | |
$ | 16,806,962 | | |
$ | 7,835,791 | |
Restricted cash | |
| 164,236 | | |
| 488,719 | |
Notes receivable | |
| 85,403 | | |
| 114,034 | |
Accounts receivable, net of allowance for doubtful accounts | |
| 18,488,553 | | |
| 20,316,037 | |
Inventories, net of reserve for obsolete inventories | |
| 4,563,662 | | |
| 4,241,022 | |
Advances to suppliers | |
| 567,348 | | |
| 565,581 | |
Deferred tax assets | |
| 378,811 | | |
| 375,744 | |
Prepaid expenses and other | |
| 143,981 | | |
| 153,260 | |
| |
| | | |
| | |
Total Current Assets | |
| 41,198,956 | | |
| 34,090,188 | |
| |
| | | |
| | |
PROPERTY AND EQUIPMENT, net | |
| 66,041,728 | | |
| 69,628,597 | |
| |
| | | |
| | |
OTHER ASSETS: | |
| | | |
| | |
Equipment held for sale | |
| 425,988 | | |
| 422,540 | |
Land use rights, net | |
| 3,653,853 | | |
| 3,672,420 | |
| |
| | | |
| | |
Total Assets | |
$ | 111,320,525 | | |
$ | 107,813,745 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Short-term bank loans | |
$ | 3,284,719 | | |
$ | 3,095,219 | |
Bank acceptance notes payable | |
| 164,236 | | |
| 488,719 | |
Accounts payable | |
| 5,255,158 | | |
| 4,322,275 | |
Accrued expenses | |
| 496,008 | | |
| 1,059,579 | |
Advances from customers | |
| 959,530 | | |
| 495,461 | |
VAT and service taxes payable | |
| 237,376 | | |
| 500,569 | |
Income taxes payable | |
| 56,990 | | |
| 531,120 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 10,454,017 | | |
| 10,492,942 | |
| |
| | | |
| | |
Total Liabilities | |
| 10,454,017 | | |
| 10,492,942 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY: | |
| | | |
| | |
Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 share issued and outstanding at June 30, 2015 and December 31, 2014) | |
| - | | |
| - | |
Common stock ($0.001 par value; 50,000,000 shares authorized; 3,939,986 and 3,859,986 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively) | |
| 3,940 | | |
| 3,860 | |
Additional paid-in capital | |
| 33,792,177 | | |
| 33,517,857 | |
Retained earnings | |
| 52,258,013 | | |
| 50,039,267 | |
Statutory reserve | |
| 3,544,457 | | |
| 3,294,199 | |
Accumulated other comprehensive income - foreign currency translation adjustment | |
| 11,267,921 | | |
| 10,465,620 | |
| |
| | | |
| | |
Total Stockholders' Equity | |
| 100,866,508 | | |
| 97,320,803 | |
| |
| | | |
| | |
Total Liabilities and Stockholders' Equity | |
$ | 111,320,525 | | |
$ | 107,813,745 | |
See notes to unaudited condensed consolidated
financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30 | | |
June 30 | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
REVENUES | |
$ | 15,190,600 | | |
$ | 17,528,018 | | |
$ | 30,837,065 | | |
$ | 35,163,289 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF REVENUES | |
| 12,497,010 | | |
| 13,443,581 | | |
| 25,071,443 | | |
| 26,805,566 | |
| |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT | |
| 2,693,590 | | |
| 4,084,437 | | |
| 5,765,622 | | |
| 8,357,723 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Depreciation | |
| 167,396 | | |
| 118,410 | | |
| 512,092 | | |
| 228,269 | |
Selling, general and administrative | |
| 794,441 | | |
| 904,467 | | |
| 1,668,986 | | |
| 1,765,066 | |
Research and development | |
| 28,562 | | |
| 31,248 | | |
| 57,260 | | |
| 58,119 | |
| |
| | | |
| | | |
| | | |
| | |
Total Operating Expenses | |
| 990,399 | | |
| 1,054,125 | | |
| 2,238,338 | | |
| 2,051,454 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME FROM OPERATIONS | |
| 1,703,191 | | |
| 3,030,312 | | |
| 3,527,284 | | |
| 6,306,269 | |
| |
| | | |
| | | |
| | | |
| | |
OTHER INCOME (EXPENSE): | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 12,684 | | |
| 3,905 | | |
| 18,517 | | |
| 9,145 | |
Interest expense | |
| (56,628 | ) | |
| (60,099 | ) | |
| (113,971 | ) | |
| (117,826 | ) |
Grant income | |
| - | | |
| 199 | | |
| - | | |
| 32,086 | |
Foreign currency transaction gain/(loss) | |
| - | | |
| 1,270 | | |
| (11 | ) | |
| 1,270 | |
Other income | |
| - | | |
| 33,866 | | |
| - | | |
| 33,866 | |
| |
| | | |
| | | |
| | | |
| | |
Total Other Income (Expense), net | |
| (43,944 | ) | |
| (20,859 | ) | |
| (95,465 | ) | |
| (41,459 | ) |
| |
| | | |
| | | |
| | | |
| | |
INCOME BEFORE INCOME TAXES | |
| 1,659,247 | | |
| 3,009,453 | | |
| 3,431,819 | | |
| 6,264,810 | |
| |
| | | |
| | | |
| | | |
| | |
INCOME TAXES | |
| 432,677 | | |
| 791,549 | | |
| 962,815 | | |
| 1,650,548 | |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME | |
$ | 1,226,570 | | |
$ | 2,217,904 | | |
$ | 2,469,004 | | |
$ | 4,614,262 | |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE INCOME: | |
| | | |
| | | |
| | | |
| | |
NET INCOME | |
$ | 1,226,570 | | |
$ | 2,217,904 | | |
$ | 2,469,004 | | |
$ | 4,614,262 | |
| |
| | | |
| | | |
| | | |
| | |
OTHER COMPREHENSIVE INCOME (LOSS): | |
| | | |
| | | |
| | | |
| | |
Unrealized foreign currency translation gain (loss) | |
| 329,321 | | |
| 106,313 | | |
| 802,301 | | |
| (675,475 | ) |
| |
| | | |
| | | |
| | | |
| | |
COMPREHENSIVE INCOME | |
$ | 1,555,891 | | |
$ | 2,324,217 | | |
$ | 3,271,305 | | |
$ | 3,938,787 | |
| |
| | | |
| | | |
| | | |
| | |
NET INCOME PER COMMON SHARE: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.31 | | |
$ | 0.61 | | |
$ | 0.63 | | |
$ | 1.29 | |
Diluted | |
$ | 0.31 | | |
$ | 0.61 | | |
$ | 0.63 | | |
$ | 1.29 | |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 3,939,986 | | |
| 3,632,222 | | |
| 3,937,333 | | |
| 3,568,219 | |
Diluted | |
| 3,939,986 | | |
| 3,632,222 | | |
| 3,937,333 | | |
| 3,568,219 | |
See notes to unaudited condensed consolidated
financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
| |
For the Six Months Ended | |
| |
June 30 | |
| |
2015 | | |
2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net income | |
$ | 2,469,004 | | |
$ | 4,614,262 | |
Adjustments to reconcile net income from operations to net cash provided by operating activities: | |
| | | |
| | |
Depreciation | |
| 4,144,514 | | |
| 4,084,790 | |
Amortization of land use rights | |
| 48,352 | | |
| 48,141 | |
Stock-based compensation | |
| 274,400 | | |
| 181,108 | |
Decrease in allowance for doubtful accounts | |
| (6,216 | ) | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Notes receivable | |
| 29,446 | | |
| 599,395 | |
Accounts receivable | |
| 1,991,705 | | |
| 1,464,659 | |
Inventories | |
| (286,891 | ) | |
| (3,224,025 | ) |
Prepaid value-added taxes on purchases | |
| - | | |
| 374,452 | |
Prepaid and other current assets | |
| 10,366 | | |
| (5,553 | ) |
Advances to suppliers | |
| 2,838 | | |
| 14,859 | |
Accounts payable | |
| 894,079 | | |
| (283,743 | ) |
Accrued expenses | |
| (568,800 | ) | |
| (381,669 | ) |
VAT and service taxes payable | |
| (266,229 | ) | |
| 38,824 | |
Income taxes payable | |
| (476,587 | ) | |
| (1,154,225 | ) |
Advances from customers | |
| 458,219 | | |
| (1,060,826 | ) |
| |
| | | |
| | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 8,718,200 | | |
| 5,310,449 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of property and equipment | |
| (5,616 | ) | |
| (6,280,015 | ) |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (5,616 | ) | |
| (6,280,015 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from bank loans | |
| 2,944,641 | | |
| 2,280,242 | |
Repayments of bank loans | |
| (2,781,050 | ) | |
| (2,280,242 | ) |
Decrease in restricted cash | |
| 327,182 | | |
| 325,749 | |
Decrease in bank acceptance notes payable | |
| (327,182 | ) | |
| (325,749 | ) |
Net proceeds from sale of common stock | |
| - | | |
| 1,623,691 | |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 163,591 | | |
| 1,623,691 | |
| |
| | | |
| | |
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS | |
| 94,996 | | |
| (2,343 | ) |
| |
| | | |
| | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | |
| 8,971,171 | | |
| 651,782 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS - beginning of period | |
| 7,835,791 | | |
| 1,114,873 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS - end of period | |
$ | 16,806,962 | | |
$ | 1,766,655 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid for: | |
| | | |
| | |
Interest | |
$ | 113,971 | | |
$ | 117,826 | |
Income taxes | |
$ | 1,439,402 | | |
$ | 2,804,773 | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Property and equipment acquired on credit as payable | |
$ | - | | |
$ | 390,060 | |
Common stock issued for future service | |
$ | - | | |
$ | 181,107 | |
See notes to unaudited condensed consolidated
financial statements
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cleantech
Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex,
Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the
Company’s corporate name was changed to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted
into a Nevada corporation.
Through
its affiliated companies and subsidiaries, the Company manufactures and sells forged products and fabricated products to a range
of clean technology customers including high precision forged rolled rings and related components for the wind power industry
and other industries and manufactures and sells textile dyeing and finishing machines. The Company is the sole owner of Fulland
Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland owns 100%
of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and Wuxi Fulland Wind
Energy Equipment Co., Ltd. (“Fulland Wind Energy”), which are wholly foreign-owned enterprises (“WFOE”)
organized under the laws of the People’s Republic of China (“PRC” or “China”). Green Power is a
party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Heavy Industries,
Co., Ltd. ("Heavy Industries"), formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd., and Wuxi Huayang
Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of,
and based in, the PRC. Heavy Industries and Dyeing are sometimes collectively referred to as the “Huayang Companies.”
Fulland
was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance
with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official
notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain
SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition
matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application
to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish
Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Heavy
Industries was formed on May 21, 2004. During the period from April 2007 until 2009, Heavy Industries produced large-scaled forged
rolled rings that are up to three meters in diameter for the wind-power and other industries. Since 2009, the forged rolled rings
were produced primarily by Fulland Wind Energy along with Heavy Industries. Beginning in February 2015, Heavy Industries began
to produce petroleum and chemical equipment, and produces and sells a variety heat exchangers, separators, tanks, towers, cryogenic
equipment, and other products. The Company refers to this new segment of its business as the petroleum and chemical equipment
segment.
Fulland
Wind Energy was formed on August 27, 2008. In 2009, the Company began to produce and sell forged products through Fulland Wind
Energy. Through Fulland Wind Energy, the Company manufactures and machines all forged products, including wind products such as
shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power
and other industries, including large-scale equipment used in the manufacturing process for the various industries. The Company
refers to this segment of its business as the forged rolled rings and related components segment.
Dyeing,
which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for
the textile industry. The Company refers to this segment as the dyeing and finishing equipment segment.
Basis
of presentation; management’s responsibility for preparation of condensed financial statements
The
Company’s unaudited condensed consolidated financial statements include the financial statements of its wholly-owned subsidiaries,
Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of Huayang Companies, Dyeing and Heavy Industries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2015. The unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2014 and footnotes
thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2015. The condensed consolidated
balance sheet as of December 31, 2014 contained herein has been derived from the audited consolidated financial statements as
of December 31, 2014, but do not include all disclosures required by the U.S. GAAP.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis
of presentation; management’s responsibility for preparation of condensed financial statements (continued)
Pursuant
to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities
(“VIE”), and the Company is the primary beneficiary. The Company’s relationships with the Huayang Companies
and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned
enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC
laws, each of Green Power, Dyeing and Heavy Industries is an independent legal entity and none of them is exposed to liabilities
incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements.
Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance
with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing
and Heavy Industries:
Consulting
Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies,
Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice
and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing
machines, electrical equipment and related components (the “ Services ”). Under this agreement, Green Power owns the
intellectual property rights developed or discovered through research and development, in the course of providing the Services,
or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi
(“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.
Operating
Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang
Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management
and employment issues. The Huayang Companies’ shareholders must designate the candidates recommended by Green Power as their
representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives
of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements
or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in
return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies
agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its
assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor
of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement,
as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation
prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.
Equity
Pledge Agreement. Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power,
the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee
the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang
Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee,
will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders
also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney
to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the
equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish
the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity
interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years
after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.
Option
Agreement. Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang
Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the
extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions
to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated
person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended
on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the
parties.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis
of presentation; management’s responsibility for preparation of condensed financial statements (continued)
Pursuant
to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang
Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies’ sales are included
in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s
net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly,
did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the
contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s
and the Huayang Companies’ financial statements.
Use
of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results
could materially differ from these estimates. Significant estimates in the six months ended June 30, 2015 and 2014 include the
allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible
assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes
due, and the value of stock-based compensation.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity
of three months or less and money market accounts to be cash equivalents. The Company maintains with various financial institutions
mainly in the PRC and the U.S. As of June 30, 2015 and December 31, 2014, cash balances in banks in the PRC of $16,804,908 and
$7,792,993, respectively, are uninsured.
Fair
value of financial instruments and other assets
The
Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
At
June 30, 2015 and December 31, 2014, equipment held for sale was measured at fair value on a nonrecurring basis as shown in the
following table.
| |
Quoted Prices in Active Markets for Identical Assets
(Level 1) | | |
Significant Other Observable Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | | |
Balance at June 30,
2015 | | |
Impairment
Loss | |
Equipment held for sale | |
$ | - | | |
$ | - | | |
$ | 425,988 | | |
$ | 425,988 | | |
$ | - | |
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments
and other assets (continued)
| |
Quoted Prices in Active Markets for Identical Assets
(Level 1) | | |
Significant Other Observable Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | | |
Balance at December 31, 2014 | | |
Impairment Loss | |
Equipment held for sale | |
$ | - | | |
$ | - | | |
$ | 422,540 | | |
$ | 422,540 | | |
$ | 3,799,947 | |
The
Company conducted an impairment assessment on the equipment held for sale based on the guidelines established in ASC Topic 360
to determine the estimated fair market value of the equipment as of December 31, 2014. Upon completion of its 2014 impairment
analysis, the Company determined that the carrying value exceeded the fair market value on this equipment. Accordingly, the Company
recorded an impairment loss of $3,799,947 at December 31, 2014. The difference in the value of equipment held for sale at June
30, 2015 from December 31, 2014 reflects changes in the currency exchange rate.
The
carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable,
accounts receivable, inventories, advances to suppliers, deferred tax assets, prepaid expenses and other, short-term bank loans,
bank acceptance notes payable, accounts payable, accrued expenses, advances from customers, VAT and service taxes payable and
income taxes payable approximate their fair market value based on the short-term maturity of these instruments.
ASC
Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
Concentrations
of credit risk
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s
economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically
associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these
deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations
of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
At
June 30, 2015 and December 31, 2014, the Company’s cash balances by geographic area were as follows:
Country: | |
June 30, 2015 | | |
December 31, 2014 | |
United States | |
$ | 2,054 | | |
| 0.01 | % | |
$ | 42,798 | | |
| 0.5 | % |
China | |
| 16,804,908 | | |
| 99.99 | % | |
| 7,792,993 | | |
| 99.5 | % |
Total cash and cash equivalents | |
$ | 16,806,962 | | |
| 100.0 | % | |
$ | 7,835,791 | | |
| 100.0 | % |
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Restricted
cash
Restricted
cash consists of cash deposits held by a bank to secure bank acceptance notes payable.
Notes
receivable
Notes
receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment
of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced
no losses on notes receivable. The Company’s notes receivable totaled $85,403 and $114,034 at June 30, 2015 and December
31, 2014, respectively.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At June 30, 2015
and December 31, 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $1,325,872 and $1,321,328, respectively.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower
of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories
may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand,
the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on
estimates. The Company recorded an inventory reserve of $183,129 and $181,646 at June 30, 2015 and December 31, 2014, respectively.
Advance
to suppliers
Advance
to suppliers represents the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended
to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $567,348 and $565,581 as of
June 30, 2015 and December 31, 2014, respectively.
Property
and equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets
are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in the statements of income and comprehensive income in the year of disposition. The Company examines the possibility
of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may
not be recoverable.
Included
in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation
and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance
these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their intended use.
Equipment
held for sale
At
June 30, 2015 and December 31, 2014, the Company reflected electro-slag re-melted (“ESR”) equipment that was used
in 2010 and 2011 to produce forged products for the high performance components market as equipment held for sale on the accompanying
condensed consolidated balance sheets. The Company has not found and does not expect to find any potential buyer or lessee in
the next twelve months.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company
did not record any impairment charge for the three and six months ended June 30, 2015 and 2014.
Advances
from customers
Advances
from customers at June 30, 2015 and December 31, 2014 amounted to $959,530 and $495,461, respectively, and consist of prepayments
from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers
take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue
recognition policy.
Revenue
recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured.
The
Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components, petroleum
and chemical equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year
warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized
when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days
of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and
generally is recognized over the contract period. For the three months ended June 30, 2015 and 2014, amounts allocated to installation
and warranty revenues were $20,120 and $32,531, respectively. For the six months ended June 30, 2015 and 2014, amounts allocated
to installation and warranty revenues were $42,886 and $65,320, respectively. Based on historical experience, warranty service
calls and any related labor costs have been minimal.
All
other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer
acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery
based on the trade terms.
Income
taxes
The
Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts
for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to
reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred
taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The
Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in the Company’s financial statements.
Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of
the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income
taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given period. As of June 30, 2015 and December 31, 2014, the Company had
no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director
services received in exchange for an award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair
value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation
is recalculated, based on the then current fair value, at each subsequent reporting date.
Shipping
costs
Shipping
costs are included in selling expenses and totaled $377,844 and $297,835 for the three months ended June 30, 2015 and 2014, respectively.
Shipping costs totaled $630,496 and $615,559 for the six months ended June 30, 2015 and 2014, respectively.
Employee
benefits
The
Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s
health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these
payments are charged to the same accounts as the related salary costs in the same period as the related salary costs incurred.
Employee benefit costs totaled $54,926 and $59,146 for the three months ended June 30, 2015 and 2014, respectively. Employee benefit
costs totaled $123,378 and $118,987 for the six months ended June 30, 2015 and 2014, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling, general and administrative expenses on the accompanying unaudited condensed
consolidated statements of income and comprehensive income and totaled $19,103 and $4,850 for the three months ended June 30,
2015 and 2014, respectively. Advertising expenses totaled $19,103 and $5,714 for the six months ended June 30, 2015 and 2014,
respectively.
Research
and development
Research
and development costs are expensed as incurred. The costs primarily consist of raw materials and salaries incurred for the development
and improvement of the Company’s new dyeing machinery. Research and development costs totaled $28,562 and $31,248 for the
three months ended June 30, 2015 and 2014, respectively. Research and development costs totaled $57,260 and $58,119 for the
six months ended June 30, 2015 and 2014, respectively.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the
functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries
and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange
rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity
is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements
of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments
resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining
comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the six months ended
June 30, 2015 and 2014 was $94,996 and $(2,343), respectively. Transactions denominated in foreign currencies are translated into
the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign
currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign
currency translation (continued)
All
of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates.
Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction
in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results
of operations of the Company.
Asset
and liability accounts at June 30, 2015 and December 31, 2014 were translated at 6.0888 RMB to $1.00 and at 6.1385 RMB to $1.00,
respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate.
The average translation rates applied to the statements of income for the six months ended June 30, 2015 and 2014 were 6.1128
RMB and 6.1397 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate.
Income
per share of common stock
ASC
Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”)
with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
Basic
net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period. The Company did not have any potentially dilutive common stock outstanding during the three and six months ended June
30, 2015 and 2014.
The
following table presents a reconciliation of basic and diluted net income per share:
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net income available to common stockholders for basic and diluted net income per share of common stock | |
$ | 1,226,570 | | |
$ | 2,217,904 | | |
$ | 2,469,004 | | |
$ | 4,614,262 | |
Weighted average common stock outstanding - basic and diluted | |
| 3,939,986 | | |
| 3,632,222 | | |
| 3,937,333 | | |
| 3,568,219 | |
Net income per common share - basic and diluted | |
$ | 0.31 | | |
$ | 0.61 | | |
$ | 0.63 | | |
$ | 1.29 | |
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The
Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
Comprehensive
income
Comprehensive
income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three
and six months ended June 30, 2015 and 2014 included net income and unrealized gains (losses) from foreign currency translation
adjustments.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements
In
April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”)
2015-03 Interest – Imputation of Interest (Subtopic 838-30): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). This ASU will simplify the presentation of debt issuance costs. It will require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The amendments in ASU 2015-03 are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s
consolidated financial statements.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification
of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for
a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the Company
beginning January 1, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact
on the Company’s consolidated financial statements.
In
January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items, or ASU 2015-01. ASU 2015-01
eliminates from GAAP the concept of extraordinary items. However, the presentation and disclosure guidance for items that are
unusual in nature of occur infrequently will be retained and will be expanded to include items that are both unusual in nature
and infrequently occurring. The amendments in ASU 2015-01 are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may
apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted.
The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations,
cash flows or disclosures.
Reclassification
Certain
reclassifications have been made in prior year same period’s consolidated financial statements to conform to the current
period’s financial presentation.
NOTE
2 – ACCOUNTS RECEIVABLE
At
June 30, 2015 and December 31, 2014, accounts receivable consisted of the following:
| |
June 30,
2015 | | |
December 31,
2014 | |
Accounts receivable | |
$ | 19,814,425 | | |
$ | 21,637,365 | |
Less: allowance for doubtful accounts | |
| (1,325,872 | ) | |
| (1,321,328 | ) |
| |
$ | 18,488,553 | | |
$ | 20,316,037 | |
The
Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to
the collectability of individual balances.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
3 – INVENTORIES
At
June 30, 2015 and December 31, 2014, inventories consisted of the following:
| |
June 30,
2015 | | |
December 31,
2014 | |
Raw materials | |
$ | 1,475,878 | | |
$ | 835,589 | |
Work-in-process | |
| 1,456,898 | | |
| 1,454,999 | |
Finished goods | |
| 1,814,015 | | |
| 2,132,080 | |
| |
| 4,746,791 | | |
| 4,422,668 | |
Less: reserve for obsolete inventories | |
| (183,129 | ) | |
| (181,646 | ) |
| |
$ | 4,563,662 | | |
$ | 4,241,022 | |
For
the three and six months ended June 30, 2015 and 2014, the Company did not make any change for reserve for obsolete inventories.
NOTE
4 – PROPERTY AND EQUIPMENT
At
June 30, 2015 and December 31, 2014, property and equipment consisted of the following:
| |
Useful life | |
June 30,
2015 | | |
December 31,
2014 | |
Office equipment and furniture | |
5 years | |
$ | 172,886 | | |
$ | 166,734 | |
Manufacturing equipment | |
5 -10 years | |
| 77,498,325 | | |
| 76,870,025 | |
Vehicles | |
5 years | |
| 207,393 | | |
| 205,714 | |
Building and building improvements | |
5 - 20 years | |
| 26,296,532 | | |
| 26,083,624 | |
| |
| |
| 104,175,136 | | |
| 103,326,097 | |
Less: accumulated depreciation | |
| |
| (38,133,408 | ) | |
| (33,697,500 | ) |
| |
| |
$ | 66,041,728 | | |
$ | 69,628,597 | |
For
the three months ended June 30, 2015 and 2014, depreciation expense amounted to $2,070,007 and $2,119,516, respectively, of which
$1,902,611 and $1,833,119, respectively, was included in cost of revenues, $0 and $167,987, respectively, which was related to
the ESR equipment held for operating lease, was included in other income, and the remainder was included in operating expenses.
For
the six months ended June 30, 2015 and 2014, depreciation expense amounted to $4,144,514 and $4,084,790, respectively, of which
$3,632,422 and $3,688,534, respectively, was included in cost of revenues, $0 and $167,987 which was related to the ESR equipment
held for operating lease, respectively, was included in other income, and the remainder was included in operating expenses.
Depreciation
is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing
equipment or any construction in progress, construction in progress balances will be classified to their respective property and
equipment category.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
5 – LAND USE RIGHTS
There
is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified
terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The
Company amortizes the land use rights over the term of the respective land use right. For the three months ended June 30, 2015
and 2014, amortization of land use rights amounted to $24,266 and $23,976, respectively. For the six months ended June 30, 2015
and 2014, amortization of land use rights amounted to $48,352 and $48,141, respectively. At June 30, 2015 and December 31, 2014,
land use rights consisted of the following:
| |
Useful life | |
June 30,
2015 | | |
December 31,
2014 | |
Land use rights | |
45 - 50 years | |
$ | 4,434,502 | | |
$ | 4,398,598 | |
Less: accumulated amortization | |
| |
| (780,649 | ) | |
| (726,178 | ) |
| |
| |
$ | 3,653,853 | | |
$ | 3,672,420 | |
Amortization
of land use rights attributable to future periods is as follows:
Twelve-month periods ending June 30: | |
Amount | |
2016 | |
$ | 97,086 | |
2017 | |
| 97,086 | |
2018 | |
| 97,086 | |
2019 | |
| 97,086 | |
2020 | |
| 97,086 | |
Thereafter | |
| 3,168,423 | |
| |
$ | 3,653,853 | |
NOTE
6 – EQUIPMENT HELD FOR SALE
During
the last quarter of 2013, the Company decided to lease the ESR equipment that was used in 2010 and 2011 to produce forged products
for the high performance components market to a third party and negotiations took place last quarter of 2013 through March 2014.
In March 2014, the Company entered into an operating lease agreement with an eight-year term commencing April 1, 2014, with a
third party, whereby the lessee leases the ESR equipment from the Company for quarterly lease payments of 1,450,000 RMB, including
value-added tax (approximately $236,000 per quarter). Accordingly, at December 31, 2013, the ESR equipment was reflected as equipment
held for operating lease. The lessee stopped using the equipment and stopped paying rent in early 2015. The Company has not found
and does not expect to find any potential buyer or other lessees in the next twelve months. Therefore, the Company reclassified
the equipment held for operating lease to equipment held for sale on the accompanying consolidated balance sheets at June 30,
2015 and December 31, 2014.
Equipment
held for operating lease was depreciated over its estimated useful life starting from the operating lease commencement date of
April 1, 2014 through December 31, 2014. Rental payments were recorded as rental income over the lease term as earned. The related
depreciation on the equipment held for operating lease was recognized as a reduction of rental income on a straight-line basis.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
7 – SHORT-TERM BANK LOANS
Short-term
bank loans represent amounts due to various banks that are due within one year. These loans can be renewed with these banks upon
maturity. At June 30, 2015 and December 31, 2014, short-term bank loans consisted of the following:
| |
June 30, 2015 | | |
December 31,
2014 | |
Loan from Agricultural and Commercial Bank, due on March 20, 2015 with annual interest rate of 7.20% at December 31, 2014, secured by certain assets of the Company and repaid in March 2015. | |
$ | - | | |
$ | 488,719 | |
| |
| | | |
| | |
Loan from Agricultural and Commercial Bank, due on June 16, 2016 with annual interest rate of 7.038% at June 30, 2015, secured by certain assets of the Company. | |
| 739,062 | | |
| - | |
| |
| | | |
| | |
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 1, 2015 with annual interest rate of 9.36% at June 30, 2015 and December 31, 2014, secured by certain assets of the Company and repaid on due date. | |
| 821,180 | | |
| 814,531 | |
| |
| | | |
| | |
Loan from Bank of Communications, due on April 16, 2015 with annual interest rate of 6.72% at December 31, 2014 and repaid in March 2015. | |
| - | | |
| 325,812 | |
| |
| | | |
| | |
Loan from Bank of Communications, due on September 5, 2015 with annual interest rate of 6.42% at June 30, 2015. | |
| 821,180 | | |
| - | |
| |
| | | |
| | |
Loan from Bank of Communications, due on April 23, 2015 with annual interest rate of 6.72% at December 31, 2014 and repaid in March 2015. | |
| - | | |
| 488,719 | |
| |
| | | |
| | |
Loan from Bank of China, due on February 16, 2015 with annual interest rate of 6.27% at December 31, 2014, secured by certain assets of the Company and repaid in January 2015. | |
| - | | |
| 488,719 | |
| |
| | | |
| | |
Loan from Bank of China, due on January 12, 2016 with annual interest rate of 7.20% at June 30, 2015, secured by certain assets of the Company. | |
| 410,590 | | |
| - | |
| |
| | | |
| | |
Loan from Bank of China, due on February 18, 2015 with annual interest rate of 6.27% at December 31, 2014, secured by certain assets of the Company and repaid in January 2015. | |
| - | | |
| 488,719 | |
| |
| | | |
| | |
Loan from Bank of China, due on January 25, 2016 with annual interest rate of 7.20% at June 30, 2015, secured by certain assets of the Company. | |
| 492,707 | | |
| - | |
| |
| | | |
| | |
Total short-term bank loans | |
$ | 3,284,719 | | |
$ | 3,095,219 | |
For
the three months ended June 30, 2015 and 2014, interest expense related to short-term bank loans amounted to $56,628 and $60,099,
respectively, which were included in interest expense on the accompanying unaudited condensed consolidated statements of income
and comprehensive income.
For
the six months ended June 30, 2015 and 2014, interest expense related to short-term bank loans amounted to $113,971 and $117,826,
respectively, which were included in interest expense on the accompanying unaudited condensed consolidated statements of income
and comprehensive income.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
8 – BANK ACCEPTANCE NOTES PAYABLE
Bank
acceptance notes payable represent amounts due to banks which are collateralized. All bank acceptance notes payable are secured
by the Company’s restricted cash which is on deposit with the lender. At June 30, 2015 and December 31, 2014, the Company’s
bank acceptance notes payables consisted of the following:
| |
June 30,
2015 | | |
December 31,
2014 | |
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due and paid on January 11, 2015, collateralized by 100% of restricted cash deposited. | |
$ | - | | |
$ | 162,907 | |
| |
| | | |
| | |
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due and paid on February 28, 2015, collateralized by 100% of restricted cash deposited. | |
| - | | |
| 81,453 | |
| |
| | | |
| | |
Bank of China, non-interest bearing, due and paid on June 4, 2015, collateralized by 100% of restricted cash deposited. | |
| - | | |
| 81,453 | |
| |
| | | |
| | |
Bank of China, non-interest bearing, due and paid on June 15, 2015, collateralized by 100% of restricted cash deposited. | |
| - | | |
| 81,453 | |
| |
| | | |
| | |
Bank of China, non-interest bearing, due and paid on June 29, 2015, collateralized by 100% of restricted cash deposited. | |
| - | | |
| 81,453 | |
| |
| | | |
| | |
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on July 28, 2015, collateralized by 100% of restricted cash deposited. | |
| 164,236 | | |
| - | |
| |
| | | |
| | |
Total | |
$ | 164,236 | | |
$ | 488,719 | |
NOTE
9 – ACCRUED EXPENSES
At
June 30, 2015 and December 31, 2014, accrued expenses consisted of the following:
| |
June 30,
2015 | | |
December 31,
2014 | |
Accrued salaries and related benefits | |
$ | 367,413 | | |
$ | 693,700 | |
Accrued professional fees | |
| 11,802 | | |
| 110,921 | |
Other payables | |
| 116,793 | | |
| 254,958 | |
| |
$ | 496,008 | | |
$ | 1,059,579 | |
NOTE
10 – STOCKHOLDERS’ EQUITY
Common
stock issued for services
On
January 7, 2015, the Company issued 80,000 shares of common stock pursuant to its 2010 long-term incentive plan, including 20,000
shares to the chief executive officer, 12,000 shares to the chief executive officer’s wife, who the Company employs in its
sales department, 18,000 shares to the chief financial officer and 30,000 shares to two other employees. The shares were valued
at the fair market value on the grant date, and the Company recorded stock-based compensation of $274,400 on the grant date.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
11– STATUTORY RESERVE
The
Company is required to make appropriations to statutory reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’
registered capital or members’ equity. As of December 31, 2014, the Company appropriated the required maximum 50% of its
registered capital to statutory reserve for Heavy Industries; accordingly, no additional statutory reserve is required for the
six months ended June 30, 2015. As of December 31, 2014, the Company had not appropriated the required maximum 50% of its registered
capital to statutory reserve for Dyeing and Fulland Wind Energy. For the six months ended June 30, 2015, statutory reserve activities
were as follows:
| |
Dyeing | | |
Heavy Industries | | |
Fulland Wind Energy | | |
Total | |
Balance - December 31, 2014 | |
$ | 922,527 | | |
$ | 1,168,796 | | |
$ | 1,202,876 | | |
$ | 3,294,199 | |
Addition to statutory reserve | |
| 190,983 | | |
| - | | |
| 59,275 | | |
| 250,258 | |
Balance – June 30, 2015 | |
$ | 1,113,510 | | |
$ | 1,168,796 | | |
$ | 1,262,151 | | |
$ | 3,544,457 | |
NOTE
12 – SEGMENT INFORMATION
For
the three and six months ended June 30, 2015, the Company operated in three reportable business segments - (1) the manufacture
of forged rolled rings and related components segment, (2) the manufacture of textile dyeing and finishing equipment segment,
and (3) the manufacture of petroleum and chemical equipment segment. For the three and six months ended June 30, 2014, the Company
operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components segment, and
(2) the manufacture of textile dyeing and finishing equipment segment. The Company’s reportable segments are strategic business
units that offer different products. They are managed separately based on the fundamental differences in their operations. All
of the Company’s operations are conducted in the PRC. Information with respect to these reportable business segments for
the three and six months ended June 30, 2015 and 2014 was as follows:
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenues | |
| | |
| | |
| | |
| |
Forged rolled rings and related components | |
$ | 2,999,002 | | |
$ | 7,849,812 | | |
$ | 10,272,614 | | |
$ | 16,106,945 | |
Dyeing and finishing equipment | |
| 8,612,954 | | |
| 9,678,206 | | |
| 15,136,306 | | |
| 19,056,344 | |
Petroleum and chemical equipment | |
| 3,578,644 | | |
| - | | |
| 5,428,145 | | |
| - | |
| |
| 15,190,600 | | |
| 17,528,018 | | |
| 30,837,065 | | |
| 35,163,289 | |
Depreciation | |
| | | |
| | | |
| | | |
| | |
Forged rolled rings and related components | |
| 703,626 | | |
| 1,207,337 | | |
| 1,402,067 | | |
| 2,424,395 | |
Dyeing and finishing equipment | |
| 859,913 | | |
| 744,192 | | |
| 1,721,997 | | |
| 1,492,408 | |
Petroleum and chemical equipment | |
| 506,468 | | |
| - | | |
| 1,020,450 | | |
| - | |
Other (a) | |
| - | | |
| 167,987 | | |
| - | | |
| 167,987 | |
| |
| 2,070,007 | | |
| 2,119,516 | | |
| 4,144,514 | | |
| 4,084,790 | |
Interest expense | |
| | | |
| | | |
| | | |
| | |
Forged rolled rings and related components | |
| 6,901 | | |
| 22,638 | | |
| 15,005 | | |
| 45,203 | |
Dyeing and finishing equipment | |
| 36,255 | | |
| 37,461 | | |
| 71,913 | | |
| 72,623 | |
Petroleum and chemical equipment | |
| 13,472 | | |
| - | | |
| 27,053 | | |
| - | |
| |
| 56,628 | | |
| 60,099 | | |
| 113,971 | | |
| 117,826 | |
Net income (loss) | |
| | | |
| | | |
| | | |
| | |
Forged rolled rings and related components | |
| (25,075 | ) | |
| 1,044,684 | | |
| 588,588 | | |
| 2,274,120 | |
Dyeing and finishing equipment | |
| 1,161,616 | | |
| 1,328,042 | | |
| 1,909,832 | | |
| 2,673,598 | |
Petroleum and chemical equipment | |
| 159,435 | | |
| - | | |
| 385,864 | | |
| - | |
Other (b) | |
| (69,406 | ) | |
| (154,822 | ) | |
| (415,280 | ) | |
| (333,456 | ) |
| |
$ | 1,226,570 | | |
$ | 2,217,904 | | |
$ | 2,469,004 | | |
$ | 4,614,262 | |
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
12 – SEGMENT INFORMATION (continued)
Identifiable long-lived tangible assets at June 30, 2015 and
December 31, 2014 by segment | |
June 30,
2015 | | |
December 31,
2014 | |
Forged rolled rings and related components (c) | |
$ | 21,383,333 | | |
$ | 38,937,371 | |
Dyeing and finishing equipment | |
| 29,217,971 | | |
| 30,691,226 | |
Petroleum and chemical equipment (c) | |
| 15,440,424 | | |
| - | |
Equipment held for sale | |
| 425,988 | | |
| 422,540 | |
| |
$ | 66,467,716 | | |
$ | 70,051,137 | |
Identifiable long-lived tangible assets at June 30, 2015 and December 31, 2014 by geographical location | |
June 30,
2015 | | |
December 31,
2014 | |
China | |
$ | 66,467,716 | | |
$ | 70,051,137 | |
United States | |
| - | | |
| - | |
| |
$ | 66,467,716 | | |
$ | 70,051,137 | |
|
(a) |
The
Company does not allocate the depreciation for equipment held for sale to any operating segment. |
|
(b) |
The
Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because
these activities are managed at a corporate level. |
|
(c) |
Reflects
reclassification of property and equipment previously used in the forged rolled rings and related components segment to petroleum
and chemical equipment segment. |
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
NOTE
13 – CONCENTRATIONS
Customers
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s sales for the
three and six months ended June 30, 2015 and 2014.
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
Customer | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
A | |
| 21 | % | |
| * | | |
| 10 | % | |
| * | |
* Less
than 10%.
The
largest customer accounted for 22.8% and 0% of the Company’s total outstanding accounts receivable at June 30, 2015 and
December 31, 2014, respectively.
Suppliers
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for
the three and six months ended June 30, 2015 and 2014.
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
Supplier | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
A | |
| * | | |
| 14 | % | |
| * | | |
| 15 | % |
B | |
| 27 | % | |
| 15 | % | |
| 24 | % | |
| 18 | % |
C | |
| * | | |
| 15 | % | |
| 12 | % | |
| 16 | % |
* Less
than 10%.
The
two largest suppliers accounted for 13.7% of the Company’s total outstanding accounts payable at June 30, 2015. The three
largest suppliers accounted for 30.4% of the Company’s total outstanding accounts payable at December 31, 2014.
NOTE
14 – RESTRICTED NET ASSETS
Regulations
in the PRC permit payments of dividends by the Company’s PRC VIEs only out of their retained earnings, if any, as determined
in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires
annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIE’s and subsidiary. Heavy Industries
had reached the cumulative limit as of June 30, 2015 and December 31, 2014, respectively. The statutory reserve funds are not
distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIE’s and its subsidiary
are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations
in PRC may further restrict the Company’s PRC VIEs and its subsidiaries from transferring funds to the Company in the form
of loans and/or advances.
As
of June 30, 2015 and December 31, 2014, substantially all of the Company’s net assets are attributable to the PRC VIE’s
and its subsidiaries located in the PRC. Accordingly, the Company’s restricted net assets at June 30, 2015 and December
31, 2014 were approximately $100,206,000 and $96,519,000, respectively.
NOTE
15 – SUBSEQUENT EVENTS
In
July 2015, the Company repaid short-term loan from Jiangsu Huishan Mintai Village Town Bank in the principal amount of $821,180,
and borrowed the same amount from the same bank. The new loan bears interest rate at 10.56% per annum and is due on March 1, 2016.
On
July 7, 2015, the Company issued 4,000 shares of common stock pursuant to its 2010 long-term incentive plan to a director. The
shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $8,370 on
the grant date and reduced accrued expense of $2,790.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We
are currently engaged in three business segments – (1) the forged rolled rings and related components segment, in which
we manufacture and sell high precision forged rolled rings, shafts, flanges, and other forged components, (2) the dyeing and finishing
equipment segment, in which we manufacture and sell textile dyeing and finishing machines, and (3) the petroleum and chemical
equipment segment, in which we manufacture and sell petroleum and chemical equipment, such as reaction kettle, heat exchangers,
separators, tanks, towers and other components. The petroleum and chemical equipment segment reflects sales to these industries
which commenced in the first quarter of 2015. We did not operate in the petroleum and chemical equipment during the 2014 periods.
The
following table sets forth information as to revenues of our forged rolled rings and related components, dyeing and finishing
equipment and petroleum and chemical equipment segments in dollars and as a percent of revenues (dollars in thousands):
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
Dollars | | |
% | | |
Dollars | | |
% | |
Forged rolled rings and related components | |
$ | 2,999 | | |
| 19.7 | % | |
$ | 7,850 | | |
| 44.8 | % |
Dyeing and finishing equipment | |
| 8,613 | | |
| 56.7 | % | |
| 9,678 | | |
| 55.2 | % |
Petroleum and chemical equipment | |
| 3,579 | | |
| 23.6 | % | |
| - | | |
| - | |
Total | |
$ | 15,191 | | |
| 100.0 | % | |
$ | 17,528 | | |
| 100.0 | % |
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
Dollars | | |
% | | |
Dollars | | |
% | |
Forged rolled rings and related components | |
$ | 10,273 | | |
| 33.3 | % | |
$ | 16,107 | | |
| 45.8 | % |
Dyeing and finishing equipment | |
| 15,136 | | |
| 49.1 | % | |
| 19,056 | | |
| 54.2 | % |
Petroleum and chemical equipment | |
| 5,428 | | |
| 17.6 | % | |
| - | | |
| - | |
Total | |
$ | 30,837 | | |
| 100.0 | % | |
$ | 35,163 | | |
| 100.0 | % |
The
factors that affected our revenue, gross margin and net income in our segments during the three and six months ended June 30,
2015, which are described below, are likely to continue to affect our operations in the rest of 2015. Our ability to expand our
operations and increase our revenue is largely affected by the PRC government’s policy on such matters as the availability
of credit, which affects all of our operations, and its policies relating to alternative energy such as wind power, which affect
our products for these industries. Our business is also affected by general economic conditions. Because of the nature of our
products, our customers’ projection of future economic conditions are an integral part of their decisions as to whether
to purchase capital equipment at this time or defer such purchases until a future date. We began to market to the petroleum and
chemical industries during 2014, but we did not generate any sales in these industries until the first quarter of 2015. During
the three and six months ended June 30, 2015, sales from the petroleum and chemical equipment segment partially offset the decline
in revenue for both the forged rolled rings and related components and the dyeing and finishing segments.
Forged
Rolled Rings and Related Components Segment
Through
our forged rolled rings and other related components division, we produce precision forged rolled rings and other forged components
to the wind power and other industries. Our forged rolled rings and other related components are sold to manufacturers of industrial
equipment. Forged rolled rings and other forged components for the wind industry are used in wind turbines, which are used to
generate wind power.
Revenues
from our forged rolled rings and related components segment decreased $4.9 million, or 61.8%, for the three months ended June
30, 2015 as compared to the three months ended June 30, 2014. Revenue from our forged rolled rings and related components segment
decreased $5.8 million, or 36.2%, for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. The
demand for products used in manufacturing in general, including wind power industry and other industries, is uncertain. Although
we believe that over the long term, the forged rolled rings and related components segment will expand, and the government of
the PRC has announced its desire to increase the use of wind power as an energy source, in the short term, other factors, such
as economic factors and the availability of credit, may affect the requirements of our customers and potential customers for our
products. To the extent that the demand for our forged rolled rings and related components declines, our revenue and net income
will be affected. We believe that there is a degree of market saturation for forged rolled rings and related components for wind
power and other industries and we expect that our revenues from forged rolled rings and related components will continue to decrease
in the near future.
Among
all the renewable energies, we believe that wind power is at a mature stage in terms of the technology and represents the best
prospect for large-scale commercial development. We believe that it is becoming more competitive against traditional energy sources
as the industry continues to grow and production costs continue to fall, although difficulties in transmission of electricity
generated by wind power continues to affect this market and the recent decline in oil prices is affecting the market for wind
power energy and other sources of renewable energy.
We
believe that wind power will see its share of China’s national energy mix gradually increase. While interest in wind power
is increasing in many countries, we do not have the infrastructure and personnel to market our products in countries other than
China, and we are continuing to limit our sales and marketing efforts to China to wind power and other industries customers.
We
previously broke down the information from this segment between wind power and other industries. We no longer believe that this
distinction is material. Accordingly, we are providing information as to all forged rolled rings and related components without
separating the two types of customers.
Dyeing
and Finishing Equipment Segment
Revenue
from our dyeing segment decreased $1.1 million, or 11.0%, for the three months ended June 30, 2015 as compared to the three months
ended June 30, 2014. Revenue from our dyeing segment decreased $3.9 million, or 20.6%, for the six months ended June 30, 2015
as compared to the six months ended June 30, 2014. In the first half of 2015, we delayed shipments of low-emission airflow dyeing
machines due to a delay in receiving scheduled payments from some of our customers with outstanding accounts receivable. In order
to reduce our business risk, we tightened our credit review policies and delayed credit sales to certain customers. We expect
payment from these customers and shipment of these machines in the near future. Additionally, we experienced a slowdown in shipments
of our low-emission airflow dyeing machines as customers replaced older dyeing equipment with our low-emission airflow dyeing
machine in the 2014 periods and orders for new low-emission airflow dyeing machines have slowed down in the first half of 2015.
Accordingly, our revenue from dyeing and finishing equipment segment decreased in the first half of 2015 as compared to the 2014
periods.
We
continue to develop new styles of dyeing machines such as a new air-fluid, dual-use dyeing machine which uses both air flow and
fluid flow in the dyeing process. It allows users to customize the dyeing process according to the specific type of textile. It
is equipped with a series of specialized and patented components, including nozzles, cloth wheels and cloth spreaders, which are
designed to permit greater color evenness and reduce defects. It can be used on a wider range of textiles and we believe that
it uses 60% to 70% less water, about 30% less power and 40% to 50% less steam than traditional models of high-temperature, high-pressure
dyeing machines and reduces the use of additives by about 50% while shortening dyeing time by 1 to 2 hours.
We
expect our revenue from dyeing segment will remain at or near the level of the second quarter of 2015 for the near future.
Petroleum
and Chemical Equipment Segment
Through our petroleum and chemical
equipment division, we produce and sell coal chemical equipment, formaldehyde plant and downstream products, reaction kettle, heat
exchangers, separators, tanks, towers, etc. to petroleum and chemical industries. We started to sell our petroleum and chemical
equipment in February 2015. Revenue from our petroleum and chemical equipment segment was $3.6 million and $5.4 million for the
three and six months ended June 30, 2015, respectively. The market for petroleum products is mainly dominated by two major Chinese
petroleum companies, and their capital expenditure and purchasing policy will have a significant effect both upon our ability to
generate revenue from this segment and the gross margins which we can generate. Furthermore, because we sell our petroleum and
chemical equipment products to a very small number of customers, the change in the purchasing policies of one or two customers
could have a significant effect on our revenues from this segment. Sales to a large state-owned enterprise for parts and equipment
to be used on a major chemical project in Xinjiang, which was generated in the second quarter of 2015, accounted for approximately
$3.1 million, or 87.7% and 57.8% of the petroleum and chemical segment revenue for the three and six months ended June 30, 2015,
respectively.
Inventory
and Raw Materials
A
major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to
price fluctuations, and recently these fluctuations have been significant. In times of increasing prices, we need to try to establish
the price at which we purchase raw materials in order to avoid increases in costs which we cannot recoup through increases in
sales prices. Similarly, in times of decreasing prices, we may have purchased metals at prices which are high in terms of the
price at which we can sell our products, which also can impair our margins. One major supplier provided approximately 27% of our
purchases of raw materials for the three months ended June 30, 2015. The supplier and one other major supplier provided approximately
36% of our purchases of raw materials for the six months ended June 30, 2015. Three major suppliers provided approximately 44%
of our purchases of raw materials for the three months ended June 30, 2014. These three suppliers provided approximately
49% of our purchases of raw materials for the six months ended June 30, 2014.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income
taxes, and the valuation of equity transactions.
We
base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported
amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions
or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used
in the preparation of the unaudited condensed consolidated financial statements.
Variable
Interest Entities
Pursuant
to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include
in our consolidated financial statements the financial statements of variable interest entities (“VIEs”). The accounting
standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE
or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual
arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the
primary beneficiary of the entity.
The
Huayang Companies are considered VIEs, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with
the Huayang Companies pursuant to which we shall receive 100% of the Huayang Companies’ net income. In accordance with these
agreements, the Huayang Companies shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, Green
Power, and Green Power shall supply the technology and administrative services needed to service the Huayang Companies.
The
accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies sales
are included in our total sales, their income from operations is consolidated with ours, and our net income includes all of the
Huayang Companies’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs
do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable
to us. Because of the contractual arrangements, we have pecuniary interest in the Huayang Companies that require consolidation
of the Huayang Companies financial statements with our financial statements.
Accounts
Receivable
We
have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our
existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based
on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account
balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
As
a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves
for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts
receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical
economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties
that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.
Inventories
Inventories,
consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or market utilizing the weighted
average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory
costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves
for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory
quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary.
If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is
identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are
not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted
for known changes in demands for such products, or the estimated forecast of product demand and production requirements.
Advances
to Suppliers
Advances
to suppliers represent the advance payments for the purchase of raw material from suppliers. The advance payments are intended
to ensure preferential pricing and delivery.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated
useful lives of the assets. The estimated useful lives of the assets are as follows:
| |
Useful Life |
Building and building improvements | |
5 – 20 Years |
Manufacturing equipment | |
5 – 10 Years |
Office equipment and furniture | |
5 Years |
Vehicles | |
5 Years |
The
cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in the statements of income and comprehensive income in the year of disposition.
Included
in property and equipment is construction-in-progress which consists of factories and office buildings under construction and
machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising
from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation
is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
We
examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that
their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Land
Use Rights
There
is no private ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual
or company. The government grants a land use right that permits the holder of the land use right to use the land for a specified
period. Our land use rights were granted with a term of 45 or 50 years. Any transfer of the land use right requires government
approval. We have recorded as an intangible asset the costs paid to acquire a land use right. The land use rights are amortized
on the straight-line method over the land use right terms.
Revenue
Recognition
We
recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the purchase price is fixed or determinable
and collectability is reasonably assured.
We
recognize revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components, petroleum and chemical
equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty.
Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when
the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the
delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally
is recognized over the contract period. For the three and six months ended June 30, 2015 and 2014, amounts allocated to installation
and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been
minimal.
All
other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer
acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery
based on the trade terms.
Income
Taxes
We
are governed by the income tax laws of the PRC and the United States. Income taxes are accounted for pursuant to ASC 740 “Accounting
for Income Taxes”, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge
for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation
of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred
tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary
differences can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to
equity, in which case the deferred tax is changed to equity. Deferred tax assets and liabilities are offset when they related
to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net
basis.
Stock-based
Compensation
Stock
based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards
Codification also requires measurement of the cost of employee and director services received in exchange for an award based on
the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable.
Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense
based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued,
or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.
Currency
Exchange Rates
Our
functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB. All of
our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels
of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular,
fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various
foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross
and net profit margins and could result in foreign exchange and operating losses.
Our
exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing
of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other
currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end
of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our
statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure
to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations
and may incur net foreign currency losses in the future.
Our
financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency
of our operating subsidiaries and affiliates is RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation
of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our
U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S.
dollar equivalent amounts of our financial results.
Recent
Accounting Pronouncements
In
April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”)
2015-03 Interest – Imputation of Interest (Subtopic 838-30): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). This ASU will simplify the presentation of debt issuance costs. It will require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The amendments in ASU 2015-03 are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2015. The adoption of this guidance is not expected to have a material impact on our consolidated
financial statements.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification
of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for
a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for us beginning
January 1, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated
financial statements.
In
January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items, or ASU 2015-01. ASU 2015-01
eliminates from GAAP the concept of extraordinary items. However, the presentation and disclosure guidance for items that are
unusual in nature of occur infrequently will be retained and will be expanded to include items that are both unusual in nature
and infrequently occurring. The amendments in ASU 2015-01 are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may
apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted.
The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. We do not discuss recent pronouncements that
are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, cash flows, or disclosures.
RESULTS
OF OPERATIONS
Comparison
of Results of Operations for the Three and Six Months Ended June 30, 2015 and 2014
The
following table sets forth the results of our operations for the three months ended June 30, 2015 and 2014 indicated as a percentage
of revenues (dollars in thousands):
| |
Three Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
Dollars | | |
Percentage | | |
Dollars | | |
Percentage | |
Revenues | |
$ | 15,191 | | |
| 100.0 | % | |
$ | 17,528 | | |
| 100.0 | % |
Cost of revenues | |
| 12,497 | | |
| 82.3 | % | |
| 13,444 | | |
| 76.7 | % |
Gross profit | |
| 2,694 | | |
| 17.7 | % | |
| 4,084 | | |
| 23.3 | % |
Operating expenses | |
| 991 | | |
| 6.5 | % | |
| 1,054 | | |
| 6.0 | % |
Income from operations | |
| 1,703 | | |
| 11.2 | % | |
| 3,030 | | |
| 17.3 | % |
Other income (expenses) | |
| (44 | ) | |
| (0.3 | )% | |
| (21 | ) | |
| (0.1 | )% |
Income before provision for income taxes | |
| 1,659 | | |
| 10.9 | % | |
| 3,009 | | |
| 17.2 | % |
Provision for income taxes | |
| 432 | | |
| 2.8 | % | |
| 791 | | |
| 4.5 | % |
Net income | |
| 1,227 | | |
| 8.1 | % | |
| 2,218 | | |
| 12.7 | % |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| 329 | | |
| 2.2 | % | |
| 106 | | |
| 0.6 | % |
Comprehensive income | |
$ | 1,556 | | |
| 10.3 | % | |
$ | 2,324 | | |
| 13.3 | % |
The
following table sets forth the results of our operations for the six months ended June 30, 2015 and 2014 indicated as a percentage
of revenues (dollars in thousands):
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
Dollars | | |
Percentage | | |
Dollars | | |
Percentage | |
Revenues | |
$ | 30,837 | | |
| 100.0 | % | |
$ | 35,163 | | |
| 100.0 | % |
Cost of revenues | |
| 25,072 | | |
| 81.3 | % | |
| 26,806 | | |
| 76.2 | % |
Gross profit | |
| 5,765 | | |
| 18.7 | % | |
| 8,357 | | |
| 23.8 | % |
Operating expenses | |
| 2,238 | | |
| 7.3 | % | |
| 2,051 | | |
| 5.8 | % |
Income from operations | |
| 3,527 | | |
| 11.4 | % | |
| 6,306 | | |
| 18.0 | % |
Other income (expenses) | |
| (95 | ) | |
| (0.3 | )% | |
| (41 | ) | |
| (0.2 | )% |
Income before provision for income taxes | |
| 3,432 | | |
| 11.1 | % | |
| 6,265 | | |
| 17.8 | % |
Provision for income taxes | |
| 963 | | |
| 3.1 | % | |
| 1,651 | | |
| 4.7 | % |
Net income | |
| 2,469 | | |
| 8.0 | % | |
| 4,614 | | |
| 13.1 | % |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| 802 | | |
| 2.6 | % | |
| (675 | ) | |
| (1.9 | )% |
Comprehensive income | |
$ | 3,271 | | |
| 10.6 | % | |
$ | 3,939 | | |
| 11.2 | % |
The
following table sets forth information as to the revenues, gross profit and gross margin for our three business segments for the
three months ended June 30, 2015 and 2014 (dollars in thousands).
| |
Three Months Ended June 30, 2015 | | |
Three Months Ended June 30, 2014 | |
| |
Revenues | | |
Cost of revenues | | |
Gross profit | | |
Gross margin | | |
Revenues | | |
Cost of revenues | | |
Gross profit | | |
Gross margin | |
Forged rolled rings and related components | |
$ | 2,999 | | |
$ | 2,843 | | |
$ | 156 | | |
| 5.2 | % | |
$ | 7,850 | | |
$ | 6,064 | | |
$ | 1,786 | | |
| 22.8 | % |
Dyeing and finishing equipment | |
| 8,613 | | |
| 6,604 | | |
| 2,009 | | |
| 23.3 | % | |
| 9,678 | | |
| 7,380 | | |
| 2,298 | | |
| 23.7 | % |
Petroleum and chemical equipment | |
| 3,579 | | |
| 3,050 | | |
| 529 | | |
| 14.8 | % | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 15,191 | | |
$ | 12,497 | | |
$ | 2,694 | | |
| 17.7 | % | |
$ | 17,528 | | |
$ | 13,444 | | |
$ | 4,084 | | |
| 23.3 | % |
The
following table sets forth information as to the revenues, gross profit and gross margin for our three business segments for the
six months ended June 30, 2015 and 2014 (dollars in thousands).
| |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | |
| |
Revenues | | |
Cost of revenues | | |
Gross profit | | |
Gross margin | | |
Revenues | | |
Cost of revenues | | |
Gross profit | | |
Gross margin | |
Forged rolled rings and related components | |
$ | 10,273 | | |
$ | 8,766 | | |
$ | 1,507 | | |
| 14.7 | % | |
$ | 16,107 | | |
$ | 12,231 | | |
$ | 3,876 | | |
| 24.1 | % |
Dyeing and finishing equipment | |
| 15,136 | | |
| 11,700 | | |
| 3,436 | | |
| 22.7 | % | |
| 19,056 | | |
| 14,575 | | |
| 4,481 | | |
| 23.5 | % |
Petroleum and chemical equipment | |
| 5,428 | | |
| 4,605 | | |
| 823 | | |
| 15.2 | % | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 30,837 | | |
$ | 25,071 | | |
$ | 5,766 | | |
| 18.7 | % | |
$ | 35,163 | | |
$ | 26,806 | | |
$ | 8,357 | | |
| 23.8 | % |
Revenues.
For the three months ended June 30, 2015, we had revenues of $15,191,000, as compared to revenues of $17,528,000 for the
three months ended June 30, 2014, a decrease of $2,337,000 or 13.3%. The decrease in revenues for the three months ended June
30, 2015 was primarily attributable to decreases in revenue from both our forged rolled rings and related components segment and
our dyeing and finishing segment, which were partially offset by revenues generated from petroleum and chemical segment. The change
in revenues is summarized as follows (dollars in thousands):
| |
Three Months Ended June 30, 2015 | | |
Three Months Ended June 30, 2014 | | |
(Decrease) Increase | | |
Percentage Change | |
Forged rolled rings and related components | |
$ | 2,999 | | |
$ | 7,850 | | |
$ | (4,851 | ) | |
| (61.8 | )% |
Dyeing and finishing equipment | |
| 8,613 | | |
| 9,678 | | |
| (1,065 | ) | |
| (11.0 | )% |
Petroleum and chemical equipment | |
| 3,579 | | |
| - | | |
| 3,579 | | |
| NA | |
Total revenues | |
$ | 15,191 | | |
$ | 17,528 | | |
$ | (2,337 | ) | |
| (13.3 | )% |
For
the six months ended June 30, 2015, we had revenues of $30,837,000, as compared to revenues of $35,163,000 for the six months
ended June 30, 2014, a decrease of $4,326,000 or 12.3%. The decrease in revenues for the six months ended June 30, 2015 was primarily
attributable to decreases in revenue from both our forged rolled rings and related components segment and our dyeing and finishing
segment, partially offset by revenues generated from petroleum and chemical segment. The change in revenues is summarized as follows
(dollars in thousands):
| |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | | |
(Decrease) Increase | | |
Percentage Change | |
Forged rolled rings and related components | |
$ | 10,273 | | |
$ | 16,107 | | |
$ | (5,834 | ) | |
| (36.2 | )% |
Dyeing and finishing equipment | |
| 15,136 | | |
| 19,056 | | |
| (3,920 | ) | |
| (20.6 | )% |
Petroleum and chemical equipment | |
| 5,428 | | |
| - | | |
| 5,428 | | |
| NA | |
Total revenues | |
$ | 30,837 | | |
$ | 35,163 | | |
$ | (4,326 | ) | |
| (12.3 | )% |
Forged
rolled rings and related components segment
For
the three months ended June 30, 2015, revenues from the sale of forged rolled rings and related components decreased by approximately
$4,851,000, or 61.8% as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, revenue from
the sale of forged rolled rings and related components decreased by approximately $5,834,000, or 36.2% as compared to the six
months ended June 30, 2014. The demand for products used in manufacturing in general, is uncertain. Although we believe that over
the long term, the forged rolled rings and related components segment will expand, and the government of the PRC has announced
its desire to increase the use of wind power as an energy source, in the short term other factors, such as economic factors and
the fluctuations in the price of oil and coal and the availability of credit, may affect the requirements by our customers and
potential customers for our products. To the extent that the demand for our forged rolled rings and related components declines,
our revenues and net income will be affected. We believe that there is a degree of market saturation, and we expect that our revenues
from customers of forged rolled rings and related components will continue to decrease for the near future.
Dyeing
and finishing equipment segment
For
the three months ended June 30, 2015, revenues from the sale of dyeing and finishing equipment decreased by approximately $1,065,000
or 11.0% as compared to the three months ended June 30, 2014. For the six months ended June 30, 2015, revenues from the sale of
dyeing and finishing equipment decreased by approximately $3,920,000 or 20.6% as compared to the six months ended June 30, 2014.
In the first half of 2015, we delayed shipments of low-emission airflow dyeing machines due to a delay in receiving scheduled
payments from some of our customers with outstanding accounts receivable. In order to reduce our business risk, we tightened our
credit review policies and delayed credit sales to certain customers. We expect payment from these customers and shipment of these
machines in the near future. Additionally, we experienced an anticipated slowdown in shipments of our low-emission airflow dyeing
machines as many customers replaced older dyeing equipment with our low-emission airflow dyeing machine in the 2014 periods, and
we believe that orders for new low-emission airflow dyeing machines have slowed down in the first half of 2015 in part because
the remaining potential customer base included more companies that did not have the ability to make the significant capital expenditures
necessary to upgrade their equipment. Accordingly, our revenues from dyeing and finishing equipment segment decreased in the three
and six months ended June 30, 2015 as compared to the 2014 periods.
Petroleum
and chemical equipment segment
We sought to expand our business to
oil and natural gas industries since year 2013. We received the certifications needed to serve these markets in mid-2013. However,
we did not generate revenues from the petroleum and chemical industries until the first quarter of 2015. We expect that our revenues
from petroleum and chemical equipment customers will have a modest increase in the near future. However, our revenue in this segment
is highly dependent upon sales to the two major Chinese petrochemical companies, whose purchasing policies affect both our revenue
and gross margin for this segment, one of which accounted for 87.7% and 57.8% of revenue from this segment for the three and six
months ended June 30, 2015, respectively.
Cost
of revenues. Cost of revenues includes the cost of raw materials, labor, depreciation and other overhead costs.
For
the three months ended June 30, 2015, cost of revenues was $12,497,000 as compared to $13,444,000 for the three months ended June
30, 2014, a decrease of $947,000, or 7.0%. Cost of revenues related to the manufacture of forged rolled rings and related components
was $2,843,000 for the three months ended June 30, 2015 as compared to $6,064,000 for the three months ended June 30, 2014. Cost
of revenues for the dyeing and finishing equipment segment was $6,604,000 for the three months ended June 30, 2015, as compared
to $7,380,000 for the three months ended June 30, 2014. Cost of revenues for the petroleum and chemical equipment was $3,050,000
for the three months ended June 30, 2015. Since the manufacture and sale of the petroleum and chemical products commenced in the
first quarter of 2015, we had neither revenues nor cost of revenues from this segment in the second quarter of 2014.
For
the six months ended June 30, 2015, cost of revenues was $25,071,000 as compared to $26,806,000 for the six months ended June
30, 2014, a decrease of $1,734,000, or 6.5%. Cost of revenues related to the manufacture of forged rolled rings and related components
was $8,766,000 for the six months ended June 30, 2015 as compared to $12,231,000 for the six months ended June 30, 2014. Cost
of revenues for the dyeing and finishing equipment segment was $11,700,000 for the six months ended June 30, 2015, as compared
to $14,575,000 for the six months ended June 30, 2014. Cost of revenues for the petroleum and chemical equipment was $4,605,000
for the six months ended June 30, 2015. Since the manufacture and sale of the petroleum and chemical products commenced in the
first quarter of 2015, we had neither revenues nor cost of revenues from this segment in the six months ended June 30, 2014.
Gross
profit and gross margin. Our gross profit was $2,694,000 for the three months ended June 30, 2015 as compared to $4,084,000
for the three months ended June 30, 2014, representing gross margins of 17.7% and 23.3%, respectively. Our gross profit was $5,766,000
for the six months ended June 30, 2015 as compared to $8,357,000 for the six months ended June 30, 2014, representing gross margins
of 18.7% and 23.8%, respectively.
Gross
profit from forged rolled rings and related components segment was $156,000 for the three months ended June 30, 2015 as compared
to $1,786,000 for the three months ended June 30, 2014, representing gross margins of approximately 5.2% and 22.8%, respectively. Gross
profit from forged rolled rings and related components segment was $1,507,000 for the six months ended June 30, 2015 as compared
to $3,876,000 for the six months ended June 30, 2014, representing gross margins of approximately 14.7% and 24.1%, respectively. The
significant decrease in our gross margin for the forged rolled rings and related components segment for the three and six months
ended June 30, 2015 was primarily attributed to the reduced scale of operations resulting from lower revenues, which is reflected
in the allocation of fixed costs, mainly consisting of depreciation, to cost of revenues, combined with a modest increase in labor
costs. We expect that our gross margin will remain at its current level and we can only improve our gross margin from forged rolled
rings and related components segment to the extent that we can become more efficient by increasing our production.
Gross
profit for the dyeing and finishing equipment segment was $2,009,000 for the three months ended June 30, 2015 as compared to $2,298,000
for the three months ended June 30, 2014, representing gross margins of approximately 23.3% and 23.7%, respectively. Gross profit
for the dyeing and finishing equipment segment was $3,436,000 for the six months ended June 30, 2015 as compared to $4,481,000
for the six months ended June 30, 2014, representing gross margins of approximately 22.7% and 23.5%, respectively. The decrease
in our gross margin for the dyeing and finishing equipment for the three and six months ended June 30, 2015 as compared to the
three and six months ended June 30, 2014 was primarily attributed to inefficiencies resulting from the decline in revenues and
the production of new styles of dyeing and finishing machines. We typically recognize a lower gross margin on new styles of equipment
due to the small quantities being produced. Such inefficiencies, including the allocation of fixed costs, mainly consisting of
depreciation, to cost of revenues over a small number of units being produced, and a modest increase in labor costs, adversely
effected our gross profit and gross margin. We expect that we can improve our gross margin from dyeing and finishing equipment
segment to the extent that we can become more efficient and be able to produce larger quantities for inventory and revenues.
Gross
profit for the petroleum and chemical equipment segment was $529,000 and $823,000, respectively, for the three and six months
ended June 30, 2015, representing gross margin of approximately 14.8% and 15.2%, respectively. Many companies bid for the petroleum
and chemical equipment orders. Since we are a small company and just entered this market in February 2015 and our customer base
is small, we must offer a lower price in order to generate orders. Therefore, our gross margin for petroleum and chemical equipment
is low. The low gross margin in this segment was one of factors in overall reduced gross margins, along with the low gross margin
for forged rolled rings and related products, particularly in the second quarter of 2015.
Depreciation.
Depreciation was $2,069,000 and $2,120,000 for the three months ended June 30, 2015 and 2014, respectively. Depreciation
was $4,144,000 and $4,085,000 for the six months ended June 30, 2015 and 2014, respectively. Depreciation for the three and six
months ended June 30, 2015 and 2014 was included in the following categories (dollars in thousands):
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Cost of revenues | |
$ | 1,902 | | |
$ | 1,834 | | |
$ | 3,632 | | |
$ | 3,689 | |
Operating expenses | |
| 167 | | |
| 118 | | |
| 512 | | |
| 228 | |
Other expense | |
| - | | |
| 168 | | |
| - | | |
| 168 | |
Total | |
$ | 2,069 | | |
$ | 2,120 | | |
$ | 4,144 | | |
$ | 4,085 | |
The
depreciation expense for cost of revenues for the three and six
months ended June 30, 2015 remained roughly consistent as compared to the three and six months ended June 30, 2014.
Some
manufacturing machinery in forged rolled rings and related components segment and in dyeing and finishing equipment segment were
temporary idle during the first quarter of 2015. We recorded the related depreciation in the amount of approximately $177,000
for the first quarter of 2015, for this machinery as operating expenses rather than as cost of revenues.
The
increase in depreciation expense for operating expenses for the three months ended June 30, 2015 as compared to the three months
ended June 30, 2014 is attributable to an increase in depreciation related to purchased office equipment and furniture and from
office and dormitory buildings and other improvements which we started depreciating in 2014.
The
increase in depreciation expense for operating expenses for the six months ended June 30, 2015 as
compared to the six months ended June 30, 2014 is attributable to an increase in depreciation related to purchased office equipment
and furniture and from office and dormitory buildings and other improvements which we started depreciating in 2014, and the inclusion
of depreciation of $177,000 from manufacturing machinery that is temporarily idle during the first quarter of 2015.
Selling,
general and administrative expenses. Selling, general and administrative expenses totaled $794,000 for the three months
ended June 30, 2015, as compared to $905,000 for the three months ended June 30, 2014, a decrease of $110,000 or 12.2%. Selling,
general and administrative expenses totaled $1,669,000 for the six months ended June 30, 2015, as compared to $1,765,000 for the
six months ended June 30, 2014, a decrease of $96,000 or 5.4%. Selling, general and administrative expenses for the three and
six months ended June 30, 2015 and 2014 consisted of the following (dollars in thousands):
| |
Three Months Ended
June 30, | | |
Six Months Ended
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Professional fees | |
$ | 58 | | |
$ | 67 | | |
$ | 110 | | |
$ | 133 | |
Payroll and related benefits | |
| 145 | | |
| 233 | | |
| 566 | | |
| 500 | |
Travel and entertainment | |
| 91 | | |
| 199 | | |
| 164 | | |
| 325 | |
Shipping | |
| 377 | | |
| 298 | | |
| 630 | | |
| 616 | |
Other | |
| 123 | | |
| 108 | | |
| 199 | | |
| 191 | |
Total | |
$ | 794 | | |
$ | 905 | | |
$ | 1,669 | | |
$ | 1,765 | |
| ● | Professional
fees for the three months ended June 30, 2015 decreased by $9,000, or 13.4%, as compared
to the three months ended June 30, 2014, due to our more strict control on corporate
spending. Professional fees for the six months ended June 30, 2015 decreased by $23,000,
or 17.3%, as compared to the six months ended June 30, 2014. The decrease was primarily
attributable to a decrease in accounting fees of approximately $2,000, a decrease in
filing fees of approximately $1,000, a decrease in fees related to our annual meeting
of approximately $8,000 which we held in the 2014 period and not in the 2015 period and
a decrease in other miscellaneous items of approximately $12,000 due to continuous stricter
control on corporate expending. |
| ● | Payroll
and related benefits for the three months ended June 30, 2015 decreased by $88,000, or
37.8%, as compared to the three months ended June 30, 2014. The decrease was mainly attributable
to a decrease in stock-based compensation of approximately $79,000,
and a decrease in employee salaries and related benefits of approximately $9,000. Payroll and related
benefits for the six months ended June 30, 2015 increased by $66,000, or 13.2%, as compared
to the six months ended June 30, 2014. The increase was mainly attributable to an increase
in stock-based compensation of approximately $82,000, offset by a decrease in employee
salaries and related benefits of approximately $16,000. |
| ● | Travel
and entertainment expense for the three months ended June 30, 2015 decreased by $108,000,
or 54.3%, as compared to the three months ended June 30, 2014. Travel and entertainment
expense for the six months ended June 30, 2015 decreased by $161,000, or 49.5%, as compared
to the six months ended June 30, 2014. The decrease in the three and six months ended
June 30, 2015 was primarily attributable to stricter control on corporation expenditure. |
| ● | Shipping
expense for the three months ended June 30, 2015 increased by $79,000, or 26.5%, as compared
to the three months ended June 30, 2014. Shipping expense for the six months ended June
30, 2015 increased by $14,000, or 2.3%, as compared to the six months ended June 30,
2014. In the second quarter of 2015, we sold some petroleum and chemical equipment to
a customer which is located in north China and is far away from our factory. Therefore,
our shipping expense for the three and six months ended June 30, 2015 increased as
compared to the three and six months ended June 30, 2014. |
| ● | Other
selling, general and administrative expenses for the three months ended June 30, 2015
increased by $15,000, or 13.9%, as compared to the three months ended June 30, 2014.
The increase was primarily attributable to an increase in advertising expense of approximately
$14,000 and an increase in other miscellaneous items of approximately $1,000. Other selling,
general and administrative expenses for the six months ended June 30, 2015 increased
by $8,000, or 4.2%, as compared to the six months ended June 30, 2014. The increase was
primarily attributable to an increase in advertising expense of approximately $13,000,
offset by a decrease in other miscellaneous items of approximately $5,000, reflecting
efforts at reducing non-sales related corporate activities as well as stricter controls
on corporate spending. |
Research
and development expenses. Research and development expenses were $29,000 for the three months ended June 30, 2015, as
compared to $31,000 for the three months ended June 30, 2014, a decrease of $2,000, or 8.6%. Research and development expenses
was $57,000 for the six months ended June 30, 2015, as compared to $58,000 for the six months ended June 30, 2014, a decrease
of $1,000, or 1.5%. Research and development expense related to the development of new dyeing and finishing products.
Income
from operations. As a result of the factors described above, for the three months ended June 30, 2015, income from
operations amounted to $1,703,000, as compared to $3,030,000 for the three months ended June 30, 2014, a decrease of $1,327,000,
or 43.8%. For the six months ended June 30, 2015, income from operations amounted to $3,527,000, as compared to $6,306,000 for
the six months ended June 30, 2014, a decrease of $2,779,000, or 44.1%.
Other
income (expense). Other income (expense) includes interest income, interest expense, grant income, foreign currency transaction
gain (loss) and other income. For the three months ended June 30, 2015, total other expense, net, amounted to $44,000 as compared
to total other expense, net, of $21,000 for the three months ended June 30, 2014, an increase of approximately $23,000 or 110.7%.
The increase in other expense, net, was primarily attributable to the decrease in other income of approximately $34,000, offset
by the increase in interest income of approximately $8,000 and the decrease in interest expense of approximately $3,000. For the
six months ended June 30, 2015, total other expense, net, amounted to $95,000 as compared to total other expense, net, of $41,000
for the six months ended June 30, 2014, an increase of approximately $54,000 or 130.3%. The increase in other expense, net, was
primarily attributable to the decrease in other income of approximately $34,000, and the decrease in grant income of approximately
$32,000, offset by the increase in interest income of approximately $9,000, and the decrease in interest expense of approximately
$3,000. The grant income was a non-recurring item which we received in the first half of 2014.
Income
tax expense. Income tax expense was $433,000 for the three months ended June 30, 2015, as compared to $792,000 for the
three months ended June 30, 2014, a decrease of $359,000, or 45.3%. Income tax expense was $963,000 for the six months ended June
30, 2015, as compared to $1,651,000 for the six months ended June 30, 2014, a decrease of $688,000, or 41.7%. The decrease in
income tax expense was primarily attributable to the decrease in taxable income generated by our operating entities in the three
and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014.
Net
income. As a result of the foregoing, our net income was $1,227,000, or $0.31 per share (basic and diluted), for the three
months ended June 30, 2015, as compared with $2,218,000, or $0.61 per share (basic and diluted), for the three months ended June
30, 2014, a decrease of $991,000, or 44.7%. Our net income was $2,469,000, or $0.63 per share (basic and diluted), for the six
months ended June 30, 2015, as compared with $4,614,000, or $1.29 per share (basic and diluted), for the six months ended June
30, 2014, a decrease of $2,145,000, or 46.5%.
Foreign
currency translation gain (loss). The functional currency of our subsidiaries and variable interest entities operating
in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to
U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for
revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated
statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign
currency translation gain of $329,000 for the three months ended June 30, 2015, as compared to a foreign currency translation
gain of $106,000 for the three months ended June 30, 2014. We reported a foreign currency translation gain of $802,000 for the
six months ended June 30, 2015, as compared to a foreign currency translation loss of $675,000 for the six months ended June 30,
2014. This non-cash gain/loss had the effect of increasing/decreasing our reported comprehensive income.
Comprehensive
income. As a result of our foreign currency translation gain/loss, we had comprehensive income for the three months
ended June 30, 2015 of $1,556,000, compared to $2,324,000 for the three months ended June 30, 2014. We had comprehensive income
for the six months ended June 30, 2015 of $3,271,000, compared to $3,939,000 for the six months ended June 30, 2014.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise
operate on an ongoing basis. At June 30, 2015 and December 31, 2014, we had cash balances of approximately $16,807,000 and $7,836,000,
respectively. These funds are located in financial institutions located as follows (dollars in thousands):
Country: | |
June 30, 2015 | | |
December 31, 2014 | |
United States | |
$ | 2 | | |
| 0.01 | % | |
$ | 43 | | |
| 0.5 | % |
China | |
| 16,805 | | |
| 99.99 | % | |
| 7,793 | | |
| 99.5 | % |
Total cash and cash equivalents | |
$ | 16,807 | | |
| 100.0 | % | |
$ | 7,836 | | |
| 100.0 | % |
The
following table sets forth a summary of changes in our working capital from December 31, 2014 to June 30, 2015 (dollars in thousands):
| |
| | |
| | |
December 31, 2014 to June 30, 2015 | |
| |
June 30,
2015 | | |
December 31,
2014 | | |
Change | | |
Percentage Change | |
Working capital: | |
| | |
| | |
| | |
| |
Total current assets | |
$ | 41,199 | | |
$ | 34,090 | | |
$ | 7,109 | | |
| 20.9 | % |
Total current liabilities | |
| 10,454 | | |
| 10,493 | | |
| (39 | ) | |
| (0.4 | )% |
Working capital: | |
$ | 30,745 | | |
$ | 23,597 | | |
$ | 7,148 | | |
| 30.3 | % |
Our
working capital increased $7,148,000 to $30,745,000 at June 30, 2015 from $23,597,000 at December 31, 2014. This increase in working
capital is primarily attributable to an increase in cash and cash equivalents of approximately $8,971,000, an increase in inventories,
net of reserve for obsolete inventories, of approximately $323,000, a decrease in bank acceptance notes payable of approximately
$324,000, a decrease in accrued expenses of approximately $564,000, a decrease in VAT and service taxes payable of approximately
$263,000, and a decrease in income taxes payable of approximately $474,000, offset by a decrease in restricted cash of approximately
$324,000, a decrease in accounts receivable, net of allowance for doubtful accounts, of approximately $1,827,000, an increase
in short-term bank loans of approximately $190,000, an increase in accounts payable of approximately $933,000, and an increase
in advances from customers of approximately $464,000.
Because
the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the
changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with
the comparable changes reflected on the consolidated balance sheets.
Net
cash flow provided by operating activities was $8,718,000 for the six months ended June 30, 2015 as compared to $5,310,000 for
the six months ended June 30, 2014, an increase of $3,408,000.
Net
cash flow provided by operating activities for the six months ended June 30, 2015 primarily reflected net income of approximately
$2,469,000 and the add-back of non-cash items primarily consisting of depreciation of approximately $4,145,000, amortization of
land use rights of approximately $48,000, and stock-based compensation of approximately $274,000, and changes in operating assets
and liabilities primarily consisting of a decrease in accounts receivable of approximately $1,992,000, an increase in accounts
payable of approximately $894,000 and an increase in advances from customers of approximately $458,000, offset by an increase
in inventories of approximately $287,000, a decrease in accrued expenses of approximately $569,000, a decrease in VAT and service
taxes payable of approximately $266,000, and a decrease in income taxes payable of approximately $477,000.
Net
cash flow provided by operating activities for the six months ended June 30, 2014 primarily reflected net income of approximately
$4,614,000 and the add-back of non-cash items consisting of depreciation of approximately $4,085,000, amortization of land use
rights of approximately $48,000 and stock-based compensation expense of approximately $181,000, and changes in operating assets
and liabilities primarily consisting of a decrease in notes receivable of approximately $599,000, a decrease in accounts receivable
of approximately $1,465,000 due to the collection made in 2014, a decrease in prepaid value-added taxes on purchases of approximately
$374,000, offset by an increase in inventories of approximately $3,224,000 due to the increase in raw materials and work-in-process
in order to satisfy the increased purchase orders from our customers, a decrease in accounts payable of approximately $284,000,
a decrease in accrued expenses of approximately $382,000, a decrease in income taxes payable of approximately $1,154,000 due to
the payments made to China tax authorities in 2014, and a decrease in advances from customers of approximately $1,061,000.
For
the six months ended June 30, 2015 and 2014, net cash flow used in investing activities reflects the purchase of property and
equipment of approximately $6,000 and $6,280,000, respectively. The property and equipment purchased in the six months ended June
30, 2014 related to the expansion of our dyeing and finishing production facilities.
Net
cash flow provided by financing activities was approximately $164,000 for the six months ended June 30, 2015 as compared to net
cash flow provided by financing activities of approximately $1,624,000 for the six months ended June 30, 2014. During the six
months ended June 30, 2015, we received proceeds from bank loans of approximately $2,945,000, and proceeds from the decrease in
restricted cash of approximately $327,000, offset by repayments for bank loans of approximately $2,781,000, and payments for the
decrease in bank acceptance notes payable of approximately $327,000. During the six months ended June 30, 2014, we received proceeds
from bank loans of $2,280,000, proceeds from the decrease in restricted cash of $326,000 and net proceeds from sale of common
stock of approximately $1,624,000, offset by the repayments of bank loans of $2,280,000 and the decrease in bank acceptance notes
payable of $326,000. We generally finance our operations through short term bank loans, which we have repaid at maturity and reborrowed
at the then applicable interest rate.
Our
capital requirements for the next twelve months relate to purchasing machinery for the manufacture of products in our petroleum
and chemical equipment segments. We believe that our cash flow from operations will be sufficient to meet our anticipated cash
requirements for the next twelve months.
We
generally finance our operations through short term loans from our banks, which we refinance upon expiration. We do not have any
long-term financing arrangements.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs,
cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates.
We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant
assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information
within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize
our contractual obligations as of June 30, 2015 (dollars in thousands), and the effect these obligations are expected to have
on our liquidity and cash flows in future periods.
| |
Payments Due by Period | |
Contractual obligations: | |
Total | | |
Less than
1 year | | |
1-3 years | | |
3-5 years | | |
5+ years | |
Bank loans (1) | |
$ | 3,285 | | |
$ | 3,285 | | |
$ | - | | |
$ | - | | |
$ | - | |
Bank acceptance notes payable | |
| 164 | | |
| 164 | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 3,449 | | |
$ | 3,449 | | |
$ | - | | |
$ | - | | |
$ | - | |
|
(1) |
Bank
loans consisted of short term bank loans. Historically, we have refinanced these bank loans for an additional term of six
months to one year and we expect to continue to refinance these loans upon expiration. |
Off-balance
Sheet Arrangements
We
have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity
or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do
not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or research and development services with us.
Foreign
Currency Exchange Rate Risk
We
produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange
rate fluctuations between RMB and US dollars. For the three and six months ended June 30, 2015, we had unrealized foreign currency
translation gain of $329,321 and $802,301, respectively, because of changes in the exchange rate.
Inflation
The
effect of inflation on our revenue and operating results was not significant.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
required for smaller reporting companies.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Adam Wasserman,
our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures
as of June 30, 2015.
Disclosure
controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief
financial officer. Based on that evaluation, Mr. Wu and Mr. Wasserman concluded that our disclosure controls and procedures were
not effective as of June 30, 2015.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness
of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
404”). As previously reported in our Form 10-K for the year ended December 31, 2014, management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2014 and, during our assessment, management identified significant
deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii)
a lack of segregation of duties within accounting functions. Although management believes that these deficiencies do not amount
to a material weakness, our internal controls over financial reporting were not effective at December 31, 2014.
We
currently have no plans to expand our ERP system during 2015 and have not implemented further ERP modules to manage inventory
and to expand existing ERP systems to other areas of our factory. Due to our working capital requirements and the lack of local
professionals with the necessary experience in implementing the ERP system, we postponed the hiring of professional staff to implement
ERP system. We have found that engaging professionals who are based outside of Wuxi is very costly and we have not been able to
find qualified personnel in the Wuxi area.
Due
to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.
As a result, we have not been able to take steps to improve our internal controls over financial reporting during the six months
ended June 30, 2015. However, to the extent possible, we will implement procedures to assure that the initiation of transactions,
the custody of assets and the recording of transactions will be performed by separate individuals.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency,
or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of the company’s financial reporting.
In
light of this significant deficiency, we performed additional analyses and procedures in order to conclude that our consolidated
financial statements for the three and six months ended June 30, 2015 included in this Quarterly Report on Form 10-Q was fairly
stated in accordance with the U.S. GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated
financial statements for the quarter ended June 30, 2015 are fairly stated, in all material respects, in accordance with the U.S.
GAAP.
Changes
in Internal Controls over Financial Reporting
There
were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal
controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
6. EXHIBITS
31.1 | |
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer |
31.2 | |
Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer |
32.1 | |
Section 1350 certification of Chief Executive Officer and Chief Financial Officer |
101.INS | |
XBRL Instance Document |
101.SCH | |
XBRL Taxonomy Extension Schema Document |
101.CAL | |
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | |
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | |
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | |
XBRL Taxonomy Extension Presentation Linkbase Document |
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.
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. |
|
|
|
Date: August 14, 2015 |
By: |
/s/ Jianhua Wu |
|
|
Jianhua Wu, Chief Executive Officer
and Principal Executive Officer |
|
|
|
Date: August 14, 2015 |
By: |
/s/ Adam Wasserman |
|
|
Adam Wasserman, Chief Financial Officer
and Principal Accounting Officer |
37
Exhibit
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY
ACT OF 2002
I,
Jianhua Wu, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Cleantech Solutions
International, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
|
b) |
designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; |
|
d) |
disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. |
The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent function): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation
of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and |
|
|
|
|
b) |
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls over financial reporting. |
Dated:
August 14, 2015 |
By: |
/s/
Jianhua Wu |
|
|
Jianhua
Wu
Chief Executive Officer
(Principal Executive Officer) |
Exhibit
31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY
ACT OF 2002
I,
Adam Wasserman, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Cleantech Solutions
International, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
|
b) |
designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; |
|
d) |
disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. |
The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of registrant’s board of directors (or persons performing the equivalent function): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation
of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and |
|
|
|
|
b) |
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls over financial reporting. |
Dated:
August 14, 2015 |
By: |
/s/
Adam Wasserman |
|
|
Adam
Wasserman Chief Financial Officer (Principal Accounting Officer) |
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Cleantech Solutions International, Inc. (the “Company”) on Form 10-Q for the
period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
Jianhua Wu, chief executive officer of the Company, and Adam Wasserman, chief financial officer of the Company, certify, pursuant
to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
| (2) | The
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
Date:
August 14, 2015 |
By: |
/s/ Jianhua
Wu |
|
|
Jianhua
Wu
Chief Executive
Officer |
|
|
(Principal
Executive Officer) |
Date:
August 14, 2015 |
By: |
/s/ Adam
Wasserman |
|
|
Adam
Wasserman
Chief Financial
Officer
(Principal
Accounting Officer) |
A
signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement has been provided to
the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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