FORM 20-F
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
Commission file number  000-22113
 
EURO TECH HOLDINGS COMPANY LIMITED
(Exact name of Registrant as specified in its charter)
 
 
(Translation of Registrant’s name into English)
 
British Virgin Islands
(Jurisdiction of incorporation or organization)
 
Unit D, 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong
(Address of principal executive offices)
 
T.C. Leung
FAX: 852-28734887
Unit D, 18/F Gee Chang Hong Centre
65 Wong Chuk Hang Road
Hong Kong
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Ordinary Shares, no par value
 
CLWT
 
NASDAQ Capital Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None.
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
None.
(Title of Class)
 
Indicate the number of issued and outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report 2,061,909 Ordinary Shares
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
 
1
 
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
 
Indicate by check mark whether the registrant has submitted electronically and posed on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large accelerated filer," " accelerated filer," and " emerging growth company" in Rule 12b-2 of the Exchange Act (Check one).
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
 Emerging Growth Company
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
 
†The term “new or revised financial accounting standards” refers to any update by the Financial Accounting Standards Board to its accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board
Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.   Item 17      Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No
 
   
 
2
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
4
4
4
 
 
 

  PART I
 
 
 
 
5
5
5
22
31
31
42
48
49
 
 
 
 
 
 

 
 
 
 
 
 
 
 
49
51
57
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
58
 
 
 
 
PART II
 
 
 
 
59
59
60
61
61
61
61
62
62
62
62
62
 
 
 
 
PART III
 
 
 
 
63
ITEM 18.
63
ITEM 19.
64
 
 
 
3
 
 
I NTRODUCTION
 
In this Form 20-F, references to ”us”, “we”, the “Company” and “Euro Tech” are to Euro Tech Holdings Company Limited and its subsidiaries unless otherwise expressly stated or the context otherwise requires.
 
Forward Looking Statements
 
This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Commission or otherwise. Such forward looking statements are within the meaning of that term in Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Annual Report, including those contained in the sections entitled Part I, Item 3D. “Risk Factors” and Item 5. “Operating and Financial Review and Prospects” and the notes to the Company’s Consolidated Financial Statements, describe factors, among others, that could contribute to or cause such differences.
 
GLOSSARY
 
The following glossary of terms may be helpful in understanding the terminology used in this Annual Report.
 
Ambient Air:
 
Atmospheric air (outdoor as opposed to indoor air).
 
 
 
Anaerobic:
 
Treating waste water biologically in the absence of air.
 
 
 
Atomic Spectrometer:
 
An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample.
 
 
 
Coalescer:
 
A process that coalesces smaller oil particles to form larger oil particles that can readily float to a tank’s surface.
 
 
 
Colorimeter:
 
An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent.
 
 
 
Human Machine Interface Software:
 
A type of software to interface (or coordinate) the interaction between machine or equipment and a human being.
 
 
 
Lamella:
 
Synthetic media installed in a clarifier tank to assist in particle flocculation (coming together in a “floc” or “flakes”).
 
 
 
Mass Spectrometer:
 
An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds.
 
 
 
Membrane Biological Reactor (MBR):
 
A suspended-growth bioreactor combined with a membrane liquid/solids separation unit. The “MBR” uses an advanced membrane technology that treats biological wastes to a quality level which in many industries is sufficient for reuse or low-cost disposal to sewers.
 
 
 
Multi-Channel Digital Recorder:
 
A device that measures and records more than one input of a digitized signal (signal in the form of pulses).
 
 
 
pH Controller:
 
A process instrument that measures and controls the acidity or alkalinity of a fluid.
 
 
 
Reagent:
 
A chemical substance used to cause a chemical reaction and detect another substance.
 
 
 
Sequential Batch Reactor (SBR):
 
A waste-water treatment process that combines aeration and settling in one reactor tank thus saving on space. Used for the treatment of industrial waste-water as well as municipal sewage. The SBR is a batch process that is ideal for waste-waters of changing characteristics.
  
 
4
 

PART I
 
I TEM 1.       IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
This item does not apply to annual reports on Form 20-F .
 
I TEM 2.       OFFER STATISTICS AND EXPECTED TIMETABLE
 
This item does not apply to annual reports on Form 20-F .
 
ITEM 3.      KEY INFORMATION
 
A.    SELECTED FINANCIAL DATA
 
SELECTED FINANCIAL INFORMATION
 
(Amounts expressed in thousands, except share and per share data and unless otherwise stated)
 
The selected consolidated statement of operations and comprehensive income / (loss) data for years ended December 31, 2018, 2017, and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 set forth below are derived from audited consolidated financial statements of the Company included herein and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and “Item 5. Operating and Financial Review and Prospects.” The selected consolidated statement of operations and comprehensive income / (loss) data for the years ended December 31, 2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2016, 2015 and 2014 set forth below are derived from audited consolidated financial statements of the Company which are not included herein.
 
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
 
 
US$
 
 
US$
 
 
US$
 
 
US$
 
 
US$
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
    5,267  
    3,380  
    3,751  
    2,480  
    4,857  
Working capital(1)
    6,013  
    2,986  
    3,101  
    3,698  
    5,267  
Total assets
    23,065  
    23,737  
    23,104  
    21,270  
    23,399  
Short-term debt(2)
    0  
    97  
    720  
    0  
    0  
Net assets
    15,545  
    17,107  
    16,618  
    16,456  
    17,530  
Capital Stock
    123  
    123  
    123  
    123  
    123  
 
(1) Current assets minus current liabilities.
(2) Short-term debt includes short-term borrowings and current portion of long-term bank loans.
   
 
5
 
 
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
 
 
US$
 
 
US$
 
 
US$
 
 
US$
 
 
US$
 
Statement of Operations and Comprehensive Income / (loss) Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
    20,104  
    17,350  
    22,478  
    18,302  
    18,822  
Cost of revenue
    (16,405 )
    (12,937 )
    (17,527 )
    (14,259 )
    (13,991 )
Gross profit
    3,699  
    4,413  
    4,951  
    4,043  
    4,831  
Finance costs
    (7 )
    (11 )
    (19 )
    (4 )
    -  
Selling and Administrative Expenses
    (4,751 )
    (4,976 )
    (5,602 )
    (5,997 )
    (5,802 )
Operating loss
    (1,059 )
    (574 )
    (670 )
    (1,958 )
    (971 )
Interest Income
    35  
    24  
    18  
    45  
    27  
Other income / (losses), net
    58  
    (14 )
    5  
    9  
    65  
Gain on disposal of property, plant and equipment
    3  
    -  
    7  
    -  
    -  
(Loss) before taxes
    (963 )
    (564 )
    (640 )
    (1,904 )
    (879 )
 
       
       
       
       
       
Income taxes credit / (expense)
    312  
    (28 )
    (228 )
    47  
    (18 )
Net gain on deemed disposal of affiliate
    -  
    128  
    24  
    -  
    -  
Equity in (loss) / income of affiliates
    (932 )
    831  
    1,002  
    850  
    605  
Gain on disposal of affiliate
    1,522  
    -  
    -  
    -  
    -  
Net (loss) / profit
    (61 )
    367  
    158  
    (1,007 )
    (292 )
 
       
       
       
       
       
Add: net loss attributable to non-controlling interests
    149  
    106  
    73  
    391  
    169
Net profit / (loss) attributable to the Company
    88  
    473  
    231  
    (616 )
    (123 )
 
       
       
       
       
       
Other comprehensive income/(loss)
       
       
       
       
       
Net (loss) / profit
    (61 )
    367  
    158  
    (1,007 )
    (292 )
Foreign exchange translation adjustments
    (58 )
    122  
    4  
    (63 )
    (15 )
 
       
       
       
       
       
Comprehensive (loss) / income
    (119 )
    489  
    162  
    (1,070 )
    (307 )
Add: Comprehensive loss attributable to non-controlling interests
    182  
    45  
    127  
    477  
    176  
 
       
       
       
       
       
Comprehensive income/(loss) attributable to the Company
    63  
    534  
    289  
    (593 )
    (131 )
 
       
       
       
       
       
Net income / (loss) per Ordinary Share-Basic
    0.04  
    0.23  
    0.11  
    (0.30 )
    (0.06 )
 -Diluted
    0.04  
    0.23  
    0.11  
    (0.30 )
    (0.06 )
 
       
       
       
       
       
Weighted Average Number of Ordinary Shares Outstanding
       
       
       
       
       
Basic
    2,061,909  
    2,061,909  
    2,061,909  
    2,063,738  
    2,069,223  
Diluted
    2,061,909  
    2,061,909  
    2,061,909  
    2,063,738  
    2,069,223  
          
The Company maintains its books and records in United States dollars (“US$” or “U.S. Dollars”). Its subsidiaries, retail shops and affiliates maintain their books and records either in US$, Hong Kong dollars (“HK$” or “Hong Kong Dollars”) or in Chinese Renminbi (“RMB” or “Renminbi”).
 
The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since 1983, the Hong Kong dollar has effectively been officially linked to the U.S. dollar at the rate of approximately HK$ 7.80 = US$ 1.00. However, the market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be influenced by the forces of supply and demand in the foreign exchange market. Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the U.S. dollar and the Hong Kong dollar.
 
 
6
 
 
Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates. From 1994 through 2004, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable and maintained at the rate of approximately RMB 8.30 = US$ 1.00. However, from 2014 through 2018, the Renminbi has fluctuated and at the end of 2018, 2017, 2016, 2015 and 2014, the exchange rates were approximately RMB 6.8785 = US$1.00, RMB 6.5040 = US$1.00, RMB 6.9445 = US$1.00, RMB 6.4855 = US$ 1.00 and RMB 6.2069 = US$1.00, respectively. The value of the Renminbi fluctuates and is subject to changes in the People’s Republic of China’s (“PRC”) political and economic conditions.

The high, low and average exchange rates are set forth below:
 
  
 
Rate at Period End
 
 
Low
 
 
High
 
 
Average  
 
US$ to RMB
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2014
    6.2069  
    6.0428  
    6.2611  
    6.1612  
Fiscal 2015
    6.4855  
    6.1931  
    6.4900  
    6.2854  
Fiscal 2016
    6.9445  
    6.4571  
    6.9593  
    6.6444  
Fiscal 2017 
    6.5040  
    6.9651  
    6.4347  
    6.7371  
Fiscal 2018
    6.8785  
    6.2460  
    6.9783  
    6.6353  
 
       
       
       
       
US$ to HK$
       
       
       
       
 
       
       
       
       
Fiscal 2014
    7.7502  
    7.7500  
    7.7677  
    7.7524  
Fiscal 2015
    7.7564  
    7.7493  
    7.8240  
    7.7549  
Fiscal 2016
    7.7555  
    7.7504  
    7.8267  
    7.7624  
Fiscal 2017
    7.8129  
    7.7528  
    7.8292  
    7.7951  
Fiscal 2018
    7.8316  
    7.7928  
    7.8504  
    7.8376  
 
 
The Following Months
 
Low
 
 
High
 
 
Average
 
US$ to RMB
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
October 2018
    6.8689  
    6.9783  
    6.9203  
November 2018
    6.8689  
    6.9723  
    6.9383  
December 2018
    6.8338  
    6.9590  
    6.8890  
January 2019
    6.6955  
    6.8839  
    6.7943  
February 2019
    6.6768  
    6.7956  
    6.7396  
March 2019
    6.6726  
    6.7408  
    6.7137  
 
       
       
       
US$ to HK$
       
       
       
 
       
       
       
October 2018
    7.8231  
    7.8476  
    7.8373  
November 2018
    7.8125  
    7.8441  
    7.8286  
December 2018
    7.8011  
    7.8353  
    7.8213  
January 2019
    7.8274  
    7.8472  
    7.8409  
February 2019
    7.8434  
    7.8499  
    7.8478  
March 2019
    7.8452  
    7.8504  
    7.8493  
 
 
7
 
 
B.    CAPITALIZATION AND INDEBTEDNESS
 
This item does not apply to annual reports on Form 20-F .
 
C.    REASONS FOR THE OFFER AND USE OF PROCEEDS
 
This item does not apply to annual reports on Form 20-F .
 
D.    RISK FACTORS
 
You should carefully consider all of the information set forth in this annual report and the following risk factors. The risks below are not the only ones we face. Additional risks not currently known by us or that we deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely effected by any of these risks. This annual report also contains forward looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See – “Forward Looking Statements.”

Certain Risks Relating to Doing Business in Hong Kong and the People’s Republic of China (the “PRC” or “China”).
 
PRC Sovereignty over Hong Kong is Still Developing.
 
The Company’s executive and principal offices are located in Hong Kong, a Special Administrative Region of China (or “SAR;” Hong Kong is sometimes herein referred to as the “Hong Kong SAR”).
  
As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the “Joint Declaration”) and the Basic Law of the Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The PRC’s political system and policies are not practiced in Hong Kong. Under this principle of “one country, two systems,” Hong Kong maintains a legal system that is based on common law and is different from that of the PRC.
 
There is friction between Hong Kong residents pressing for greater democracy and the new government leadership in Beijing. The formula for the preservation of Hong Kong’s independent legal and economic system under Chinese sovereignty has been referred to as “one country, two systems.”  There appears to be a deep suspicion that Hong Kong’s democracy advocates are being manipulated by the United States to cause difficulties at China’s doorstep as regional tensions rise, i.e. as China has been asserting territorial claims in the East and South China Seas. The foregoing is raising concerns that civil liberties in Hong Kong may be eroded in the years to come. At this point in time it is not possible to predict if this trend will continue and what effect it will have on the Company, if any.
 
The Company’s results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See  — “Economic Stability Uncertain.”
 
There can be no assurance that these past, or any prospective future, changes in political, economic or commercial conditions in Hong Kong and the PRC will not result in a material adverse effect upon the Company.
 
Economic Stability in the Far East is Uncertain.
 
  Some economies in the Far East have suffered from an economic instability. There can be no assurance that there will be a recovery, most especially in light of the recent global economic downturn. Continued growth in the PRC depends on an adequate supply of energy. There is no assurance that adequate supplies of energy can be developed or found to fuel the PRC’s continued economic growth.
 
The PRC’s Economic, Political and Social Conditions; Slowdown in Growth.
 
The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past thirty years, growth has been uneven, both geographically and among the various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by changes in applicable tax regulations, rates of currency exchange, inflation and effects to curb inflation.
 
 
8
 
 
The PRC economy appears to be moving from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC are still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Recently, the Chinese economy experienced a steep slowdown in growth from a 9.5% GDP in 2011 to 6.6% GDP in 2018 as the Chinese government focuses on raising the incomes of the average citizen and seek a national economy less driven by investment and more by domestic consumer demand. Although past predictions have not always proven reliable, if these predictions prove accurate, they, as well as future actions and policies of the PRC government, could suffer a material adverse effect.
 
Also, financial reporting suggests a real estate “bubble” exists in the PRC. If a real estate “bubble” truly exists in the PRC and it bursts, the PRC’s economy and the Company could suffer a material adverse effect.
 
The success of the Company’s activities in the PRC depends on the Company’s continued ability to overcome circumstances specifically effecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment.
 
Economic Reforms May Not Continue or Impact Positively On the Company; Changing Business Environment.
 
Over the past several years, the PRC’s government has pursued economic reform policies including encouraging private economic activities and decentralization of economic deregulation. It appears that the PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. Changes in policies by the PRC government resulting in changes in laws, regulations, or their interpretation, or the imposition of confiscatory taxes, restrictions on currency conversion and imports could materially and adversely affect our business and operating results. From 2016 through 2018, the annual growth rates in imports and exports were -5.5%, 5.9%, 15.8% and -7.7%, 7.9%, 9.9%, respectively. The nationalization or other expropriations of private enterprises by the PRC government could result in a loss of our investments in actual funds and time and effort, in China.
  
The Company’s results at times may also be adversely effected by: (1) changes in political, economic and social conditions in the PRC; (2) changes in government policies such as changes in laws and regulations (or their interpretation); (3) the introduction of additional measures to control inflation; (4) changes in the rate or method of taxation; (5) imposition of additional restrictions on currency conversion remittances abroad; (6) reduction in tariff protection and other import restrictions; and (7) a return to the more centrally-planned economy that existed previously.
 
We Are Subject To International Economic And Political Risks, Over Which We Have Little Or No Control.
 
Doing business entirely outside the United States subjects us to various risks, including changing economic and political conditions, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and other unforeseeable risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practice in time to avoid the adverse effect of any of these changes.
 
The International Financial Crisis and Economic Conditions May Have A Material Adverse Impact on Our Business and Financial Conditions.
 
With deteriorating worldwide economies, global markets have experienced significant turmoil and upheavals characterized by extreme volatility and the volatility in prices and securities and commodities, diminished credit availability, inability to access capital markets, waves of bankruptcies, high unemployment and declining consumer and business confidence. It appears that international economic deterioration has negatively impacted our revenue and other results of operation. We cannot predict the short and long-term impact of these events on our business and financial condition that may be materially and adversely affected in the future.
 
 
9
 
 
Our Revenue and Net Income may be Materially and Adversely Affected by any Economic Slowdown in China.
 
The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. According to the National Bureau of Statistics of China, China's GDP growth rate was 6.6% in 2018. Any continuing or worsening slowdown could significantly reduce domestic commerce in China. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse effect on our business, financial condition and results of operations.
 
We May be Impacted by Inflation in PRC .
 
In recent years, the PRC has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically. In response to the increased inflation rate during 2004, the Chinese government announced measures to restrict lending and investment in the PRC in order to reduce inflationary pressure on the PRC’s economy; more recently, the average inflation rate has increased by 1.9%, 1.4%, 2.0%, 1.6% and 2.1% in 2014, 2015, 2016, 2017 and 2018, respectively. Efforts by the PRC to curb inflation may also curb economic growth, increase our overhead costs and adversely affect our sales. Inflationary increases cause a corresponding increase in our general overhead. If the PRC rate of inflation continues to increases, the Chinese government may introduce further measures intended to reduce the inflation rate in the PRC. Any such measures adopted by the Chinese government may not be successful in reducing or slowing the increase in the PRC’s inflation rate. A sustained or increased inflation in the PRC may have an adverse impact on the PRC’s economy and may materially and adversely affect our business and financial results.
 
The PRC legal system embodies uncertainties which could limit the available legal protections and expand the government’s power.
 
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the media, ecommerce, education, advertising and retail industries, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, and our foreign investors, including you. 
 
 
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the annual report.
 
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, our principal offices are located in Hong Kong and all of our directors and executive officers reside within Hong Kong and China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, we understand that the PRC currently does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
 
Regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose our PRC resident shareholders to liability under PRC law.
 
 China’s State Administration of Foreign Exchange, or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, in July 2014. SAFE Circular No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No.37 as a “special purpose vehicle.” The term “control” under SAFE Circular No. 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE Circular No. 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event.
 
If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. In February 2015, SAFE issued SAFE Circular No. 13, which took effect on June 1, 2015.  SAFE Circular No. 13 has delegated to the qualified banks the authority to register all PRC residents’ investment in “special purpose vehicle” pursuant to the SAFE Circular No. 37, except that those PRC residents who have failed to comply with the SAFE Circular No. 37 will remain to fall into the jurisdiction of the local SAFE branch and must make their supplementary registration application with the local SAFE branch.
 
We have requested PRC residents who we know hold direct or indirect interest in our company to make the necessary applications, filings and amendments as required under SAFE Circular No. 37 and other related rules. However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements under SAFE Circular No. 37 or other related rules. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into these subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

 
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If the custodians or authorized users of controlling non-tangible assets of our Company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
 
Under PRC law, legal documents for corporate transactions are executed using the chops or seals of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration of Industry and Commerce.
 
 Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries and consolidated affiliated entities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of our PRC subsidiaries and consolidated affiliated entities are members of our senior management team who have signed employment agreements with us or our PRC subsidiaries and consolidated affiliated entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of our chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel in the legal or finance department of each of our subsidiaries and consolidated affiliated entities. Although we monitor such authorized personnel, there is no assurance that such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries or consolidated affiliated entities, we or our PRC subsidiary and consolidated affiliated entity would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.
 
The PRC Government Imposes Currency Controls.
 
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantial part of our revenues in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future.
 
There is a Foreign Currency Risk.
 
The Company operates in Hong Kong, the PRC and trades with both local and overseas customers and suppliers, and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to purchases in, Hong Kong dollar, Renminbi, US dollars, the Japanese yen and Euro. Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders and sales orders, recognized assets and liabilities, and net investment in the PRC operations.
 
Because our revenues are generated in Renminbi and our results are reported in U.S. dollars, ongoing devaluation of the Renminbi could negatively impact our results of operations.
 
The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably, and in recent years the Renminbi has depreciated significantly against the U.S. dollar.  Since October 1, 2016, the Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. This depreciation halted in 2017, and the Renminbi appreciated approximately 7% against the U.S. dollar during this one-year period. In 2018, the Renminbi depreciated approximately 1.1% against the U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
 
 
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Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, repaying our U.S. dollar denominated notes or other payment obligations or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the Renminbi relative to U.S. dollars would affect our financial results reported in U.S. dollar terms regardless of any underlying change in our business or results of operations.
  
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
 
The PRC has had Turbulent Relations with the United States of America (the “United States” or the “U.S”).
 
Recently, the United States and China have imposed new or higher tariffs on goods imported from the other's country, and have threatened the imposition of additional tariffs in retaliation. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact costs and the world economy in general, which in turn could have a material adverse effect on our business, results of operations and financial condition. In addition, changes in trade relations between the United States and China may trigger negative customer sentiment or retaliation towards companies in China with ties to the United States, potentially resulting in a negative impact on our results of operations and financial condition.
 
Differences between the United States and PRC governments on some political issues continue occasionally to color their relationship. These occasional controversies could materially and adversely affect our business and operations. Political or trade friction between the two countries could also materially and adversely affect the market price of our ordinary shares (“Ordinary Shares”), whether or not they adversely affect our business.
 
Certain Risks Relating to the Company’s Business.
 
Our Operating Results may Fluctuate Significantly from Year to Year. We Cannot be Certain that we will Achieve or Maintain Profitability in the Future.
 
Our operating results historically have been difficult to predict and have at times significantly fluctuated from year to year due to a variety of factors, many of which are outside of our control.
 
During Fiscal 2018, the Company had revenues of approximately US$20,104,000, operating losses of approximately US$1,059,000, and losses before income taxes, equity in loss of affiliates and non-controlling interests of approximately US$963,000. In addition, we had income tax credits of US$312,000, equity in loss of affiliates of (US$932,000), and a gain on the disposal of affiliate of US$1,522,000. As a result, we had a net loss of $61,000 for Fiscal 2018 before giving effect to the effect on our results attributable to our non-controlling interests. The principal reason for the operating losses before income taxes, equity in loss of affiliates and non-controlling interests for Fiscal 2018 was the decrease in the gross profit margin percentage of contracts under the keen competitive market condition . After giving effect to the net loss attributable to non-controlling interest, other comprehensive income/(loss) and comprehensive loss attributable to non-controlling interest, we had comprehensive income attributable to the Company of $63,000 for Fiscal 2018. During Fiscal 2017, the Company had revenues of approximately US$17,350,000, operating losses of approximately US$574,000, and losses before income taxes, equity in income of affiliates and non-controlling interests of approximately US$564,000. In addition, we had we had income tax expenses of US$28,000, a net gain on deemed disposal of affiliate of US$128,000 and equity in income of affiliates of US$831,000. As a result, we had a net profit of US$367,000 for Fiscal 2017 before giving effect to the effect on our results attributable to our non-controlling interests. The principal reason for the operating losses before income taxes, equity in income of affiliates and non-controlling interests for Fiscal 2017 was decrease in revenue, and research and development costs incurred of approximately US$163,000. After giving effect to the net loss attributable to non-controlling interest, other comprehensive income/(loss) and comprehensive loss attributable to non-controlling interest, we had comprehensive income attributable to the Company of $534,000 for Fiscal 2017. During Fiscal 2016, the Company had revenues of approximately US$22,478,000, operating losses of approximately US$670,000, and losses before income taxes, equity in income of affiliates and non-controlling interests of approximately US$640,000. In addition, we had income tax expenses of US$228,000, a net gain on deemed disposal of affiliate of $24,000 and equity in income of affiliates of US$1,002,000. As a result, we had a net profit of US$158,000 for Fiscal 2016 before giving effect to the effect on our results attributable to our non-controlling interests. The principal reason for the operating losses before income taxes, equity in income of affiliates and non-controlling interests for Fiscal 2016 was research and development costs of approximately US$475,000. After giving effect to the net loss attributable to non-controlling interest, other comprehensive income/(loss) and comprehensive loss attributable to non-controlling interest, we had comprehensive income attributable to the Company of $289,000 for Fiscal 2016.
 
 
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As a result of these factors, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular year or quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that period, and therefore such a revenue shortfall would have a disproportionate effect on our operating results for that period.
 
Future Plans to Increase Revenue, Decrease Losses and Achieve Profitability are Uncertain.
 
The Company has been attempting to stem the decline in revenue by streamlining its activities. The Company has reduced its staff, consolidated offices and is trying to improve staff efficiencies. To date, this effort has not been successful, but the Company plans to continue these economizing efforts. In addition, the Company has obtained formal certification from China’s Classification Society (“CCS”), and from the U.S. Coast Guard for use as an Alternate Management Systems (“AMS”) in U.S. waters, for its ballast water treatment system (“BWTS”) models 200, 300, 500, 750, 1200 and 1250 Cubic Meters per hour, as well as RS type approval (Russian Maritime Register) for its 300 Cubic Meters per hour BWTS. The Company also received an anti-explosion certificate from China National Quality Supervision and Test Centre for Explosion Protected Electrical Products for its BWTS in 2017.
 
During 2015, the Company entered into a contract to supply a 300 Cubic Meters per hour BWTS for a maritime institute in Jiangsu, and such goods were delivered in 2016. It also received an order for one set of P-300 BWTS for a scientific research ship from Russia in 2017 and completed in 2018. In addition, in 2018, it received a PRC government grant for port ballast solution. The Company is commencing a barge and port R&D product development project as part of its efforts to continue to be a pioneer of research and development for ballast water technology in Asia. The Company hopes to receive revenues from both port (barge) and commercial vessels for ballast water treatment including retrofit orders and new built orders. However, the intake of retrofit orders may be affected by, among other things, the decision of International Maritime Organization (“IMO”), a specialized agency of the United Nations that serves as the global standard-setting authority for the safety, security and environmental performance of international shipping, to extend the phase-in period for ballast water system retrofits until September 2019, the success of the Company’s marketing and sales efforts, and by the acceptance of the Company’s products by customers.  There can be no assurance that the Company’s continued streamlining efforts, or that sales of its ballast water treatment process, will be successful or, if successful, that these efforts will result in a reduction in losses, an increase in revenues and/or the achievement of profitability by the Company. 
 
Increases in manufacturing and operating costs and/or the ability to achieve the savings anticipated from our structural cost improvement initiative may affect operating results.
 
Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, energy and related utilities and cost of labor. The achievement of our financial objectives is reliant on our ability to manage these fluctuations through cost savings or recovery actions and efficiency initiatives.
 
We may pursue a number of structural cost improvement initiatives from time to time, but these efforts may not improve our financial performance or produce the full efficiencies and benefits we expect due to delays or other factors affecting our execution of these initiatives.  
 
We are subject to a variety of litigation and similar proceedings in the course of our business that could adversely affect our financial statements.
 
We may be subject to various litigations and similar proceedings incidental to our business that arise in the ordinary course of our business, including claims for damages arising out of the use of our products and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, environmental matters and personal injury. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert management’s attention, we may incur significant expenses in defending these lawsuits and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our consolidated financial statements. Moreover, any insurance or indemnification rights that we have may be insufficient or unavailable to protect us against such losses and expenses. In addition, developments in legal proceedings in any given period may require us to revise our expectations regarding the outcome of certain matters or adjust the loss contingency estimate that is recorded in our consolidated financial statements, which could adversely affect our results of operations or cash flows in any particular period. We cannot assure that our liabilities in connection with litigation and similar proceedings will not exceed estimates or adversely affect our consolidated financial statements or reputation.
 
 
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Our business depends significantly on the strength of our product brands and corporate reputation; our failure to develop, maintain and enhance our product brands and corporate reputation may materially and adversely affect the level of market recognition of, and trust in, our products.
 
In China’s fragmented, developing and increasingly competitive consumer market, product brands and corporate reputation have become critical to the success of our new products and the continued popularity of our existing products. Our promotional activities may prove to be expensive and may fail to either effectively promote our product brands or generate additional sales.
 
 In addition, our product brands, corporate reputation and product sales could be harmed if, for example:
 
  our advertisements, or the advertisements of the owners of the third-party brands that we market or those of our distributors, are deemed to be misleading or inaccurate;    
 
our products fail to meet customer expectations;
 
we provide poor or ineffective customer service;
 
our products contain defects or otherwise fail; or
 
consumers confuse our products with inferior or counterfeit products.
  
We Have Made And May Make Further Acquisitions Without Your Approval.
 
Although we endeavor to evaluate the risks inherent in any particular acquisition, there can be no assurance that we will properly or accurately ascertain all such risks. We will have virtually unrestricted flexibility in identifying and selecting prospective acquisition candidates and in deciding if they should be acquired for cash, equity or debt, and in what combination of cash, equity and/or debt.
 
We have taken equity positions in related businesses. We will not seek stockholder approval for any additional acquisitions unless required by applicable law and regulations. Our stockholders may not have an opportunity to review financial and other information on acquisition candidates prior to consummation of any acquisitions under almost all circumstances.
 
Investors will be relying upon our management, upon whose judgment the investor must depend, with only limited information concerning management’s specific intentions.
 
There can be no assurance that the Company will locate and successfully complete any such additional acquisitions, or any acquisition will perform as anticipated, will not result in significant unexpected liabilities or will ever contribute significant revenues or profits to the Company or that the Company will not lose its entire investment in any acquisition.
 
Risks related to our existing and future joint ventures, acquisitions and investments also include, as applicable:
 
our ability to enter into, exit or acquire additional interests in our joint ventures or other acquisitions or investments may be restricted by or subject to various approvals under PRC law or may not otherwise be possible, may result in a possible dilutive issuance of our securities or may require us to secure financing to fund those activities;
 
we may disagree with our joint venture partner(s) or other investors on how the venture or business investment should be managed and/or operated;
 
to the degree we wish to do so, we may be unable to integrate and retain acquired employees or management personnel; incorporate acquired products, or capabilities into our business; integrate and support pre-existing manufacturing or distribution arrangements; consolidate duplicate facilities and functions; or combine aspects of our accounting processes, order processing and support functions; and
 
the joint venture or investment could suffer losses and we could lose our total investment, which would have a negative effect on our operating results.
 
 
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Any of these events could distract our management’s attention and result in our not obtaining the anticipated benefits of our joint ventures, acquisitions or investments and, in turn, negatively affect the performance of such joint ventures, acquisitions and investments and their respective contributions to our results of operations.
 
Dependence upon Management.
 
The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company’s Board of Directors and its Chief Executive Officer. The business of the Company could be adversely affected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. The Company does not maintain “Key Man” life insurance on the lives of any of its officers and directors. See – Item 6. “Directors, Senior Management and Employees.”
 
We have limited general business insurance coverage and we may be subject to losses that might not be covered by our existing insurance policies, which may result in our incurring substantial costs and the diversion of resources.
 
  We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased product transportation insurance covering risk of product loss during transportation, property insurance for our warehouse covering the risk of product loss in the warehouse, and third party liability insurance for certain contracts. We also provide social security insurance, including work-related injury insurance, and medical insurance for our employees. However, we do not maintain business liability, interruption or litigation insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
 
Material Adverse Effect upon the Company of PRC’s Credit Restrictions.
 
The Company faces increasing competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. Competition may cause purchaser demands for price reductions and reduced profit margin.
 
Competition with Vendors.
 
As the Company assembles products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may adversely affect its relationship with its vendors.
 
Dependence on Vendors; Lack of Long Term Arrangements; Loss of Vendors .
 
The Company distributes supplies manufactured by a number of vendors. Thermo Fisher Scientific Group (“Thermo”), Stanford Research Systems, Inc. (“Stanford”), Hach Company (“Hach”) and Hioki E.E. Corp. (“Hioki”) are among the Company’s largest suppliers, pursuant to short term arrangements. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have an adverse effect on the Company’s operations due to the Company’s dependence on these vendors. A substantial number of the Company’s suppliers have been selling their products into China directly and through other distributors. During Fiscal 2016, our sales revenue from trading activities increased by approximately 12%. During Fiscal 2017, our sales revenue from trading activities decreased by approximately 20%. During Fiscal 2018, our sales revenue from trading activities increased by approximately 25%. A loss of a substantial vendor or substantial number of our other vendors and/or our competing with them would have a material adverse effect on our revenues from trading activities.
 
The loss of any of our key customers could reduce our revenues and our profitability.
 
For the year ended December 31, 2018, sales to our two largest customers amounted in the aggregate to approximately 22% of our total revenue. For the year ended December 31, 2017, sales to our four largest customers amounted in the aggregate to approximately 27% of our total revenue. For the year ended December 31, 2016, sales to our three largest customers amounted in the aggregate to approximately 25% of our total revenue. There can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. Any failure to pay by these customers could have a material negative effect on our company’s business. In addition, having a relatively small number of customers may cause our half yearly or annual results to be inconsistent, depending upon when these customers pay for outstanding invoices.
 
 
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During the years ended December 31, 2018, 2017 and 2016, respectively, we had one customer that accounted for 10% or more of our revenues.
 
Customer Name
 
Year Ended
December 31,
2018
 
 
Year Ended
December 31,
2017
 
 
Year Ended
December 31,
2016
 
Customer A
 
 
15
%
 
 
10
%
 
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If we cannot maintain long-term relationships with this major customer, the loss of our sales to them could have an adverse effect on our business, financial condition and results of operations.
 
Risks Relating To the Company Itself;
 
Control by T.C. Leung; Potential Conflict of Interests.
 
T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company’s Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See – Item 6. “Directors, Senior Management and Employees” and Item 7. “Major Shareholders and Related Party Transactions.”
 
The Company does not control certain joint ventures or associated companies in which it holds interests or invests, which could limit Company’s ability to identify and manage risks.
 
Company holds interests and has invested, and may continue to hold interests and invest, in joint ventures or associated companies in which it has a non-controlling interest; for example, Zhejiang Tianlan Environmental Protection Technology Co., Ltd.. In these cases, Company has limited influence over, and limited or no control of, the governance, performance and cost of operations of such entities. Some of these entities may represent significant investments and potentially also use the Company’s brand. These entities that Company does not control may make business, financial or investment decisions contrary to Company’s interests or may make decisions different from those that Company itself may have made. Additionally, Company’s partners or members of a joint venture or associated company may not be able to meet their financial or other obligations, which could expose Company to additional financial or other obligations, as well as having a material adverse effect on the value of its investments in those entities or potentially subjecting Company to additional claims.
 
The Company’s inability to secure and maintain intellectual property rights for products, whilst maintaining overall competitiveness, could have a material adverse effect on its results.
 
Company is dependent on its ability to obtain and maintain trademarks, patents, licenses and other intellectual property (IP) rights covering its products and its design and manufacturing processes. The IP portfolio is the result of an extensive patenting process that could be influenced by a number of factors, including innovation. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards developed or co-developed by Company. This is particularly applicable to the Company’s PRC subsidiary, Shanghai Euro Tech Limited, which engages in the development, production and sale of analytical and testing instruments and equipment, and is applying for related patents.
 
 
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Environmental Compliance: The costs of complying with evolving regulatory requirements could negatively impact the Company's financial results. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
 
The Company may be subject to local laws, regulations, rules and ordinances relating to pollution, protection of the environment, greenhouse gas emissions, and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In addition, the Company may have costs related to environmental remediation and restoration obligations associated with past and current sites as well as related to the Company’s past or current waste disposal practices or other hazardous materials handling. Although management will estimate and accrue liabilities for these obligations, it is reasonably possible that the Company’s ultimate cost with respect to these matters could be significantly higher, which could negatively impact the Company’s financial condition and results of operations. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Company’s operations, or require modifications to its facilities. Accordingly, environmental, health or safety regulatory matters could result in significant unanticipated costs or liabilities.
 
Health and Safety: Increased concerns regarding the safe use of chemicals and plastics in commerce and their potential impact on the environment as well as perceived impacts of plant biotechnology on health and the environment have resulted in more restrictive regulations and could lead to new regulations.
 
Concerns regarding the safe use of chemicals and plastics in commerce and their potential impact on health and the environment and the perceived impacts of plant biotechnology on health and the environment reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest themselves in stockholder proposals, preferred purchasing, delays or failures in obtaining or retaining regulatory approvals, delayed product launches, lack of market acceptance and continued pressure for more stringent regulatory intervention and litigation. These concerns could also influence public perceptions, the viability or continued sales of certain of the Company's products, the Company's reputation and the cost to comply with regulations. In addition, terrorist attacks and natural disasters have increased concerns about the security and safety of chemical production and distribution. These concerns could have a negative impact on the Company's results of operations.
 
Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders Not As Extensive As In U.S. Corporations.
 
Principles of British Virgin Islands (“BVI”) corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company’s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States.
 
The rights of shareholders under BVI law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. United States shareholder action must be taken in good faith and actions by controlling shareholders in a United States jurisdiction and executive compensation which are obviously unreasonable may be declared null and void.
 
The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company’s Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions.
 
Anti-Takeover Provisions.
 
The Company has 5,000,000 shares of “blank check preferred stock” authorized. The “blank check preferred stock” is intended to strengthen the Company’s ability to resist an unsolicited takeover bid and may be deemed to have an anti-takeover effect. The Board of Directors has the right to fix the rights, terms and preferences at the time of issue of “blank check preferred stock” without further action by our shareholders.
 
 
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Uncertainty of Enforcing United States Judgments.
 
There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice.
 
All of the Company’s directors and executive officers reside outside of the United States, service of process upon the Company and such persons may be difficult to effect in the United States upon all such directors and officers.
 
All of the Company’s assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States’ courts arising out of or based on the ownership of the securities, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws or otherwise. See — “Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations.”
 
Being a Foreign Private Issuer Exempts Us from Certain SEC and NASDAQ Stock Market (“NASDAQ”) Requirements.
 
We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). As such, with certain limitations, we are exempt from certain provisions applicable to United States public companies including: (1) the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; (2) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (3) the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and (4) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months). Because of these exemptions, investors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
 
Our Securities Must Continue To Meet Qualitative And Quantitative Listing Maintenance Criteria For NASDAQ; Recent Deficiency Cured.
 
Our securities are quoted and traded on NASDAQ. There can be no assurance that we will continue to meet both the qualitative and quantitative criteria for continued quotation and trading of our securities on NASDAQ. One of NASDAQ’s listing requirements is the maintenance of a closing bid price of US$ 1.00 per share. During periods of time in 2008 and 2009 the Company was not in compliance with that requirement but NASDAQ had generally suspended that requirement and others due to market conditions and/or the US$1.00 per share bid price was not met for a sufficient period of time to cause a NASDAQ deficiency action.
 
On September 20, 2011, the Company was notified by NASDAQ that it was not in compliance with NASDAQ’s listing maintenance rule for failing to have a bid price of at least US$1.00 per share for the prior thirty trading days. In January 2012, the Company effected a combination or reverse stock split of its issued Ordinary Shares, and thereafter, in February 2012, the Company received a letter from NASDAQ advising that it had regained compliance with NASDAQ’s maintenance listing requirements.
 
 
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No assurance can be given that we will continue to meet applicable NASDAQ continued listing standards. Failure to meet applicable NASDAQ continued listing standards could result in a delisting of our common stock. A delisting of our common stock from NASDAQ could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities. See—“We Are Also Required To Meet Certain, But Not All Corporate Governance Criteria Applicable to NASDAQ Listed Issuers.”
 
We Are Also Required To Meet Certain, But Not All, Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.
 
Although, in the past, we have been able to satisfy corporate governance criteria applicable to NASDAQ listed issuers, those criteria are difficult to comply with and include, among other things: (a) a heightened degree of independence of members of the board of directors with independent directors to, among other things: hold regular meetings among themselves only; (b) establishment of a code of conduct addressing compliance with laws; and (c) a limit on payments to independent directors and their family members (other than for services on the board of directors).
 
These corporate governance requirements and a strict definition of “independent director” make it more difficult to find independent directors for our Board of Directors. There is intense competition for qualified independent directors, including those persons with accounting experience and financial statement acumen to serve on audit committees. We believe that continued compliance with the corporate governance requirements applicable to NASDAQ listed issuers may be difficult and increase our costs and expenses as the costs of finding and compensating independent directors escalate and the costs of administering their new powers and responsibilities is an added financial burden. If we are unable to attract and keep a sufficient number of independent directors willing to take on the responsibilities imposed by such rules on what we believe to be commercially reasonable terms, our securities may be delisted from NASDAQ. See—“Being a ‘Controlled Company’ Exempts Us from Certain Other Corporate Governance Criteria Applicable to NASDAQ Listed Issuers.”
   
Being A “Controlled Company” Exempts Us From Certain Other Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.
 
As a result of T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer, beneficially owning the majority voting power of our Ordinary Shares, we are a “controlled company” as that term is defined in rules and regulations applicable to NASDAQ listed issuers. As a “controlled company,” we are not required to comply with certain NASDAQ corporate governance criteria including, among other things, the requirements that the majority of our Board be independent directors, and their having the authority to approve director nominations and executive officer compensation.
 
We Are Not Subject To Various Corporate Governance Measures, Which May Result In Shareholders Having Limited Protections.
 
The Sarbanes-Oxley Act of 2002 (“SOX”), has resulted in the adoption of various corporate governance measures by securities exchanges and NASDAQ designed to promote the integrity of the corporate management and the securities markets. Being a “controlled company,” we are exempt from many, but not all, of those requirements. Furthermore, the absence of such practices with respect to our Company may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters.
 
We May Be Exposed To Potential Risks Relating To Our Internal Controls Over Financial Reporting.
 
Pursuant to Section 404 of SOX, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal controls over financial reporting in their annual reports, including Form 20-F.
 
We expend significant resources in developing and maintaining the necessary documentation and testing procedures required by SOX, there is a risk that we will not maintain compliance with all of these requirements.
 
 
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In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner our ability to obtain equity or debt financing could suffer and the market price of our shares could decline.
  
The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price you paid.
 
The trading price for our Ordinary Shares has fluctuated since we first listed our Ordinary Shares. Over the past two years, the trading price of our Ordinary Shares has ranged from US$2.00 to US$11.73 per common share, and the last reported trading price on May 7, 2019 was US$4.43 per Ordinary Share. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
 
changes in the general environment and the outlook of the segments in which we operate;
  
regulatory developments in the segments in which we operate;
 
actual or anticipated fluctuations in our half yearly or annual results of operations;
 
changes in financial estimates by securities research analysts;
 
negative market studies or reports;
 
changes in performance and valuation of our peer or comparable companies;
 
announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;
 
changes in our senior management;
 
sales or anticipated sales of additional ordinary shares; and
 
fluctuations in the exchange rate between the Renminbi and the U.S. dollar.
 
In addition, the securities markets in the United States, China and elsewhere have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the Ordinary Shares.
 
There Are Risks In Purchasing Low-Priced Securities.
 
If our securities were to be suspended or delisted from NASDAQ, they could be subject to rules under the Exchange Act which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors.” For transactions covered by such rules, a broker-dealer must make a special suitability determination of the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Consequently, such rules may affect the ability of broker-dealers to sell our securities and the ability to sell any of our securities in any secondary market that may develop for such securities. In the event our securities are no longer listed on NASDAQ or are not otherwise exempt from the provisions of the SEC’s “penny stock” rules, such rules may also affect the ability of broker-dealers and investors to sell our securities.
 
 
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We May Be Considered To Be A Passive Foreign Investment Company For The 2018 Calendar Year And May Be A Passive Foreign Investment Company For Future Years, Which Would Result In Adverse U.S. Federal Income Tax Consequences To U.S. Holders Of Our Ordinary Shares.
 
A non-U.S. corporation will be considered a passive foreign investment company (“PFIC”) for U.S. income tax purposes, for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The annual PFIC determination to be made by a U.S. holder of our ordinary shares is an inherently factual determination and there is limited guidance regarding the application of the PFIC rules to specific situations. We currently hold a substantial amount of cash and cash equivalents, and investments in PRC enterprises, and the value of our goodwill and other assets may be based in part on the market price of our ordinary shares, which has experienced significant fluctuations. Although the determination of PFIC status is subject to factual uncertainties because it depends upon the valuation of our ordinary shares, as well as our goodwill and other assets and income, we are uncertain if we would be considered to be a PFIC for 2018. In addition, as the determination of PFIC status is made on an annual basis and depends on variables over which we have limited control, there can be no assurance that we will not be a PFIC for 2018 or any future years. If we are a PFIC in any year, U.S. holders will be subject to certain adverse United States federal income tax consequences, and are urged to consult with his or her tax advisor. See— Item 10. “Taxation—United States Federal Income Taxation .”
 
If We Become Directly Subject to the Recent Scrutiny Involving U.S.-Listed Chinese Companies, We May Have to Expend Significant Resources to Investigate and/or Defend the Matter, Which Could Harm our Business Operations, Stock Price and Reputation and Could Result in a Complete Loss of Your Investment in Us.
 
U.S. listed companies that have substantial operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject of any unwarranted scrutiny, even allegations that are not true, we may have to expend significant resources to investigate such allegations and/or defend the Company. Such investigations or allegations will be costly and time-consuming and distract our management from our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless of the truthfulness of the allegations.
 
I TEM 4.       INFORMATION ON THE COMPANY
 
A.    HISTORY AND DEVELOPMENT OF THE COMPANY
 
The Company was organized under the laws of the BVI on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Limited ("Far East"), a Hong Kong corporation involved in the distribution of advanced water treatment equipment. In March 1997, the Company acquired all the issued and outstanding capital stock of Far East and it became a wholly-owned subsidiary and was the primary operational entity of the Company.
 
Yixing Pact Environmental Technology Company Limited (“Yixing”) and Pact Asia Pacific Limited (“Pact,” collectively with “Yixing”, “Pact-Yixing”), companies engaged in the water and waste-water treatment solution business, became our majority-owned subsidiaries in 2005, and we acquired additional two percent (2%) and five percent (5%) equity interests in Pact and Yixing in January 2010 and July 2011, respectively.
 
Pact-Yixing, situated in Shanghai, specialize in the design, manufacture and operation of water and waste-water treatment plants in several industries situated in China.
   
We established Shanghai Euro Tech Environmental Engineering Company Ltd. (“Shanghai Environmental”) as a wholly-owned subsidiary under the laws of the PRC, to carry on our environmental engineering department with that line of business and its personnel transferred from our subsidiary, Far East. Shanghai Environmental is focusing on our water and waste-water treatment engineering business. We are scaling down this company to avoid duplication of costs and efforts as we have a 58% equity interest in Pact-Yixing which operate similar business activities. Shanghai Environmental is just completing its outstanding projects and had made an operating loss of approximately US$137,000 in Fiscal 2017 and US$34,000 in Fiscal 2018 and we plan to wind it down upon collection of outstanding accounts receivable.
 
 
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China’s rapid economic growth had led it to become one of the world’s largest emitters of sulfur dioxide. The damage due to acid rain caused by sulfur dioxide is vast, and is also affecting the neighboring countries as air currents transport sulfur dioxide. To tackle these environmental and geo-political issues, China has established targets to reduce key pollutants, namely, sulfur dioxide, nitrogen oxides and suspended particulates. Heavy polluters are being warned to reduce their emissions or face penalties. We believe that as a result, the demand of desulphurization and dust removal equipment will increase accordingly.
 
Far East owns a 19.4% (2017: 19.4%, 2016:19.7%) equity interest in Zhejiang Tianlan Environmental Protection Technology Co. Ltd. (“Blue Sky”), founded in 2000. Blue Sky provides design and general contracting services, equipment manufacturing, installation, testing and operation management for the purification treatment of industrial waste gases (specifically as desulphurization, flue gas de-nitration, dust removal) emitted from various boilers and industrial furnaces of power plants, steelworks and chemical plants. By securing an equity stake in Blue Sky’s business, we have a strategic partner to work within China’s environmental protection business. With Blue Sky’s technology and technical support, we believe we are able to provide services and environmental solutions not only for water and waste-water treatment but also for air pollution control for industrial clients in China. Blue Sky's revenue decreased during Fiscal 2016, increased during Fiscal 2017 and decreased during Fiscal 2018, and its net income increased during Fiscal 2016 and 2017 and decreased significantly during Fiscal 2018 particularly due to the filing for bankruptcy liquidation of one of its major customers. Blue Sky listed its shares on the New Third Board since November 17, 2015 and it suspended trading from August 15, 2017 and resumed trading on February 2, 2018. The New Third Board in the PRC, a national over-the-counter market in the PRC regulated by the China Securities Regulatory Commission, serves as a trading platform for small and medium-sized enterprises. Any new issuance of Blue Sky's shares on the New Third Board will dilute our ownership in Blue Sky. On the other hand, the New Third Board provides us with an exit channel to sell our position in Blue Sky if the price is attractive. At the first 2018 General Meeting of Blue Sky’s shareholders held on January 25, 2018, it was resolved that Blue Sky should sell all of its shareholding in its wholly-owned subsidiary, Zhejiang Tianlan Environmental Engineering and Design Company Limited (‘Blue Sky Engineering’) to two of Blue Sky’s shareholders, including the major shareholder. After the General Meeting, some shareholders and their representatives (including the Company) expressed opposition to the sale, based upon, among other things, the fact that Blue Sky Engineering holds an Engineering design Qualification Certificate (Class A) (the “Engineering Certificate”) in the PRC, and if disposed, Blue Sky would thereby be rendered unable to conduct any engineering design business. In light of such opposition, management of Blue Sky sought the views of its shareholders, who indicated preference for the termination of the disposal of Blue Sky Engineering. As a result, the secretary of Blue Sky’s board of directors has informed the Company that Blue Sky would consult the related professional parties and duly decide and resolve upon this matter in accordance with the law. No final decision has been made with respect to this proposed transaction.
 
We previously had a 20% equity interest in Zhejiang Jia Huan Electronic Co. Ltd., a company incorporated in the PRC (“Jia Huan”), with total cost of investment US$2,486,000. Jia Huan was engaged in the environmental protection business since 1969. On March 5, 2018, we entered into an Equity Transfer Agreement to sell this 20% equity stake of Jia Huan for a purchase price of RMB31,312,500 to Ms. Jin Lijuan (the “Purchaser”), the wife of the holder of the remaining 80% equity stake of Jia Huan. In accordance with the terms of the Agreement, all approvals and registrations with the relevant governmental authorities were obtained, the closing of the transaction has been completed, and the Purchaser paid the purchase price to us, in full in May 2018. As a result, we recognized a net gain of US$1,522,000 on the disposal of our equity interest in Jia Huan.
 
In Fiscal 2018, Blue Sky made a loss contribution of approximately US$786,000, and Jia Huan made a loss contribution of approximately US$146,000 (up to the date of disposal) to the Company. The loss contribution from Blue Sky in Fiscal 2018 was principally caused by a decrease in sales revenue as a result of the filing for bankruptcy liquidation of one of Blue Sky’s major customers, while the loss contribution from Jia Huan is only reflective of the loss contribution of Jia Huan up to the date of its disposal in May 2018.  In Fiscal 2017, Blue Sky and Jia Huan made income contribution of approximately US$712,000 and US$119,000, respectively, to the Company. In Fiscal 2016, Blue Sky and Jia Huan made income contribution of approximately US$689,000 and US$313,000, respectively, to the Company. China’s 13th Five Year Plan promotes a cleaner and greener economy, with strong commitments to environmental management and protection, clean energy and emissions controls, ecological protection and security, and the development of green industries. This demonstrates a clear focus on charting a sustainable course for the economy in the long-term and the desire to play a global role in curbing greenhouse gas emissions. Thus, despite the loss contribution of Blue Sky in Fiscal 2018, management believes the development in the Chinese government policy will benefit our business as well as the business of its affiliate, Blue Sky.

 
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B.     BUSINESS OVERVIEW
 
The Company had been primarily a distributor of a wide range of advanced water treatment equipment, laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers). The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the PRC.
 
The Company distributes products through its Hong Kong headquarters, its trading companies and representative offices in Beijing, Shanghai and Chongqing. The Company’s PRC trading subsidiaries are Chongqing Euro Tech Rizhi Technology Co., Ltd. and Rizhi Euro Tech Instrument (Shaanxi) Co., Ltd. Guangzhou Euro Tech Environmental Equipment Co., Ltd. was closed on March 18, 2019.
 
Laboratory instruments, analyzers and test kits are used to analyze the chemical content and ascertain the level of impurities or other contaminants in water. The Company distributes analytical re-agents and chemicals to support testing systems of laboratory and portable instruments, process analyzers and portable test kits and assist in the analysis process. The Company offers a wide variety of test kits to test water quality. The Company believes that these portable test kits are easy to use and preadapted for rugged field use. These test kits are used to monitor drinking water distribution systems.
 
Laboratory and portable instruments generally consist of analytical instruments including, but not limited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes, chemical oxygen demand apparati, digestion apparati, and precision re-agent dispensing devices which are used to test and monitor impurities and contaminants in water systems. See “Glossary.”
 
The Company also distributes continuous-reading process analyzers, process turbidimeters, pH controllers and analyzer accessories. These products are generally used to monitor and control drinking water quality to ensure that water treatment procedures comply with regulatory standards. See – “Glossary.”
 
In 2005, we acquired Pact-Yixing to allow the Company to bid on larger water, waste-water and power generation projects. The Company believes that the Pact-Yixing business is complementary to the Company’s business as the Company expects to have a competitive advantage by offering customers and potential customers not only hardware but solutions to engineering problems as well.
 
Pact-Yixing completed a substantial number of industrial water and waste-water treatment projects in the PRC. The majority of these projects are for large multinational manufacturing facilities for clients from the USA, Europe and Japan. Process design as well as mechanical and electrical engineering are completed in-house and manufacturing contracted to approved fabricators of components. Fabrication drawings are also done in-house for submittal to said fabricators under the supervision of Pact-Yixing’s quality control engineers.
 
Pact-Yixing’s clients cover a varied spectrum of industries covering semiconductor, pharmaceutical, petrochemicals, auto and auto parts, steel, food and beverage and beauty products.
 
The water and waste-water treatment processes applied at Pact-Yixing cover chemical, physical, biological and membrane separation. Combinations of those processes are normally used to treat a specific industrial process feed or effluent. With respect to the water treatment side of Pact-Yixing’s business, they design and build filtration equipment, ion-exchange softeners and demineralizers, reverse osmosis, electro-deionization, chemical treatment systems and package type mobile water treatment plants. As for waste-water treatment, Pact-Yixing design and build biological treatment systems, oil coalescers, dissolved air flotation, lamella clarifiers, chemical reactor tanks, ultrafiltration, microfiltration, dewatering systems and package type mobile sewage treatment plants. Biological treatment plants cover both aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors) and MBR (membrane biological reactors) are technologies also covered by Pact-Yixing. See   – “Glossary.”
 
 
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In 2006, Pact-Yixing commenced selling water and waste-water treatment equipment. Pact and Engineering FZC (“PACTFZC”), a Middle Eastern water treatment company based in Dubai, and a third party formed a joint venture (the “JV”). Pact invested US$300,000 and had a 60% controlling interest of the JV, PACTFZC, majority owned by George Hayek, Pact-Yixing’s managing director, and a third party each invested US$100,000 in consideration for 20% interests. In 2013, The JV was liquidated and its business has been taken over by Pact-Yixing.
 
We continue the process of shifting our emphasis from the distribution of instruments and equipment to engineering and manufacturing activities. Revenues from our trading activities have fallen-off as a substantial number of our suppliers have been selling their products into China directly and through other distributors. Many of these other distributors are local Chinese companies and can operate with a lower overhead.
 
During Fiscal 2016, there were increases in revenues from both trading and engineering activities. Revenue from Pact-Yixing increased significantly in 2016 to US$8,757,000, while Shanghai Environmental incurred an operating loss of US$105,000. In addition, we incurred research and development costs of approximately US$475,000 in 2016 relating to BWTS and Pact-Yixing incurred an operating loss of approximately US$104,000. This resulted in operating loss from engineering activities of approximately US$209,000. We continue to scale down Shanghai Environmental to avoid duplication of costs and efforts, as Pact-Yixing operate similar business activities, and we plan to wind it down upon collection of outstanding accounts receivable.
 
During Fiscal 2017, there were decreases in revenues from both trading and engineering activities. Revenue from Pact-Yixing decreased in 2017 to US$6,349,000, while Shanghai Environmental incurred an operating loss of US$137,000. In addition, we incurred research and development costs of approximately US$163,000 in 2017 relating to BWTS and Pact-Yixing incurred an operating loss of approximately US$169,000. This resulted in operating loss from engineering activities of approximately US$306,000. We continue to scale down Shanghai Environmental to avoid duplication of costs and efforts, as Pact-Yixing operate similar business activities, and we plan to wind it down upon collection of outstanding accounts receivable.
 
During Fiscal 2018, there was increase in revenues from trading and manufacturing activities. Revenue from Pact-Yixing in 2018 was US$6,354,000, while Shanghai Environmental incurred an operating loss of US$ 34,000. In addition, we incurred research and development costs of approximately US$160,000 in 2018 relating to BWTS and Pact-Yixing incurred an operating loss of approximately US$787,000. This resulted in operating loss from engineering activities of approximately US$821,000. We continue to scale down Shanghai Environmental to avoid duplication of costs and efforts, as Pact-Yixing operate similar business activities, and we plan to wind it down upon collection of outstanding accounts receivable.
 
  Our Growth Strategy
 
We are focusing our trading activities in Hong Kong, Macau and Guangdong. These cities are located close to our Hong Kong headquarters, our customers are more concentrated in these cities rendering customer support easier while incurring less travel expenses and while supporting distributorships in these cities as opposed to distributorships throughout China. We will continue our efforts to control costs to enhance operational efficiency. At the same time we will place greater focus at the manufacturing level on the chemical reagent business that we believe is very profitable and easier to sell. These chemical reagents are manufactured in our plant in Shanghai. These reagents include but are not limited to chemical oxygen demand (COD) analyzers, fine carbon tetrachloride, total nitrogen and free chlorine. These reagents are used by water and wastewater treatment plants and other industries such as beverage, as consumables with the water analyzers to monitor the quality of the water/ discharged water. To date, our existing distribution network for these products has had modest success. In 2016, we received a contract worth about US$6.0 million from a foreign mobile phone company that covers design, supply, installation and the commissioning of industrial wastewater treatment and scrubber systems for its OEM plants in Shanghai, Shenzhen and Zhengzhou, China. This contract was completed in Fiscal 2017. In 2018, the Company received a PRC government grant for port ballast solution to fund the development of a prototype, which prototype expected to be completed prior to the end of 2019. The Company is undertaking marketing and promotion efforts related to the barge and port product development project in order to seek orders for this solution following its completion. We are also currently exploring ways to penetrate into the Russia market, although no assurance can be given that we will be able to do so.   In addition, we also continue to invest a portion of our resources to developing our BWTS for the global market, and, based upon Pact-Yixing’s competitive prices and the high quality of its services, feel positive about our ability to expand our worldwide customer base by working closely and actively with some international engineering companies. However, no assurance can be given that these efforts will be successful. 
 
 
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We also maintain a website which provides us with the ability to offer “on-line” product sales (via www.yibaynet.com.cn) at lower prices than our competitors. To date, however, this website has not generated any material income. 
 
The Company believes that by assembling the products it distributes it may realize increased gross profit margins and greater revenues and net income than if it remains only a product distributor. During the next twelve months, we intend to continue to assemble and/or manufacture additional products, and seek opportunities with our suppliers to assemble their products, secure manufacturing and/or assembly facilities. We continue to promote our BWTS products that currently treat wastewater at rates of 200, 300, 500, 750, 1,200 and 1,250 cubic meters per hour.
 
We also anticipate that, during Fiscal 2019, we will spend up to an additional US$200,000 in research and development costs on similar projects and potential research and development projects for the development of BWTS, portable ballast water checker, water testing equipment and monitoring equipment.
 
Future Planning and Expansion
 
We continuously search for products and equipment with substantial market potential for design and development. For example, international shipping ballast water cargo stowaway species and microorganisms that create unpredictable ecosystem contaminations as ballast water tanks are emptied or refilled at ports of call. Pact has been attempting to develop a non-chemical BWTS since late 2010. In 2012, Pact successfully completed and passed the land based test requirement, and, in 2014, Pact passed ship board testing and obtained CCS certification in the PRC and compliance with the IMO convention. In September 2016, the International Maritime Organization received acceptance from 52 States, representing approximately 35% of world merchant shipping tonnage. This triggered the applicability of the entry into force of the Ballast Water Management Convention, which occurred on September 8, 2017. In July 2017, IMO de cided that the phase-in period for ballast water system retrofits will start on September 8, 2019.  The Company is continuing to look for strategic investors who are interested in providing financing for the application of the United States Coast Guard (“USCG”) Type Approval for its BWTS in order to enlarge is market coverage.
 
We anticipate that the costs of any such acquisition or product development would be drawn from our general working capital and, possibly, by seeking strategic partners such as companies in the BWM Convention shipping industries or funding raising from substantial investors, and by private sales of our securities. We have no commitments or received no indications of interest for the private sales of our securities.
 
Product Distribution and Other Services
 
Scientific Instruments .  The Company distributes analytical instruments, environmental quality monitoring instruments, sample pre-treatment equipment and general purpose laboratory instruments. Analytical instruments include, but are not limited to, chromatographs, mass spectrometers, flow injector analyzers, automated sample preparation workstations and atomic spectrometers. Environmental monitoring instruments include both air and water quality monitoring instruments. Air quality monitoring instruments are generally divided into those which monitor ambient (i.e., atmospheric) air, and those which monitor pollution sources. The revenue from sales of air quality monitoring instruments is nominal as the Company has not been able to acquire a distributorship for air quality instruments from brand name manufactures that we believe engage in direct customer sales or rely on their existing distributors. Sample pre-treatment equipment is used to clean-up the sample prior to chemical analysis for checking pesticides and drug residues in food. Additionally, the Company offers general purpose laboratory instruments including a variety of water quality monitoring and analysis equipment, such as continuous reading process analyzers, process turbidimeters, pH controllers, and test kits for monitoring chemical content in water (i.e., chlorine, fluorides, etc.). See – “Glossary.”
 
Customers for the analytical instruments include government agencies, academic and research institutions, major laboratories and beverage producers, including analytical system to the Hong Kong Government Laboratory for analysis of persistent organic pollutants (POPs) and pesticides in the environment. Customers for water quality monitoring instruments also include government agencies. Customers for sample pre-treatment equipment are mainly different laboratories of major cities under the Administration of Quality Supervision, Inspection and Quarantine in the PRC. The Company derived approximately 70.4%, 67.5% and 75.0% of its revenues from the sale of scientific instruments during Fiscal 2018, 2017 and 2016, respectively.   
 
 
26
 
 
Power Solutions and Process Automation Products.  The Company distributes general testing and measuring equipment including multi-channel digital and analogue recorders, signal amplifiers and calibration equipment for energy conservation, renewable energy equipment, power quality analyzers, continuous emissions monitoring systems and air pollution control systems to industries including power plants, railway and aero-space industries, utilities, educational institutions and telecommunications companies.
 
The Company also provides process control systems specifically designed for the industrial needs of clients including sensors, temperature gauges, pressure gauges, power and energy consumption meters, flow meters, valves, temperature and pressure transmitters and control devices, temperature and pressure calibrators, moisture, power, energy and harmonic analyzers. Customers for the foregoing distributed products include government water supply agencies, water treatment facilities, power and electric companies, petrochemical plants and instrument manufacturers. 
 
In conjunction with the distribution of products such as programmable logic controllers, telemetry units and supervisory control and data acquisition (SCADA) systems and software, the Company also provides systems engineering to government agencies, waste-water treatment and power generation plants and beverage producers. Specific services provided include automated control system design, the operation and management of various waste-water, water and power generation projects. We endeavor to introduce, develop, and promote new and advanced technologies, products, and appropriate technical developments from abroad. We have also been cooperating with established technology companies and engage in systems and special projects in Programmable Logic Control, Telemetry unit, SCADA systems, Human Machine Interface Software and Sequential Event Recording.
   
The Company derived approximately 28.5%, 31.2% and 23.6% of revenues from the sale of power solutions and process during Fiscal 2018, 2017 and 2016, respectively.
 
Technical Support.  The Company’s technical support staff provides customers with maintenance, installation assistance, and calibration services, and assists sales personnel in giving technical advice to and performing product demonstrations for customers. The Company derived approximately 1.1%, 1.3% and 1.4% of its revenues from technical support operations during Fiscal 2018, 2017 and 2016, respectively.
 
Customers.  During Fiscal 2018, the Company distributed products to approximately 1,000 customers, located in Hong Kong, the PRC and Macau such as the Hong Kong Food and Environmental Hygiene Department, Hong Kong Water Supplies Department, Government Laboratory, Drainage Services Department, and various Environmental Monitoring Centers in the PRC. For the year ended December 31, 2018, sales to our two largest customers amounted in the aggregate to approximately 22% of our total revenue, with one of such customers accounting for 15% of our total revenue.
 
Manufacturing and Product Assembly Operations
 
The Company, through its PRC subsidiary, Shanghai Euro Tech Limited located in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, production, sales and servicing of environmental equipment, including the development of modern laboratory analyzers, on-line measuring equipment and other analyzers for chemicals. Our products are “tailor-made” for the diversified needs of equipment users. Main products include infrared photometric oil analyzer (“IPOA”), COD analyzers, total organic carbon (“TOC”) analyzer, turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers, various types of spectrophotometers as well as a full spectrum of matching chemical reagents. We also offer turbidity meters manufactured by the Company and directed at water treatment plants, environmental monitoring status, and hydrological stations. We also offer our own TOC analytical instrument that measures the degree of the pollution. We have also upgraded other existing instruments and developed a quick response COD test instrument for use on surface water, underground water and domestic and industrial wastewater. Additionally, we offer a flue gas emissions analyzer for use in environmental compliance monitoring. We also developed energy meters (devices measuring electric energy consumption and corresponding carbon dioxide emissions) and water toxicity analysis instruments. Although it takes substantial time, effort and expense to develop, test and market a product, our sales of the TOC analyzer and the flue gas emissions analyzer have been nominal to date. We have been unable to find a suitable market to sell the energy meters. We have developed evaporator for extraction of organic solvents to remove the impurities prior to chemical analysis and are developing a larger size evaporator. Our customers are analyzing environmental pollutants, toxic substances such as pesticides and drug residues in food, drugs in clinical or forensic applications. We started test sale of this product in second half of fiscal 2015 and received orders of 11, 14 and 9 sets in Fiscal 2018, 2017 and 2016, respectively. The Company has developed a handheld ballast water checker which is the first handheld rapid indicative compliance instrument made in China, based on well accepted PAM fluorescence Technology. The instrument is a very powerful screening tool for ship owners, compliance officers, ship builders and BWTS providers. The company was one of the few qualified local and foreign candidates to participate in China Marine Safety Administration’s (“MSA”) evaluation of indicative testing instruments to be used by Port State Control officers for compliance test according to IMO D2 standard. The unofficial reports of comparison data between our instrument and lab test results indicated that our instrument readings trend followed the actual lab test results closely. We obtained patent approval in China and got the environmental testing certificate according to Chinese Standard GB/T 11606-2007 from Shanghai Institute of Measurement and Technology. We are going to carry out testing of this instrument at the land-based test facility of one of the Chinese National Engineering Laboratories for Ballast Water Testing and type approval according to IMO guidelines in order to get a certified test report from this approved laboratory.   We are doing the ground work of promoting our instrument to ship owners, shipping service and equipment providers, ship builders, BWTS manufacturers and local MSA. We also participated in a number of trade shows and exhibitions. Although the regulation is not enforced now, we are getting market awareness of our product application. Shanghai Euro Tech Limited achieved its economic breakeven point in Fiscal 2014.
 
 
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Sources of Supply
 
The Company distributes products manufactured by a substantial number of major American, European and Japanese corporations, including Thermo, Stanford, Hach and Hioki, which are the Company’s largest suppliers, with purchases from them accounting for approximately 63%, 7%, 5% and 4% during fiscal 2016, 45%, 10%, 9% and 5% during Fiscal 2017, and 55%, 8%, 7% and 7% during Fiscal 2018, respectively. The Company has exclusivity agreements for specified geographic areas with many of its suppliers for certain products. Those agreements do not encompass all products distributed by the Company or all of the market areas serviced by the Company. In addition, some of these agreements are memorialized not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreement or arrangement, and therefore may be unenforceable.  The Company has agreements and has an Authorization Letter from Hach appointing the Company as Hach’s distributor in Hong Kong and Macau which is valid until January 4, 2020. The Company has an Agreement with Thermo granting the Company rights to sell Thermo’s Mass Spec Products to the Government and hospitals in Hong Kong which is valid until March 31, 2020. The Company has only an Authorization Letter from Stanford appointing the Company as Stanford’s sales representative in the PRC and Hong Kong. The Company has only an Authorization Letter from Hioki appointing the Company as Hioki’s sole agent in Hong Kong and Macau. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have an adverse effect on operations.
   
Regu l atory Environment
 
Concerns about and awareness of pollution problems and environmental issues have grown at all levels of PRC government as the PRC experienced economic growth. Environmental protection laws and strict regulations have been enacted and are buttressed by increased budget allocations for environmental regulation, monitoring and enforcement. The PRC’s primary environmental protection agency is the Ministry of Ecology and Environment (“MEE”) which replaced the Ministry of Environmental Protection (“MEP”) after the 13 th National People’s Congress was held in March 2018. The new streamlined ministry is a sign of China’s upgraded dedication to the task of improving its environment. As of 2015, there were 2,810 monitoring centers in China. In the 19 th Five-Year Program (2016-2020), MEE launched three major campaigns of prevention and control of environment, including action plans for control of air pollution, water pollution and soil pollution. Special action was also taken in the Beijing-Tianjin-Hebei region and the Yangtze River economic belt for air and water pollution control, respectively. Major indicators to assess air quality are SO2, NOX, PM10 and PM2.5. Indicators for water are COD, petroleum oil, total nitrogen, total phosphorus and ammonia nitrogen. We have designed and built instruments to detect these indicators. In-depth investigation of soil environment quality, building monitoring network and improvement of soil quality information management are ongoing. The government’s goal is to have 90% safe utilization of polluted farmland. The government has outsourced testing to commercial testing labs. Heavy metals and organic pollutants are being analyzed. Our concentrator automates evaporation and improves data quality for organic analysis. There can be no assurance that the agencies will continue to use our products for these purposes, or that other market competitors will not enter the market with superior products, distribution systems or more competitive prices. See – “Competition.”
 
Competition
 
The Company faces competition from other distributors of substantially similar products as well as the manufacturers of such products, and in both foreign and Chinese markets. The Company faces its principal competition from manufacturers and other distributors of its core products located in Hong Kong and the PRC. Moreover, the Company has implemented plans to assemble products of the kind that it presently distributes (see – “Manufacturing and Product Assembly Operations”). Assembly operations have developed to the stage where some products have already been presented to the market and the Company is in direct and unavoidable competition with certain of its vendors. There can be no assurance that the existence of this direct competition will not impair the Company’s ability or such competitor’s willingness to continue providing other products for continued distribution by the Company and that such a development would not materially adversely affect the Company’s core business.
 
 
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During Fiscal 2018, 2017 and 2016, the Company’s gross profit margins were approximately 18%, 25% and 22%, respectively. The Company believes that it competes with the PRC manufacturers on the basis of quality and technology. The Company believes it offers foreign-manufactured products which are of higher quality and use more advanced technology than products manufactured in the PRC. The Company believes that it competes with foreign manufacturers and other distributors of their products on the basis of the Company’s more extensive distribution network and an established reputation. Pact-Yixing focuses on a market of providing water and waste water treatment services to multinational companies. The Company competes in this market based upon the quality of its products and having a knowledgeable staff, but faces competition from large PRC and multinational engineering companies, that, in the Company’s view, market their services based upon low pricing as opposed to quality of service.
 
Website
 
The Company has an internet platform located at http://www.chinah2o.com. The website is directed toward environmental businesses in China. The website provides environmental news, directories of western suppliers, potential clients in China, and advertisement space but has not generated sufficient external revenue.
 
The Company, through its subsidiary, Euro Tech Trading (Shanghai) Limited, a PRC corporation, has an internet platform. The website is located at http://www.yibaynet.com.cn. The website is an instrument sourcing platform under which potential customers can ask for sales quotations and place orders via internet. It can replace some functions of the closed retail shops.
 
Sales and Marketing
 
The Company distributes products through its principal office located in Hong Kong, and its wholly-owned trading company in Shanghai. During Fiscal 2016, the Company had a marketing and sales force of 21 people who are paid a salary plus a sales-based commission.  During Fiscal 2017, the Company had a marketing and sales force of 16 people who are paid a salary plus a sales-based commission. During Fiscal 2018, the Company had a marketing and sales force of 15 people who are paid a salary plus a sales-based commission. Our sales staff assists customers in selecting the equipment, auxiliary parts and products to suit customer specifications.

Our remaining sales subsidiaries are located in: Shanghai, Chongqing and Xi’an. We are now closing Chongqing and Xi’an subsidiaries.
 
Our remaining representative office is located in Beijing, which is a sales office of Shanghai Euro Tech Limited.
 
Litigation
 
From time to time, we are subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not currently a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results of operations. Shanghai Euro Tech Environmental Engineering Company Limited (“Shanghai Environmental”), our wholly-owned subsidiary, filed a civil action claim in the Baise Intermediate People’s Court of Guangxi Zhaung Autonomous Region against GuangXi Tiandong Industrial Investment Development Co., Ltd., for outstanding accounts receivable debts of approximately of US$334,000. The litigation has not been concluded.
 
C.     ORGANIZATIONAL STRUCTURE
 
Euro Tech Holdings Company Limited was incorporated in the British Virgin Islands on September 30, 1996.
 
Far East is the principal operating subsidiary of the Company.  It is principally engaged in the marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems in Hong Kong and in the PRC.
 
 
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Details of the Company’s current significant subsidiaries are summarized as follows:
 
Name
 
Percentage of equity ownership
 
Place of incorporation
 
Principal activities
 
 
 
 
 
 
 
Subsidiaries:
 
 
 
 
 
 
 
 
 
 
 
 
 
Euro Tech (Far East) Limited
 
100%
 
Hong Kong
 
Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems
 
 
 
 
 
 
 
Euro Tech Trading (Shanghai) Limited
 
100%
 
PRC
 
Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems
 
 
 
 
 
 
 
Shanghai Euro Tech Limited
 
100%
 
PRC
 
Manufacturing of analytical and testing equipment
 
 
 
 
 
 
 
Shanghai Euro Tech Environmental Engineering Company Limited
 
100%
 
PRC
 
Undertaking water and waste-water treatment engineering projects
 
 
 
 
 
 
 
Yixing Pact Environmental Technology Co., Ltd
 
58%
 
PRC
 
Design, manufacturing and operation of water and waste water treatment machinery and equipment
 
 
 
 
 
 
 
Pact Asia Pacific Limited
 
58%
 
British Virgin Islands
 
Selling of environmental protection equipment, undertaking environment protection projects and providing relevant technology advice, training and services
 
 
 
 
 
 
 
Affiliate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Zhejiang Tianlan Environmental Protection Technology Co. Ltd.
 
19.4%
 
PRC
 
Design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted
 
 
 
 
 
 
 
 
D.     PROPERTY, PLANT AND EQUIPMENT
 
The Company has various operating lease agreements for office and industrial premises. Rental expenses for the year ended December 31, 2018 were approximately US$276,000. Future minimum rental payments as of December 31, 2018, under the agreements classified as operating leases with non-cancellable terms amounted to US$87,000, of which US$87,000 are payable in the year 2019 and US$Nil are payable within years 2020 to 2024.
 
 
30
 
   
The Company maintains an executive office at Unit C and D, 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupies approximately 7,000 square feet of office and warehouse storage space under a two year lease that expires in May 2019 with a monthly rental payment of approximately US$7,282. The warehouse storage space is used to hold products for distribution to our customers via common carriers.
 
The Company owns approximately 1,200 square feet of space in a building in Hong Kong. This property is now rented out to a third party. 
 
Euro Tech Trading (Shanghai) Limited has two offices rented pursuant to short term leases, at an aggregate monthly rent of approximately US$1,160. Shanghai Euro Tech Limited’s premises are rented pursuant to a short term lease for a monthly rent of approximately US$4,735. Shanghai Euro Tech Environmental Engineering Company Limited's premises are also rented pursuant to a short term lease for a monthly rent of approximately US$554.
 
Yixing occupies a 700 square meter facility in Shanghai, pursuant to a three year lease expiring in January 2020, providing for a monthly rent of approximately US$5,613.
 
ITEM 4A.     U NRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5.      O PERATING AND FINANCIAL REVIEW AND PROSPECTS
 
Overview . The Company is engaged in two different major segments, namely trading and manufacturing and engineering.
 
For the trading and manufacturing segment, the Company is a distributor of a wide range of advanced water treatment equipment, laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers), and its PRC subsidiary, Shanghai Euro Tech Limited, which is located in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, engineering, production, sales and servicing of environmental protection equipment, and energy conservation and related products.
 
For the engineering segment, the Company, through its majority owned subsidiaries, Pact-Yixing, its wholly-owned subsidiary, Shanghai Environmental, and its minority owned affiliate, Blue Sky, also engages in water and waste-water treatment engineering and air pollution control business.
 
A.    OPERATING RESULTS
 
Background - Political and Economic Conditions in Hong Kong and the PRC
 
The Company’s operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. Set forth below are the approximate percentage of the Company’s sales made to customers in the PRC and Hong Kong for the fiscal years indicated:
 
Fiscal Year
 
PRC
 
 
Hong Kong
 
 
 
 
 
 
 
 
2016
    47 %
    52 %
2017
    45 %
    53 %
2018
    40 %
    56 %
 
 
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Sales to customers situated in Macau and elsewhere through Fiscal 2018 were nominal. This makes the Company particularly susceptible to changes in the political and economic climate of either Hong Kong or the PRC.
 
Hong Kong.  Hong Kong has been one of the prime centers for commercial activity and economic development recently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC. As provided in the Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The Basic Law provides that the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years after the transfer of sovereignty. Based on the current political conditions and the Company’s understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had or will have an adverse impact on its financial and operating environment. Although the Chinese government has pledged to maintain the economic and political autonomy of Hong Kong over its internal affairs, there is no assurance that such pledge will continue to be honored if there are changes in the Chinese political or economic climate. Sales in Hong Kong, expressed as a percentage of our revenue, increased by 4% in Fiscal 2016 as compared with Fiscal 2015. Sales in Hong Kong, expressed as a percentage of our revenue, increased by 1% in Fiscal 2017 as compared with Fiscal 2016.  Sales in Hong Kong, expressed as a percentage of our revenue, increased by 3% in Fiscal 2018 as compared with Fiscal 2017. See – Item 3D. “Key Information — Risk Factors.”
 
PRC.  The PRC has been a socialist state since 1949. For more than half a century, the PRC’s economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various state plans adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities who may set production and development targets. However, since approximately the early 1980s, the PRC’s national government has undertaken certain reforms to permit greater provincial and local economic autonomy and private economic activities. Any change in political or economic conditions may substantially adversely affect these reform initiatives and, in turn, the Company. Sales in the PRC, expressed as a percentage of total revenue, decreased by 4% in Fiscal 2016 as compared with Fiscal 2015. The decrease was primarily due to the fact that the increase in sales in PRC were less than the overall increase in sales of the Company. Sales in the PRC, expressed as a percentage of total revenue, decreased by 2% in Fiscal 2017 as compared with Fiscal 2016. The decrease was primarily due to a decrease in engineering revenue in PRC. Sales in the PRC, expressed as a percentage of total revenue, decreased by 5% in Fiscal 2018 as compared with Fiscal 2017. The decrease was primarily due to the increase in sales in PRC were less than the overall increase in sales of the Company. See – Item 3D. “Key Information — Risk Factors.”
   
Results from Operations
 
The following operating and financial review should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report. All financial data referred to in the following discussion has been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
 
 
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The following table presents selected statement of operations data expressed in thousands of US$ and as a percentage of revenue for the Company’s fiscal years indicated below:
 
 
 
2018
 

 
    2017  
 

 
    2016  
 

 
2015
 
 
 
    2014  
 
Revenue
  $ 20,104  
    100 %
   
  $ 17,350  
    100 %
 
  $ 22,478  
    100 %
 
  $ 18,302  
    100 %
  
  $ 18,822  
    100 %
Cost of revenue
  $ 16,405  
    81.6 %

  $ 12,937  
    74.6 %

  $ 17,527  
    78.0 %

  $ 14,259  
    77.9 %

  $ 13,991  
    74.3 %
Gross Profit
  $ 3,699  
    18.4 %
 
  $ 4,413  
    25.4 %

  $ 4,951  
    22.0 %
 
  $ 4,043  
    22.1 %

  $ 4,831  
    25.7 %
Selling and administrative expenses
  $ 4,751  
    23.6 %

  $ 4,976  
    28.7 %

  $ 5,602  
    24.9 %

  $ 5,997  
    32.8 %

  $ 5,802  
    30.8 %
Loss before income Taxes
  $ (963 )
    -4.8 %

  $ (564 )
    -3.3 %

  $ (640 )
    -2.8 %
   
  $ (1,904 )
    -10.4 %

  $ (879 )
    -4.7 %
Income taxes credit / (expense)
  $ 312  
    1.6 %

  $ (28 )
    -0.2 %

  $ (228 )
    -1.0 %

  $ 47  
    0.3 %

  $ (18 )
    -0.1 %
Equity in (loss) / income of affiliates
  $ (932 )
    -4.6 %
    
  $ 831  
    4.8 %

  $ 1,002  
    4.5 %

  $ 850  
    4.6 %

  $ 605  
    3.2 %
Net gain on disposal of affiliate  
  $ 1,522  
    7.6 %

    -  
    -  

    -  
    -  

    -  
    -  

    -  
    -  
Net (loss) / profit
  $ (61 )
    -0.3 %

  $ 367  
    2.1 %

  $ 158  
    0.7 %

  $ (1,007 )
    -5.5 %

  $ (292 )
    -1.6 %
Net loss attributable to non-controlling interest
  $ 149  
    0.7 %

  $ 106  
    0.6 %

  $ 73  
    0.3 %

  $ 391  
    2.1 %

  $ 169  
    0.9 %
Net profit / (loss) attributable to the Company
  $ 88  
    0.4 %

  $ 473  
    2.7 %

  $ 231  
    1.0 %

  $ (616 )
    -3.4 %

  $ (123 )
    -0.7 %
 
Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended December 31, 2017
 
Revenue; Gross Profit and Cost of Revenue. Revenue increased by approximately US$2,754,000 or 15.9% to approximately US$20,104,000 in Fiscal 2018 from approximately US$17,350,000 in Fiscal 2017. Revenue from trading and manufacturing activities and engineering activities increased by approximately US$2,769,000 and decreased by US$15,000, respectively. The increase in revenues from trading and manufacturing activities was principally due to increase in big system sales. Pact-Yixing’s revenues of approximately US$6,354,000 and US$6,349,000 were included in our revenues in Fiscal 2018 and Fiscal 2017, respectively.
 
Gross profits decreased by approximately US$714,000 or 16.2% to approximately US$3,699,000 for Fiscal 2018 as compared to approximately US$4,413,000 for Fiscal 2017.   During Fiscal 2018, the Company’s cost of revenues was approximately US$16,405,000 or 81.6% of revenues, in comparison to approximately US$12,937,000 or 74.6% for Fiscal 2017. Cost of revenue expressed as a percentage of revenue increased by 7.0% in Fiscal 2018 as compared with Fiscal 2017. Cost of revenues from trading and manufacturing activities and engineering activities increased by approximately US$2,573,000 and US$895,000, respectively. The overall change was principally due to increase in trading activities of big system sales which were of lower gross margin and the decrease in the gross profit margin percentage of engineering contracts under the keen competitive market condition. Pact-Yixing contributed approximately US$1,113,000 to our gross profit in Fiscal 2018, a decrease of approximately US$1,975,000 from Fiscal 2017.  
 
 
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Selling and Administrative Expenses.  Selling and administrative expenses were approximately US$4,751,000 in Fiscal 2018, a decrease of approximately US$225,000 or 4.5% from approximately US$4,976,000 in Fiscal 2017. The decrease was largely due to tight control over overheads spent. The research and development expenses increased from approximately US$163,000 in Fiscal 2017 to approximately US$184,000 in Fiscal 2018.
 
Equity in (Loss) / Income of Affiliates. Equity in loss of affiliates was approximately loss of (US$932,000) in Fiscal 2018, a decrease of approximately US$1,763,000 from income of affiliates of approximately US$831,000 in Fiscal 2017. The Fiscal 2018 results included a loss contribution from Blue Sky of US$786,000 principally caused by a decrease in sales revenue as a result of the filing for bankruptcy liquidation of one of Blue Sky’s major customers, and a loss contribution from Jia Huan of US$146,000.
 
Net Gain on Disposal of Affiliate. Net gain on disposal of affiliate was approximately US$1,522,000 in Fiscal 2018 resulting from the disposal of our equity interest in Jia Huan.
 
Interest Income.  Interest income in Fiscal 2018 was approximately US$35,000 as compared to approximately US$24,000 in Fiscal 2017.
 
Other income / (losses). Other income increased by approximately US$72,000 to approximately US$58,000 in Fiscal 2018 from approximately US$(14,000) in Fiscal 2017. The increase in other income was principally due to increase in exchange gain of US$53,000.  
 
Income Taxes.  Tax credit of approximately US$312,000 in Fiscal 2018 as compared to tax expenses of approximately US$(28,000) in Fiscal 2017. This change was primarily the result of overcharge of tax expenses in previous years.
 
Net Income.  Profit from continuing operations was approximately US$88,000 in Fiscal 2018 as compared to approximately US$473,000 in Fiscal 2017. This decrease was primarily due to an increase in operating loss resulting primarily from higher costs of revenue in our trading and manufacturing activities and engineering activities, coupled with the negative contribution from affiliates, which was partially offset by a gain on disposal of equity in an affiliate. 
 
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended December 31, 2016
 
Revenue; Gross Profit and Cost of Revenue. Revenue decreased by approximately US$5,128,000 or 22.8% to approximately US$17,350,000 in Fiscal 2017 from approximately US$22,478,000 in Fiscal 2016. Revenue from trading and manufacturing activities and engineering activities decreased by approximately US$2,720,000 and US$2,408,000, respectively. The decrease in revenues from trading and manufacturing activities was principally due to drop in big system sales. The decrease in revenues from engineering activities was principally because there was a big contract from a foreign mobile phone company received in Fiscal 2016. Pact-Yixing’s revenues of approximately US$6,349,000 and US$8,757,000 were included in our revenues in Fiscal 2017 and Fiscal 2016, respectively.
 
Gross profits decreased by approximately US$538,000 or 10.9% to approximately US$4,413,000 for Fiscal 2017 as compared to approximately US$4,951,000 for Fiscal 2016.   During Fiscal 2017, the Company’s cost of revenue was approximately US$12,937,000 or 74.6% of revenues, in comparison to approximately US$17,527,000 or 78.0% for Fiscal 2016. Cost of revenue expressed as a percentage of revenue decreased by 3.4% in Fiscal 2017 as compared with Fiscal 2016. This change was principally due to drop in trading activities of big system sales which were of lower gross margin. Pact-Yixing contributed approximately US$1,975,000 to our gross profit in Fiscal 2017, a decrease of approximately US$601,000 from Fiscal 2016.  
 
Selling and Administrative Expenses.  Selling and administrative expenses were approximately US$4,976,000 in Fiscal 2017, a decrease of approximately US $626,000 or 11.2% from approximately US$5,602,000 in Fiscal 2016. The decrease was largely due to tight control over overheads spent. The research and development expenses decreased from approximately US$475,000 in Fiscal 2016 to approximately US$163,000 in Fiscal 2017.
 
 
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Equity in Income of Affiliates. Equity in income of affiliates was approximately US$831,000 in Fiscal 2017, a decrease of approximately US$171,000 or 17.1% from approximately US$1,002,000 in Fiscal 2016 because of decrease in contribution for Jia Huan.  
 
Interest Income.  Interest income in Fiscal 2017 was approximately US$24,000 as compared to approximately US$18,000 in Fiscal 2016.
 
Other (losses) / income. Other income decreased by approximately US$19,000 to approximately US$(14,000) in Fiscal 2017 from approximately US$5,000 in Fiscal 2016. The decrease in other income was principally due to decrease in rental income of US$48,000 as one property was vacant during Fiscal 2017.  
 
Income Taxes.  Tax expenses of approximately US$28,000 in Fiscal 2017 as compared to approximately US$228,000 in Fiscal 2016. This change was primarily the result of a decrease in net taxable income for Fiscal 2017.
 
Net Income.  Profit from continuing operations was approximately US$473,000 in Fiscal 2017 as compared to approximately US$231,000 in Fiscal 2016. This change was primarily due to decrease in operating loss and income taxes. 
 
B.     LIQUIDITY AND CAPITAL RESOURCES
 
The Company has primarily used its own funds to finance receivables, net, contract assets, inventories, and capital expenditures including purchases of property, office furniture and equipment, computers and calibration equipment. The Company has historically met its cash requirements from cash flows from operations, short-term borrowings, bank lines of credit, and long-term mortgage bank loans. The Company expects, but can make no assurances that its present cash reserves, cash from operations and existing available bank credit facilities exercises would be sufficient to fund its future capital expenditure requirements. Working capital at the end of Fiscal 2018 and Fiscal 2017 were approximately US$6,013,000 and US$2,986,000, respectively.
   
As of December 31, 2018, we had approximately US$5,267,000 in cash and cash equivalents, compared to approximately US$3,380,000 in cash and cash equivalents as of December 31, 2017. Net cash (used in) / provided by operating activities was (US$1,345,000) for the year ended December 31, 2018 as compared to US$652,000 for the year ended December 31, 2017 and US$153,000 for the year ended December 31, 2016. Net cash provided by investing activities was US$5,083,000, US$272,000 and US$199,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The major items of cash provided by / (used in) in Fiscal 2018 were net cash inflow of approximately US$4,889,000 as a result of the sale of our equity interest in Jia Huan. Net cash (used in) / provided by financing activities was (US$1,540,000) for the year ended December 31, 2018 as a result of repayment of bank borrowings related to finance trade purchases , and dividend payment of approximately (US$1,443,000) , as compared to (US$623,000) for the year ended December 31, 2017 and US$720,000 for the year ended December 31, 2016.
 
The Company had various banking facilities available for overdraft, import and export credits and foreign exchange contracts from which the Company could have accessed up to approximately US$897,000 at December 31, 2018. These credit facilities were obtained on the conditions that, among other things, the Company pledge rented out property of approximately 1,200 square feet in Hong Kong as security, not create a charge or lien on its other assets in favor of third parties without such bank’s consent, and the Company maintaining a certain level of net worth.
 
Cash increased from approximately US$3,380,000 at the end of Fiscal 2017 to US$5,267,000 at the end of Fiscal 2018. The principal reason for the increase in cash was net cash inflow from investing activities.
 
The Company’s receivables, net increased from approximately US$3,808,000 at the end of Fiscal 2017 to US$5,089,000 at the end of Fiscal 2018. The amount of receivables subject to collection is expected to be received under normal commercial trading terms.
 
 
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The Company’s inventories decreased from approximately US$496,000 at the end of Fiscal 2017 to US$401,000 at the end of Fiscal 2018.
 
The Company’s capital expenditures were approximately US$85,000 and US$18,000 in Fiscal 2018 and Fiscal 2017, respectively. Capital expenditures during Fiscal 2018 and Fiscal 2017 were incurred primarily in connection with the purchase of office equipment, furniture and fixtures, and motor vehicles. The Company continues to develop new products, for example, non-chemical ballast water treatment system. If such products developments are indeed made, the Company may expect to incur significantly larger capital expenditures, for which the Company presently intends, but as to which no assurance can be made, to use existing cash reserves, cash from operations and available bank credit facilities.
 
Goodwill
 
Goodwill related to the engineering segment which is profitable. As of December 31, 2018, we completed the annual impairment test. Based on the result of the first step of the test, the Company determined that there was no impairment of goodwill.
 
Anticipated Future Resources and Uses of Cash
 
The Company has historically funded its working capital, capital expenditure, investing and expansions needs from operations, available bank credit facilities and proceeds from the issuances of our ordinary shares and expects to continue funding these requirements from operations and available bank credit facilities. The Company may use its funds to form strategic alliances with third parties, invest in product research and development, or expand its sales offices or, with third parties, seek to acquire new products or form strategic alliances. The Company expects, but can make no assurances that its present cash reserves, cash from operations and existing available bank credit facilities would be sufficient to fund its future cash requirements.
 
Inflation
 
The Company believes generally that past declining rates of inflation in the PRC have had a positive effect on its results from operations. As a result of the recent rise in the rate of inflation in the PRC, we anticipate increases in the overhead costs of our PRC affiliates and offices. The Company believes, although no assurance can be given, that as credit restrictions are gradually lifted, it will be able to increase prices in the market for its products and thus realize increased profit margins.
   
Critical Accounting Policies and Estimate
 
Basis of Consolidation
 
The consolidated financial statements include the financial statements of Euro Tech Holdings Company Limited and its subsidiaries (the “Group”). The financial statements of variable interest entities (“VIEs”), as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 810-10, Consolidation, are included in the consolidated financial statements, if applicable. All significant intercompany balances and transactions have been eliminated on consolidation.
 
The Group identified that a retail shop established in the PRC qualified as a variable interest entity as defined in ASC 810-10. This retail shop was principally engaged in the retailing business of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems. The Company is the primary beneficiary of this retail shop and, accordingly, consolidated their financial statements. The Company has a controlling financial interest in this retail shop and is subject to a majority of the risk of loss from the retailing activities, and is entitled to receive a majority of the retail shop’s residual returns. This VIE had ceased operation since October 2016.
 
 
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Subsidiaries and affiliates
 
A subsidiary is a company in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
 
Investments in companies in which the Group has significant influence (ownership interest of between 20% and 50%) but less than controlling interests, are accounted for by the equity method. Income on intercompany sales, not yet realized outside of the Group, was eliminated. The Group also reviews these investments for impairment whenever events indicate the carrying amount may not be recoverable.
 
In accordance with ASC Topic 323-10-40-1, a change in the Group's proportionate  share of an investee's equity, resulting from issuance of shares by the investee to third parties, is accounted for as if the Group had sold  a proportionate share of its investment. Any gain or loss resulting from an investee's share issuance is recognized in earnings.
 
Management evaluates investments in affiliated companies, for evidence of other-that-temporary declines in value. Such evaluation is dependent on the specific facts and circumstances and includes analysis of relevant financial information (e.g. budgets, business plans, financial statements, etc.). During the years ended December 31, 2018, 2017 and 2016, no impairment was identified.
 
Revenue Recognition
 
The Group’s revenue are under two segments: Trading and Manufacturing, and Engineering.
 
(i)   The Trading and Manufacturing segment refers to the distribution by the Group of a wide range of advanced water treatment equipment, laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers), as well as the development, engineering, production, sales and servicing of environmental protection equipment, and energy conservation and related products.
 
Under the Trading and Manufacturing segment, sales are recognized when or as the Group satisfies a performance obligation by transferring control of a product or service to a customer, in an amount that reflects the consideration to which the Group expect to be entitled in exchange for the product or service. The Group considers a number of factors in determining when the Group has transferred control to a customer, including the following: (i) our present right to payment; (ii) the customer’s legal title to the asset; (iii) physical possession of the asset; (iv) the customer’s significant risks and rewards of ownership of the asset; and (v) the customer’s acceptance of the asset.
 
Generally, payment terms with the Group's customers are consistent with those used in their industries and the regions in which the Group operates.
 
(ii)  The Engineering segment refers to the Group’s water and waste-water treatment engineering and air pollution control business.
 
Under the Engineering segment, the Group's revenues are recognized as performance obligations are satisfied over time (formerly known as percentage-of-completion method), using the output method. Output method is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material, labor, subcontract and other costs and those indirect costs determined to relate to contract performance, such as indirect salaries and wages, equipment repairs and depreciation and insurance. Administrative and general expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and associated change orders and claims, including those changes arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
 
Our contracts generally take 12 to 36 months to complete. The Group generally provides a one- to two-year warranty for workmanship under its contracts when completed.
 
Change orders are modifications of an original contract that effectively change the existing provisions of the contract without adding new provisions or terms. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either the Group or their customers may initiate change orders.
 
 
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The Group considers unapproved change orders to be contract variations for which the Group has customer approval for a change of scope but a price change associated with the scope change has not yet been agreed upon. Costs associated with unapproved change orders are included in the estimated costs to complete the contracts and are treated as project costs as incurred. The Group recognizes revenue equal to costs incurred on unapproved change orders when management determines approval to be probable. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers. Change orders that are unapproved as to both price and scope are evaluated as claims.
 
Research and Development Costs
 
Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately US$184,000, US$163,000 and US$475,000 for the years ended December 31, 2018, 2017 and 2016 respectively and were included in “Selling and Administrative expenses”   in the Group’s consolidated statements of operations and comprehensive income / (loss).
 
Income Taxes
 
The Group accounts for income and deferred tax under the provision of FASB ASC Subtopic 740-10, Income Taxes, in accordance with which deferred taxes are recognized for all temporary differences between the applicable tax balance sheets and the consolidated balance sheet. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. ASC 740-10 also requires the recognition of the future tax benefits of net operating loss carry forwards. A valuation allowance is established when the deferred tax assets are not expected to be realized.
 
In accordance with ASC 740-10, the Group recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such tax benefits. The Group recognizes interest and/or penalties, if any, related to income tax matters in income tax expense (Nil for the years ended December 31, 2018, 2017 and 2016). The Group did not have such uncertain tax positions in 2018, 2017 and 2016. The Group is subject to examination of tax authorities in the United States of America (open for audit for 2016 to 2018), Hong Kong (open for audit for 2012 to 2018) and PRC (open for audit for 2016 to 2018).
 
Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applicable for taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations and comprehensive income / (loss) for the period that includes the enactment date.
 
Evaluating Impairment for Long Lived Assets
 
When events or changes in circumstances indicate that long-lived assets may be impaired, an evaluation is performed. The evaluation would be based on estimated undiscounted cash flows associated with the assets as compared to the asset’s carrying amount to determine if a write-down to fair value is required. There was no impairment in 2018, 2017 and 2016. Management believes that there are no additional events or changes in circumstances which have indicated that other long-lived assets may be impaired.
 
 
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Goodwill
 
Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition. Accounting principles generally accepted in the United States of America (“GAAP”) requires that: (1) goodwill not be amortized, and (2) goodwill is to be tested for impairment at least annually at the reporting unit level.
 
Foreign Currency Translation
 
The Company maintains its books and records in United States dollars. Its subsidiaries and affiliates maintain their books and records either in Hong Kong dollars or Chinese Renminbi (“functional currencies”). Foreign currency transactions during the year are translated into the respective functional currencies at the applicable rates of exchange at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the respective functional currencies using the exchange rates prevailing at the balance sheet dates. Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations and comprehensive income / (loss) during the year in which they occur. Translation adjustments on subsidiaries’ equity are included as accumulated comprehensive income or loss.
 
Use of Estimates
 
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain of the Group’s accounting policies require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts over time, the valuation of income taxes, goodwill, valuation allowance for the deferred tax assets, stock compensation, useful lives of long live assets, impairment of long lived assets, receivables, net and inventories written down. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
 
Related Parties
 
Related parties are affiliates of the Group; entities for which investments are accounted for by the equity method by the Group; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the Group; its management; members of the immediate families of principal owners of the Group and its management; and other parties with which the Group may deal 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. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
  
Recent Accounting Pronouncements
 
The Group considers the applicability and impact of all accounting standards updates (“ASUs”) . The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements.
 
Recently Adopted Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. We adopted the requirements of the new pronouncement effective January 1, 2018. See Note 3 to the consolidated financial statements for further information related to the Group’s accounting policy and transition disclosures associated with the adoption of this pronouncement.
 
 
 
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In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805)”: Clarifying the Definition of a Business, which clarified 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 Group adopted this ASU on a prospective basis in January 2018 and there was no effect on the Group’s financial position, results of operations or cash flows.
 
Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the measurement and recognition of expected credit losses for financial assets held at amortized cost. The amendments in this ASU replace the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which among other things, clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The guidance is effective for the annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years. The Group is currently evaluating the impact on its consolidated financial position and results of operations upon adopting these amendments.
 
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this ASU eliminate, add and modify certain disclosure requirements for fair value measurements. The amendments in this ASU, among other things, require public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Group does not expect the adoption of these amendments to have a material impact on its consolidated financial position and results of operations.
 
In August 2016, the FASB issued guidance in ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This update addresses specific cash flow issues with the objective of reducing existing diversity in practice. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Group expects to adopt this guidance as required and does not expect a material impact to the consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350)”: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill, through elimination of Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance requires application on a prospective basis. The Group does not expect that this pronouncement will have a significant impact on its consolidated financial statements.
 
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The amendments under this pronouncement will change the way all leases with durations in excess of one year are treated. Under this guidance, lessees will be required to recognize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, which contain provisions similar to capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in the statement of operations and comprehensive income / (loss). Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations and comprehensive income / (loss). This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018. The Group intends to adopt this new guidance using the cumulative effect method, which would apply to all new lease contracts initiated on or after January 1, 2019. For existing lease contracts that have remaining obligations as of January 1, 2019, the difference between the recognition criteria in the new guidance and the Company’s current practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings .
 
The Group continues to evaluate the impact that this pronouncement, and all amendments relating to this pronouncement, will have on its policies and procedures pertaining to its existing and future lease arrangements, disclosure requirements and on the Group’s consolidated financial statements. When this pronouncement is adopted in 2019, the Group expects that most existing operating lease commitments that extend beyond twelve months at the time of adoption will be recognized as lease liabilities and right-of-use (“ROU”) assets upon adoption. Based on preliminary evaluations, the Group estimates that the value of lease liabilities will be insignificant upon adoption with corresponding ROU assets of the same amount based on the present value of the remaining minimum lease payments under current leasing standards. Additionally, the Group expects to elect the ’package of practical expedients,’ which permits the Group to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Group currently does not expect to elect the use of the hindsight practical expedient or the practical expedient pertaining to land easements. The Group, however, expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Group will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Group also currently expects to elect the practical expedient to not separate lease and non-lease components for our real estate leases. While the Group is still evaluating the requirements of this update, it currently does not expect the adoption to have a material impact on the recognition, measurement or presentation of lease expenses within the consolidated statements of operations and comprehensive income or consolidated statements of cash flows.
 
 
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C.     RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
 
During Fiscal 2018, 2017 and 2016, the Company expensed approximately US$184,000, US$163,000 and US$475,000, respectively, on the research and development of its products.
 
D.     TREND INFORMATION
 
There are increasing demands in the PRC for clean water, clean air, greater industrial pollution controls, waste management and electricity. We also see additional distributors competing with us. However, given the political situation in the PRC, trends could quickly disappear and we do not know if they will continue in the future. We note that, as evidenced by our acquisition of Pact-Yixing, we are placing greater emphasis on developing our engineering solution business in an effort to capitalize on these increased demands (clean water, pollution controls and waste management).
 
The Company believes that the expenses incurred in product development may result in increases in revenue but such increases are unlikely to allow for a recovery of the expenses for approximately the next two years.
 
E.     OFF-BALANCE SHEET ARRANGEMENTS
 
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any obligation under a derivative instrument. We do not have any obligation arising out of a variable interest in any unconsolidated entity that is held by, and material to, us which provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
F.     TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
The following table sets forth our contractual obligations by specified categories as of December 31, 2018.  
 
Payment Due By Period
 
Contractual Obligations
 
Total
 
Less than
1 Year
 
 
1-3 Years
 
 
4-5 Years
 
 
After
5 Years
 
Operating Leases
 
US$87,000
 
US$87,000
 
     
     
     
 
 
       
       
Total Contractual Cash Obligations
 
US$87,000
 
US$87,000
 
     
     
     
 
 
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ITEM 6.       D IRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
A.    DIRECTORS AND SENIOR MANAGEMENT
 
Information concerning the Directors and Executive Officers of the Company are as follows:
 
Name
 
Age
 
Position
T.C. Leung
 
75
 
Chairman of the Board of Directors and Chief Executive Officer
 
 
 
 
 
Jerry Wong
 
60
 
Director and Chief Financial Officer
 
 
 
 
 
Alex Sham
 
55
 
Director
 
 
 
 
 
Y.K. Liang
 
89
 
Director
 
 
 
 
 
Fu Ming Chen
 
70
 
Director
 
 
 
 
 
Janet Cheang
 
63
 
Director
 
 
 
 
 
David YL Leung
 
45
 
Director
 
Set forth below is a brief background of the executive officers and directors based upon the information supplied by them to the Company:
 
T.C. Leung  has been Chief Executive Officer and Chairman of the Board of Directors of both the Company and Far East since their inception. Before establishing Far East, Mr. Leung was an engineer for English Electric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm (Far East) Ltd. (“Eurotherm”) between 1971 and 1992. From 1988 until he retired in February 2005, Mr. Leung had also served as managing director of Eurotherm Hong Kong. Mr. Leung received a Master’s degree in Business Administration from the University of East Asia, Macau in 1986 and is a Chartered Engineer, a title bestowed upon a member of the Council of Engineering Institutions in the United Kingdom.
 
Jerry Wong  has served as Director and Chief Financial Officer of Far East since 1994 and has been with Far East since 1987. Mr. Wong has been the Chief Financial Officer and a Director of the Company since its inception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged in the insurance business, as deputy manager of its secretarial, legal and accounting department. From 1981 until 1985, Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association of Chartered Certified Accountants in the United Kingdom and a Certified Public Accountant in Hong Kong.
 
Alex Sham  has been a Director of the Company since its inception. Mr. Sham joined Far East in 1988 and has been its Sales Manager since 1993 and became a Director of Far East in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistry from Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Sham was employed by the Environmental Protection Department of the Hong Kong Government from 1986 until 1988. Mr. Sham received a Master’s Degree in Business Administration from the University of Adelaide in 2003.
 
Y.K. Liang  has been a Director of the Company since February 1998. Mr. Liang was a director of Wong Liang Consultants Ltd. (“Consultants”) and a member of the certified public accounting firm of Y.K. Liang & Co. (“LCO”). Mr. Liang has been a director of Sammy Lau CPA Limited for more than the past six years. Consultants is a general business consulting firm.
 
 
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Fu Ming Chen has been a Director of the Company since August 24, 2015.  Mr. Chen has a background in accounting and tax. He served as the Finance and Tax Manager of Shanghai Huaxiang Woolen Dressing Co., Ltd. from 1995 to 2013. Prior to that, from 1978 to 1994, he served as the Chief Accountant at Gulu Chemical Factory, where he was a member of the senior management. He held a County Township Audit Certificate issued by Shanghai ChuanSha County People’s Government from 1991 to 2001 which authorized him to carry out audit of Township and Village Enterprises in Shanghai ChuanSha County on behalf of local tax authority. He also holds a Certificate of Accounting Professional – Intermediate Level Accountant as well as a Higher Professional Education Certificate issued by Shanghai Television University. The Board believes Mr. Chen’s qualifications to sit on the Board include his significant experience with accounting and tax, as well as his leadership of business organizations.
 
Janet Cheang has been a Director of the Company since July 11, 2017. She is currently director of Metta Fine Arts Ltd. an online art gallery specializing in the promotion and trading of contemporary arts. From 2007 to 2017, she founded and operated Pinpoint Consultancy Limited, a business consultancy firm specializing in business development and executive coaching for companies operating in Hong Kong and mainland China. From 2003 to 2007, she was founding partner and managing director of Culture Tainment Services Ltd., responsible for business and brand development consultancy and training projects. From 1997 to 2002, she had worked for Estee Lauder (Hong Kong) Ltd. as the Brand General Manager for Estee Lauder brand in Hong Kong and mainland China. She holds a Master of Arts in Practical Philosophy, Lingnan University, Hong Kong (2013), Master of Arts in Training and Human Resource Development, University of Technology Sydney, Sydney (2006) and Bachelor of Arts in Economics & Political Science, Carleton University, Ottawa (1978).
 
David YL Leung,  has been the General Manager of Yixing Pact Environmental Technology Co., Ltd, Shanghai since 2011. His responsibility includes management of engineering, sales, marketing, projects, and procurement. Before joining Yixing, he was the Business Development Manager of Euro Tech (Far East) Limited, the parent company of Yixing Pact in Hong Kong, and has been working for the parent company for more than 10 years. Mr. Leung has gained a solid sales and marketing experience in distributing power, analytical and scientific testing equipment in Hong Kong and Macau. He has also worked for a high tech Japanese company focused on power and electrical testing instrument in Japan from 2000 and 2001 as a trainee. Mr. Leung is an environmental studies graduate from Carleton University, Ottawa, Canada (1997) with a special focus on Environmental Impact Assessment, and a Master of Management graduate from Macquarie Graduate School of Management, Sydney Australia (2010).
 
Directors of the Company serve until the next annual meeting of shareholders of the Company and until their successors are elected and duly qualified. Officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors.
 
Currently to our knowledge, there is no material legal proceeding involving any director, officer or holder of more than five percent of the Company’s Ordinary Shares.
 
Mr. David YL Leung is the son of Mr. T.C. Leung, the Company’s Chief Executive Officer and Chairman of the Board. There are no other family relationships among any of our current or former directors or executive officers.  There was no arrangement or understanding with any major shareholders, customers, suppliers or others pursuant to which any person above was selected as a director or member of senior management.
 
Key Employees
 
George Hayek , Managing Director. He is the founder of Pact-Yixing and is a civil engineer (1967) and post-graduate certificate holder in sanitary engineering and environmental management from the American University of Beirut and the University of California at Irvine (in 1971 and 1988, respectively). Since 1971, he has occupied several key posts in water and waste-water treatment companies in the USA, the UK, Spain, Cyprus, The Middle East, Southeast Asia and the PRC. From 1998 to now, he has been the managing director of Pact-Yixing. His international experience helped Pact in securing most of the contracts with European and American multinational industries in the PRC.
 
 
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David YL Leung  is the General Manager of Yixing Pact Environmental Technology Co., Ltd, Shanghai. His responsibility includes management of engineering, sales, marketing, projects, and procurement. Before joining Yixing, he was the Business Development Manager of Far East, the parent company of Yixing Pact in Hong Kong, and has been working for the parent company for more than 10 years. Mr. Leung has gained a solid sales and marketing experience in distributing power, analytical and scientific testing equipment in Hong Kong and Macau. He has also worked for a high tech Japanese company focused on power and electrical testing instrument in Japan from 2000 and 2001 as a trainee. Mr. Leung is an environmental studies graduate from Carleton University, Ottawa, Canada (1997) with a special focus on Environmental Impact Assessment, and a Master of Management graduate from Macquarie Graduate School of Management, Sydney Australia (2010). Mr. David YL Leung is the son of Mr. T.C. Leung, the Company’s Chief Executive Officer and Chairman of the Board.
 
B.     COMPENSATION.
 
From the Company and its subsidiaries, for services rendered in all capacities to the Company and its subsidiaries during Fiscal 2018, T.C. Leung, the Chairman of the Board and Chief Executive Officer received a yearly salary of US$193,000 (2017: US$ 194,000, 2016: US$ 195,000), Jerry Wong, Chief Financial Officer received a yearly salary of US$107,000 (2017: US$ 108,000, 2016: US$ 108,000) and George Hayek, a Key Employee of Yixing, received a yearly salary of US$59,000 (2017: US$ 62,000, 2016: US$66,000). David YL Leung, a Key Employee of Yixing receives an annual salary of US$136,000 (2017: US$ 131,000, 2016: US$ 130,000) and is reimbursed for actual travel and lodging expenses in Shanghai. There is no other information with respect to the compensation paid by the Company and its subsidiaries, for services rendered in all capacities to the Company and its subsidiaries during Fiscal 2018 to the Chairman of the Board and Chief Executive Officer and a Key Employee of the Company. No other executive officer or employee received in excess of US$100,000 as compensation during Fiscal 2018.
 
Compensation of Directors .  Directors of the Company do not receive compensation for their services as directors; however, Board of Directors authorize the payment of compensation to the Directors for their attendance at regular and annual meetings of the Board and for attendance at committee meetings of the Board as is customary for similar companies. Directors are reimbursed for their reasonable out-of-pocket expenses in connection with their duties to the Company.
 
Pension Plan.  Prior to December 1, 2000, Far East had only one defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions 50% to 100% of individual fund account balances contributed by Far East, depending on their years of service with Far East. Far East was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company.
   
With the introduction of the Mandatory Provident Fund Scheme, a defined contribution scheme managed by an independent trustee on December 1, 2000, Far East and its employees who joined Far East subsequently makes monthly contributions to the scheme at 5% of the employee’s cash income as defined under the Mandatory Provident Fund Schemes Ordinance. Contributions of both Far East and its employees are subject to a cap of monthly relevant income of HK$30,000 and thereafter contributions are voluntary and are not subject to any limitation. Far East and its employees made their first contributions in December 2000.
 
As stipulated by the rules and regulations in the PRC, the PRC subsidiaries contribute to state-sponsored retirement plans for its employees in the PRC. PRC subsidiaries' contribution range from 14% to 20% of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.
 
During the year ended December 31, 2018, the aggregate contribution of the Company to the aforementioned pension plans and retirement benefit schemes was approximately US$278,000.
 
 
44
 
 
Company's Stock Option Plans.
 
2019 Stock Option and Incentive Plan
 
In April 2019, the Board of Directors approved the adoption of the 2019 Stock Option and Incentive Plan (the “Plan”). The Plan was also subsequently approved under a resolution of the Company's shareholders. The Plan provides for the granting of up to 300,000 Ordinary Shares (the “Share Limit”), in the form of options to Officers, Directors and Key Employees who perform services which contribute to the successful performance of the Company and its subsidiaries. In addition, the Plan provides that, on the first day of each fiscal year commencing on January 1, 2020, the Share Limit shall automatically be increased by that number of shares equal to 5% of the number of Ordinary Shares outstanding as of such date.
 
The Board of Directors or a committee (the “Committee”) appointed by the Board of Directors administers the Plan.
 
Appropriate adjustment in the maximum number of Ordinary Shares issuable pursuant to this Plan, the maximum number of Ordinary Shares with respect to which options may be granted within any 12-month period to any participant during the duration of this Plan, the number of shares subject to options granted under this Plan, and the exercise price with respect to options, shall be made to give effect to any increase or decrease in the number of issued Ordinary Shares resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, division of shares, reverse share split, spin-off, split-off, spin-out, or other distribution of assets to shareholders, issue of bonus shares or combination of shares, assumption and conversion of outstanding options due to an acquisition by the Company of the shares, stock or assets of any other company or corporation, other increase or decrease in the number of such shares outstanding effected, without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate.
 
The purchase price per share of the Ordinary Shares to be paid upon the exercise of the option must be at least 100% of the fair market value of an Ordinary Shares on the date on which the option was granted. Under the Plan, if the Ordinary Shares are principally traded on a national securities exchange or the Nasdaq Global Market or Capital Market at the time of grant, the Company is required to use, at fair market value, the average of the closing prices of the Ordinary Shares for the ten consecutive trading days immediately before the date of grant. If the Ordinary Shares are traded on a national securities exchange or the Nasdaq Stock Global Market or Capital Market, but no closing prices are reported for such ten-day period, or if the Ordinary Shares are principally traded in the over-the-counter market, the Company is required to use, as fair market value, the average of the mean between the bid and asked prices reported for the Company’s Ordinary Shares at the close of trading during such ten-day period before the date of grant. If the Ordinary Shares are traded neither on a national securities exchange, one of the Nasdaq’s Markets nor in the over-the-counter market or if bid and asked prices are otherwise not available, the fair market value of the Ordinary Shares on the date of grant will be determined in good faith by the Committee or the Board of Directors, as the case may be.
 
The Board of Directors or the Committee, as the case may be, determines, at the time of grant, when each option granted under the Plan will become exercisable. Notwithstanding the foregoing, all options held by a key employee of the Company or its subsidiaries become immediately exercisable, whether or not exercisable at the time, upon the death or disability, and shall be exercisable within twelve (12) months after the date of death or disability, but in no event later than the expiration date of such Options.
 
No option is to be exercisable more than ten years from the date the option is granted.
 
Payment of Exercise Price for Options.  Under the Plans, payment for shares purchased upon exercise of an option may be made by any of the following methods, subject to certain requirements: (i) in cash, (ii) in Ordinary Shares which have been held by the participant for not less than six months prior to the exercise of the option, valued at its Fair Market Value (as defined) on the date of exercise, (iii) in cash by a broker-dealer to whom the holder of the option has submitted an exercise notice consisting of a fully endorsed option, or (iv) by such other medium of payment as the Board or the Committee, as applicable, in its sole discretion, shall authorize, or by any combination of (i), (ii), or (iii), at the sole discretion of the Board or  the Committee, as applicable, or in any manner provided in the option agreement, except by directing the Company to withhold Ordinary Shares otherwise issuable upon the exercise of the Option in payment of the exercise price.
 
 
45
 
 
               Transfer Of Options.  Under the Plans, an option may not be sold, assigned or otherwise transferred except to:
 
the spouse or lineal descendant of a plan participant;
 
the trustee of a trust for the primary benefit of a plan participant’s spouse or lineal descendant;
 
a partnership of which a plan participant and lineal descendants are the only partners; or
 
a tax exempt organization.
 
These assignments are only permitted if the assigning option holder does not receive any compensation in connection with the assignment and the assignment is expressly approved by the Board or Committee, as the case may be.
 
The Company indemnifies the members of any Committee and its delegates and the Chief Executive Officer against (a) the reasonable expenses (as such expenses are incurred), including attorneys’ fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein), to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any option granted under the Plan; and (b) all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or delegatee, as applicable, is liable for gross negligence or gross misconduct in the performance of his or her duties; provided that within 60 days after institution of any such action, suit or proceeding a Committee member or delegatee shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same.
 
The Board may terminate, suspend, or amend the Plan at any time without the authorization of shareholders to the extent allowed by law or the rules of any market on which the Company’s shares are then listed or quoted.
 
Other Stock Option Plans
 
Effective on November 22, 2014, the Company entered into a stock option contract with a Business Development Manager of Yixing-Pact, granting the optionee the right to purchase 20,692 Ordinary Shares, 1% of the Company’s issued and outstanding shares, at an exercise price of $3.44 per share. The exercise price was determined by the average closing price of the Company’s Ordinary Shares as reported by NASDAQ for a ten day period prior to the end of the Business Development Manager’s probationary period on November 22, 2014, the effective date of the stock option contract. The stock options granted are exercisable three years after the effective date and terminate five years after the effective date. In the event of the optionee’s termination, except for his resignation, the options may be exercisable within three months of the termination. In the event of optionee’s death, retirement or disability, he or his legal representative shall have up to one year to exercise the option.
 
Changes in outstanding stock options under plans mentioned above, during the year ended December 31, 2018, were as follows:
 
 
 
As of December 31,
 
 
 
2018
 
 
2017
 
 
2016
 
 
 
 
Number of Options
 
 
Weighted average exercise price
 
 
 
Number of Options
 
 
Weighted average exercise price
 
 
 
Number of Options
 
 
Weighted average exercise price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding, beginning of year
    -  
    -  
    -  
    -  
    20,692  
    3.44  
Cancelled
    -  
    -  
    -  
    -  
    (20,692 )
    (3.44 )
 
       
       
       
       
       
       
Outstanding, end of year
    -  
    -  
    -  
    -  
    -  
    -  
 
       
       
       
       
       
       
Exercisable, end of year
    -  
    -  
    -  
    -  
    -  
    -  
 
As of December 31, 2018, there were no options outstanding.
 
 
46
 
   
C.     BOARD PRACTICES
 
The term of each of the Company’s directors expires at the election and qualification of their successors at the next annual meeting of the Company’s shareholders, anticipated to be held in September of this year. One director was appointed in March 2019 as an addition to the existing Board of Directors . The Company’s other six directors were re-elected at the Company’s last annual meeting of shareholders in November 2018. The Board has a standing Audit Committee to assist the Board in carrying out its duties. The Audit Committee has a written charter approved by the Board. The chair of the Audit Committee determines the meeting agenda of the Audit Committee. The Audit Committee members receive materials in advance of Committee meetings allowing them to prepare for the meeting.
 
The Company had two meetings of its Board of Directors during Fiscal 2018, while its Audit Committee had three meetings during Fiscal 2018.
  
The Audit Committee assists the Board in monitoring the Company’s financial accounting, internal controls, planning and reporting. Among its duties, the Audit Committee:
 
reviews the Company’s auditing, accounting and financial reporting process;
 
reviews the adequacy of the Company’s internal controls;
 
reviews the independence, fee arrangements, audit scope, and performance of the Company’s independent auditors, and recommends the appointment or replacement of independent auditors to the Board of Directors;
 
reviews and approves all non-audit work, if any, to be performed by the auditors;
 
reviews the adequacy of the organizational structure;
 
reviews, before release, the audited consolidated financial statements and operating and financial review and prospects contained in the Company’s Annual Report on Form 20-F, and recommends that the Board of Directors submit these items to the shareholders’ meeting for approval;
 
provides an open avenue of communication among the Company’s independent auditors, financial and senior management, and the Board of Directors;
 
reviews and updates the Company’s Code of Business Conduct and Ethics and ensure that there is a system to enforce the same and that this Code complies with all applicable rules and regulations;
 
ensures that the Company’s management and auditors assess current financial reporting issues and practices; and
 
reviews and pre-approves both audit and non-audit services to be provided by the Company’s auditors.
 
The Audit Committee is currently composed of Y.K. Liang, Janet Cheang and Fu Ming Chen. The Audit Committee’s “financial expert” is Y.K. Liang. The Board has determined that the membership of the Audit Committee meets the current independence requirements of the NASDAQ listing standards as same applies to private foreign issuers and the applicable rules and regulations of the SEC because they are not currently employed by us, and do not fall into any of the enumerated categories of who cannot be considered independent in NASDAQ’s listing standards.
 
 
 
47
 
   
D.    EMPLOYEES
 
At May 7, 2019, the Company (exclusive of Yixing-Pact) had approximately 54 full-time employees. At December 31, 2018, 2017 and 2016, staffing levels at the Company (exclusive of Yixing-Pact) were approximately as follows:
 
 
 
2018
 
 
2017
 
 
2016
 
Marketing and sales
    15  
    16  
    21  
Administrative
    22  
    27  
    28  
Technical
    17  
    16  
    16  
Total full time employees
    54  
    59  
    65  
 
At May 7, 2019, Pact-Yixing had approximately 36 full-time employees.  In addition, as of December 31, 2018, 2017 and 2016, respectively, staffing levels at Pact-Yixing were approximately as follows: Engineers - 27, 30 and 41; Administrative Persons - 8, 8 and 8.
 
The Company is not subject to any collective bargaining agreement and believes that its relations with its employees are good. The Company’s Management consists of its officers and directors.
 
E.     SHARE OWNERSHIP
 
With respect to the share ownership of the directors and senior management of the Company, reference is made to Items 7 “Major Shareholders” and 7B. “Related Party Transactions.”
 
ITEM 7.        MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
A.    MAJOR SHAREHOLDERS
 
The following table sets forth, as of May 7, 2019, certain information concerning beneficial ownership of the Company’s voting shares that date, with respect to (i) each person known to the Company to own 5% or more of the outstanding Ordinary Shares, (ii) each director and executive officer of the Company, and (iii) all officers and directors of the Company as a group. Based upon 2,061,909 shares of the Company’s Ordinary Shares outstanding as of May 7, 2019.  The Company’s major shareholders do not have different voting rights.
 
 
 
Amount and Nature of Beneficial Ownership(4)
 
 
Approximate Percentage Of Ordinary Shares Owned
 
T.C. Leung (1)
    1,059,924  
    51.4 %
 
       
       
Alex Sham(1)
    53,722  
    2.6 %
 
       
       
Jerry Wong(1)
    34,866  
    1.7 %
 
       
       
Y.K. Liang(1)
    *  
    *  
 
       
       
Fu Ming Chen(1)
    *  
    *  
 
       
       
Janet Cheang(1)
    *  
    *  
 
       
       
David YL Leung
    *  
    *  
 
       
       
All Executive Officers And Directors of the Company as a group (7 persons)
    1,148,512  
    55.7 %
 
* Denotes Nil
 
(1)
The address for the Company’s officers and directors is c/o Euro Tech (Far East) Ltd., Unit D, 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong.
   
 
48
 
 
B.     RELATED PARTY TRANSACTIONS
 
See – Item 6B. Compensation.
 
C.     INTERESTS OF EXPERTS AND COUNSEL
 
This item does not apply to annual reports on Form 20-F .
 
ITEM 8.       F INANCIAL INFORMATION
 
A.    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
Item 8A.1
See – Item 18.
 
 
Item 8A.2
See – Item 18.
 
 
Item 8A.3
See – Report of Independent Registered Public Accounting Firms, pages F-2 and F-3.
 
 
Item 8A.4
We have complied with this requirement.
 
 
Item 8A.5
Not applicable.
 
 
Item 8A.6
Not applicable.
 
 
Item 8A.7
Legal Proceedings.  See – Item 4B. Business Overview-Litigation.
 
 
 Item 8A.8
Dividend Policy.
 
On June 1, 2018, we declared a special cash dividend of an aggregate of $1,443,336.30, which dividend was paid to all holders of our outstanding ordinary shares as of June 15, 2018. The payment of cash dividends, if any, in the future is within the discretion of the Board of Directors. The payment of cash dividends, if any, in the future will depend upon the Company’s earnings, capital requirements and financial conditions and other relevant factors. The Company’s Board of Directors does not presently intend to declare any cash dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company and Far East’s business operations.
 
B.     SIGNIFICANT CHANGES
 
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
 
ITEM 9.      THE O FFER AND LISTING
 
A.    OFFER AND LISTING DETAILS
 
The Company has one class of securities presently registered: Ordinary Shares. These securities are presently traded on the NASDAQ’s Capital Market under the trading symbols “CLWT”.
 
 
49
 
 
The high and low prices for the Ordinary Shares in the periods indicated, as reported by NASDAQ, are set forth below: 
 
Years Ended December 31,
 
  Low
 
 
  High
 
 
 
  US$  
 
 
  US$  
 
 
 
 
 
 
 
 
2014
    2.56  
    6.24  
2015
    2.04  
    4.41  
2016
    1.46  
    4.43  
2017
    2.70  
    5.65  
2018
    2.00  
    8.45  
2019 (through May 7, 2019)
    2.58  
    11.73  
 
Quarters Ended
 
  Low
 
 
  High
 
 
 
  US$
 
 
  US$
 
March 31, 2017
    3.35  
    4.15  
June 30, 2017
    2.70  
    4.50  
September 30, 2017
    2.75  
    3.50  
December 31, 2017
    3.15  
    5.65  
March 31, 2018
    2.50  
    4.45  
June 30, 2018
    2.00  
    8.45  
September 30, 2018
    3.45  
    5.90  
December 31, 2018
    2.25  
    5.07  
 
       
       
 
The Following Months
 
  Low
 
 
  High
 
 
 
  US$
 
 
  US$
 
November 2018
    3.18  
    4.48  
December 2018
    2.25  
    3.41  
January 2019
    2.58  
    3.23  
February 2019
    3.02  
    3.99  
March 2019
    3.03  
    11.73  
April 2019
    4.10  
    6.50  
 
Based upon information received from its transfer agent, the Company believes that it has approximately 25 shareholders of record including 1,309 beneficial owners of its Ordinary Shares held in nominee names by large clearing houses.