CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
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 of heat exchangers, separators, tanks, towers, cryogenic equipment, and other products. The Company refers to this segment
of its business as the petroleum and chemical equipment segment.
Basis
of presentation; management’s responsibility for preparation of financial statements
The
Company’s unaudited 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, 2016 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2016. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015 and footnotes thereto
included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2016. The consolidated balance sheet
as of December 31, 2015 contained herein has been derived from the audited consolidated financial statements as of December 31,
2015, but does not include all disclosures required by the U.S. GAAP.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis
of presentation; management’s responsibility for preparation of 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 the two 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
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis
of presentation; management’s responsibility for preparation of 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 (loss) income from operations is consolidated with the Company’s, and the Company’s
net (loss) income includes all of the Huayang Companies net (loss) income. The Company does not have any non-controlling interest
and, accordingly, did not subtract any net (loss) income in calculating the net (loss) 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 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 three and six months ended June 30, 2016 and 2015 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. Because of the significant decline in revenues from the forged rolled rings and
related components and petroleum equipment segments, the Company is evaluating on an ongoing basic, the continuation of these
segments. In the event that the Company discontinues either or both of these segments, the Company may suffer an impairment expense
with respect to the assets dedicated to those segments.
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 June 30, 2016 and December 31, 2015, cash balances
held in PRC and PRC banks of $19,520,763 and $18,777,228, respectively, are uninsured. The funds are primarily held in banks.
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.
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 liabilities, 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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2016 and December 31, 2015, the Company’s cash balances by geographic area were as follows:
Country:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
United States
|
|
$
|
2,142
|
|
|
|
0.01
|
%
|
|
$
|
13,142
|
|
|
|
0.1
|
%
|
China
|
|
|
19,520,763
|
|
|
|
99.99
|
%
|
|
|
18,777,228
|
|
|
|
99.9
|
%
|
Total cash and cash equivalents
|
|
$
|
19,522,905
|
|
|
|
100.0
|
%
|
|
$
|
18,790,370
|
|
|
|
100.0
|
%
|
Restricted
cash
Restricted
cash consists of cash deposits held by various banks to secure bank acceptance notes payable. The Company’s restricted cash
totaled $248,367 and $647,080 at June 30, 2016 and December 31, 2015, respectively.
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 $69,242 and $132,497 at June 30, 2016 and December
31, 2015, 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, 2016
and December 31, 2015, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $3,144,612 and $3,218,592, 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 $1,068,196 and $1,093,326 at June 30, 2016 and December 31, 2015, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $855,671 and $1,038,884 at June
30, 2016 and December 31, 2015, 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.
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.
Advances
from customers
Advances
from customers at June 30, 2016 and December 31, 2015 amounted to $350,345 and $433,050, 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, 2016 and 2015, amounts allocated to installation
and warranty revenues were $21,113 and $20,120, respectively. For the six months ended June 30, 2016 and 2015, amounts allocated
to installation and warranty revenues were $37,876 and $42,886, 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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
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 June 30, 2016 and December 31, 2015, 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 $32,002 and $377,844 for the three months ended June 30, 2016 and 2015, respectively.
Shipping costs totaled $66,478 and $630,496 for the six months ended June 30, 2016 and 2015, 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 $43,489 and $54,926 for the three months ended June 30, 2016 and 2015, respectively. Employee benefit
costs totaled $91,240 and $123,378 for the six months ended June 30, 2016 and 2015, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling, general and administrative expenses. The Company did not incur any advertising
expenses for the three and six months ended June 30, 2016. Advertising expenses totaled $19,103 for the three and six months ended
June 30, 2015.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $66,237 and $28,562 for the
three months ended June 30, 2016 and 2015, respectively. Research and development costs totaled $84,638 and $57,260 for the
six months ended June 30, 2016 and 2015, 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 (loss) income. The cumulative translation adjustment and effect of exchange rate changes on cash for the six months
ended June 30, 2016 and 2015 was $(458,073) and $94,996, 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 June 30, 2016 and December 31, 2015 were translated at 6.6434 RMB to $1.00 and at 6.4907 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 six months ended June 30, 2016 and 2015 were 6.5354
RMB and 6.1128 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rate.
(Loss)
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 (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 three and six months ended June 30, 2016 and 2015. The following table presents a reconciliation of basic and diluted
net (loss) income per share:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net (loss) income for basic and diluted net (loss) income per share of common stock
|
|
$
|
(680,182
|
)
|
|
$
|
1,226,570
|
|
|
$
|
(1,524,275
|
)
|
|
$
|
2,469,004
|
|
Weighted average common stock outstanding - basic and diluted
|
|
|
4,485,002
|
|
|
|
3,939,986
|
|
|
|
4,292,846
|
|
|
|
3,937,333
|
|
Net (loss) income per common share - basic and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.63
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
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 three and six months ended June 30, 2016 and 2015 included net (loss) income and unrealized (loss) gain
from foreign currency translation adjustments.
Reclassification
Certain reclassifications
have been made in prior year same period’s consolidated financial statements to conform to the current period’s financial
presentation.
Recent
accounting pronouncements
In
March 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718)”. Under ASU 2016-09, all excess tax
benefits and deficiencies arising from employee share-based payment awards, and dividends on those awards, will be recognized
in the income statement during the period in which they occur. ASU 2016-09 allows companies to make an accounting policy election
to estimate forfeitures, as required today, or record them when they occur and allows companies to withhold an amount up to the
maximum statutory tax rate without causing the award to be classified as a liability. Within the statement of cash flows, ASU
2016-09 requires excess tax benefits to be classified as an operating activity and cash payments to tax authorities in connection
with shares withheld to be classified as a financing activity. ASU 2016-09 is effective for annual periods, and interim periods
within the annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company has not yet determined
the effect that ASU 2016-09 will have on its 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
June 30, 2016 and December 31, 2015, accounts receivable consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Accounts receivable
|
|
$18,208,847
|
|
|
$19,042,451
|
|
Less: allowance for doubtful accounts
|
|
|
(3,144,612
|
)
|
|
|
(3,218,592
|
)
|
|
|
$
|
15,064,235
|
|
|
$
|
15,823,859
|
|
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
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
3 –
INVENTORIES
At
June 30, 2016 and December 31, 2015, inventories consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
1,293,112
|
|
|
$
|
690,824
|
|
Work-in-process
|
|
|
1,030,398
|
|
|
|
1,593,815
|
|
Finished goods
|
|
|
1,718,709
|
|
|
|
635,771
|
|
|
|
|
4,042,219
|
|
|
|
2,920,410
|
|
Less: reserve for obsolete inventories
|
|
|
(1,068,196
|
)
|
|
|
(1,093,326
|
)
|
|
|
$
|
2,974,023
|
|
|
$
|
1,827,084
|
|
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.
NOTE
4 –
PREPAID EXPENSES AND OTHER
At
June 30, 2016 and December 31, 2015, prepaid expenses and other consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Prepaid income taxes
|
|
$
|
579,135
|
|
|
$
|
785,471
|
|
Prepaid stock-based professional fees
|
|
|
72,600
|
|
|
|
-
|
|
Prepaid valued added tax on purchase
|
|
|
87,733
|
|
|
|
89,353
|
|
Other
|
|
|
125,431
|
|
|
|
117,231
|
|
|
|
$
|
864,899
|
|
|
$
|
992,055
|
|
NOTE
5 –
PROPERTY AND EQUIPMENT
At
June 30, 2016 and December 31, 2015, property and equipment consisted of the following:
|
|
Useful life
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Manufacturing equipment
|
|
5 - 10 years
|
|
$
|
64,864,789
|
|
|
$
|
66,381,394
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
24,101,262
|
|
|
|
24,668,268
|
|
Vehicles
|
|
5 years
|
|
|
190,080
|
|
|
|
194,552
|
|
Office equipment and furniture
|
|
5 years
|
|
|
161,601
|
|
|
|
165,403
|
|
|
|
|
|
|
89,317,732
|
|
|
|
91,409,617
|
|
Less: accumulated depreciation
|
|
|
|
|
(42,041,431
|
)
|
|
|
(39,655,653
|
)
|
|
|
|
|
$
|
47,276,301
|
|
|
$
|
51,753,964
|
|
For
the three months ended June 30, 2016 and 2015, depreciation expense amounted to $1,677,033 and $2,070,007, respectively, of which
$1,302,898 and $1,902,611, respectively, was included in cost of revenues, and the remainder was included in operating expenses.
For the six months ended June 30, 2016 and 2015, depreciation expense amounted to $3,351,761 and $4,144,514, respectively, of
which $2,816,888 and $3,632,422, respectively, was included in cost of revenues, and the remainder was included in operating expenses
NOTE
6 –
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, 2016
and 2015, amortization of land use rights amounted to $22,627 and $24,266, respectively. For the six months ended June 30, 2016
and 2015, amortization of land use rights amounted to $45,226 and $48,352, respectively. At June 30, 2016 and December 31, 2015,
land use rights consisted of the following:
|
|
Useful life
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Land use rights
|
|
45 - 50 years
|
|
$
|
4,064,304
|
|
|
$
|
4,159,920
|
|
Less: accumulated amortization
|
|
|
|
|
(804,460
|
)
|
|
|
(777,849
|
)
|
|
|
|
|
$
|
3,259,844
|
|
|
$
|
3,382,071
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
6 –
LAND USE RIGHTS (continued)
Amortization
of land use rights attributable to future periods is as follows:
Twelve-month periods ending June 30:
|
|
Amount
|
|
2017
|
|
$
|
88,981
|
|
2018
|
|
|
88,981
|
|
2019
|
|
|
88,981
|
|
2020
|
|
|
88,981
|
|
2021
|
|
|
88,981
|
|
Thereafter
|
|
|
2,814,939
|
|
|
|
$
|
3,259,844
|
|
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
maturities. At June 30, 2016 and December 31, 2015, short-term bank loans consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
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 and repaid in May 2016
|
|
$
|
-
|
|
|
$
|
693,300
|
|
Loan form Agricultural and Commercial Bank, due on May 26, 2017 with annual interest rate of 7.038% at June 30, 2016, secured by certain assets of the Company
|
|
|
677,364
|
|
|
|
-
|
|
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 Jiangsu Huishan Mintai Village Town Bank, due on November 1, 2016 with annual interest rate of 10.56% at June 30, 2016, secured by certain assets of the Company
|
|
|
752,627
|
|
|
|
-
|
|
Loan from Bank of Communications, due on September 3, 2016 with annual interest rate of 5.62% at June 30, 2016 and December 31, 2015
|
|
|
752,627
|
|
|
|
770,333
|
|
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 December 26, 2016 with annual interest rate of 5.97% at June 30, 2016, secured by certain assets of the Company
|
|
|
752,626
|
|
|
|
-
|
|
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
|
|
$
|
2,935,244
|
|
|
$
|
3,081,332
|
|
Interest
related to the short-term bank loans, which was $55,462 and $56,628 for the three months ended June 30, 2016 and 2015, respectively,
and $111,176 and $113,971 for the six months ended June 30, 2016 and 2015, respectively, is included in interest expense on the
accompanying consolidated statements of operations and comprehensive (loss) income.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
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 are deposits with various lenders. At June 30, 2016 and December 31, 2015, the Company’s
bank acceptance notes payables consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
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 and paid on June 29, 2016, collateralized by 100% of restricted cash deposited
|
|
|
-
|
|
|
|
77,034
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on August 29, 2016, collateralized by 100% of restricted cash deposited
|
|
|
75,263
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on September 25, 2016, collateralized by 100% of restricted cash deposited
|
|
|
30,105
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on October 13, 2016, collateralized by 100% of restricted cash deposited
|
|
|
30,105
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on December 28, 2016, collateralized by 100% of restricted cash deposited
|
|
|
45,158
|
|
|
|
-
|
|
Agricultural and Commercial Bank, non-interest bearing, due on September 10, 2016, collateralized by restricted cash deposited of $67,736
|
|
|
57,199
|
|
|
|
-
|
|
Total
|
|
$
|
237,830
|
|
|
$
|
647,080
|
|
NOTE
9 –
ACCRUED LIABILITIES
At
June 30, 2016 and December 31, 2015, accrued liabilities consisted of the following:
|
|
June 30,
2016
|
|
|
December 31, 2015
|
|
Accrued liability for claimed sale contract dispute (1)
|
|
$
|
5,434,512
|
|
|
$
|
5,562,365
|
|
Accrued salaries and related benefits
|
|
|
85,956
|
|
|
|
465,514
|
|
Accrued professional fees
|
|
|
32,336
|
|
|
|
171,433
|
|
Other payables
|
|
|
85,649
|
|
|
|
161,767
|
|
|
|
$
|
5,638,453
|
|
|
$
|
6,361,079
|
|
(1)
|
In
December 2015, the Company received a notice of contract termination in writing from
its largest customer, which was a customer in the petroleum and chemical equipment segment,
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 ($5,434,512 and $5,562,365 at June 30, 2016 and December
31, 2015, respectively).
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
10 –
STOCKHOLDERS’ EQUITY
Common
stock issued for services
On
March 1, 2016, the Board of Directors approved and authorized the Company to issue 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 stock-based compensation and fees of $91,150 for the six months ended June
30, 2016 and recorded prepaid expenses of $64,450 which will be amortized over the balance of the corresponding service periods.
On
March 1, 2016, the Board of Directors approved and authorized the Company to issue a total of 300,000 shares of common stock to
two companies which performed services relating to preparing and implementing a new business plan for the Company with the objective
of improving the Company’s long-term growth. Of these shares, 100,000 shares were issued pursuant to an agreement with one
consultant and 200,000 shares were issued pursuant to an agreement with a second consultant. The agreements provide for the issuance
of an additional 100,000 shares to one consultant and 200,000 to the second consultant if the agreement is in effect in July 2016.
The shares were valued at fair market value using the reported closing share price on the date of grant, and the Company recorded
stock-based compensation of $393,000 in the six months ended June 30, 2016.
On
June 30, 2016, the Board of Directors approved and authorized the Company to issue 12,500 shares of common stock pursuant to its
amended 2010 long-term incentive plan to a consultant. The shares were valued at $12,500, the fair market value on the grant date
using the reported closing share price on the date of grant, and the Company recorded stock-based compensation and fees of $4,350
for the six months ended June 30, 2016 and recorded prepaid expenses of $8,150 which will be amortized over the rest of service
periods.
The
Company recorded stock-based compensation and fess of $60,250 for the three months ended June 30, 2016.
Common
stock sold for cash
On
June 6, 2016, the Company sold 230,000 shares of common stock at a purchase price of $1.00 per share to one investor pursuant
to a stock purchase agreement. The Company did not engage a placement agent with respect to the sale. The Company received net
proceeds of $230,000.
On
June 24, 2016, the Company sold 230,000 shares of common stock at a purchase price of $1.10 per share to one investor pursuant
to a stock purchase agreement. The Company did not engage a placement agent with respect to the sale. The Company received net
proceeds of $253,000.
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, 2015, the Company appropriated the required maximum 50% of its
registered capital to statutory reserve for Dyeing and Heavy Industries; accordingly, no additional statutory reserve is required
for the three and six months ended June 30, 2016. As of June 30, 2016, the Company had not appropriated the required maximum 50%
of its registered capital to statutory reserve for Fulland Wind Energy. During the three and six months ended June 30, 2016, the
Company did not make any appropriations to statutory reserve for Fulland Wind Energy as it incurred recurring net loss.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
12 –
SEGMENT INFORMATION
For
the three and six months ended June 30, 2016 and 2015, the Company operated in three reportable business segments - (1) the manufacture
of textile dyeing and finishing equipment segment, (2) the manufacture of forged rolled rings and related components segment,
and (3) the manufacture of petroleum and chemical 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. Because of the significant decline in revenues from the forged rolled
rings and related components and petroleum equipment segments, the Company is evaluating, on an ongoing basic, the continuation
of these two segments. In the event that the Company discontinues either or both of these segments, the Company may suffer an
impairment expense with respect to the assets dedicated to those segments. Information with respect to these reportable business
segments for the three and six months ended June 30, 2016 and 2015 was as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
3,917,882
|
|
|
$
|
8,612,954
|
|
|
$
|
8,444,582
|
|
|
$
|
15,136,306
|
|
Forged rolled rings and related components
|
|
|
143,394
|
|
|
|
2,999,002
|
|
|
|
405,449
|
|
|
|
10,272,614
|
|
Petroleum and chemical equipment
|
|
|
-
|
|
|
|
3,578,644
|
|
|
|
130,736
|
|
|
|
5,428,145
|
|
|
|
|
4,061,276
|
|
|
|
15,190,600
|
|
|
|
8,980,767
|
|
|
|
30,837,065
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
1,013,625
|
|
|
|
859,913
|
|
|
|
1,968,904
|
|
|
|
1,721,997
|
|
Forged rolled rings and related components
|
|
|
663,408
|
|
|
|
703,626
|
|
|
|
1,325,963
|
|
|
|
1,402,067
|
|
Petroleum and chemical equipment
|
|
|
-
|
|
|
|
506,468
|
|
|
|
56,894
|
|
|
|
1,020,450
|
|
|
|
|
1,677,033
|
|
|
|
2,070,007
|
|
|
|
3,351,761
|
|
|
|
4,144,514
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
32,344
|
|
|
|
36,255
|
|
|
|
64,954
|
|
|
|
71,913
|
|
Forged rolled rings and related components
|
|
|
12,123
|
|
|
|
6,901
|
|
|
|
24,365
|
|
|
|
15,005
|
|
Petroleum and chemical equipment
|
|
|
10,995
|
|
|
|
13,472
|
|
|
|
21,857
|
|
|
|
27,053
|
|
|
|
|
55,462
|
|
|
|
56,628
|
|
|
|
111,176
|
|
|
|
113,971
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
139,789
|
|
|
|
1,161,616
|
|
|
|
508,244
|
|
|
|
1,909,832
|
|
Forged rolled rings and related components
|
|
|
(682,773
|
)
|
|
|
(25,075
|
)
|
|
|
(1,380,851
|
)
|
|
|
588,588
|
|
Petroleum and chemical equipment
|
|
|
(66,532
|
)
|
|
|
159,435
|
|
|
|
(108,968
|
)
|
|
|
385,864
|
|
Other (a)
|
|
|
(70,666
|
)
|
|
|
(69,406
|
)
|
|
|
(542,700
|
)
|
|
|
(415,280
|
)
|
|
|
$
|
(680,182
|
)
|
|
$
|
1,226,570
|
|
|
$
|
(1,524,275
|
)
|
|
$
|
2,469,004
|
|
Identifiable long-lived tangible assets at June 30, 2016 and December 31, 2015 by segment
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Dyeing and finishing equipment
|
|
$
|
23,614,343
|
|
|
$
|
25,782,801
|
|
Forged rolled rings and related components
|
|
|
12,854,879
|
|
|
|
14,212,045
|
|
Petroleum and chemical equipment
|
|
|
10,807,079
|
|
|
|
11,759,118
|
|
|
|
$
|
47,276,301
|
|
|
$
|
51,753,964
|
|
Identifiable long-lived tangible assets at June 30, 2016 and December 31, 2015 by geographical location
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
China
|
|
$
|
47,276,301
|
|
|
$
|
51,753,964
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
47,276,301
|
|
|
$
|
51,753,964
|
|
(a)
|
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.
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
13 –
CONCENTRATION
Customers
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for
the three and six months ended June 30, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Customer
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
A
|
|
|
16
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
B
|
|
|
14
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
C
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
D
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
F
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
|
|
*
|
|
G
|
|
|
*
|
|
|
|
21
|
%
|
|
|
*
|
|
|
|
10
|
%
|
No
customer accounted for 10% of the Company’s total outstanding accounts receivable at June 30, 2016 and December 31, 2015.
At December 31, 2015, the Company had a dispute with its largest customer and the accounts receivable from its largest customer
was fully reserved.
Suppliers
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s inventories purchases
for the three and six months ended June 30, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Supplier
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
A
|
|
|
12
|
%
|
|
|
27
|
%
|
|
|
18
|
%
|
|
|
24
|
%
|
B
|
|
|
11
|
%
|
|
|
*
|
|
|
|
13
|
%
|
|
|
*
|
|
C
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
%
|
The
two largest suppliers accounted for 9.8% of the Company’s total outstanding accounts payable at June 30, 2016. Three largest
suppliers accounted for 13.6% of the Company’s total outstanding accounts payable at December 31, 2015.
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
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 June 30, 2016 and December 31, 2015, 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, 2016 and December
31, 2015 were approximately $76,803,000 and $79,627,000, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2016
NOTE
15 –
COMMITMENTS AND CONTINGENCIES
On June 13, 2016, the Company entered into an agreement to purchase patent
technology use right for a ten-year term from Chengdu Textile College (“Chengdu College”). According to the agreement,
the Company has the obligation to make a one-time payment of RMB 16.0 million (approximately $2.4 million) to Chengdu Textile
College for this ten-year term exclusive patent use right. The patent covers ozone-ultrasonic textile dyeing equipment is valid
for ten years from the issuance date of April 20, 2016. The ten-year term of the right is contemporaneous with the life
of the patent. Chengdu College has the obligation to maintain the patent rights and to provide us with the information and
material to enable us to use the patent rights.
NOTE
16 –
SUBSEQUENT EVENTS
On
July 1, 2016, the Company issued 100,000 shares of its common stock to a company pursuant to an agreement with a consultant as
described in Note 10. The shares were valued at fair market value using the reported closing share price on the date of issuance,
and the Company recorded prepaid expense of $97,980 which will be amortized over the related service period. A consulting agreement
with a second consultant which is described in Note 10 was terminated, and no additional shares of common stock were issued or
are issuable pursuant to the consulting agreement with the second consultant.
On
July 18, 2016, the Company sold 260,000 shares of its common stock at a purchase price of $1.04 per share to one investor pursuant
to a stock purchase agreement. The Company did not engage a placement agent with respect to the sale. The Company received net
proceeds received of $270,400 from the sale.
On August 5,
2016, the Company made the RMB 16.0 million payment due to Chengdu College pursuant to the patent use right purchase agreement
described in Note 15.