CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2015 and 2014
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 textile dyeing and finishing machines 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. 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.
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.
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.
Beginning
in February 2015, Heavy Industries began to produce equipment for the petroleum and chemical industries, and it 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.
Basis
of presentation
The
Company’s 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.
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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis
of presentation (continued)
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.
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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of estimates
The
preparation of the 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 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. At December 31, 2015 and 2014, cash balances in banks in the PRC of $18,777,228 and $7,792,993,
respectively, are uninsured.
Fair
value of financial instruments
The
Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
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
December 31, 2015 and 2014, equipment held for sale was measured at fair value on a nonrecurring basis as shown in the following
tables.
|
|
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,
2015
|
|
|
Impairment
Loss
|
|
Equipment held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
417,171
|
|
|
|
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 held for sale as of December 31, 2015 and 2014. Upon completion
of its 2015 and 2014 impairment analysis, the Company determined that the carrying value exceeded the fair market value on the
equipment held for sale. Accordingly, the Company recorded an impairment loss of $417,171 and $3,799,947 at December 31, 2015
and 2014, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair
value of financial instruments (continued)
The
carrying amounts reported in the 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
December 31, 2015 and 2014, the Company’s cash balances by geographic area were as follows:
Country:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
United States
|
|
$
|
13,142
|
|
|
|
0.1
|
%
|
|
$
|
42,798
|
|
|
|
0.5
|
%
|
China
|
|
|
18,777,228
|
|
|
|
99.9
|
%
|
|
|
7,792,993
|
|
|
|
99.5
|
%
|
Total cash and cash equivalents
|
|
$
|
18,790,370
|
|
|
|
100.0
|
%
|
|
$
|
7,835,791
|
|
|
|
100.0
|
%
|
In
December 2015, the Company received a letter from its largest customer which accounted approximately 13% of the Company’s
revenues, pursuant to which the customer claimed that the Company was delinquent in the delivery of the products and those products
that were delivered did not meet the required quality standards. The customer claimed that it is entitled to damages of
RMB 36,103,640, or approximately $5,806,778 at December 31, 2015. As a result of the dispute with this customer, the Company,
at December 31, 2015:
|
·
|
Included in accrued expenses $5,562,365,
representing the potential liability to this customer based on the customer’s claim (See Note 9);
|
|
·
|
Increased its accounts receivable reserve
to fully reserve the approximately $1,759,000 due from this customer (See Note 2);
|
|
·
|
Increased its reserve for obsolete inventory
by approximately $836,000, representing the remaining inventory manufactured to the specifications of this customer (See Note 3);
and
|
|
·
|
Recorded an impairment charge of approximately $1,900,000 relating to the manufacturing equipment which is specially
designed to manufacture products for petroleum and chemical customer and is not otherwise used by the Company (See Note 4).
|
The Company is engaged in discussions
with this customer, but cannot predict the results of these discussions.
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 $132,497 and $114,034 at December 31, 2015 and 2014,
respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 December 31,
2015 and 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $3,218,592 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. A reserve is established when management determines that certain inventories
may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand,
the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on
estimates. The Company recorded an inventory reserve of $1,093,326 and $181,646 at December 31, 2015 and 2014, respectively.
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended
to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $1,038,884 and $565,581 at December
31, 2015 and 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 operations and comprehensive (loss) 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
In
March 2014, the Company signed an operating lease agreement related to the lease of electro-slag re-melted (“ESR”)
equipment for a period of eight years. Equipment held for operating lease was depreciated over its estimated useful life
starting from the operating lease commencement date, April 1, 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. For the year ended December 31, 2014, rental income was $605,214 and the related depreciation
on the equipment held for operating lease was $503,675, respectively. The lessee stopped using the equipment and stopped paying
its lease payments in early 2015 and the Company has not found and does not expect to find other potential lessees in the next
twelve months. Therefore, at December 31, 2015 and 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 consolidated balance sheets.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
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.
For
the years ended December 31, 2015 and 2014, the Company incurred impairment charge in operations of $417,171 and $3,799,947, respectively,
on electro-slag re-melted equipment. The valuations of the ESR equipment which were reflected as equipment held for sale at December
31, 2015 and 2014 on the accompanying consolidated balance sheets, and the amounts of the impairment charge, were based on the
impairment assessments conducted on the ESR equipment at December 31, 2015 and 2014.
At
December 31, 2015 and 2014, the Company conducted an impairment assessment on property and equipment based on the guidelines established
in ASC Topic 360 to determine the estimated fair market value of property and equipment as of December 31, 2015 and 2014. Such
analysis considered future use of such equipment, consultation with equipment resellers, and other industry factors. Upon completion
of the 2015 impairment analysis, the Company determined that the carrying value exceeded the fair market value on certain equipment
used in the Company’s petroleum and chemical equipment segment and forged rolled rings and related components segment. Accordingly,
in connection with the impairment of such equipment, the Company recorded an impairment charge of $6,599,487 at December 31, 2015.
The Company did not record any impairment charge on the property and equipment for the year ended December 31, 2014.
Advances
from customers
Advances
from customers at December 31, 2015 and 2014 amounted to $433,050 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 years ended December 31, 2015 and 2014, amounts allocated to installation
and warranty revenues were $154,515 and $130,565, respectively. Based on historical experience, warranty service calls and any
related labor costs have been minimal.
Rental
income is recognized on a straight-line basis over the term of the operating lease.
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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 December 31, 2015 and 2014, the Company had no uncertain
tax positions, and will continue to evaluate for uncertain positions in the future.
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 $916,089 and $1,372,724 for the years ended December 31, 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 $224,359 and $245,267 for the years ended December 31, 2015 and 2014, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements
of operations and comprehensive (loss) income and totaled $29,459 and $24,175 for the years ended December 31, 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 $98,780 and $116,061 for the
years ended December 31, 2015 and 2014, respectively.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 (loss). The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended
December 31, 2015 and 2014 was $(925,082) and $6,338, 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.
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 December 31, 2015 and 2014 were translated at 6.4907 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 operations for the years ended December 31, 2015 and 2014 were 6.2175 RMB and 6.1432 RMB to
$1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average
translation rate.
Earnings
per share of common stock
ASC
Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”)
with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
Basic
net (loss) income per share is computed by dividing net (loss) income available to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted net (loss) income per share is computed by dividing net
(loss) 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 common stock equivalents and potentially dilutive common stock outstanding
during the years ended December 31, 2015 and 2014. The following table presents a reconciliation of basic and diluted net (loss)
income per share:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Net (loss) income for basic and diluted net (loss) income per share of common stock
|
|
$
|
(12,770,222
|
)
|
|
$
|
4,266,417
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding– basic and diluted
|
|
|
3,940,622
|
|
|
|
3,715,300
|
|
Net (loss) income per common share - basic and diluted
|
|
$
|
(3.24
|
)
|
|
$
|
1.15
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
(loss) income
Comprehensive
(loss) income is comprised of net (loss) 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
(loss) income for the years ended December 31, 2015 and 2014 included net (loss) income and unrealized loss from foreign currency
translation adjustments.
Reclassification
Certain
reclassifications have been made in prior year’s consolidated financial statements to conform to the current year’s
financial presentation. The reclassifications are primarily within operating expenses to reflect bad debt expense as a separate
line item.
Recent
accounting pronouncements
In
June 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-10, “Technical Corrections and Improvements” (“ASU 2015-10”). The amendments in ASU 2015-10 cover
a wide range of Topics in the Accounting Standards Codification (the “ASC”). The amendments in ASU 2015-10 represent
changes to clarify the ASC, correct unintended application of guidance, or make minor improvements to the ASC that are not expected
to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally,
some of the amendments will make the ASC easier to understand and easier to apply by eliminating inconsistencies, providing needed
clarifications, and improving the presentation of guidance in the ASC. Transition guidance varies based on the amendments in ASU
2015-10. The amendments in ASU 2015-10 that require transition guidance are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim
period. All other amendments will be effective upon the issuance of ASU 2015-10. The adoption of this guidance is not expected
to have a material impact on the Company’s consolidated financial statements.
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU
2015-11”). The amendments in this update require an entity to measure inventory within the scope of ASU 2015-11 (the amendments
in ASU 2015-11 do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost) at the lower
of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is uncharged for inventory measured
using last-in, first-out or the retail inventory method. The amendments in ASU 2015-11 more closely align the measurement of inventory
in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (“IFRS”). ASU 2015-11
is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. The amendments in ASU 2015-11 should be applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. The adoption of this guidance is not expected to have a material impact on
the Company’s consolidated financial statements.
In
August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date”, which defers the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit
entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as
of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
CLEANTECH
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements (continued)
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU
2015-17”). ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity
be offset and presented as a single amount is not affected by the amendments in ASU 2015-17. ASU 2015-17 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard
may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The adoption of ASU
2015-17 is not expected to have a significant 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.
NOTE
2 –
ACCOUNTS RECEIVABLE
At
December 31, 2015 and 2014, accounts receivable consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Accounts receivable
|
|
$
|
19,042,451
|
|
|
$
|
21,637,365
|
|
Less: allowance for doubtful accounts
|
|
|
(3,218,592
|
)
|
|
|
(1,321,328
|
)
|
|
|
$
|
15,823,859
|
|
|
$
|
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. After evaluating the collectability of individual receivable balances, the Company
increased the allowance for doubtful accounts in the amount of approximately $2,062,000 and $522,000 for the years ended December
31, 2015 and 2014, respectively. In December 2015, based on a notice of contract termination received by the Company from its
largest petroleum and chemical equipment segment customer, the customer requested some relief and has not paid the remaining outstanding
accounts receivable balance of approximately $1,759,000. Accordingly, in addition to general changes in the allowance for doubtful
accounts balance, the Company increased its allowance for doubtful accounts by approximately $1,759,000 which represents this
customer’s full amount of outstanding accounts receivable. The Company is currently discussing this issue with the customer
and the Company is unable to determine if the accounts receivable balance will be collected.
NOTE
3 –
INVENTORIES
At
December 31, 2015 and 2014, inventories consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Raw materials
|
|
$
|
690,824
|
|
|
$
|
835,589
|
|
Work-in-process
|
|
|
1,593,815
|
|
|
|
1,454,999
|
|
Finished goods
|
|
|
635,771
|
|
|
|
2,132,080
|
|
|
|
|
2,920,410
|
|
|
|
4,422,668
|
|
Less: reserve for obsolete inventories
|
|
|
(1,093,326
|
)
|
|
|
(181,646
|
)
|
|
|
$
|
1,827,084
|
|
|
$
|
4,241,022
|
|
The
Company establishes a reserve to mark down its inventories for estimated unmarketable inventories equal to the difference between
the cost of inventories and the estimated net realizable value based on assumptions about the usability of the inventories, future
demand and market conditions. For the years ended December 31, 2015 and 2014, the Company increased the reserve for obsolete inventories
in the amount of approximately $962,000 and $0, respectively, which has been included in cost of revenues. In December 2015, based
on a notice of contract termination received by the Company from its largest petroleum and chemical equipment segment customer,
the Company increased its reserve for obsolete inventories by approximately $836,000 for all remaining inventories manufactured
to the specifications of such customer and not readily saleable to other customers.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
4 –
PROPERTY AND EQUIPMENT
At
December 31, 2015 and 2014, property and equipment consisted of the following:
|
|
Useful life
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Office equipment and furniture
|
|
5 years
|
|
$
|
165,403
|
|
|
$
|
166,734
|
|
Manufacturing equipment
|
|
5 -10 years
|
|
|
66,381,394
|
|
|
|
76,870,025
|
|
Vehicles
|
|
5 years
|
|
|
194,552
|
|
|
|
205,714
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
24,668,268
|
|
|
|
26,083,624
|
|
|
|
|
|
|
91,409,617
|
|
|
|
103,326,097
|
|
Less: accumulated depreciation
|
|
|
|
|
(39,655,653
|
)
|
|
|
(33,697,500
|
)
|
|
|
|
|
$
|
51,753,964
|
|
|
$
|
69,628,597
|
|
For
the years ended December 31, 2015 and 2014, depreciation expense amounted to $8,128,805 and $8,469,771, respectively, of which
$7,299,775 and $7,244,647, respectively, was included in cost of revenues. In 2014, $503,675 of the depreciation expense related
to the ESR equipment, which was held for operating lease in 2014, was included as a reduction in rental income, and the remainder
was included in operating expenses. In 2015 the equipment was treated as equipment held for sale, and no depreciation expense
was taken with respect to that equipment.
At
December 31, 2015 and 2014, the Company conducted an impairment assessment on property and equipment based on the guidelines established
in ASC Topic 360 to determine the estimated fair market value of property and equipment as of December 31, 2015 and 2014. Such
analysis considered future use of such equipment, consultation with equipment resellers, and other industry factors. Upon completion
of the 2015 impairment analysis, the Company determined that the carrying value exceeded the fair market value on certain equipment
used in the Company’s petroleum and chemical equipment segment and forged rolled rings and related components segment. Accordingly,
in connection with the impairment of such equipment, the Company recorded an impairment charge of $6,599,487 at December 31, 2015.
The Company did not record any impairment charge on the property and equipment for the year ended December 31, 2014.
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 years ended December 31, 2015 and
2014, amortization of land use rights amounted to $95,076 and $96,226, respectively. At December 31, 2015 and 2014, land use rights
consisted of the following:
|
|
Useful life
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Land use rights
|
|
45 - 50 years
|
|
$
|
4,159,920
|
|
|
$
|
4,398,598
|
|
Less: accumulated amortization
|
|
|
|
|
(777,849
|
)
|
|
|
(726,178
|
)
|
|
|
|
|
$
|
3,382,071
|
|
|
$
|
3,672,420
|
|
Amortization
of land use rights attributable to future periods is as follows:
Year ending December 31:
|
|
Amount
|
|
2016
|
|
$
|
91,075
|
|
2017
|
|
|
91,075
|
|
2018
|
|
|
91,075
|
|
2019
|
|
|
91,075
|
|
2020
|
|
|
91,075
|
|
Thereafter
|
|
|
2,926,696
|
|
|
|
$
|
3,382,071
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
6 –
EQUIPMENT HELD FOR SALE
During
the last quarter of 2013, the Company decided to dispose of or 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 December 31, 2015 and 2014. At December 31, 2015 and 2014, the Company evaluated the ESR equipment for impairment. The Company
compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment
charge for the excess of carrying value over fair value. For the years ended December 31, 2015 and 2014, the Company recorded
an impairment loss on ESR equipment in the amount of $417,171 and $3,799,947, respectively. As of December 31, 2015 and 2014,
the equipment held for sale amounted to $0 and $422,540, respectively.
Equipment
held for operating lease was depreciated over its estimated useful life starting from the operating lease commencement date, 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. For the year ended December 31, 2014, the Company recorded rental income of $605,214 and recorded related depreciation
on the equipment held for operating lease of $503,675, respectively, which were included in rental income, net, on the accompanying
consolidated statements of income and comprehensive income.
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 December 31, 2015 and 2014, short-term bank loans consisted of the following:
|
|
December 31,
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 December 31, 2015, secured by certain assets of the Company
|
|
|
693,300
|
|
|
|
-
|
|
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 1, 2015 with annual interest rate of 9.36% at December 31, 2014, secured by certain assets of the Company and repaid on due date
|
|
|
-
|
|
|
|
814,531
|
|
Loan from Jiangsu Huishan Mintai Village Town Bank, due on March 1, 2016 with annual interest rate of 10.56% at December 31, 2015, secured by certain assets of the Company and repaid in February 2016
|
|
|
770,333
|
|
|
|
-
|
|
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 3, 2016 with annual interest rate of 5.62% at December 31, 2015
|
|
|
770,333
|
|
|
|
-
|
|
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 December 31, 2015, secured by certain assets of the Company and repaid in January 2016
|
|
|
385,166
|
|
|
|
-
|
|
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 December 31, 2015, secured by certain assets of the Company and repaid in January 2016
|
|
|
462,200
|
|
|
|
-
|
|
Total short-term bank loans
|
|
$
|
3,081,332
|
|
|
$
|
3,095,219
|
|
For
the years ended December 31, 2015 and 2014, interest expense related to short-term bank loans amounted to $235,366 and $238,226,
respectively, which were included in interest expense on the accompanying consolidated statements of operations and comprehensive
(loss) income.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
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 December 31, 2015 and 2014, the Company’s
bank acceptance notes payables consisted of the following:
|
|
December 31,
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 and paid on January 9, 2016, collateralized by 100% of restricted cash deposited
|
|
|
308,133
|
|
|
|
-
|
|
Bank of China, non-interest bearing, due and paid on January 16, 2016, collateralized by 100% of restricted cash deposited
|
|
|
107,847
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due and paid on March 21, 2016, collateralized by 100% of restricted cash deposited
|
|
|
77,033
|
|
|
|
-
|
|
Bank of China, non-interest bearing, due and paid on March 23, 2016, collateralized by 100% of restricted cash deposited
|
|
|
77,033
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on June 29, 2016, collateralized by 100% of restricted cash deposited
|
|
|
77,034
|
|
|
|
-
|
|
Total
|
|
$
|
647,080
|
|
|
$
|
488,719
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
9 –
ACCRUED EXPENSES
At
December 31, 2015 and 2014, accrued expenses consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Accrued liability for claimed sale contract dispute (1)
|
|
$
|
5,562,365
|
|
|
$
|
-
|
|
Accrued salaries and related benefits
|
|
|
465,514
|
|
|
|
693,700
|
|
Accrued professional fees
|
|
|
171,433
|
|
|
|
110,921
|
|
Other payables
|
|
|
161,767
|
|
|
|
254,958
|
|
|
|
$
|
6,361,079
|
|
|
$
|
1,059,579
|
|
|
(1)
|
In
December 2015, the Company received a notice of contract termination in writing from
its largest petroleum and chemical equipment segment customer alleging breach of contract
for late delivery of product and for delivery of product with quality defects. Pursuant
to the sales contract, the customer demanded payment of a penalty of 20% of the contract
price plus penalties for late delivery and damages in the amounts of 36,103,640 RMB ($5,562,365
at December 31, 2015) which has been included in accrued expenses. In connection with
this contingent liability, the Company recorded a loss from sales contract dispute of
$5,806,778 which has been reflected in operating expenses on the accompanying statements
of operations.
|
NOTE
10 –
INCOME TAXES
The
Company accounts for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition
of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting
standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary
differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes,
are dependent upon future taxable income and timing of reversals of future taxable differences along with any other positive and
negative evidence during the periods in which those temporary differences become deductible or are utilized.
The
Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Under the Income
Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the
statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Heavy Industries) and the
Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary,
Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject
to income taxes.
Cleantech
Solutions International, Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately
$6,818,000 for income taxes purposes through December 31, 2015, subject to the Internal Revenue Code Section 382, which places
a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating
loss carries forward for United States income taxes and may be available to reduce future years’ taxable income. These carry
forwards will expire, if not utilized, through 2035. Management believes that it appears more likely than not that the Company
will not realize these tax benefits due to the Company’s continuing losses for United States income taxes purposes. Accordingly,
the Company has provided a 100% valuation allowance on the deferred tax asset benefit related to the U.S. net operating loss carry
forward to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.
The
Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $52 million and $64 million as of
December 31, 2015 and 2014, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely
reinvested in the Company’s PRC operations. Accordingly, no provision has been made for any deferred taxes related to future
repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if
we concluded that such earnings will be remitted in the future.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
10 –
INCOME TAXES (continued)
Net
deferred tax assets related to the U.S. net operating loss carry forward and impairment loss on equipment held for sale have been
fully offset by a valuation allowance. The Company reviews the realization of its deferred tax assets related to the deduction
of impairment loss on tangible long-lived assets and allowance for doubtful accounts and reserve for obsolete inventories on a
quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In the fourth quarter of 2015
and 2014, the Company performed analysis related to the realization of the deferred tax asset related to the deduction of impairment
loss on tangible long-lived assets, allowance for doubtful accounts and reserve for obsolete inventories. As a result, the Company
determined that it was more likely than not that the deferred tax asset related to the deductibility for PRC tax purposes of impairment
losses on tangible long-lived assets, a portion of allowance for doubtful accounts, and a portion of reserve for obsolete inventories
would not be realized.
The
table below summarizes the Company’s income taxes provision:
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Income
taxes provision:
|
|
|
|
|
|
|
Current
|
|
$
|
1,331,697
|
|
|
$
|
3,475,822
|
|
Deferred
|
|
|
13,023
|
|
|
|
1,085,208
|
|
Total
provision for income taxes
|
|
$
|
1,344,720
|
|
|
$
|
4,561,030
|
|
The
table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for
the years ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
U.S. statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
U.S. effective rate in excess of China tax rate
|
|
|
(30.5
|
)%
|
|
|
2.5
|
%
|
China valuation allowance
|
|
|
(13.4
|
)%
|
|
|
12.3
|
%
|
U.S. valuation allowance
|
|
|
(1.9
|
)%
|
|
|
2.9
|
%
|
Total provision for income taxes
|
|
|
(11.8
|
)%
|
|
|
51.7
|
%
|
For
the years ended December 31, 2015 and 2014, income taxes expense related to our operations in the PRC and amounted to $1,344,720
and $4,561,030, respectively.
The
tax effects of temporary differences under ASC 740 “Accounting for Income Taxes” that give rise to significant portions
of deferred tax assets and liabilities as of December 31, 2015 and 2014 were as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net U.S. operating loss carry forward
|
|
$
|
2,318,150
|
|
|
$
|
2,098,420
|
|
Loss on impairment of tangible long-lived assets
|
|
|
3,730,060
|
|
|
|
2,167,335
|
|
Allowance for doubtful accounts and reserve for obsolete inventories
|
|
|
1,077,979
|
|
|
|
375,744
|
|
Total gross deferred tax assets
|
|
|
7,126,189
|
|
|
|
4,641,499
|
|
Less: valuation allowance
|
|
|
(6,905,294
|
)
|
|
|
(4,265,755
|
)
|
Net deferred tax assets
|
|
$
|
220,895
|
|
|
$
|
375,744
|
|
At
December 31, 2015 and 2014, the valuation allowance were $2,318,150 and $2,098,420 related to the U.S. net operating loss carry
forward, $3,730,060 and $2,167,335 related to the PRC impairment loss on tangible long-lived assets, and $857,084 and $0 related
to allowance for doubtful accounts and reserve for obsolete inventories, respectively. During the years ended December 31, 2015
and 2014, the valuation allowance increased by approximately $2,640,000 and $2,421,000, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
11 –
STOCKHOLDERS’ EQUITY
Common
stock issued for services
During
2014, the Company issued 65,500 shares of common stock pursuant to its amended 2010 long-term incentive plan, including 20,000
shares to the chief executive officer, 15,000 shares to the then chief financial officer and 3,500 shares to an independent director.
The shares were valued at fair market value using the reported closing share price on the dates of grant, and the Company recorded
stock-based compensation of $362,215 in 2014.
During
2015, the Company issued 84,000 shares of common stock pursuant to its amended 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 4,000 shares to a director. The shares were valued at fair
market value using the reported closing share price on the dates of grant, and the Company recorded stock-based compensation of
$285,560 in 2015.
Common
stock sold for cash – related parties
On
June 2, 2014, the Company sold 290,984 shares of its common stock to its chief executive officer and his wife for $1,623,691.
The purchase price per share was the highest closing price per share during the period from the date of the chief executive officer
advised the board of his proposal to advance the funds, which was May 2, 2014, until June 2, 2014, when the Company’s independent
directors approved the terms of the stock sale.
2010
long-term incentive plan
In
January 2010, the Company’s board of directors adopted, and in March 2010, the stockholders approved the Company’s
2010 long-term incentive plan, which initially covered 200,000 shares of common stock. In October 2013, the Company’s
board of directors adopted, and in December 2013, the stockholders approved, an amendment to the 2010 long-term incentive plan
to increase the number of shares of common stock subject to the plan, to 500,000 shares. The plan provides for the grant of incentive
and non-qualified options and stock grants to employees, including officers, directors and consultants. The plan is to be administered
by a committee of not less than three directors, each of whom is to be an independent director. In the absence of a
committee, the plan is administered by the board of directors. Members of the committee are not eligible for stock
options or stock grants pursuant to the plan unless such stock options or stock grant are granted by a majority of the Company’s
independent directors other than the proposed grantee. As of December 31, 2015, the Company had issued a total of 327,491
shares of common stock under the plan.
NOTE
12–
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, 2013, 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
years ended December 31, 2015 and 2014. As of December 31, 2015, the Company appropriated the required maximum 50% of its registered
capital to statutory reserve for Dyeing, and the Company had not appropriated the required maximum 50% of its registered capital
to statutory reserve for Fulland Wind Energy. During the years ended December 31, 2015 and 2014, the Company did not make any
appropriations to statutory reserve for Fulland Wind Energy as it incurred recurring net losses.
For
the years ended December 31, 2015 and 2014, statutory reserve activities were as follows:
|
|
Dyeing
|
|
|
Heavy Industries
|
|
|
Fulland Wind Energy
|
|
|
Total
|
|
Balance - December 31, 2013
|
|
$
|
373,048
|
|
|
$
|
1,168,796
|
|
|
$
|
1,202,876
|
|
|
$
|
2,744,720
|
|
Addition to statutory reserve
|
|
|
549,479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
549,479
|
|
Balance - December 31, 2014
|
|
|
922,527
|
|
|
|
1,168,796
|
|
|
|
1,202,876
|
|
|
|
3,294,199
|
|
Addition to statutory reserve
|
|
|
261,269
|
|
|
|
-
|
|
|
|
-
|
|
|
|
261,269
|
|
Balance - December 31, 2015
|
|
$
|
1,183,796
|
|
|
$
|
1,168,796
|
|
|
$
|
1,202,876
|
|
|
$
|
3,555,468
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
13 –
SEGMENT INFORMATION
For
the year ended December 31, 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 year ended December 31, 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 years ended December 31, 2015 and
2014 was as follows:
Revenues
|
|
2015
|
|
|
2014
|
|
Dyeing and finishing equipment
|
|
$
|
29,010,950
|
|
|
$
|
42,209,342
|
|
Forged rolled rings and related components
|
|
|
12,080,893
|
|
|
|
33,749,334
|
|
Petroleum and chemical equipment
|
|
|
8,473,733
|
|
|
|
-
|
|
|
|
|
49,565,576
|
|
|
|
75,958,676
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
3,397,397
|
|
|
|
3,119,823
|
|
Forged rolled rings and related components
|
|
|
2,755,726
|
|
|
|
4,846,273
|
|
Petroleum and chemical equipment
|
|
|
1,975,682
|
|
|
|
-
|
|
Other (a)
|
|
|
-
|
|
|
|
503,675
|
|
|
|
|
8,128,805
|
|
|
|
8,469,771
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
144,056
|
|
|
|
147,525
|
|
Forged rolled rings and related components
|
|
|
40,363
|
|
|
|
90,701
|
|
Petroleum and chemical equipment
|
|
|
50,947
|
|
|
|
-
|
|
|
|
|
235,366
|
|
|
|
238,226
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
3,652,124
|
|
|
|
5,494,791
|
|
Forged rolled rings and related components
|
|
|
(6,136,431
|
)
|
|
|
(482,221
|
)
|
Petroleum and chemical equipment
|
|
|
(9,638,721
|
)
|
|
|
-
|
|
Other (b)
|
|
|
(647,194
|
)
|
|
|
(746,153
|
)
|
|
|
$
|
(12,770,222
|
)
|
|
$
|
4,266,417
|
|
Identifiable long-lived tangible assets at December 31, 2015 and 2014 by segment
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Dyeing and finishing equipment
|
|
$
|
25,782,801
|
|
|
$
|
30,691,226
|
|
Forged rolled rings and related components (c)
|
|
|
14,212,045
|
|
|
|
38,937,371
|
|
Petroleum and chemical equipment (c)
|
|
|
11,759,118
|
|
|
|
-
|
|
Equipment held for sale
|
|
|
-
|
|
|
|
422,540
|
|
|
|
$
|
51,753,964
|
|
|
$
|
70,051,137
|
|
Identifiable long-lived tangible assets at December 31, 2015 and 2014 by geographical location
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
China
|
|
$
|
51,753,964
|
|
|
$
|
70,051,137
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
51,753,964
|
|
|
$
|
70,051,137
|
|
(a)
|
Depreciation
for equipment held for sale is not taken in 2015. The equipment was held for rental in
2014. The Company does not allocate the depreciation for equipment held for rental to
any operating segment. Such depreciation is reflected as a reduction in rental income.
|
|
|
(b)
|
The
Company does not allocate any general and administrative expense 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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
14 –
CONCENTRATIONS
Customers
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for
the year ended December 31, 2015. No customer accounted for 10% or more of the Company’s revenues during 2014.
Customer
|
|
Year
Ended December 31, 2015
|
A
|
|
13%
|
The customer A is the customer in the petroleum
and chemical segment with which we have the dispute and we have fully reserved the receivable from this customer. See Note 2.
No customer accounted for 10% or more of the Company’s outstanding accounts receivable at December 31, 2015 and 2014.
Suppliers
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for
the years ended December 31, 2015 and 2014.
|
|
Year Ended December 31,
|
|
Supplier
|
|
2015
|
|
|
2014
|
|
A
|
|
|
17
|
%
|
|
|
20
|
%
|
B
|
|
|
15
|
%
|
|
|
13
|
%
|
C
|
|
|
15
|
%
|
|
|
16
|
%
|
The
three largest suppliers accounted for 13.6% and 30.4% of the Company’s total outstanding accounts payable at December 31,
2015 and 2014, respectively.
NOTE
15 –
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
and Dyeing had reached the cumulative limit as of December 31, 2015. 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 December 31, 2015 and 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 December 31, 2015 and 2014 were
approximately $79,627,000 and $96,519,000, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
NOTE
16 –
SUBSEQUENT EVENTS
On March 1, 2016, the Company issued 160,000
shares of common stock pursuant to its amended 2010 long-term incentive plan, including 75,000 shares to its former chief financial
officer. The shares were valued at $209,600, the fair market value on the grant date using the reported closing share price on
the date of grant, and the Company reduced accrued liabilities of $54,000 and recorded prepaid expenses of $155,600 which will
be amortized over the rest of corresponding service periods.
On March 1, 2016, the Company issued 300,000
shares of common stock to two companies which performed and will perform services relating to preparing and implementing a new
business plan for the Company with the objective of improving the Company’s long-term growth. The shares were valued at fair
market value using the reported closing share price on the dates of grant, and the Company recorded stock-based compensation of
$393,000 in the first quarter of 2016.
In
January 2016, the Company repaid short-term loan from Bank of China in the principal amount of $385,166, and borrowed the same
amount from the same bank. The new loan bears interest rate at 5.972% per annum and is due on December 26, 2016.
In
January 2016, the Company repaid short-term loan from Bank of China in the principal amount of $462,200, and borrowed $385,166
from the same bank. The new loan bears interest rate at 5.972% per annum and is due on December 26, 2016.
In
February 2016, the Company repaid short-term loan from Jiangsu Huishan Mintai Village Town Bank in the principal amount of $770,333,
and borrowed the same amount from the same bank. The new loan bears interest rate at 10.56% per annum and is due on November 1,
2016.
F-25