NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
1 –
DESCRIPTION OF BUSINESS AND 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. The Company
is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on
May 9, 2007. Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”)
and, until December 30, 2016, Fulland owned 100% of Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind”).
Green Power is and Fulland Wind was a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s
Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements,
as fully described below, dated October 12, 2007 with Wuxi Huayang Heavy Industries, Co., Ltd. (“Heavy Industries”),
formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd., and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”),
both of which are limited liability companies organized under the laws of, and based in, the PRC. Heavy Industries and Dyeing
are sometimes collectively referred to as the “Huayang Companies.”
Fulland
was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital in accordance
with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official
notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain
SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition
matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and his wife, Ms. Lihua Tang, submitted their
application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens
to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Dyeing,
which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for
the textile industry. The Company refers to this segment as the dyeing and finishing equipment segment.
On
December 26, 2016, Dyeing and an unrelated individual formed Wuxi Shengxin New Energy Engineering Co., Ltd. (“Shengxin”),
a limited liability company organized under the laws of the PRC in which Dyeing has a 30% equity interest and the unrelated third
party holds a 70% interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain
photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. At December
31, 2016, Shengxin had not yet commenced operations.
Fulland
Wind was formed on August 27, 2008. In 2009, the Company began to produce and sell forged products through Fulland Wind. Through
Fulland Wind, the Company manufactured and sold forged products, including wind products such as shafts, rolled rings, gear rims,
gearboxes, bearings and other components and finished products and assemblies for the wind power and other industries, including
large-scale equipment used in the manufacturing process for the various industries. The Company refers to this segment of its
business as the forged rolled rings and related components segment. On December 30, 2016, Fulland sold the stock of Fulland Wind
and accordingly, the forged rolled rings and related components business is reflected as a discontinued operations for all periods
presented (See Note 3).
Beginning
in February 2015, Heavy Industries began to produce equipment for the petroleum and chemical industries. The Company referred to
this segment of its business as the petroleum and chemical equipment segment. Because of a significant decline in revenues from
this segment, the Company determined it would not continue to operate in this segment and accordingly, the petroleum and chemical
equipment segment is reflected as a discontinued operations for all periods presented (See Note 3). As a result of the discontinuation
of the forged rolled rings and the petroleum and chemical equipment business, the Company’s business is limited to the dyeing
and finishing equipment business as its sole continuing operations at December 31, 2016.
Reverse
split; change in authorized common stock
On
February 24, 2017, the Company filed a certificate of change which effected a one-for-four reverse split, which became effective
in the marketplace on March 20, 2017, and a reduction in the Company’s authorized common stock from 50,000,000 shares to
12,500,000 shares. These consolidated financial statements have been retroactively restated to reflect this reverse split.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
concern
These consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company had a loss from
continuing operations of $1,393,222 for the year ended December 31, 2016. The net cash used in operations were $6,948,531 for the
year ended December 31, 2016. Additionally, during the year ended December 31, 2016, revenues, all of which are derived from the
manufacture and sales of textile dyeing and finishing equipment, decreased by 40.1% as compared to the year ended December 31,
2015. In addition, on December 26, 2016, the Company invested approximately $8,611,000 for a 30% interest in Shengxin, a newly-formed
company which plans to develop, construct and maintain solar farms in China, which may require additional investments by the Company.
The current cash balance cannot be projected to cover the additional investments if needed from the Company for its share of interest
in Shengxin and pay operating expenses arising from normal business operations for the next twelve months from the issuance date
of this report. Management believes that these matters raise substantial doubt about the Company’s ability to continue as
a going concern. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash
flow positive, or raise additional debt and/or equity capital. Management believes that its capital resources are not currently
adequate to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2017.
The Company may seek to raise capital through
additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital
from sales of equity and from bank loans, there is no assurance that it will be able to continue to do so. If the Company is unable
to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail
or cease operations. The accompanying consolidated financial statements do not include any adjustments related to the recoverability
and or classification of recorded asset amounts and or classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
Basis
of presentation
The
Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland,
Green Power and Fulland Wind, as well as the financial statements of Huayang Companies Dyeing, which conducts the Company’s
continuing operations, and Heavy Industries, which operated discontinued operations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On December 30, 2016, the Company sold and transferred its 100 % interest in Fulland Wind to an unrelated party and discontinued
the Company’s forged rolled rings and related components business
. Additionally, the Company’s management decided to discontinue its petroleum and chemical equipment segment due to significant declines in revenues and the loss of its major customer. As such,
forged rolled rings and related components segment
’s and petroleum and chemical segment’s assets and liabilities have been classified on the consolidated balance sheets as assets and liabilities of discontinued operations as of December 31, 2016 and 2015. The operating results of the
forged rolled rings and related components
and petroleum and chemical segments have been classified as discontinued operations in our consolidated statements of operations for all years presented. Unless otherwise indicated, all disclosures and amounts in the notes to the consolidated financial statements are related to the Company’s continuing operations.
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. To date, no such
payments have been made and all profits were reinvested in the Company’s operations.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
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.
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 the years ended December 31, 2016 and 2015 include the allowance for doubtful
accounts on accounts and other receivables, 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, the fair
value of equity method investment, the fair value of assets held for sale, accruals for taxes due, and the value of stock-based
compensation.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2016 and 2015, cash balances held in PRC banks of $1,480,941 and $18,777,228, respectively,
are uninsured. The funds are primarily held in banks.
Fair
value of financial instruments
The
Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows
:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date
.
Level
2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data
.
Level
3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information
.
The
following table presents information about equipment held for sale – discontinued operations measured at fair value on a
nonrecurring basis at December 31, 2016. The Company did not measure these assets at fair value at December 31, 2015.
|
|
Quoted Prices in
Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance at December 31,
2016
|
|
Equipment held for sale – discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,147,035
|
|
|
$
|
1,147,035
|
|
The
Company conducted an impairment assessment on the equipment held for sale of discontinued operations based on the guidelines established
in ASC Topic 360 to determine the estimated fair market value of the equipment held for sale of discontinued operations as of
December 31, 2016. Upon completion of its 2016 impairment analysis, the Company determined that the carrying value exceeded the
fair market value on the equipment held for sale of discontinued operations. Accordingly, the Company recorded an impairment loss
of $1,660,305 at December 31, 2016, which has been included in loss from discontinued operations, net of income taxes in the accompanying
statements of operations. The Company did not have any equipment held for sale of discontinued operations at December 31, 2015.
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, receivable from sale of subsidiary, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
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
December 31, 2016 and 2015, the Company’s cash balances by geographic area were as follows:
Country:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
United States
|
|
$
|
557
|
|
|
|
|
*
|
|
$
|
13,142
|
|
|
|
|
*
|
China
|
|
|
1,480,941
|
|
|
|
99.96
|
%
|
|
|
18,777,228
|
|
|
|
99.93
|
%
|
Total cash and cash equivalents
|
|
$
|
1,481,498
|
|
|
|
100.0
|
%
|
|
$
|
18,790,370
|
|
|
|
100.0
|
%
|
Restricted
cash
Restricted
cash mainly consists of cash deposits held by various banks to secure bank acceptance notes payable. The Company’s restricted
cash totaled $551,047 and $647,080 at December 31, 2016 and 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 $133,913 and $132,497 at December 31, 2016 and 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 December 31,
2016 and 2015, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $1,797,476 and $860,923, 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 $21,177 and $22,658 at December 31, 2016 and 2015, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
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 $1,116,525 and $434,409 at December
31, 2016 and 2015, respectively.
Equipment
held for sale
Long-lived
assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to
a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to
locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is
expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in
relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure
long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At December
31, 2016, the Company reflected certain manufacturing equipment that was previously used in the petroleum and chemical equipment
segment as part of assets of discontinued operations as equipment held for sale, which was included in the assets of discontinued
operations on the accompanying consolidated balance sheets. This equipment was sold in March 2017 to a third party (See Note 19).
Property
and equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets
are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in the statements of operations in the year of disposition. The Company examines the possibility of decreases in
the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Equity
method investment
Investments
in which the Company has the ability to exercise significant influence, but do not control, are accounted for under the equity
method of accounting and are included in the long term assets on the consolidated balance sheets. Under this method of accounting,
the Company’s share of the net earnings or losses of the investee is presented below the income tax line on the consolidated
statements of operations. The Company evaluates its equity method investment whenever events or changes in circumstance indicate
that the carrying amounts of such investment may be impaired. If a decline in the value of an equity method investment is determined
to be other than temporary, a loss is recorded in the current period. (See Note 6).
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.
At
December 31, 2016 and 2015, 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, 2016 and 2015. Such
analysis considered future use of such equipment, consultation with equipment resellers, subsequent sales of price of equipment
held for sale, and other industry factors. Upon completion of the 2016 and 2015 impairment analysis, the Company determined that
the carrying value exceeded the fair market value on certain equipment formerly used in the Company’s forging and related
components, and petroleum and chemical equipment segments. Accordingly, in connection with the impairment of such equipment, the
Company recorded impairment charges of $1,660,305 and $7,016,658 for the years at December 31, 2016 and 2015, respectively, which
was included in loss from discontinued operations on the accompanying consolidated statements of operations and comprehensive
loss.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advances
from customers
Advances
from customers at December 31, 2016 and 2015 amounted to $427,446 and $403,778, respectively, and consist of prepayments from
customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue when customers take
delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition
policy.
Revenue
recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured
.
The
Company recognizes revenues from the sale of equipment upon shipment and transfer of title. The other elements may include installation
and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete
installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is
generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person
hours to complete a service and generally is recognized over the contract period. For the years ended December 31, 2016 and 2015,
amounts allocated to installation and warranty revenues were $159,233 and $154,515, 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 are recognized upon customer acceptance and the delivery of the
parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms
.
Income
taxes
The
Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts
for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to
reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred
taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The
Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in the Company’s financial statements.
Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of
the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income
taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given period. As of December 31, 2016 and 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 vesting period or immediately if fully vested and non-forfeitable. The Financial Accounting Standards Board (“FASB”)
also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date
fair value of the award
.
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 or on issuance if fully-vested
and non-forfeitable. 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
.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping
costs
Shipping
costs are included in selling expenses, general and administrative and totaled $141,180 and $200,538 for the years ended December
31, 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 $100,045 and $125,988 for the years ended December 31, 2016 and 2015, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling, general and administrative expenses. Advertising expenses totaled $0 and $19,009
for the years ended December 31, 2016 and 2015, 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 $304,054 and $98,780
for the years ended December 31, 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. The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended December
31, 2016 and 2015 was $(519,152) and $(925,082), 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.
The Company did not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are
not expected to have, a material effect on the results of operations of the Company.
Asset
and liability accounts at December 31, 2016 and 2015 were translated at 6.9448 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 years ended December 31, 2016 and 2015 were 6.6435 RMB and 6.2175 RMB to
$1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average
translation rate.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss
per share of common stock
ASC
Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”)
with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
Basic
net (loss) 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 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, 2016 and 2015. In a period in which the Company has a net loss, all potentially dilutive
securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The
following table presents a reconciliation of basic and diluted net loss per share:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net (loss) income for basic and diluted net loss per common share
|
|
$
|
(11,679,154
|
)
|
|
$
|
(12,770,222
|
)
|
From continuing operations
|
|
|
(1,393,222
|
)
|
|
|
2,998,154
|
|
From discontinued operations
|
|
$
|
(10,285,932
|
)
|
|
$
|
(15,768,376
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding– basic and diluted
|
|
|
1,189,940
|
|
|
|
985,156
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
|
|
|
|
|
|
|
From continuing operations – basic and diluted
|
|
$
|
(1.17
|
)
|
|
$
|
3.04
|
|
From discontinued operations – basic and diluted
|
|
|
(8.64
|
)
|
|
|
(16.01
|
)
|
Net (loss) income per common share - basic and diluted
|
|
$
|
(9.81
|
)
|
|
$
|
(12.97
|
)
|
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The
Company discloses all related party transactions.
Comprehensive
loss
Comprehensive
loss is comprised of net loss and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the years
ended December 31, 2016 and 2015 included net loss 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 have no effect on previously reported net income (loss) and
related to the reclassification of discontinued operations.
Reverse
stock split
The Company
effected a one-for-four reverse stock split of its common stock on March 20, 2017. All share and per share information has been
retroactively adjusted to reflect this reverse stock split.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to
have a material impact on the Company’s 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
3 –
DISCONTINUED OPERATIONS
Pursuant
to an agreement dated December 23, 2016, the Company, through its wholly-owned subsidiary Fulland, sold the stock of Fulland Wind
to a third party for a sales price of RMB48 million (approximately $6.9 million). The Company’s forging and related
components business was conducted through Fulland Wind. The purchase price is payable in three installments. The Company received
the first installment of RMB 14,400,000 (approximately $2.1 million) on December 28, 2016. The Company delivered Fulland Wind’s
business license, seals, books and records, business contracts and personnel roster to the third party buyer on December 30, 2016,
effectively the sale date. A second installment of RMB 14,400,000 (approximately $2.1 million) is due within six months after
the transfer registration formalities are completed and, if the equity transfer registration formalities are completed within
one year without any third party claims on the equity transfer, a final payment of RMB 19,200,000 (approximately $2.7 million)
is due 25 working days after the expiration of such period. The Company expects the final payment to be received within one
year. As a result of the sale, the forged rolled rings and related components business is treated as a discontinued operation.
Additionally,
in December 2016, the Company’s management decided to discontinue its petroleum and chemical equipment segment due to significant
decline in revenues and the loss of its major customer. Accordingly, the petroleum and chemical equipment segment business is
treated as a discontinued operation.
Pursuant
to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the business of the forging and related components
segment and petroleum and chemical equipment segment are considered discontinued operations because: (a) the operations and cash
flows of the forging and related components segment and petroleum and chemical equipment segment were eliminated from the Company’s
operations; and (b) the Company has no interest in the divested operations.
As
of December 31, 2016, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967)
which are still guaranteed
by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2016, the buyer of Fulland Wind has
not obtained the release by Dyeing, the Company’s chief executive officer and his wife of their guarantees.
The sale of Fulland Wind resulted in a loss
on disposal of discontinued operations of $6,459,407. This loss plus the results of operations from Fulland Wind and petroleum
and chemical equipment segment for the years ended December 31, 2016 and 2015 have been reclassified to the loss from discontinued
operations line on the accompanying consolidated statements of operations and comprehensive loss presented herein. In addition,
the historical consolidated balance sheet and consolidated statement of cash flow amounts have also been reclassified to reflect
the forging and related components segment and petroleum and chemical equipment segment businesses as discontinued operations.
Contemporaneously
with the sale of the Fulland Wind stock, pursuant to an agreement dated December 23, 2016, Heavy Industry entered into a lease
with Wang Jiahong for a factory building owned by Heavy Industry at an annual rental of RMB 680,566 (approximately $98,000). The
lease has a ten-year term, commencing January 1, 2017. The first year’s rent is payable in two installments, the first installment,
equals to 30% of the annual rental, being due on signing the lease, which has been paid as of December 31, 2016.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
3 –
DISCONTINUED OPERATIONS (continued)
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as
of and for the fiscal years ended December 31, 2016 and 2015 is set forth below.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Assets:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
78,407
|
|
|
$
|
4,151,958
|
|
Inventories, net of reserve for obsolete inventories
|
|
|
31,019
|
|
|
|
160,036
|
|
Advances to suppliers
|
|
|
200,275
|
|
|
|
604,474
|
|
Equipment held for sale (1)
|
|
|
1,147,035
|
|
|
|
-
|
|
Prepaid expenses and other
|
|
|
302,250
|
|
|
|
981,770
|
|
Total current assets
|
|
|
1,758,986
|
|
|
|
5,898,238
|
|
Equipment held for sale (1)
|
|
|
-
|
|
|
|
3,338,002
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
13,781,006
|
|
Total assets
|
|
$
|
1,758,986
|
|
|
$
|
23,017,246
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
-
|
|
|
$
|
693,300
|
|
Accounts payable
|
|
|
458,433
|
|
|
|
1,599,340
|
|
Accrued expenses and other liabilities
|
|
|
45,280
|
|
|
|
270,471
|
|
Accrued liability for claimed sale contract dispute (2)
|
|
|
-
|
|
|
|
5,562,365
|
|
Advances from customers
|
|
|
54,948
|
|
|
|
29,273
|
|
Total current liabilities
|
|
|
558,661
|
|
|
|
8,154,749
|
|
Total liabilities
|
|
$
|
558,661
|
|
|
$
|
8,154,749
|
|
(1)
|
The
Company committed to a plan to sell the manufacturing equipment that was previously used
in petroleum and chemical equipment segment and reflected this equipment in discontinued
operations as equipment held for sale. In connection with the Company’s analysis
of the equipment held for sale, for the year ended December 31, 2016, the Company recorded
an impairment charge of $1,660,305 which is included on the consolidated statements of
operations in loss from discontinued operations. The Company subsequently sold the equipment
in March 2017 to a third party (See Note 19).
|
(2)
|
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. As a result of the claimed breach of 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 RMB 36,103,640 ($5,562,365 at December 31, 2015). In the third
quarter of 2016, the claimed sale contract dispute was resolved, and the Company made
the payment of RMB 36,103,640 RMB to this customer in full satisfaction of the customer’s
claims against the Company.
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
3 –
DISCONTINUED OPERATIONS (continued)
The
summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is
as follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
595,855
|
|
|
$
|
20,554,626
|
|
Cost of revenues
|
|
|
1,562,774
|
|
|
|
19,701,621
|
|
Gross (loss) profit
|
|
|
(966,919
|
)
|
|
|
853,005
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
1,660,305
|
|
|
|
7,016,658
|
|
Loss from sales contract dispute
|
|
|
-
|
|
|
|
5,806,778
|
|
Other operating expenses
|
|
|
1,124,304
|
|
|
|
3,592,743
|
|
Total operating expenses
|
|
|
2,784,609
|
|
|
|
16,416,179
|
|
Loss from operations
|
|
|
(3,751,528
|
)
|
|
|
(15,563,174
|
)
|
Other expense, net
|
|
|
(74,997
|
)
|
|
|
(77,857
|
)
|
Loss from discontinued operations before income taxes
|
|
|
(3,826,525
|
)
|
|
|
(15,641,031
|
)
|
Income taxes
|
|
|
-
|
|
|
|
127,345
|
|
Loss from discontinued operations, net of income taxes
|
|
|
(3,826,525
|
)
|
|
|
(15,768,376
|
)
|
Loss on sale / disposal of discontinued operations, net of income taxes
|
|
|
(6,459,407
|
)
|
|
|
-
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(10,285,932
|
)
|
|
$
|
(15,768,376
|
)
|
NOTE
4 –
ACCOUNTS RECEIVABLE
At
December 31, 2016 and 2015, accounts receivable consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Accounts receivable
|
|
$
|
15,719,847
|
|
|
$
|
12,532,825
|
|
Less: allowance for doubtful accounts
|
|
|
(1,797,476
|
)
|
|
|
(860,923
|
)
|
|
|
$
|
13,922,371
|
|
|
$
|
11,671,902
|
|
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.
NOTE
5 –
INVENTORIES
At
December 31, 2016 and 2015, inventories consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
1,003,359
|
|
|
$
|
643,976
|
|
Work-in-process
|
|
|
639,345
|
|
|
|
549,824
|
|
Finished goods
|
|
|
772,652
|
|
|
|
495,906
|
|
|
|
|
2,415,356
|
|
|
|
1,689,706
|
|
Less: reserve for obsolete inventories
|
|
|
(21,177
|
)
|
|
|
(22,658
|
)
|
|
|
$
|
2,394,179
|
|
|
$
|
1,667,048
|
|
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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
6 –
EQUITY METHOD INVESTMENT
On
December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin pursuant to an agreement dated December 23, 2016.
The agreement sets forth general terms relating to the proposed business, but does not set forth specific funding obligations
for either party. Dyeing has agreed to invest RMB 60,000,000 (approximately $8,640,000) and had invested RMB 59.8 million ($8,610,759
at December 31, 2016), for which it received a 30% interest, and Mr. Xue has a commitment to invest RMB 140,000,000 (approximately
$20.2 million), of which Mr. Xue has contributed RMB 20,000,000 (approximately $2.9 million), for which Mr. Xue received a 70%
interest in Shengxin. Shengxin’s registered capital is RMB 200 million (approximately $28.8 million). Mr. Xue has advised
Dyeing that he anticipates that he will fund the remaining RMB 120,000,000 (approximately $25.9 million) of his commitment during
the first half of 2017. If Mr. Xue does not make this payment by the end of 2017, Dyeing will have the right to amend the contract,
and both parties will adjust each side’s equity interest to reflect the amount of capital each side has actually invested.
Shengxin
intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the
provinces of GuiZhou and YunNan. As of December 31, 2016, Shengxin had not yet commenced operations.
The
solar farm industry is China is subject to significant government regulation. In order to construct and operate solar farms in
China, it is necessary to obtain a permit for a specific location, to obtain leasehold rights to a significant amount of contiguous
land parcels in provinces where there is significant sunlight for most of the year to support a solar farm and to have an agreement
to connect with the local grid. The development of solar farms requires significant funding, which, if financing is not available,
would have to be provided by Dyeing and Mr. Xue. There are no agreements relating to the funding obligations of either Dyeing
or Mr. Xue with respect to any specific project. Shengxin anticipates that to the extent that it obtains permits for solar farms,
it will form a new subsidiary for the sole purpose of obtaining the permit for a specific location and constructing the solar
farm at that location. The nature of the parties’ respective investments and the respective equity interest in any solar
farm project will be determined on a case-by-case basis. To the extent that Mr. Xue develops the project, he may receive an equity
interest in the project greater than the percentage of his equity investment, with the specific amount being subject to mutual
agreement of the parties.
The
Company’s investment in Shengxin is subject to a high degree of risk. The Company cannot give any assurance that Shengxin
will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably
or that Dyeing will have the resources to provide any funds that may be required in order to fund any solar farm projects for
which Shengxin may obtain permits. There may be a significant delay between the time funds are advanced for any project and the
realization of revenue or cash flow from any project.
For
the year ended December 31, 2016, the Company’s share of Shengxin’s net income or loss was $0. At December 31, 2016,
Shengxin’s assets consisted of cash and advances to supplier of approximately $11.3 million and $144,000, respectively,
and had no liabilities.
NOTE
7 –
PROPERTY AND EQUIPMENT
At
December 31, 2016 and 2015, property and equipment consisted of the following:
|
|
Useful life
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Office equipment and furniture
|
|
5 years
|
|
$
|
65,209
|
|
|
$
|
68,310
|
|
Manufacturing equipment
|
|
5 -10 years
|
|
|
32,240,010
|
|
|
|
34,481,747
|
|
Vehicles
|
|
5 years
|
|
|
169,773
|
|
|
|
181,651
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
21,135,718
|
|
|
|
21,376,122
|
|
|
|
|
|
|
53,610,710
|
|
|
|
56,107,830
|
|
Less: accumulated depreciation
|
|
|
|
|
(23,732,035
|
)
|
|
|
(21,472,874
|
)
|
|
|
|
|
$
|
29,878,675
|
|
|
$
|
34,634,956
|
|
For
the years ended December 31, 2016 and 2015, depreciation expense amounted to $3,829,345 and $4,364,166, respectively, of which
$3,311,410 and $3,776,185, respectively, was included in cost of revenues, and the remainder was included in operating expenses.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
7 –
PROPERTY AND EQUIPMENT (continued)
At December
31, 2016 and 2015, 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, 2016 and 2015. Such
analysis considered future use of such equipment, consultation with equipment resellers, and other industry factors.
Upon
completion of the 2016 and 2015 impairment analysis, the Company determined that the carrying value exceeded the fair market value
on certain equipment formerly used in the Company’s forging and related components, and petroleum and chemical equipment
segments, which have been accounted for as discontinued operations as of December 31, 2016 and 2015 . Accordingly, in connection
with the impairment of such equipment, the Company recorded impairment charges of $1,660,305 and $7,016,658 for the years at December
31, 2016 and 2015, respectively, which was included in loss from discontinued operations on the accompanying consolidated statements
of operations and comprehensive loss.
NOTE
8 –
INTANGIBLE ASSETS
At
December 31, 2016 and 2015, intangible assets
consisted
of the following:
|
|
Useful life
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Land use rights
|
|
45 - 50 years
|
|
$
|
3,887,915
|
|
|
$
|
4,159,920
|
|
Patent use rights
|
|
10 years
|
|
|
2,303,882
|
|
|
|
-
|
|
|
|
|
|
|
6,191,797
|
|
|
|
4,159,920
|
|
Less: accumulated amortization
|
|
|
|
|
(908,102
|
)
|
|
|
(777,849
|
)
|
|
|
|
|
$
|
5,283,695
|
|
|
$
|
3,382,071
|
|
Amortization
of intangible assets attributable to future periods is as follows:
Year ending December 31:
|
|
Amount
|
|
2017
|
|
$
|
315,508
|
|
2018
|
|
|
315,508
|
|
2019
|
|
|
315,508
|
|
2020
|
|
|
315,508
|
|
2021
|
|
|
315,508
|
|
Thereafter
|
|
|
3,706,155
|
|
|
|
$
|
5,283,695
|
|
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.
In
August 2016, the Company purchased a
patent
technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment. The
Company amortizes the exclusive patent use right over the term of the patent.
For
the years ended December 31, 2016 and 2015, amortization of intangible assets amounted to $189,329 and $95,076, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
9 –
SHORT-TERM BANK LOANS
Short-term
bank loans represent amounts due to various banks that are due within one year. These loans can be renewed with these banks upon
maturities. At December 31, 2016 and 2015, short-term bank loans consisted of the following
:
|
|
December 31,
2016
|
|
|
December 31, 2015
|
|
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 July 5, 2017 with annual interest rate of 10.56% at December 31, 2016, secured by certain assets of the Company
|
|
|
719,963
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on September 3, 2016 with annual interest rate of 5.62% at December 31, 2015, secured by certain assets of the Company and repaid on due date
|
|
|
-
|
|
|
|
770,333
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on September 5, 2017 with annual interest rate of 5.62% at December 31, 2016, secured by certain assets of the Company
|
|
|
719,963
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 6, 2017 with annual interest rate of 6.09% at December 31, 2016, secured by certain assets of the Company
|
|
|
359,982
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of China, due on December 8, 2017 with annual interest rate of 6.09% at December 31, 2016, secured by certain assets of the Company
|
|
|
359,981
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
2,159,889
|
|
|
$
|
2,388,032
|
|
Interest
related to the short-term bank loans, which was $124,937 and $144,056 for the years ended December 31, 2016 and 2015, respectively,
is included in interest expense on the accompanying consolidated statements of operations and comprehensive loss
.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
10 –
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 December 31, 2016 and 2015, the Company’s
bank acceptance notes payables consisted of the following
:
|
|
December 31, 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 and paid on January 29, 2017, collateralized by 100% of restricted cash deposited
|
|
|
71,996
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on May 9, 2017, collateralized by 100% of restricted cash deposited
|
|
|
431,978
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Bank of China, non-interest bearing, due and paid on January 6, 2017, collateralized by 100% of restricted cash deposited
|
|
|
43,198
|
|
|
|
-
|
|
Total
|
|
$
|
547,172
|
|
|
$
|
647,080
|
|
NOTE
11 –
ACCRUED EXPENSES
At
December 31, 2016 and 2015, accrued expenses consisted of the following:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Accrued salaries and related benefits
|
|
$
|
143,622
|
|
|
$
|
315,355
|
|
Other payables
|
|
|
224,773
|
|
|
|
295,479
|
|
|
|
$
|
368,395
|
|
|
$
|
610,834
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
12 –
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 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 subsidiary, Green Power, and VIEs (Dyeing
and Heavy Industries) 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
$7,925,000 for income taxes purposes through December 31, 2016, 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 2036. 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 China subsidiary and VIEs of approximately $45.2 million and $53.3 million
as of December 31, 2016 and 2015, 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.
Net deferred tax
assets related to the U.S. net operating loss carry forward are fully offset by a valuation allowance. The Company reviews the
realization of its deferred tax assets related to the deduction of 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.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
12 –
INCOME TAXES (continued)
The
table below summarizes the Company’s income taxes provision:
|
|
Year Ended December 31,
|
|
Income taxes provision:
|
|
2016
|
|
|
2015
|
|
Current
|
|
$
|
-
|
|
|
$
|
1,204,352
|
|
Deferred
|
|
|
-
|
|
|
|
13,023
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
1,217,375
|
|
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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
U.S. statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
U.S. effective rate in excess of China tax rate
|
|
|
(4.2
|
)%
|
|
|
(10.3
|
)%
|
Bad debt allowance
|
|
|
(8.8
|
)%
|
|
|
(0.4
|
)%
|
China valuation allowance
|
|
|
(11.6
|
)%
|
|
|
0.4
|
%
|
U.S. valuation allowance
|
|
|
(9.4
|
)%
|
|
|
5.2
|
%
|
Total provision for income taxes
|
|
|
0.0
|
%
|
|
|
28.9
|
%
|
For
the years ended December 31, 2016 and 2015, income taxes expense was related to our operations in the PRC and amounted to $0 and
$1,217,375, 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, 2016 and 2015 were as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net U.S. operating loss carry forward
|
|
$
|
2,694,569
|
|
|
$
|
2,318,150
|
|
Allowance for doubtful accounts and reserve for obsolete inventories
|
|
|
454,663
|
|
|
|
220,895
|
|
Total gross deferred tax assets
|
|
|
3,149,232
|
|
|
|
2,539,045
|
|
Less: valuation allowance
|
|
|
(2,762,851
|
)
|
|
|
(2,318,150
|
)
|
Net deferred tax assets
|
|
$
|
386,381
|
|
|
$
|
220,895
|
|
At
December 31, 2016 and 2015, the valuation allowance were $2,694,569 and $2,318,150 related to the U.S. net operating loss carry
forward, and $68,282 and $0 related to allowance for doubtful accounts and reserve for obsolete inventories, respectively. During
the year ended December 31, 2016, the valuation allowance increased by approximately $445,000.
The Company had incurred a significant
loss from discontinued operations of $10,285,932 for the year ended December 31, 2016. Such loss is attributable to the Company’s
China operations from the forged rolled rings and related component segment and the petroleum and chemical equipment segment. Management
believes there will be no tax benefit from such loss and accordingly, no deferred tax asset and corresponding valuation reserve
has been provided for at December 31, 2016 and 2015.
NOTE
13 –
STOCKHOLDERS’ EQUITY
Common
stock issued for services
During
2015, the Company issued 21,000 shares of common stock pursuant to its amended 2010 long-term incentive plan, including 5,000
shares to the chief executive officer, 3,000 shares to the chief executive officer’s wife, who the Company employs in its
sales department, 4,500 shares to the chief financial officer and 1,000 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.
On
March 1, 2016, the Company issued 40,000 shares of common stock pursuant to its amended 2010 long-term incentive plan, including
18,750 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 $155,600 for the year ended December 31, 2016
.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
13 –
STOCKHOLDERS’ EQUITY (continued)
On
March 1, 2016, Company issued a total of 75,000 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, 25,000 shares were issued pursuant to an agreement with one consultant and 50,000 shares were issued pursuant to
an agreement with a second consultant. The agreements provide for the issuance of an additional 25,000 shares to one consultant
and 50,000 to the second consultant if the agreement is in effect in July 2016.
On
July
1, 2016, the Company issued an additional 25,000 shares of its common stock to the first consultant pursuant to the agreement.
A consulting agreement with the second consultant was terminated, and no additional shares of common stock were issued or are
issuable pursuant to the consulting agreement with the second consultant
.
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 and fees of $490,980 for the year ended December 31, 2016.
On
June
30, 2016, the Company issued 3,125 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 $12,500 for the year ended December 31, 2016
.
On
December 28, 2016, the Company issued 105,000 shares of common stock pursuant to its 2016 long-term incentive plan, including
50,000 shares to its chief executive officer. The shares were valued at $277,200, 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 $268,126
for the year ended December 31, 2016
and recorded
prepaid expenses of $9,074 which will be amortized over the rest of the corresponding service periods.
Common
stock sold for cash
The
Company sold a total of 180,000 shares of common stock to an investor during June and July 2016 pursuant to stock purchase agreements.
On
June 6, 2016, the Company sold 57,500 shares of common stock at a purchase price
of $4.00 per share, from which the Company received net proceeds of $230,000
. On June 24, 2016, the Company sold 57,500
shares of common stock at a purchase price of $4.40 per share, from which it received net proceeds of $253,000. On July 18, 2016,
the Company sold 65,000 shares of common stock at a purchase price of $4.16 per share, from which it received gross proceeds of
$270,400. The Company did not engage a placement agent with respect to these sales.
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 50,000 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 125,000 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, 2016, the Company had issued a total of 124,998 shares of common
stock under the plan and the Company terminated this 2010 long-term incentive plan in year 2017.
2016
long-term incentive plan
In
September 2016, the Company’s board of directors adopted, and in November 2016, the stockholders approved the Company’s
2016 long-term incentive plan, which covers 125,000 shares of common stock. 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, 2016, the Company had issued a total of 105,000 shares
of common stock under the plan.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
14 –
STATUTORY RESERVE
The
Company is required to make appropriations to statutory reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’
registered capital or members’ equity. The profit arrived at must be set off against any accumulated losses sustained by
the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be
made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of
the registered capital. This statutory reserve is not distributable in the form of cash dividends. As of December 31, 2015, the
Company appropriated the required 50% of its registered capital to statutory reserve for Dyeing and Heavy Industries. Accordingly,
no additional statutory reserve for Dyeing and Heavy Industries are required for the year ended December 31, 2016. Green Power
had loss since its establishment. No appropriation to statutory reserves for it was required as it incurred recurring net loss.
For
the years ended December 31, 2016 and 2015, statutory reserve activities were as follows:
|
|
Continuing Operations
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
Dyeing
|
|
|
Heavy Industries
|
|
|
Fulland Wind
|
|
|
Total
|
|
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
|
|
Reclassification of statutory reserve upon sale of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,202,876
|
)
|
|
|
(1,202,876
|
)
|
Balance - December 31, 2016
|
|
$
|
1,183,796
|
|
|
$
|
1,168,796
|
|
|
$
|
-
|
|
|
$
|
2,352,592
|
|
NOTE
15 –
SEGMENT INFORMATION
During
2016 and for the year ended December 31, 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 were strategic business
units that offered different products. They were managed separately based on the fundamental differences in their operations.
All of the Company’s operations are conducted in the PRC.
Because
of significant declines in revenues from the forged rolled rings and related components segment and
petroleum
and chemical equipment segment,
the Company discontinued these segments and sold
the
forged rolled rings and related components segment
in the fourth quarter of 2016.
Pursuant
to ASC Topic 205-20, Presentation of Financial Statements-Discontinued Operations, the business of forged rolled rings and related
components segment, and petroleum and chemical equipment segment are considered as discontinued operations because: (a) the operations
and cash flows of these segments were eliminated from the Company’s operations; and (b) the Company would not have ability
to influence the operation or financial policies of the
forged rolled rings and related components
segment
subsequent to the sale. The results of operation of the forged rolled rings and related components and the petroleum and chemical
equipment segments have been presented as discontinued operations for the years ended December 31, 2016 and 2015.
At December 31, 2016
and 2015, all remaining identifiable long-lived tangible assets belong to the Company’s continuing operations, the
textile
dyeing and finishing equipment segment and are located in China.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
16 –
CONCENTRATIONS
Customers
No
customer accounted for 10% or more of the Company’s revenues for the years ended December 31, 2016 and 2015.
One
customer accounted for 11% of the Company’s total outstanding accounts receivable at December 31, 2016 and no customer accounted
for 10% of the Company’s total outstanding accounts receivable at December 31, 2015.
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 years ended December 31, 2016 and 2015.
|
|
Year Ended December 31,
|
|
Supplier
|
|
2016
|
|
|
2015
|
|
A
|
|
|
17
|
%
|
|
|
29
|
%
|
B
|
|
|
14
|
%
|
|
|
15
|
%
|
C
|
|
|
10
|
%
|
|
|
*
|
|
No
supplier accounted for 10% or more of the Company’s total outstanding accounts payable at December 31, 2016. One supplier
accounted for 14% of the Company’s total outstanding accounts payable at December 31, 2015.
NOTE
17 – COMMITMENT AND CONTINGENCIES
Equity
investment commitment
On
December 26, 2016, Dyeing made an equity investment with one unrelated company in Shengxin, a newly-formed entity which plans
to develop, construct and maintain photovoltaic power generation projects in China. Shengxin’s total registered capital
is RMB 200 million (approximately $28.8 million).
Dyeing
has agreed to invest RMB 60,000,000 (approximately $8,640,000) for a 30% equity interest and had invested RMB 59,800,000 (approximately
$8,611,000) as of December 31, 2016. Mr. Xue has a commitment to invest RMB 140,000,000 (approximately $20.2 million) for a 70%
interest. Mr. Xue contributed RMB 20,000,000 (approximately $2.9 million), and he advised Dyeing that he anticipates that he will
fund the balance of his commitment during the first half of 2017. If Mr. Xue does not make this payment by the end of 2017, Dyeing
will have the right to amend the contract, and both parties will adjust each sides’ equity interest to reflect the amount
of capital each side has actually invested. As of December 31, 2016, Shengxin had not commenced operations.
Guarantee
of bank loan of sold subsidiary
Pursuant
to an agreement dated December 23, 2016, the Company, through its wholly-owned subsidiary Fulland, sold the stock of Fulland
Wind to a third party. As of December 31, 2016, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967)
which
are still guaranteed by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2016, the
buyer of Fulland Wind has not obtained the release by Dyeing and the Company’s chief executive officer and his wife of
their guarantees. The Company expects that Dyeing and the chief executive officer and his wife will be released from their
guarantee of these bank loans by the end of April 2017, although it cannot give assurance as to whether or when such releases
will be obtained.
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE
18 –
RESTRICTED NET ASSETS
Regulations
in the PRC permit payments of dividends by the Company’s PRC subsidiary and VIEs only out of their retained earnings, if
any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory
reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIEs and subsidiary.
Heavy Industries and Dyeing had reached the cumulative limit as of December 31, 2016. The statutory reserve funds are not distributable
as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIEs and its subsidiary are restricted
in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may
further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or
advances
.
As
of December 31, 2016 and 2015, substantially all of the Company’s net assets are attributable to the PRC VIEs and its subsidiary
located in the PRC. Accordingly, the Company’s restricted net assets at December 31, 2016 and 2015 were approximately $57,324,000
and $79,627,000, respectively
.
NOTE
19 –
SUBSEQUENT EVENTS
In
January 2017, the Company repaid the bank acceptance notes payable of $115,194.
In
March 2017, the Company sold certain manufacturing equipment that previously used in petroleum and chemical equipment segment
and reflected as equipment held for sale on the accompanying consolidated balance sheets at December 31, 2016, for approximately
$1,147,000 (see Note 3).
F-28