PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This item does not apply to annual reports on Form
20-F.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
This item does not apply to annual reports on Form
20-F.
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, 2019, 2018 and
2017 and the selected consolidated balance sheet data as of
December 31, 2019 and 2018 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, 2016 and 2015 and the selected consolidated balance sheet data
as of December 31, 2017, 2016 and 2015 set forth below are derived
from audited consolidated financial statements of the Company which
are not included herein.
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Balance
Sheet Data:
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Cash and cash
equivalents
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5,991
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5,267
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3,380
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3,751
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2,480
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Working
capital(1)
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5,350
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6,013
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2,986
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3,101
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3,698
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Total
assets
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22,213
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23,065
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23,737
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23,104
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21,270
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Short-term
debt(2)
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565
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0
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97
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720
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0
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Net
assets
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15,337
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15,545
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17,107
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16,618
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16,456
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Capital
Stock
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123
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123
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123
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123
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123
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(1)
Current assets minus current liabilities.
(2)
Short-term debt includes short-term borrowings and current portion
of long-term bank loans.
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Statement
of Operations and Comprehensive Income / (Loss) Data:
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Revenues
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17,399
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20,104
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17,350
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22,478
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18,302
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Cost of
revenues
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(12,982)
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(16,405)
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(12,937)
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(17,527)
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(14,259)
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Gross
profit
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4,417
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3,699
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4,413
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4,951
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4,043
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Finance
costs
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(4)
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(7)
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(11)
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(19)
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(4)
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Selling and
administrative expenses
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(4,853)
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(4,751)
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(4,976)
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(5,602)
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(5,997)
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Operating
loss
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(440)
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(1,059)
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(574)
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(670)
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(1,958)
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Interest
income
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83
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35
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24
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18
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45
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Other income /
(losses), net
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52
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58
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(14)
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5
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9
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(Loss) / gain on
disposal of property, plant and equipment
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(5)
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3
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-
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7
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-
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Net gain on deemed
disposal of affiliate
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-
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-
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128
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24
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-
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Equity in income /
(loss) of affiliates
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137
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(932)
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831
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1,002
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850
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Net gain on
disposal of affiliate
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-
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1,522
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-
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-
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-
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(Loss) / income
before income taxes
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(173)
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(373)
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395
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386
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(1,054)
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Income taxes
(expense) / credit
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(37)
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312
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(28)
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(228)
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47
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Net (loss) /
income
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(210)
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(61)
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367
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158
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(1,007)
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Net loss
attributable to non-controlling interests
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64
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149
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106
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73
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391
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Net (loss) / income
attributable to Euro Tech Holdings Company Limited’s
shareholders
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(146)
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88
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473
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231
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(616)
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Other comprehensive
income/(loss)
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Net (loss) /
income
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(210)
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(61)
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367
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158
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(1,007)
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Foreign exchange
translation adjustments
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(8)
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(58)
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122
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4
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(63)
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Comprehensive
(loss) / income
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(218)
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(119)
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489
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162
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(1,070)
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Comprehensive loss
attributable to non-controlling interests
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78
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182
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45
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127
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477
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Comprehensive
(loss) / income attributable to the Company
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(140)
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63
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534
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289
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(593)
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Net (loss) / income
per ordinary share attributable to Euro Tech Holdings Company
Limited’s shareholders
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-Basic
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(0.06)
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0.04
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0.23
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0.11
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(0.30)
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-Diluted
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(0.06)
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0.04
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0.23
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0.11
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(0.30)
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Weighted average
ordinary shares outstanding
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-Basic
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2,301,993
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2,061,909
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2,061,909
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2,061,909
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2,063,738
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-Diluted
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2,301,993
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2,061,909
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2,061,909
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2,061,909
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2,063,738
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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.
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 2015
through 2019, the Renminbi has fluctuated and at the end of 2019,
2018, 2017, 2016 and 2015, the exchange rates were approximately
RMB 6.9761 = US$1,00, RMB 6.8785 = US$1.00, RMB 6.5040 = US$1.00,
RMB 6.9445 = US$1.00 and RMB 6.4855 = US$ 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.
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.
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 6.1% GDP in 2019 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 2017 through 2019, the annual
growth rates in imports and exports were -5.9%, 15.8%, -2.8% and
7.9%, 9.9%, 0.5%, 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.
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 6.1% in 2019. 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 1.4%, 2.0%, 1.6%, 2.1% and 2.9% in 2015,
2016, 2017, 2018 and 2019, respectively. Efforts by the PRC to curb
inflation may also curb economic growth, increase our overhead
costs and adversely affect our revenues. 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.
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.
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 6.3% against the
U.S. dollar during this one-year period. In 2018, the Renminbi
depreciated approximately 1.1% against the U.S. dollar. In 2019,
the Renminbi appreciated approximately 1.7% 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.
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 2019, the Company had
revenues of approximately US$17,399,000, operating losses of
approximately US$440,000, and losses before income taxes,
equity in loss of affiliates and non-controlling interests of
approximately US$310,000. In addition, we had income tax expense of
US$37,000, equity in income of affiliates of US$137,000. As a
result, we had a net loss of $210,000 for Fiscal 2019 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 2019 was the decrease
in revenues even though there was increase in the gross profit
margin percentage. 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
loss attributable to the Company of $140,000 for Fiscal 2019.
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.
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.
We face risks related to natural disasters, health epidemics and
other outbreaks, which could significantly disrupt our operations.
Specifically the novel coronavirus could have a material adverse
impact on our business, results of operations, financial condition,
cash flows or liquidity.
Our
business could be materially and adversely affected by natural
disasters, such as snowstorms, earthquakes, fires or floods, the
outbreak of a widespread health epidemic, such as swine flu, avian
influenza, severe acute respiratory syndrome (SARS), coronavirus or
COVID-19, Ebola, Zika or other events, such as wars, acts of
terrorism, environmental accidents, power shortage or communication
interruptions. The occurrence of a disaster or a prolonged outbreak
of an epidemic illness or other adverse public health developments
in Hong Kong or elsewhere in the world could materially disrupt our
business and operations. These events could also significantly
impact our industry and cause a temporary closure of the facilities
we use for our operations, which would severely disrupt our
operations and have a material adverse effect on our business,
financial condition and results of operations. Our operations could
be disrupted if any of our employees or employees of our business
partners were suspected of contracting an epidemic disease, since
this could require us or our business partners to quarantine some
or all of these employees or disinfect the facilities used for our
operations. In addition, our revenue and profitability could be
materially reduced to the extent that a natural disaster, health
epidemic or other outbreak harms the global or PRC economy in
general. Our operations could also be severely disrupted if our
consumers, merchants or other participants were affected by natural
disasters, health epidemics or other outbreaks.
The
outbreak of a novel coronavirus (which causes the disease now known
as COVID-19), was first identified in December 2019 in Wuhan,
China, and has since spread globally. Government efforts to contain
the spread of the coronavirus through lockdowns of cities, business
closures, restrictions on travel and emergency quarantines, among
others, and responses by businesses and individuals to reduce the
risk of exposure to infection, including reduced travel,
cancellation of meetings and events, and implementation of
work-at-home policies, among others, have caused significant
disruptions to the global economy and normal business operations
across a growing list of sectors and countries. The foregoing
is likely to adversely affect business confidence and consumer
sentiments, and has been, and may continue to be, accompanied by
significant volatility in financial and commodity markets.
The spread of the coronavirus, particularly as it develops into a
worldwide health crisis, is also likely have broader macro-economic
implications, including reduced levels of economic growth and
possibly a global recession, the effects of which could be felt
well beyond the time the spread of infection is
contained.
The
outbreak of the coronavirus could have a material impact on our
business in 2020. The pandemic may have the affect of
causing delay and disruption in engineering contracts and
completion of projects. Further, the travel restrictions have had
an disrupted our ability to make business visits which, in turn,
our ability to make potential new sales. In general, the
combination of supply-side disruption, delivery challenges and
potential, long-term waning consumer demand caused by COVID-19,
potentially exacerbated by other factors, have negatively impacted
and could continue to negatively impact our business. While we
continue to monitor the situation, at this point it is difficult to
assess the probable significance or duration of any disruption. As
a result, we are taking a number of defensive measures to cut costs
and conserve our cash resources, including salary reductions and
the indefinite suspension of the quarterly dividend until we have
more confidence concerning the current situation.
We
currently are unable to predict the duration and severity of the
spread of the coronavirus, and responses thereto, on our business
and operations, and on our results of operations, financial
condition, cash flow and liquidity, as these depend on rapidly
evolving developments, which are highly uncertain and will be a
function of factors beyond our control, such as the speed of
contagion, the implementation of effective preventative and
containment measures, the development of effective medical
solutions, the timing and scope of governmental restrictions on
public gatherings, mobility and other activities, financial and
other market reactions to the foregoing, and reactions and
responses of the populace both in affected regions and regions yet
to be affected. While we expect we will suffer adverse
effects, the more severe the outbreak and the longer it lasts, the
more likely it is that the effects on us and our business will be
materially adverse.
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 ballast water port solution. The development
of the ballast water port solution prototype is now completed and
under system and operation tests in various ports. The port
solution system is a system installed in port to offer ballast
water treatment services for ocean going ships without their own
ballast water treatment system (“BWTS”) and for those
with damaged BWTS. The Company is now embarking on promotion
activities for port solution systems in China and South East 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 orders may be
affected by, among other things, 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.
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.
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.
Our sale of products could subject us to product liability claims,
potential safety-related regulatory actions or product recalls.
These events could damage our brand and reputation and the
marketability of the products that we sell, divert our
management’s attention and result in lower net revenues and
increased costs.
The
manufacture and sale of products, such as BWTS, could expose us to
product liability claims for personal injuries related liability
claims. Also, if our products are deemed by the PRC authorities to
fail to conform to product quality or personal safety requirements
in China, we could be subject to PRC regulatory action. Violation
of PRC product quality and safety requirements by products sold by
us may subject us to confiscation of the products, imposition of
penalties or an order to cease sales of the violating products or
to cease operations pending rectification. If the offense is
determined to be serious, our business license could be suspended
and subject to criminal liabilities. Any product liability claim or
governmental regulatory action could be costly and time-consuming
to defend. If successful, product liability claims may require us
to pay substantial damages. Also, a material design, manufacturing
or quality failure in the products sold by us, other safety issues
or heightened regulatory scrutiny could each warrant a product
recall by us and result in increased product liability claims.
Furthermore, customers may not use the products sold by us in
accordance with our product usage instructions, possibly resulting
in customer injury. All of these events could materially harm our
brand and reputation and marketability of our products, divert our
management’s attention and result in lower net revenues and
increased costs.
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
2017, our sales revenue from trading activities decreased by
approximately 20%. During Fiscal 2018, our sales revenue from
trading activities increased by approximately 25%. During Fiscal
2019, our sales revenue from trading activities decreased by
approximately 14%. 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, 2019, sales to our three largest customers
amounted in the aggregate to approximately 34% of our total
revenue. 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. 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.
During
the years ended December 31, 2019, 2018 and 2017, respectively, we
had one or more customers that accounted for 10% or more of our
revenues.
|
Customer
Name
|
Year
Ended
December 31,
2019
|
Year
Ended
December 31,
2018
|
Year
Ended
December 31,
2017
|
|
Customer
A
|
19%
|
15%
|
10%
|
|
Customer
B
|
10%
|
—%
|
7%
|
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.
We and our distributors are subject to various laws regulating our
advertising and any violation of these laws by us or our
distributors could result in fines, penalties and legal
liabilities, harm our product brands and disrupt our
business.
We
advertise and market our products. Our distributors often advertise
our products they distribute. PRC advertising laws and regulations
require advertisers and advertising operators, such as us and our
distributors, to ensure the contents of the advertisement they
prepare, publish or broadcast are fair and accurate, are not
misleading and are in full compliance with applicable laws, through
independent review and verification before displaying the
advertisement through print media, radio or Internet portals. PRC
unfair competition law also prohibits us and our distributors from
displaying misleading, false or inaccurate information with respect
to quality, function, use, or other features of products, through
advertising. Violation of these laws or regulations may result in
penalties, including fines, confiscation of advertising income,
orders to cease dissemination of the advertising, orders to publish
an advertisement correcting the misleading information and criminal
liabilities. In circumstances involving serious violations, the PRC
government may suspend or revoke a violator’s business
license. Moreover, government actions and civil claims may be filed
against us for misleading or inaccurate advertising, fraud,
defamation, subversion, negligence, copyright or trademark
infringement or other violations due to the nature and content of
our advertising produced by us or our distributors.
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.
The
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.
The
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.
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.
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.
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.
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$1.33 to US$7.82 per
common share, and the last reported trading price on June 3, 2020
was US$2.28 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.
We May Be Considered To Be A Passive Foreign Investment Company For
The 2019 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 2019. 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 2020 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.
ITEM 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) / income of approximately (US$137,000) in
Fiscal 2017, (US$34,000) in Fiscal 2018 and US$36,000 in Fiscal
2019 and we plan to wind it down upon collection of outstanding
accounts receivable.
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% (2018: 19.4%, 2017:19.4%) 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 increased
during Fiscal 2017, decreased during Fiscal 2018 and decreased
during Fiscal 2019, and its net income increased during 2017,
decreased significantly during Fiscal 2018 and increased during
Fiscal 2019, 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.
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 2019, Blue Sky made an income contribution of approximately
US$137,000 to the Company. The income contribution from Blue Sky in
Fiscal 2019 was principally because there was no major impairment
loss for the accounts receivables from its major customers.
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. 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, management believes the development
in the Chinese government policy may benefit our business as well
as the business of its affiliate, Blue Sky.
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 company in Shanghai. The Company’s PRC trading
subsidiary is Euro Tech Trading (Shanghai) Limited. Chongqing Euro
Tech Rizhi Technology Co., Ltd., Rizhi Euro Tech Instrument
(Shaanxi) Co., Ltd. and Guangzhou Euro Tech Environmental Equipment
Co., Ltd. were dissolved in 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.”
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 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.
During
Fiscal 2019, there was decrease in revenues from trading and
manufacturing activities. Revenue from Pact-Yixing in 2019 was
US$5,522,000, while Shanghai Environmental had an operating income
of US$36,000. In addition, we incurred research and development
costs of approximately US$35,000 in 2019 relating to BWTS and
Pact-Yixing incurred an operating loss of approximately US$194,000.
This resulted in operating loss from engineering activities of
approximately US$158,000. 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.
The development of the ballast water port solution prototype was
completed in 2019 and under system and operation tests in various
ports. The port solution system is a system installed in port to
offer ballast water treatment services for ocean going ships
without their own ballast water treatment system
(“BWTS”) and for those with damaged BWTS. The Company
is now embarking on promotion activities for port solution systems
in China and South East Asia, although no assurance can be given
that we will be able to do so. We are applying the utility
model patent for this port solution system in China. 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.
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 and port solution
system.
We also
anticipate that, during Fiscal 2020, we will spend up to an
additional US$300,000 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 decided that the phase-in period for
ballast water system retrofits started on September 8,
2019. The IMO convention stipulates that type approval for
revised G8 requirements must be obtained for all BWTS
installed on or after 28 October 2020. To comply with these
requirements, we are going to start the land
based test for our BWTS to obtain such type approval
certification in China.
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. The Company derived
approximately 70.0%, 70.4% and 67.5% of its revenues from the sale
of scientific instruments during Fiscal 2019, 2018 and 2017,
respectively.
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 and continuous
emissions monitoring 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 28.3%, 28.5% and 31.2% of revenues
from the sale of power solutions and process during Fiscal 2019,
2018 and 2017, 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 1.7%, 1.1% and 1.3% of its revenues from
technical support operations during Fiscal 2019, 2018 and 2017,
respectively.
Customers. During Fiscal 2019, 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, 2019, sales to our three largest customers
amounted in the aggregate to approximately 34% of our total
revenue, with one of such customers accounting for 19% 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 12, 11 and 14 sets in Fiscal
2019, 2018 and 2017, 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
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 45%, 10%, 9% and 5% during Fiscal 2017, 55%, 8%, 7%
and 7% during Fiscal 2018, and 53%, 7%, 6% and 6% during Fiscal
2019, 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 December 31, 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, 2021. 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.
Regulatory
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
13th 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 19th 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.
During
Fiscal 2019, 2018 and 2017, the Company’s gross profit
margins were approximately 25%, 18% and 25%, 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 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.
During Fiscal 2019, 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 subsidiary is located in: Shanghai. We closed
Chongqing, Guangzhou and Xi’an subsidiaries in Fiscal
2019.
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.
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.
Details
of the Company’s current principal subsidiaries are
summarized as follows:
|
Name
of entity
|
|
Ownership
interest held by the Group
|
|
Place of incorporation
and principal place of operation
|
|
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, PLANTS AND EQUIPMENT
The
Company has various operating lease agreements for office and
industrial premises.
The
following is a summary of certain information related to the lease
costs for operating leases for the year ended December 31,
2019:
|
|
|
|
|
|
|
|
|
|
Operating lease
cost
|
193
|
|
Short-term lease
cost
|
153
|
|
Total lease
cost
|
346
|
The
future undiscounted minimum lease payments, as reconciled to the
discounted minimum lease obligation indicated on the Group’s
consolidated balance sheets, under current portion of operating
lease obligations and operating lease obligations, net of current
maturities, as of December 31, 2019 were as follows:
|
|
Operating lease
obligations
|
|
|
|
|
|
|
|
2020
|
196
|
|
2021
|
138
|
|
2022
|
96
|
|
Total minimum lease
payments
|
430
|
|
Financing
component
|
(44)
|
|
Net present value
of minimum lease payments
|
386
|
|
Less: current
portion of operating lease obligations
|
(170)
|
|
Long-term operating
lease obligations
|
216
|
The
financing component for operating lease obligations represents the
effect of discounting the lease payments to their present
value.
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 2021
with a monthly rental payment of approximately US$8,308. The
warehouse storage space is used to hold products for distribution
to our customers via common carriers.
The
Company’s owned property in Hong Kong was sold in February
2020 .
Euro
Tech Trading (Shanghai) Limited has one office rented pursuant to
short term leases, at an aggregate monthly rent of approximately
US$310. Shanghai Euro Tech Limited’s premises are rented
pursuant to a short term lease for a monthly rent of approximately
US$3,328. 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$609.
Yixing
occupies a 464 square meter facility in Shanghai, pursuant to a
three year lease expiring in December 2022, providing for a
monthly rent of approximately US$8,277.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING 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
|
|
|
|
|
|
|
|
2017
|
45%
|
53%
|
|
2018
|
40%
|
56%
|
|
2019
|
40%
|
58%
|
Sales
to customers situated in Macau and elsewhere through Fiscal 2019
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 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. Sales in Hong Kong,
expressed as a percentage of our revenue, increased by 2% in Fiscal
2019 as compared with Fiscal 2018. 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 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. Sales in the PRC, expressed as a percentage
of total revenue, was the same in Fiscal 2019 as compared with
Fiscal 2018. 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”).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$17,399
|
100%
|
$20,104
|
100%
|
$17,350
|
100%
|
$22,478
|
100%
|
$18,302
|
100%
|
|
Cost of revenue
|
$12,982
|
74.6%
|
$16,405
|
81.6%
|
$12,937
|
74.6%
|
$17,527
|
78.0%
|
$14,259
|
77.9%
|
|
Gross profit
|
$4,417
|
25.4%
|
$3,699
|
18.4%
|
$4,413
|
25.4%
|
$4,951
|
22.0%
|
$4,043
|
22.1%
|
|
Selling and administrative
expenses
|
$4,853
|
27.9%
|
$4,751
|
23.6%
|
$4,976
|
28.7%
|
$5,602
|
24.9%
|
$5,997
|
32.8%
|
|
Loss before income taxes, equity in
income/(loss) of affiliates and non-controlling
interests
|
$(310)
|
-1.8%
|
$(963)
|
-4.8%
|
$(564)
|
-3.3%
|
$(640)
|
-2.8%
|
$(1,904)
|
-10.4%
|
|
Income taxes (expense) /
credit
|
$(37)
|
-0.2%
|
$312
|
1.6%
|
$(28)
|
-0.2%
|
$(228)
|
-1.0%
|
$47
|
0.3%
|
|
Equity in income / (loss) of
affiliates
|
$137
|
0.8%
|
$(932)
|
-4.6%
|
$831
|
4.8%
|
$1,002
|
4.5%
|
$850
|
4.6%
|
|
Net gain on disposal of
affiliate
|
$-
|
-
|
$1,522
|
7.6%
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net (loss) /
income
|
$(210)
|
-1.2%
|
$(61)
|
-0.3%
|
$367
|
2.1%
|
$158
|
0.7%
|
$(1,007)
|
-5.5%
|
|
Net loss attributable to
non-controlling interests
|
$64
|
0.4%
|
$149
|
0.7%
|
$106
|
0.6%
|
$73
|
0.3%
|
$391
|
2.1%
|
|
Net (loss) / income attributable to
Euro Tech Holding Company Limited's
sharehodlers
|
$(146)
|
-0.8%
|
$88
|
0.4%
|
$473
|
2.7%
|
$231
|
1.0%
|
$(616)
|
-3.4%
|
Fiscal Year Ended December 31, 2019 Compared to Fiscal Year
Ended December 31, 2018
Revenue; Gross Profit and Cost of Revenue.
Revenue decreased by approximately US$2,705,000 or 13.5% to
approximately US$17,399,000 in Fiscal 2019 from approximately
US$20,104,000 in Fiscal 2018. Revenue from trading and
manufacturing activities and engineering activities decreased by
approximately US$1,893,000 and decreased by US$812,000,
respectively. The decrease in revenues from trading and
manufacturing activities was principally due to decrease in big
system sales. Pact-Yixing’s revenues of approximately
US$5,522,000 and US$6,354,000 were included in our revenues in
Fiscal 2019 and Fiscal 2018, respectively.
Gross
profits increased by approximately US$718,000 or 19.4% to
approximately US$4,417,000 for Fiscal 2019 as compared to
approximately US$3,699,000 for Fiscal 2018. During
Fiscal 2019, the Company’s cost of revenues was approximately
US$12,982,000 or 74.6% of revenues, in comparison to approximately
US$16,405,000 or 81.6% for Fiscal 2018. Cost of revenue expressed
as a percentage of revenue decreased by 7% in Fiscal 2019 as
compared with Fiscal 2018. Cost of revenues from trading and
manufacturing activities and engineering activities decreased by
approximately US$1,851,000 and US$1,572,000, respectively. The
overall change was principally due to decrease in trading
activities of big system sales which were of lower gross margin and
the increase in the gross profit margin percentage of engineering
contracts. Pact-Yixing contributed approximately US$1,819,000 to
our gross profit in Fiscal 2019, an increase of approximately
US$706,000 from Fiscal 2018.
Selling and Administrative Expenses.
Selling and administrative expenses were approximately US$4,853,000
in Fiscal 2019, an increase of approximately US$102,000 or 2.1%
from approximately US$4,751,000 in Fiscal 2018. The slight increase
was in line with the general inflation rate.
Equity in Income / (Loss) of Affiliates.
Equity in income of affiliates was approximately income of
US$137,000 in Fiscal 2019, an increase of approximately
US$1,069,000 from loss of affiliates of approximately (US$932,000)
in Fiscal 2018. The exceptional poor 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 the disposed affiliate of
US$146,000.
Interest Income. Interest income in Fiscal 2019 was
approximately US$83,000 as compared to approximately US$35,000 in
Fiscal 2018.
Other income / (losses). Other income decreased by
approximately US$6,000 to approximately US$52,000 in Fiscal 2019
from approximately US$58,000 in Fiscal 2018. The decrease in other
income was principally due to increase in exchange loss of
US$37,000, being mostly offset by increase in rental income of
US$31,000.
Income Taxes. Tax expense of approximately
US$37,000 in Fiscal 2019 as compared to tax credit of approximately
US$312,000 in Fiscal 2018. This credit for Fiscal 2018 was
primarily the result of overcharge of tax expenses in previous
years.
Net Income. (Loss) / profit from continuing operations
was approximately loss of (US$146,000) in Fiscal 2019 as compared
to profit of approximately US$88,000 in Fiscal 2018. This
decrease was primarily due to a non-recurrent gain on disposal of
equity in an affiliate of approximately US$1,522,000 in Fiscal
2018.
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.
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.
B. LIQUIDITY AND CAPITAL RESOURCES
The
Company has primarily used its own funds to finance accounts
receivable, 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 2019 and Fiscal 2018 were
approximately US$5,350,000 and US$6,013,000,
respectively.
As of
December 31, 2019, we had approximately US$5,991,000 in cash
and cash equivalents, compared to approximately US$5,267,000 in
cash and cash equivalents as of December 31, 2018. Net cash
(used in) / provided by operating activities was (US$266,000) for
the year ended December 31, 2019 as compared to (US$1,345,000) for
the year ended December 31, 2018 and US$652,000 for the year ended
December 31, 2017. Net cash (used in) / provided by investing
activities was (US$169,000), US$5,083,000 and US$272,000 for the
years ended December 31, 2019, 2018 and 2017, respectively. Net
cash provided by / (used in) financing activities was US$565,000
for the year ended December 31, 2019 as a result of increase in
bank borrowings related to trade finance purchases as compared to
(US$1,540,000) for the year ended December 31, 2018.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.
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, 2019. 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 and bank deposit of approximately US$900,000
after the sale of this property in February 2020, 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$5,267,000 at the end of Fiscal 2018
to US$5,991,000 at the end of Fiscal 2019. The principal reason for
the increase in cash was net cash inflow from financing
activities.
The
Company’s accounts receivable, net decreased from
approximately US$5,089,000 at the end of Fiscal 2018 to
US$3,586,000 at the end of Fiscal 2019. The amount of accounts
receivable, net subject to collection is expected to be received
under normal commercial trading terms.
The
Company’s inventories increased from approximately US$401,000
at the end of Fiscal 2018 to US$586,000 at the end of Fiscal
2019.
The
Company’s capital expenditures were approximately US$21,000
and US$85,000 in Fiscal 2019 and Fiscal 2018, respectively. Capital
expenditures during Fiscal 2019 and Fiscal 2018 were incurred
primarily in connection with the purchase of office equipment, and
furniture and fixtures. The Company continues to develop new
products. 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
As of
December 31, 2019, the Group completed the annual impairment test
(i.e. comparing the carrying amount of the net assets, including
goodwill, with the fair value of Yixing Pact Environmental
Technology Co., Ltd and Pact Asia Pacific Limited as of December
31, 2019). Based on management’s assessment, the Group
determined that there was no impairment of goodwill as of December
31, 2019.
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.
Significant Accounting Policies and Estimate
Basis of Consolidation
The
accompanying consolidated financial statements include the results
of operations of the Company and its subsidiaries. Significant
intercompany transactions and balances have been
eliminated.
Subsidiaries
Subsidiaries are
all entities over which the Group has control; has the power to
appoint or remove the majority of the members of the board of
directors; has the right 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.
Equity Method of Accounting
We
account for our interest in an investment using the equity method
of accounting per Accounting Standards Codification ("ASC") No.
323, “Investments - Equity Method and Joint Ventures”
if we are not the primary beneficiary of a VIE or do not have a
controlling interest. The investment is recorded at cost and the
carrying amount is adjusted periodically to recognize our
proportionate share of income or loss, additional contributions
made and dividends and capital distributions received. We record
the effect of any impairment or other than temporary decrease in
the value of the investment.
In the
event a partially owned equity affiliate were to incur a loss and
our cumulative proportionate share of the loss exceeded the
carrying amount of the equity method investment, application of the
equity method would be suspended and our proportionate share of
further losses would not be recognized unless we committed to
provide further financial support to the affiliate. We would resume
application of the equity method once the affiliate became
profitable and our proportionate share of the affiliate’s
earnings equals our cumulative proportionate share of losses that
were not recognized during the period the application of the equity
method was suspended.
Revenue Recognition
We
adopted ASU No. 2014-09 ASC Topic 606, Revenue from Contracts with
Customers, from January 1, 2018, using the modified retrospective
transition method. Because there was no change to the timing and
pattern of revenue recognition, there was no material changes to
the Group's processes and internal controls and there was no
adjustment to beginning retained earnings on January 1,
2018.
Our
revenue is derived from long-term contracts for customers in our
engineering services and short-term contracts for trading and
manufacturing activities. Accounting treatment for these contracts
in accordance with ASU No. 2014-09 ASC Topic 606, Revenue from
Contracts with Customers, is as follows:
(i) Performance
obligations satisfied over time (Engineering services)
Recognition of
performance obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer, and is the unit of
account in the new revenue standard. The contract transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Engineering services projects typically span between several days
to over 5 years. The majority of our contracts have a single
performance obligation as the promise to transfer the individual
goods or services is not separately identifiable from other
promises in the contracts and, therefore, is not distinct. Some
contracts have multiple performance obligations, most commonly due
to the contract covering multiple phases of the project life cycle
(engineering).
Revenues are
recognized as our obligations are satisfied over time, by reference
to the progress towards complete satisfaction of that performance
obligation.
If the
Group expects the reference to progress certificates issued by the
customers, with additional adjustments where necessary, depicts the
Group’s performance in transferring control of goods or
services promised to customers for individual projects, the Group
satisfies the performance obligation over time and therefore,
recognises revenue over time in accordance with the output method
for measuring progress. Under output method, revenue recognition is
based on the stage of completion of the contracts, provided that
the stage of contract completion and the gross billing value of
contracting work can be measured reliably. The stage of completion
of a contract is established by reference to the construction works
certified by customers.
Remaining
performance obligations (“RPOs”)
RPOs
represent the amount of revenues we expect to recognize in the
future from our contract commitments on projects and are hereafter
referred to as “Backlog”. Backlog includes the entire
expected revenue values for subsidiary we consolidate. Backlog may
not be indicative of future operating results, and projects
included in Backlog may be canceled, modified or otherwise altered
by customers.
Variable
consideration
Contract
modifications through change orders, claims and incentives are
routine in the performance of the Group’s contracts to
account for changes in the contract specifications or requirements.
In most instances, contract modifications are not distinct from the
existing contract due to the significant integration service
provided in the contract and are accounted for as a modification of
the existing contract and performance obligation. Either the Group
or its customers may initiate change orders, which may include
changes in specifications or designs, manner of performance,
facilities, equipment, materials, sites and period of completion of
the work. Change orders that are unapproved as to both price and
scope are evaluated as claims. The Group considers claims to be
amounts in excess of approved contract prices that the Group seeks
to collect from its customers or others for customer-caused delays,
errors in specifications and designs, contract terminations, change
orders that are either in dispute or are unapproved as to both
scope and price, or other causes of unanticipated additional
contract costs.
The
Group estimates variable consideration for a performance obligation
at the most likely amount to which the Group expects to be entitled
(or the most likely amount the Group expects to incur in the case
of liquidated damages), utilizing estimation methods that best
predict the amount of consideration to which the Group will be
entitled (or will be incurred in the case of liquidated damages).
The Group includes variable consideration in the estimated
transaction price to the extent it is probable that a significant
reversal of cumulative revenue recognized will not occur or when
the uncertainty associated with the variable consideration is
resolved. The Group’s estimates of variable consideration and
determination of whether to include estimated amounts in
transaction price are based largely on an assessment of its
anticipated performance and all information (historical, current
and forecasted) that is reasonably available to the
Group.
The
effect of variable consideration on the transaction price of a
performance obligation is recognized as an adjustment to revenue on
a cumulative catch-up basis. To the extent unapproved change orders
and claims reflected in transaction price (or excluded from
transaction price in the case of liquidated damages) are not
resolved in the Group’s favor, or to the extent incentives
reflected in transaction price are not earned, there could be
reductions in, or reversals of, previously recognized
revenue.
(ii)
Performance
obligations satisfied at a point-in-time (Trading and
manufacturing)
Revenue
for our trading and manufacturing contracts is recognized at a
point in time. The Group recognizes revenue at the amount to which
it expects to be entitled when control of the products is
transferred to its customers. Control is generally transferred when
the Group has a present right to payment and title and the
significant risks and rewards of ownership of products are
transferred to its customers. For most of the Group’s
products sales, control transfers when products are delivered to
the customer. Payment for products sales is collected within a
short period following transfer of control, as
applicable.
Research and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately US$35,000,
US$184,000 and US$163,000 for the years ended December 31, 2019,
2018 and 2017, 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 follows the liability method of accounting for income tax.
Under this method, deferred tax assets and liabilities are recorded
for future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are expected
to be in effect when the underlying assets or liabilities are
recovered or settled. The Group also evaluates whether the recorded
deferred tax assets and valuation allowances can be realized and,
when necessary, reduces the amounts to what is expected to be
realized.
Impairment of Goodwill
The
Group annually performs a qualitative analysis that includes
reviewing the carrying value of intangible assets not subject to
amortization, including goodwill, to determine whether impairment
may exist, or whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be
recoverable.
The
excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as goodwill.
After a qualitative analysis indicates an impairment test is
needed, the Group completes a two-step goodwill impairment test.
The first step is to compare the fair values of each reporting unit
to its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill is not
considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value,
the second step is to compare the implied fair value of goodwill to
the carrying value of a reporting unit’s goodwill. The
implied fair value of goodwill is determined in a manner similar to
accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and
liabilities of the reporting unit. The excess of the fair value of
the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. An impairment
loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the
primary technique being a discounted cash flow.
Functional Currencies and Foreign Currency Translation
For
foreign operations where substantially all monetary transactions
are in the local currency, we use the local currency as our
functional currency. The effects of translating financial
statements of foreign operations into our reporting currency are
recognized as a cumulative translation adjustment, net of tax in
“Accumulated other comprehensive income” in the
consolidated statements of shareholders’ equity. Gains or
losses on foreign currency transactions are recorded in income in
the period in which they are incurred.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
revenue and expenses in the consolidated financial statements and
accompanying notes. Significant accounting estimates reflected in
the Group’s consolidated financial statements include
accounts receivable, net, equity method investment, impairment of
goodwill and long-lived assets, income taxes, share-based
compensation, contract assets and contract liabilities. Actual
results could differ from those 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.
Going Concern
As
shown in the Note
23 (iii) of accompanying consolidated financial statements, the
operations and business
results of the Group could
be materially adversely
affected by coronavirus, which creates an
uncertainty about the Group's ability to continue as a going
concern. Management's plan
with
new contracts with
customers will alleviate such
uncertainty.
Leases
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments are recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases. The Group elected the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, the Group did not recognize right-of-use assets or
lease liabilities, including not recognizing right-of-use assets or
lease liabilities for existing short-term leases of those assets in
transition. The Group also elected to separate lease and non-lease
components for our real estate leases.
The
Group enters into non-cancelable leases for some of our facility
needs. These leases allow the Group to conserve cash by paying a
monthly lease rental fee for the use of facilities rather than
purchasing them.
The
Group’s leases have remaining terms ranging from one to three
years, and some of which may include options to terminate the
leases within one year. Currently, all the Group’s leases
contain fixed payment terms. The Group may decide to cancel or
terminate a lease before the end of its term, in which case we are
typically liable to the lessor for the remaining lease payments
under the term of the lease. Additionally, all of the Group’s
month-to-month leases are cancelable, by the Group or the lessor,
at any time and are not included in our right-of-use asset or
liability. Leases are accounted for as operating or finance leases,
depending on the terms of the lease.
Operating
right-of-use leases.
Operating
right-of-use leases are included in operating lease right-of-use
assets, current portion of operating lease obligations and
operating lease obligations, net of current maturities on the
Group’s consolidated balance sheets, as appropriate.
Operating lease right-of-use assets and operating lease liabilities
are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most of
the Group’s leases do not provide an implicit rate to
calculate present value, the Group determines this rate by
estimating the Group’s incremental borrowing rate, utilizing
the borrowing rates associated with the Group’s various debt
instruments. The operating lease right-of-use asset also includes
any lease payments made and excludes lease incentives. Our lease
terms may include options to extend or terminate the lease when it
is reasonably certain that we will exercise that option. Lease
expense for minimum lease payments is recognized on a straight-line
basis over the lease term.
On
January 1, 2011, the Group also adopted ASU No. 2016-02, Leases
(Topic 842) for its long term lease as lessor.
Prior
to January, 2019 the Group accounted for its leases in accordance
with Leases (Topic 840). Leases with characteristics of operating
leases were expensed on a straight-line basis over the life of the
lease on the Group’s consolidated statements of operations
and comprehensive income / (loss).
Change
in accounting policy
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments are recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases. The Group elected the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, the Group did not recognize right-of-use assets or
lease liabilities, including not recognizing right-of-use assets or
lease liabilities for existing short-term leases of those assets in
transition. The Group also elected to separate lease and non-lease
components for our real estate leases. Adoption of the new standard
resulted in the recording of additional operating right-of-use
assets and operating lease liabilities of approximately US$133,000,
as of January 1, 2019. The adoption of Topic 842 did not impact the
Group’s retained earnings, consolidated net loss or cash
flows
Recent
Accounting Pronouncements
Changes
to GAAP are typically established by the Financial Accounting
Standards Board (“FASB”) in the form of accounting
standards updates (“ASUs”) to the FASB’s
Accounting Standards Codification (“ASC”). The Group
considers the applicability and impact of all 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
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The amendments under this pronouncement changed the way all leases
with durations in excess of one year are treated. Under this
guidance, lessees are required to recognize virtually all leases on
the balance sheet as a right-of-use asset and an associated finance
lease liability or operating 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 finance
leases or operating leases. Finance lease liabilities, which
contain provisions similar to capitalized leases under the prior
accounting standards, are amortized as amortization expense and
interest expense in the statement of operations.
Recently Issued Accounting Pronouncements
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 June
2016, the FASB issued ASU No. 2016-13, Financial Instruments -
Credit Losses (Topic 326), Measurement of Credit Losses on
Financial Instruments, which introduced an expected credit loss
methodology for the measurement and recognition of credit losses on
most financial instruments, including trade receivables and
off-balance sheet credit exposures. Under this guidance, an entity
is required to consider a broader range of information to estimate
expected credit losses, which may result in earlier recognition of
losses. This ASU also requires disclosure of information regarding
how a company developed its allowance, including changes in the
factors that influenced management’s estimate of expected
credit losses and the reasons for those changes. The ASU and its
related clarifying updates are effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years, with early adoption permitted. The adoption of this standard
will be through a cumulative-effect adjustment to retained earnings
as of the effective date. Based on our historical experience, the
Group does not expect that this pronouncement will have a
significant impact in its consolidated financial statements or on
the estimate of the allowance for uncollectable
accounts.
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, which modifies
the disclosure requirements for Level 1, Level 2 and Level 3
instruments in the fair value hierarchy. The guidance is effective
for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years, with early adoption permitted
for any eliminated or modified disclosures. The adoption of this
standard is not expected to have a material impact on the
Group’s consolidated financial statements or
disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes, which simplifies the accounting for
income taxes, eliminates certain exceptions within ASC No. 740,
Income Taxes, and clarifies certain aspects of the current guidance
to promote consistent application among reporting entities. The
guidance is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years, with early
adoption permitted. Upon adoption, the Group must apply certain
aspects of this standard retrospectively for all periods presented
while other aspects are applied on a modified retrospective basis
through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. The Group is
evaluating the impact this update will have on its consolidated
financial statements.
C. RESEARCH AND DEVELOPMENT, PATENTS AND
LICENSES, ETC.
During
Fiscal 2019, 2018 and 2017, the Company expensed approximately
US$35,000, US$184,000 and US$163,000, 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
future undiscounted minimum lease payments, as reconciled to the
discounted minimum lease obligation indicated on the Group’s
consolidated balance sheets, under current portion of operating
lease obligations and operating lease obligations, net of current
maturities, as of December 31, 2019 were as follows:
|
|
Operating lease
obligations
|
|
|
|
|
|
|
|
2020
|
196
|
|
2021
|
138
|
|
2022
|
96
|
|
Total minimum lease
payments
|
430
|
|
Financing
component
|
(44)
|
|
Net present value
of minimum lease payments
|
386
|
|
Less: current
portion of operating lease obligations
|
(170)
|
|
Long-term operating
lease obligations
|
216
|
ITEM 6.
DIRECTORS, 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
|
|
76
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
|
|
|
|
|
|
Jerry
Wong
|
|
61
|
|
Director
and Chief Financial Officer
|
|
|
|
|
|
|
|
Alex
Sham
|
|
56
|
|
Director
|
|
|
|
|
|
|
|
Y.K.
Liang
|
|
90
|
|
Director
|
|
|
|
|
|
|
|
Fu Ming
Chen
|
|
71
|
|
Director
|
|
|
|
|
|
|
|
Janet
Cheang
|
|
64
|
|
Director
|
|
|
|
|
|
|
|
David
YL Leung
|
|
46
|
|
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.
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.
B. COMPENSATION.
From
the Company and its subsidiaries, for services rendered in all
capacities to the Company and its subsidiaries during Fiscal 2019,
T.C. Leung, the Chairman of the Board and Chief Executive Officer
received a yearly salary of US$197,000 (2018: US$ 193,000, 2017:
US$ 194,000), Jerry Wong, Chief Financial Officer received a yearly
salary of US$111,000 (US$107,000, 2017: US$ 108,000) and George
Hayek, a Key Employee of Yixing, received a yearly salary of US$
59,000 (2018: US$59,000, 2017: US$ 62,000). David YL Leung, a Key
Employee of Yixing receives an annual salary of US$148,000 (2018:
US$136,000, 2017: US$ 131,000) 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 2019 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 2019.
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 plus
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 (“MPF
scheme”), a defined contribution scheme managed by an
independent trustee on December 1, 2000, Far East and its employees
who joined Far East subsequently make monthly contributions to the
scheme at 5% of the employee’s cash income as defined under
the Mandatory Provident Fund Schemes Ordinance. Under the MPF
scheme, the employer and its employees are each required to make
contributions to the plan at 5% of the employees' relevant income,
subject to a cap of monthly relevant income of HK$30,000.
Contributions to the plan vest immediately.
As
stipulated by the rules and regulations in the PRC, the PRC’s
subsidiaries contributes to state-sponsored retirement plans for
its employees in Mainland China. PRC’s subsidiaries’
contribution range from 14% to 20% of the basic salaries of its
employees, and have 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, 2019 the aggregate contributions of the
Group to the aforementioned pension plans and retirement benefit
schemes was approximately US$332,000.
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.
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.
During
the year ended December 31, 2019, the Company granted such options
to its officers, directors and employees, which allow them to
purchase up to 51,000 ordinary shares. The exercise price of all
options granted is US$2.60 per share. The stock options granted are
exercisable on January 1, 2022 and terminate on April 18,
2029.
The
Company estimate the fair value of the options granted under the
Binomial pricing model at US$2.324 per share.
Changes
in outstanding stock options under plans mentioned above were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price
|
|
Weighted average exercise price
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Granted
|
51,000
|
2.60
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, end of
year
|
51,000
|
2.60
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Exercisable, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
As of
December 31, 2019, there was no unrecognized stock-based
compensation expense related to unvested stock options. The
compensation expense for the year is US$10,358
The
Group applies the provisions of ASC No. 718-10, which requires to
recognise expense related to the fair value of stock-based
compensation awards, including employee stock options.
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. The Company’s directors were
re-elected at the Company’s last annual meeting of
shareholders in August 2019. 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 six meetings of its Board of Directors during Fiscal
2019, while its Audit Committee had four meetings during Fiscal
2019.
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.
D. EMPLOYEES
At June
3, 2020, the Company (exclusive of Yixing-Pact) had approximately
50 full-time employees. At December 31, 2019, 2018 and 2017,
staffing levels at the Company (exclusive of Yixing-Pact) were
approximately as follows:
|
|
|
|
|
|
Marketing and
sales
|
15
|
15
|
16
|
|
Administrative
|
20
|
22
|
27
|
|
Technical
|
15
|
17
|
16
|
|
Total full time
employees
|
50
|
54
|
59
|
At June
3, 2020, Pact-Yixing had approximately 36 full-time
employees. In addition, as of December 31, 2019,
2018 and 2017, respectively, staffing levels at Pact-Yixing were
approximately as follows: Engineers - 28, 27 and 30; 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 June 3, 2020, 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 3,092,859 shares of the Company’s
Ordinary Shares outstanding as of June 3, 2020. 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)
|
1,594,386
|
51.6%
|
|
|
|
|
|
Alex
Sham(1)
|
80,582
|
2.6%
|
|
|
|
|
|
Jerry
Wong(1)
|
52,298
|
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)
|
1,727,266
|
55.9%
|
|
(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.
|
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.
FINANCIAL 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 Firm,
page F-2.
|
|
|
|
|
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 March 6, 2020, we declared a special cash
dividend of an aggregate of $1,299,000.78, which dividend was paid
to all holders of record of our ordinary shares as of March 20,
2020. 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
OFFER 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”.
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,
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
2.04
|
4.41
|
|
2016
|
1.46
|
4.43
|
|
2017
|
2.70
|
5.65
|
|
2018
|
2.00
|
8.45
|
|
2019
|
1.72
|
7.82
|
|
2020 (through June
3,
2020)
|
1.73
|
3.15
|
|
Quarters Ended
|
|
|
|
|
|
|
|
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
|
|
March 31,
2019
|
1.72
|
7.82
|
|
June 30,
2019
|
2.33
|
4.33
|
|
September 30,
2019
|
2.51
|
3.64
|
|
December 31,
2019
|
2.13
|
3.08
|
|
The Following Months
|
|
|
|
|
|
|
|
December
2019
|
2.20
|
2.59
|
|
January 2020
|
2.24
|
3.15
|
|
February 2020
|
1.95
|
2.70
|
|
March
2020
|
1.73
|
2.28
|
|
April
2020
|
1.85
|
2.47
|
|
May
2020
|
2.02
|
2.49
|
Based
upon information received from its transfer agent, the Company
believes that it has approximately 25 shareholders of record
including 1,210 beneficial owners of its Ordinary Shares held in
nominee names by large clearing houses.
B. PLAN OF DISTRIBUTION
This item does not apply to annual reports on Form
20-F.
C. MARKETS
See
– Item 9A. “Listing Details.”
D. SELLING SHAREHOLDERS
This item does not apply to annual reports on Form
20-F.
E. DILUTION
This item does not apply to annual reports on Form
20-F.
F. EXPENSES OF THE ISSUE
This item does not apply to annual reports on Form
20-F.
ITEM 10.
ADDITIONAL INFORMATION
A. SHARE CAPITAL
This item does not apply to annual reports on Form
20-F.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
On
January 1, 2005, the BVI Business Companies Act, as amended, (the
“BC ACT”) came into force, with the objective of
replacing the now repealed International Business Companies Act (
the “IBC” Act ) over a 2 year transitional period. The
Company was incorporated under the IBC Act, on January 1, 2007, the
Company was automatically re-registered under the BC Act as a BVI
Business Company. Companies that were automatically re-registered
on January 1, 2007 were not required to submit a new
Memorandum and Articles of Association and certain key
sections of the IBC Act were “grandfathered” into the
BC Act: these are known as the “Transitional
Provisions”. The Transitional Provisions ensure that well
established and recognized concepts from the IBC Act, such as
“ authorized capital:, “capital accounts” and
“surplus accounts , remain relevant until such time as that
company elects to adopt and register a New Memorandum and Articles
of Association that fully conform with the BC Act. In November 2011
and January 2012, the Company filed an Amended and Restated
Memorandum and Articles of Association with the Registry of
Corporate Affairs of the BVI Financial Services Commission that on
November 29, 2011 and January 30, 2012 that became as of filing
with the BVI authorities to, among other things, (i) not apply the
Transitional Provisions and (ii) remove these concepts from the
Company’s charter documents eliminating a layer of
requirements that would otherwise apply to share divisions
(splits), combinations (reverse splits), redemptions and dividends.
The Company’s accounting treatment of share capital need not
change. Changes in the Company’s Amended and Restated
Memorandum are summarized in the Company’s Forms 6-K filed
with the SEC on November 30, 2011 and February 6, 2012.The
foregoing Forms 6-K are hereby incorporated by reference as if
fully stated herein. Set forth below is a summary of certain terms
of the Amended and Restated Memorandum and
Articles of Association and the BC Act relating to the
Company’s securities. This description and the descriptions
contained in the Forms 6-K incorporated by reference does not
purport to be complete and is qualified in its entirety by
reference to BVI statutory law and the Amended and Restated
Memorandum and Articles of Association.
Holders
of the Company’s Ordinary Shares are entitled to one vote for
each whole share on all matters to be voted upon by shareholders,
including the election of directors. Holders of Ordinary Shares do
not have cumulative voting rights in the election of directors. All
shares of Ordinary Shares are equal to each other with respect to
liquidation and dividend rights. In the event of the liquidation of
the Company, all assets available for distribution to the holders
of Ordinary Shares are distributable among them according to their
respective share holdings. All of the outstanding shares of
Ordinary Shares of the Company are duly authorized, validly issued,
fully paid and non-assessable.
Pursuant to the
Company’s Memorandum and Articles of Association and pursuant
to the laws of the BVI, the Company’s Memorandum and Articles
of Association may be amended by a resolution of the Board of
Directors without shareholder approval. This includes amendments to
increase or reduce the authorized capital stock of the Company or
to increase or reduce the par value of its shares. The ability of
the Company to amend its Memorandum and Articles of Association
without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of the Company without
any further action by the shareholders including but not limited
to, a tender offer to purchase the Common Stock at a premium over
then current market prices.
Under
United States law, majority and controlling shareholders generally
have certain “fiduciary” responsibilities to the
minority shareholders. Shareholder action must be taken in good
faith and actions by controlling shareholders 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. While BVI law does not permit a
shareholder of a BVI company to sue its directors derivatively,
i.e., in the name of and for the benefit of the Company, and to sue
the Company and its directors for his benefit and the benefit of
others similarly situated, the circumstances in which any such
action may be brought that may be available in respect of any such
action may result in the rights of shareholders of a British Virgin
Island company being more limited than those rights of shareholders
in a United States company.
The
Board of Directors of the Company, without further shareholder
action, may issue shares of Preferred Stock in any number of series
and may establish as to each such series the designation and number
of shares to be issued and the relative rights and preferences of
the shares of each series, including provisions regarding voting
powers, redemption, dividend rights, rights upon liquidation and
conversion rights. The issuance of shares of Preferred Stock by the
Board of Directors could adversely affect the rights of holders of
Ordinary Shares by, among other matters, establishing preferential
dividends, liquidation rights and voting power. The Company has not
issued any shares of Preferred Stock and has no present intention
to issue shares of Preferred Stock. The issuance thereof could
discourage or defeat efforts to acquire control of the Company
through acquisition of Ordinary Shares.
Share Register and Voting Restrictions.
The Company maintains a share register at its registered
office in the BVI. The Company’s registered number is 200960.
The objects of the Company are to engage in any act or activity
that is not prohibited under any law of the BVI. Under the
Articles, the Company is not required to treat the holder of a
registered share in the Company as a shareholder until that
person’s name has been entered in the share register. The
holders of Ordinary Shares have one vote for each Ordinary Share
held of record. The holders of Preferred Shares have such voting
powers, full or limited, or no voting powers and such restrictions
as may be stated and expressed in the resolution providing for the
issuance of the Preferred Shares.
Shareholders Meeting. The
directors of the Company may convene meetings of the shareholders
of the Company at such times and in such manner and places within
or outside the BVI as the directors consider necessary or
desirable. Upon the written request of the shareholders holding ten
(10%) percent or more of the outstanding voting shares in the
Company the directors must convene a meeting of
shareholders.
A
shareholder may participate at a meeting of shareholders by
telephone or other electronic means, as long as all shareholders
participating in the meeting are able to hear each
other.
A
meeting of shareholders is duly constituted if, at the commencement
of the meeting, there are present in person or by proxy not less
than fifty (50%) percent of the votes of the shares or class series
of shares entitled to vote on resolutions of shareholders to be
considered at the meeting. If a quorum is not present, the meeting,
if convened upon the requisition of shareholders, shall be
dissolved; in any other case it shall stand adjourned to the next
business day at the same time and place or to such other time and
place as the directors may determine, and if at the adjourned
meeting there are present in person or by proxy not less than one
third of the votes of the shares or each class or series of shares
entitled to vote on the resolutions to be considered by the
meeting, those present shall constitute a quorum but otherwise the
meeting shall be dissolved.
Any
action that may be taken by the shareholders at a meeting may also
be taken by a resolution of shareholders consented to in writing or
by written electronic communication by a majority or greater number
of shares entitled to vote, without the need for any notice, but if
not an unanimous writing, a copy of such resolution shall be sent
to all non-consenting shareholders.
Pre-emptive Rights. The holders of
Ordinary Shares and Preferred Shares are not entitled to any
pre-emptive or similar rights.
Conflict of Interests. No
agreement or transaction between the Company and one or more of its
directors or any person in which any director has a financial
interest or to whom any director is related, including as a
director of that other person, is void and avoidable for this
reason only, or by reason only that the director is present at the
meeting of directors, or at the meeting of the committee of
directors that approves the agreement or transaction, or that the
vote or consent of the director is counted for that purpose, if the
material facts of the interest of each director in the agreement or
transaction and his interest in or relationship to any other party
to the agreement or transaction are disclosed in good faith, or are
known by the other directors. A director who has an interest in any
particular business to be considered at a meeting of directors or
shareholders may be counted for purposes of determining whether the
meeting is duly constituted.
Generally, no
purchase, redemption or other acquisition of shares shall be made
unless the directors determine that immediately after purchase,
redemption or other acquisition the Company will be able to satisfy
its liabilities as they become due in the ordinary course of its
business and the realizable value of the assets of the Company will
not be less than the sum of its total liabilities, other than
deferred taxes, as shown in the books of account, and its capital
and, in the absence of fraud, the decision of the directors as to
the realizable value of the assets of the Company is conclusive,
unless a question of law is involved.
Duration, Liquidation, Merger. The
Company shall continue until wound-up and dissolved by a resolution
of shareholders, or under the terms of any insolvency or
liquidation laws in force in the BVI. Under BVI law the Company may
merge with another company, including a parent company or
subsidiary, incorporated in the BVI, or in a jurisdiction outside
of the BVI where the laws of that jurisdiction permit the merger. A
merger must be authorized by the directors of the Company and
approved by the shareholders.
Board of Directors. The business
and affairs of the Company are managed by the directors who may
exercise all such powers of the Company as are not by BVI law or by
the Company’s Articles reserved to the shareholders of the
Company.
C. MATERIAL CONTRACTS
We have
not entered into any material contracts other than in the ordinary
course of business and other than those described below, in
“Item 4. Information on the Company” or elsewhere in
this annual report on Form 20-F.
On
March 5, 2018, we entered into an Equity Transfer Agreement to sell
our 20% equity stake of Jia Huan. The transaction is subject to
completion of all closing formalities, including the need to obtain
approval and registration with the relevant governmental
authorities, and was completed in May 2018. For a complete
description of the terms of the Agreement, see “Item 4A.
History And Development of the Company.”
D. EXCHANGE CONTROLS
There
are no exchange control restrictions on payment of dividends on the
Company’s Ordinary Shares or on the conduct of the
Company’s operations either in Hong Kong, where the
Company’s principal executive offices are located, or the
BVI, where the Company is incorporated. There are no BVI laws which
impose foreign exchange controls on the Company or that effect the
payment of dividends, interest, or other payments to non-resident
holders of the Company’s securities. BVI laws and the
Company’s Memorandum and Articles of Association impose no
limitations on the right of non-resident or foreign owners to hold
the Company’s securities or vote the Company’s Ordinary
Shares. The PRC government has established a unified exchange rate
system and system of exchange controls to which the Company is
subject.
E. TAXATION
The
following summary of the material British Virgin Islands, Hong
Kong, People’s Republic of China and United States federal
income tax consequences of an investment in our ordinary shares is
based upon laws and relevant interpretations thereof in effect as
of the date of this annual report, all of which are subject to
change. This summary does not deal with all possible tax
consequences relating to an investment in our ordinary shares, such
as the tax consequences under state, local and other tax
laws.
BVI
The
Company and Pact Asia Pacific Limited are exempted from taxation in
the BVI.
HONG KONG
The
Company’s subsidiaries organized in Hong Kong, Far East and
Euro Tech (China) Limited, provide for Hong Kong profits tax at a
rate of 16.5% in 2019 on the basis of their income for financial
reporting purposes, adjusting for income and expense items which
are not assessable or deductible for profits tax
purposes.
PRC
Euro
Tech Trading (Shanghai) Limited (“ETTS”), a subsidiary
of Far East, provides for PRC Enterprise Income Tax
(“EIT”) at a rate of 25% in 2019 after offsetting
losses brought forward, if any, on the basis of its income for
financial reporting purposes, adjusting for income and expense
items which are not assessable or deductible for PRC Enterprise
Income Tax purposes. As of December 31, 2019, ETTS had an
assessable loss carried forward of US$518,328 as agreed by the
local tax authority to offset its profit for the forth coming
years. Such loss will expire in 5 years.
Shanghai Euro Tech
Limited (“SET”), a subsidiary of Far East, provides for
the PRC Enterprise Income Tax of 25% in 2019. As of December 31,
2019, SET had an assessable loss carried forward of US$444,192 as
agreed by the local tax authority to offset its profit for the
forth coming years. Such loss will expire in 5 years.
Shanghai Euro Tech
Environmental Engineering Limited (“SETEE”), a
subsidiary of Far East, provides for the PRC Enterprise Income Tax
of 25% in 2019. As of December 31, 2019, SETEE had an assessable
loss carried forward of US$380,591 as agreed by the local tax
authority to offset its profit for the forthcoming years. Such loss
will expire in 5 years.
Chongqing Euro Tech
Rizhi Technology Co., Ltd, Rizhi Euro Tech Instrument (Shaanxi)
Co., Ltd and Guangzhou Euro Tech Environmental Equipment Co., Ltd
provide for PRC Enterprise Income Tax at a rate of 25% in 2019,
after offsetting losses brought forward, if any, on the basis of
its income for financial reporting purposes, adjusting for income
and expense items which are not assessable or deductible for PRC
Enterprise Income Tax purposes. These three companies were
dissolved in 2019.
Yixing
Pact Environmental Technology Co. Ltd. (“Yixing”)
provides for PRC Enterprise Income Tax at a rate of 25% in 2019,
after offsetting losses brought forward, if any, on the basis of
its income for financial reporting purposes, adjusting for income
and expense items which are not assessable or deductible for PRC
Enterprise Income Tax purposes. As of December 31, 2019, Yixing had
an assessable loss carried forward of US$1,664,275 as agreed by the
local tax authority to offset its profit for the forth coming
years. Such loss will expire in 5 years.
Under
the New Enterprise Income Tax Law and the implementation rules,
profits of the PRC subsidiaries earned on or after January 1, 2008
and distributed by the PRC subsidiaries to foreign holding company
are subject to a withholding tax at a rate of 10% unless reduced by
tax treaty. Aggregate undistributed earnings of Far East's
subsidiaries located in the PRC that are available for distribution
to Far East of approximately US$0.6 million at December 31, 2019
are intended to be reinvested, and accordingly, no deferred
taxation has been made for the PRC dividend withholding taxes that
would be payable upon the distribution of those amounts to Far
East. Distributions made out of pre January 1, 2008 retained
earnings will not be subject to the withholding tax.
The
items comprising the difference between income taxes computed at
the hong Kong profits tax and PRC EIT statutory tax rates in effect
for 2019, 2018 and 2017 and our effective income taxes rates were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
(310)
|
(963)
|
(564)
|
|
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
(69)
|
(254)
|
(94)
|
|
Change in valuation
allowances
|
(30)
|
68
|
120
|
|
Under /
(over-provision) for income taxes in prior years
|
5
|
(131)
|
-
|
|
Non-deductible
expenses
|
131
|
5
|
2
|
|
|
|
|
|
|
Income taxes
expense / (credit) at effective tax rate
|
37
|
(312)
|
28
|
PRC STATUTORY RESERVES.
Under
the relevant PRC laws and regulations, the PRC subsidiaries are
required to appropriate certain percentage of their respective net
income to two statutory funds i.e. the statutory reserve fund and
the statutory staff welfare fund. The PRC subsidiaries can also
appropriate certain amount of their net income to the enterprise
expansion fund.
(i)
Statutory reserve fund.
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate at least 10% of its net income to the
statutory reserve fund until such fund reaches 50% of its
registered capital. The statutory reserve fund can be utilized upon
the approval by the relevant authorities, to offset accumulated
losses or to increase its registered capital, provided that such
fund is maintained at a minimum of 25% of its registered
capital.
Under
the PRC laws and regulations, the PRC subsidiaries are restricted
in their ability to transfer certain of their net assets in the
form of dividend payments, loans or advances. The amounts
restricted include paid-in capital and statutory reserves, as
determined pursuant to PRC generally accepted accounting
principles, totaling US$3,174,000 as at December 31,
2019.
(ii)
Statutory staff welfare fund.
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate certain amount of its respective net income to
the statutory staff welfare funds determined by it. The statutory
staff welfare funds can only be used to provide staff welfare
facilities and other collective benefits to their employees. This
fund is non-distributable other than upon liquidation of the PRC
subsidiaries.
(iii)
Enterprise expansion fund.
The
enterprise expansion fund shall only be used to make up losses,
expand the PRC subsidiaries’ production operations, or
increase the capital of the subsidiaries. The enterprise expansion
fund can be utilized upon approval by relevant authorities, to
convert into registered capital and issue bonus capital to existing
investors, provided that such fund is maintained at a minimum of
25% of its registered capital.
UNITED STATES
The
following discussion is a summary of the material United States
federal income tax considerations that may be relevant to the
purchase, holding, ownership, disposition or sale of our ordinary
shares.
This
discussion is general in nature and does not discuss all aspects of
U.S. federal income taxation which may be important to particular
investors in light of their individual circumstances, including
investors subject to special U.S. taxation rules.
A U.S.
Holder holding or considering acquiring or disposing of our
ordinary shares is urged to consult his or her own tax advisor
concerning the U.S. federal, state, local and non-U.S. income and
other tax consequences of the holding, ownership, purchase,
disposition or sale of our ordinary shares in light of such U.S.
Holder’s particular circumstances.
A
“U.S. Holder” for purposes of this discussion is a
beneficial owner of ordinary shares that is, for U.S. federal
income tax purposes: (a) a citizen or resident of the United
States; (b) a corporation or other entity taxable as a corporation
created or organized in or under the laws of the United States, any
state thereof, or the District of Columbia; (c) an estate the
income of which is subject to U.S. federal income taxation,
regardless of its source; or (d) a trust if it is subject to the
primary supervision of a court within the United States and one or
more U.S. persons have the authority to control all substantial
decisions of the trust or has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a U.S.
person. If a partnership holds our ordinary shares, the tax
treatment of a partner will generally depend on the status of the
partner and the activities of the partnership. A partner of a
partnership holding our ordinary shares is urged to consult its own
tax advisor regarding an investment in our ordinary
shares.
Passive foreign investment company
rules. A passive foreign investment company
(“PFIC”) for any taxable year in which either
(a) at least 75% of our gross income is passive income or
(b) at least 50% of the value (determined on the basis of a
quarterly average) of our assets is attributable to assets that
produce or are held for the production of passive income. For this
purpose, passive income generally includes dividends, interest,
royalties, rents (other than rents and royalties derived in the
active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce
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. 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. 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
classified as a PFIC for 2017 or any future calendar
years.
If we
are determined to be a PFIC for any taxable year, a U.S. Holder
could be treated as owning a proportionate share of some of our
subsidiaries and, in the absence of certain elections, will subject
to special rules that will have a penalizing effect on certain
“excess distributions” (as defined).
A U.S
Holder that holds our Ordinary Shares in any year in which we are
classified as a PFIC may make a “deemed sale” election
with respect to such ordinary shares in a subsequent taxable year
in which we are not classified as a PFIC. If you make a
valid deemed sale election with respect to your Ordinary Shares,
you will be treated as having sold all of your Ordinary Shares for
their fair market value on the last day of the last taxable year in
which we were a PFIC and such Ordinary Shares will no longer be
treated as PFIC stock. You will recognize gain (but not
loss), which will be subject to tax as an “excess
distribution” received on the last day of the last taxable
year in which we were a PFIC. Your basis in the Ordinary
Shares would be increased to reflect gain recognized, and your
holding period would begin on the day after we ceased to be a
PFIC.
Also, a
U. S. Holder may be required to file certain forms with the U.S.
Treasury Department.
A U.S.
Holder will generally recognize capital gain or loss upon the sale
or other disposition of our Ordinary Shares in an amount equal to
the difference between the amount realized upon the disposition and
the holder’s adjusted tax basis in such ordinary
shares. Any capital gain or loss will be long-term if
the Ordinary Shares have been held for more than one year and will
generally be United States source gain or loss for United States
foreign tax credit purposes.
Certain
U.S. Holders are required to report information to the Internal
Revenue Service relating to an interest in “specified foreign
financial assets,” including shares issued by a non-United
States corporation, for any year in which the aggregate value of
all specified foreign financial assets exceeds $50,000 (or a higher
dollar amount prescribed by the Internal Revenue Service), subject
to certain exceptions. These rules also impose penalties
if a holder is required to submit such information to the Internal
Revenue Service and fails to do so.
F. DIVIDENDS AND PAYING AGENT
This item does not apply to annual reports on Form
20-F.
G. STATEMENT BY EXPERTS
This item does not apply to annual reports on Form
20-F.
H. DOCUMENTS ON DISPLAY
The
documents that are exhibits to or incorporated by reference in this
annual report can be read at the U.S. SEC’s public reference
facilities at 100 F Street, N.E., Washington, DC 20549-2001 or on
the Commission’s website: www.sec.gov.
I. SUBSIDIARY INFORMATION
For
information on the Company’s subsidiaries see – Item
4C. The separate financial statements of Blue Sky as required under
Regulation S-X 210.3-09, an entity in which the Company owns a
19.4% equity interest are attached hereto.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company’s primary risk exposures arise from changes in
interest rates and foreign currency exchanges rates.
Foreign Currency Risks
The
Company is exposed to risk from changing foreign currency exchange
rates. The Company’s sales are denominated either in HK
dollar or RMB. The majority of the Company’s expenses and
cost of revenue are denominated in HK dollars, followed by RMB,
U.S. dollars, Japanese yen and the Euro. The Company is subject to
a variety of risks associated with changes among the relative value
of the U.S. dollar, HK dollar, RMB, Japanese yen and the Euro. The
Company does not currently adequately hedge its foreign exchange
positions. Any material increase in the value of the HK dollar,
RMB, Japanese yen and the Euro relative to the U.S. dollar would
increase the Company’s expenses and cost of revenue and
therefore would have a material adverse effect on the
Company’s business, financial condition and results of
operations.
Inflation
The
Company cannot accurately determine the precise effect of inflation
on its operations; however, it does not believe inflation has had a
material effect on revenues or results of operations during the
past several years. Efforts by the PRC to curb inflation may also
curb economic growth, increase our overhead costs and adversely
affect our revenues. If the PRC rate of inflation continues to
increase, 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.
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
Company is currently not exposed to material future earnings or
cash flow exposures from changes in interest rates on debt
obligations as the Company had no material bank indebtedness in
Fiscal 2019. The Company does not currently anticipate entering
into interest rate swaps and/or similar instruments.
ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
This item does not apply to annual reports on Form
20-F.
B. WARRANTS AND RIGHTS
This item does not apply to annual reports on Form
20-F.
C. OTHER SECURITIES
This item does not apply to annual reports on Form
20-F.
D. AMERICAN DEPOSITARY SHARES
Not
applicable.
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
EURO TECH
HOLDINGS COMPANY LIMITED’S SHARHOLDERS
|
|
|
|
|
|
|
Additional
paid-in
capital
|
|
Accumulated
other
com-
prehensive
income
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2016
|
2,229,609
|
123
|
9,551
|
(786)
|
857
|
352
|
5,338
|
1,183
|
16,618
|
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
473
|
(106)
|
367
|
|
Foreign currency translation
adjustments, net of tax
|
-
|
-
|
-
|
-
|
61
|
-
|
-
|
61
|
122
|
|
Balance at December 31,
2017
|
2,229,609
|
123
|
9,551
|
(786)
|
918
|
352
|
5,811
|
1,138
|
17,107
|
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
88
|
(149)
|
(61)
|
|
Foreign currency translation
adjustments
|
-
|
-
|
-
|
-
|
(25)
|
-
|
-
|
(33)
|
(58)
|
|
Appropriation of
reserves
|
-
|
-
|
-
|
-
|
-
|
(36)
|
36
|
-
|
-
|
|
Dividend paid
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,443)
|
-
|
(1,443)
|
|
Balance at December 31,
2018
|
2,229,609
|
123
|
9,551
|
(786)
|
893
|
316
|
4,492
|
956
|
15,545
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(146)
|
(64)
|
(210)
|
|
Foreign currency translation
adjustments
|
-
|
-
|
-
|
-
|
6
|
-
|
-
|
(14)
|
(8)
|
|
Bonus shares
issued
|
1,030,950
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Stock-based compensation
expense
|
-
|
-
|
10
|
-
|
-
|
-
|
-
|
-
|
10
|
|
Balance at December 31,
2019
|
3,260,559
|
123
|
9,561
|
(786)
|
899
|
316
|
4,346
|
878
|
15,337
|
The
accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial
statements.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organization
and business
Euro
Tech Holdings Company Limited (the “Company”) was
incorporated in the British Virgin Islands on September 30,
1996.
Euro
Tech (Far East) Limited (“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 People’s Republic of China (the
“PRC”).
The
Group’s principal subsidiaries at December 31, 2019 are set
out below.
|
|
Name
of entity
|
Ownership interest held by the
Group
|
Place
of incorporation and principal place of
operation
|
Principal
activities
|
|
|
|
2019
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
Tech (Far East) Limited
|
100%
|
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 (China) Limited
|
100%
^
|
100%
|
Hong
Kong
|
Inactive
|
|
|
|
|
|
|
|
|
|
|
|
Euro
Tech Trading (Shanghai) Limited
|
100%
|
100%
|
The
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%
|
100%
|
The
PRC
|
Manufacturing of
analytical and testing equipment
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Euro Tech
Environmental Engineering Company Limited
|
100%
|
100%
|
The
PRC
|
Undertaking water
and waste-water treatment engineering projects
|
|
|
|
|
|
|
|
|
|
|
|
Chongqing Euro Tech
Rizhi Technology Co., Ltd.
|
#
|
100%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
|
|
|
|
|
|
Rizhi
Euro Tech Instrument (Shaanxi) Co., Ltd.
|
##
|
100%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
^ This
company was deregistered on April 3, 2020.
# This
company was dissolved on December 12, 2019.
## This
company was dissolved on December 24, 2019.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
1
Organization
and business (Cont’d)
The
Group’s principal subsidiaries at December 31, 2019 are set
out below (Cont’d).
|
|
Name
of entity
|
Ownership
interest held by the Group
|
Place
of incorporation and principal place of
operation
|
Principal
activities
|
|
|
|
2019
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Euro Tech
Environmental Equipment Co., Ltd.
|
**
|
100%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
|
|
|
|
|
|
Yixing
Pact Environmental Technology Co., Ltd.
|
58%
|
58%
|
The
PRC
|
Design,
manufacturing and operation of water and waste water treatment
machinery and equipment
|
|
|
|
|
|
|
|
|
|
|
|
Pact
Asia Pacific Limited
|
58%
|
58%
|
The
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. (“Blue
Sky”)
|
19.4%
*
|
19.4%
*
|
The
PRC
|
Design,
general contract, equipment manufacturing, installation, testing
and operation management of the treatment of waste gases
emitted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The
Group’s interest in Blue Sky has been counted for as an
affiliate using the equity method as the Group has representation
on both the Board and Executive Committee of Blue Sky, and the
ability to participate in the decision-making process and exercise
significant influence.
** This
company was dissolved on March 18, 2019.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies
(a)
Basis
of presentation
The
accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”) and the financial statement
rules and regulations of the Securities and Exchange Commission
(“SEC”). References for Financial Accounting Standards
Board (“FASB”) standards are made to the FASB
Accounting Standards Codification (“ASC”).
(b)
Basis
of consolidation
The
accompanying consolidated financial statements include the results
of operations of the Company and its subsidiaries. Significant
intercompany transactions and balances have been
eliminated.
(c)
Subsidiaries
Subsidiaries are
all entities over which the Group has control; has the power to
appoint or remove the majority of the members of the board of
directors; has the right 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.
(d)
Equity
method of accounting
We
account for our interest in an investment using the equity method
of accounting per ASC No. 323, “Investments - Equity Method
and Joint Ventures” if we are not the primary beneficiary of
a VIE or do not have a controlling interest. The investment is
recorded at cost and the carrying amount is adjusted periodically
to recognize our proportionate share of income or loss, additional
contributions made and dividends and capital distributions
received. We record the effect of any impairment or other than
temporary decrease in the value of the investment.
In the
event a partially owned equity affiliate were to incur a loss and
our cumulative proportionate share of the loss exceeded the
carrying amount of the equity method investment, application of the
equity method would be suspended and our proportionate share of
further losses would not be recognized unless we committed to
provide further financial support to the affiliate. We would resume
application of the equity method once the affiliate became
profitable and our proportionate share of the affiliate’s
earnings equals our cumulative proportionate share of losses that
were not recognized during the period the application of the equity
method was suspended.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(e)
Revenue
recognitiom
We
adopted ASU No. 2014-09 ASC Topic 606, Revenue from Contracts with
Customers, from January 1, 2018, using the modified retrospective transition
method. Because there was no change to
the timing and pattern of revenue recognition, there was no
material changes to the Group's processes and internal controls and
there was no adjustment to beginning retained earnings on
January 1,
2018.
Our
revenue is derived from long-term contracts for customers in our
engineering services and short-term contracts for trading and
manufacturing activities. Accounting treatment for these contracts
in accordance with ASU No. 2014-09 ASC Topic 606, Revenue from
Contracts with Customers, is as follows:
(i)
Performance
obligations satisfied over time (Engineering services)
Recognition of
performance obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer, and is the unit of
account in the new revenue standard. The contract transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Engineering services projects typically span between several days
to over 5 years. The majority of our contracts have a single
performance obligation as the promise to transfer the individual
goods or services is not separately identifiable from other
promises in the contracts and, therefore, is not distinct. Some
contracts have multiple performance obligations, most commonly due
to the contract covering multiple phases of the project life cycle
(engineering).
Revenues are
recognized as our obligations are satisfied over time, by reference
to the progress towards complete satisfaction of that performance
obligation.
If the
Group expects the reference to progress certificates issued by the
customers, with additional adjustments where necessary, depicts the
Group’s performance in transferring control of goods or
services promised to customers for individual projects, the Group
satisfies the performance obligation over time and therefore,
recognises revenue over time in accordance with the output method
for measuring progress. Under output method, revenue recognition is
based on the stage of completion of the contracts, provided that
the stage of contract completion and the gross billing value of
contracting work can be measured reliably. The stage of completion
of a contract is established by reference to the construction works
certified by customers.
Remaining
performance obligations (“RPOs”)
RPOs
represent the amount of revenues we expect to recognize in the
future from our contract commitments on projects and are hereafter
referred to as “Backlog”. Backlog includes the entire
expected revenue values for subsidiary we consolidate. Backlog may
not be indicative of future operating results, and projects
included in Backlog may be canceled, modified or otherwise altered
by customers.
The
Group had the following backlog:
|
|
|
|
|
|
|
|
US$'000
|
US$'000
|
|
|
Engineering segment
|
8,611
|
4,303
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(e)
Revenue
recognition (Continued)
(i)
Performance
obligations satisfied over time (Engineering services)
(Continued)
Variable
consideration
Contract
modifications through change orders, claims and incentives are
routine in the performance of the Group’s contracts to
account for changes in the contract specifications or requirements.
In most instances, contract modifications are not distinct from the
existing contract due to the significant integration service
provided in the contract and are accounted for as a modification of
the existing contract and performance obligation. Either the Group
or its customers may initiate change orders, which may include
changes in specifications or designs, manner of performance,
facilities, equipment, materials, sites and period of completion of
the work. Change orders that are unapproved as to both price and
scope are evaluated as claims. The Group considers claims to be
amounts in excess of approved contract prices that the Group seeks
to collect from its customers or others for customer-caused delays,
errors in specifications and designs, contract terminations, change
orders that are either in dispute or are unapproved as to both
scope and price, or other causes of unanticipated additional
contract costs.
The
Group estimates variable consideration for a performance obligation
at the most likely amount to which the Group expects to be entitled
(or the most likely amount the Group expects to incur in the case
of liquidated damages), utilizing estimation methods that best
predict the amount of consideration to which the Group will be
entitled (or will be incurred in the case of liquidated damages).
The Group includes variable consideration in the estimated
transaction price to the extent it is probable that a significant
reversal of cumulative revenue recognized will not occur or when
the uncertainty associated with the variable consideration is
resolved. The Group’s estimates of variable consideration and
determination of whether to include estimated amounts in
transaction price are based largely on an assessment of its
anticipated performance and all information (historical, current
and forecasted) that is reasonably available to the
Group.
The
effect of variable consideration on the transaction price of a
performance obligation is recognized as an adjustment to revenue on
a cumulative catch-up basis. To the extent unapproved change orders
and claims reflected in transaction price (or excluded from
transaction price in the case of liquidated damages) are not
resolved in the Group’s favor, or to the extent incentives
reflected in transaction price are not earned, there could be
reductions in, or reversals of, previously recognized
revenue.
(ii)
Performance
obligations satisfied at a point-in-time (Trading and
manufacturing)
Revenue
for our trading and manufacturing contracts is recognized at a
point in time. The Group recognizes revenue at the amount to which
it expects to be entitled when control of the products is
transferred to its customers. Control is generally transferred when
the Group has a present right to payment and title and the
significant risks and rewards of ownership of products are
transferred to its customers. For most of the Group’s
products sales, control transfers when products are delivered to
the customer. Payment for products sales is collected within a
short period following transfer of control, as
applicable.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(f)
Research
and development costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately US$35,000,
US$184,000 and US$163,000 for the years ended December 31, 2019,
2018 and 2017 respectively and were included in “Selling and
Administrative expenses” in the Group’s consolidated
statements of operations and comprehensive income /
(loss).
(g)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately
US$13,000, US$16,000 and US$13,000 for the years ended December 31,
2019, 2018 and 2017 respectively and were included in
“Selling and Administrative expenses” in the Group’s consolidated
statements of operations and comprehensive income /
(loss).
(h)
Income
taxes
The
Group follows the liability method of accounting for income tax.
Under this method, deferred tax assets and liabilities are recorded
for future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are expected
to be in effect when the underlying assets or liabilities are
recovered or settled. The Group also evaluates whether the recorded
deferred tax assets and valuation allowances can be realized and,
when necessary, reduces the amounts to what is expected to be
realized.
(i)
Cash
and cash equivalents
Cash
and cash equivalents consist of cash on hand, and bank deposits
with original maturities of three months or less, all of which are
unrestricted as to withdrawal. There were no cash equivalents as of
December 31, 2019 and 2018.
(j)
Restricted
cash
Restricted cash
represents cash deposits retained with banks in the PRC for
issuance of performance guarantees to the customers.
(k)
Accounts
receivable and allowance for doubtful accounts
The
Group does not charge interest to its customers and carries its
customer receivables at their face amounts, less an allowance for
doubtful accounts. As is common practice in the industry, the Group
classifies all accounts receivable as current assets.
The
Group grants trade credit, on a non-collateralized basis, to its
customers and is subject to potential credit risk related to
changes in business and overall economic activity. The Group
analyzes specific accounts receivable balances, historical bad
debts, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. In the event that a customer
balance is deemed to be uncollectible, the account balance is
written-off against the allowance for doubtful
accounts.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(l)
Contracts
in progress
The
timing of revenue recognition, billings and costs incurred results
in billed accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts (contract assets) on
the consolidated balance sheet. For performance obligations
satisfied over time, amounts are billed as work progresses in
accordance with agreed-upon contractual terms, either at periodic
intervals (e.g. weekly or monthly) or upon achievement of
contractual milestones. Typically, bills for advances or deposits
from customers, before revenue is recognized, result in billings in
excess of costs and estimated earnings on uncompleted contracts
(contract liabilities). However, the Group occasionally bills
subsequent to revenue recognition, resulting in contract assets.
These assets and liabilities are reported on the consolidated
balance sheet on a contract-by-contract basis at the end of each
reporting period.
(m)
Inventories
Inventories are
measured using the first-in, first-out method and are stated at the
lower of cost or net realizable value. Cost of finished goods
comprise direct material, direct production costs and an allocated
portion of production overhead costs based on normal operating
capacity. Allowance is made for obsolete, slow moving or defective
items, where appropriate.
(n)
Property,
plant and equipment
Property, plant and
equipment is carried at cost. Major modifications or refurbishments
which extend the useful life of the assets are capitalized and
depreciated over the adjusted remaining useful life of the assets.
Upon retirement or disposition of property, plant and equipment,
the cost and related accumulated depreciation are removed and any
resulting gain or loss is recognized in consolidated income from
operations. The cost of maintenance and repairs is charged to
expense as incurred. Property, plant and equipment is reviewed for
impairment and tested for recoverability whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. If the carrying value of property, plant and equipment
exceeds its fair value, an impairment charge would be recorded in
the consolidated statement of operations.
Depreciation of
property, plant and equipment are computed using the straight-line
method over the assets’ estimated useful lives as
follows:
|
Office
premises
|
47 to
51 years
|
|
Leasehold
improvements whichever is less
|
over
terms of the leases or the useful lives
|
|
Furniture,
fixtures and office equipment
|
3 to 5
years
|
|
Motor
vehicles
|
4
years
|
|
Testing
equipment
|
3
years
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(o)
Long-term
investment
The
Group has elected to apply the measurement alternative to equity
securities without readily determinable fair values. As such, the
Group’s non-marketable equity securities are measured at
cost, less any impairment, and are adjusted for changes in fair
value resulting from observable transactions for identical or
similar investments of the investee.
(p)
Leases
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments are recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases. The Group elected the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, the Group did not recognize right-of-use assets or
lease liabilities, including not recognizing right-of-use assets or
lease liabilities for existing short-term leases of those assets in
transition. The Group also elected to separate lease and non-lease
components for our real estate leases.
The
Group enters into non-cancelable leases for some of our facility
needs. These leases allow the Group to conserve cash by paying a
monthly lease rental fee for the use of facilities rather than
purchasing them.
The
Group’s leases have remaining terms ranging from one to three
years, and some of which may include options to terminate the
leases within one year. Currently, all the Group’s leases
contain fixed payment terms. The Group may decide to cancel or
terminate a lease before the end of its term, in which case we are
typically liable to the lessor for the remaining lease payments
under the term of the lease. Additionally, all of the Group’s
month-to-month leases are cancelable, by the Group or the lessor,
at any time and are not included in our right-of-use asset or
liability. Leases are accounted for as operating or finance leases,
depending on the terms of the lease.
Operating
right-of-use leases are included in operating lease right-of-use
assets, current portion of operating lease obligations and
operating lease obligations, net of current maturities on the
Group’s consolidated balance sheets, as appropriate.
Operating lease right-of-use assets and operating lease liabilities
are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most of
the Group’s leases do not provide an implicit rate to
calculate present value, the Group determines this rate by
estimating the Group’s incremental borrowing rate, utilizing
the borrowing rates associated with the Group’s various debt
instruments. The operating lease right-of-use asset also includes
any lease payments made and excludes lease incentives. Our lease
terms may include options to extend or terminate the lease when it
is reasonably certain that we will exercise that option. Lease
expense for minimum lease payments is recognized on a straight-line
basis over the lease term.
On
January 1, 2019, the Group also adopted ASU No. 2016-02, Leases
(Topic 842) for its long term lease as lessor.
Prior
to January, 2019 the Group accounted for its leases in accordance
with Leases (Topic 840). Leases with characteristics of operating
leases were expensed on a straight-line basis over the life of the
lease on the Group’s consolidated statements of operations
and comprehensive income / (loss).
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(q)
Impairment
of goodwill
The
Group annually performs a qualitative analysis that includes
reviewing the carrying value of intangible assets not subject to
amortization, including goodwill, to determine whether impairment
may exist, or whenever events or changes in circumstances indicate
that the carrying amount of an asset may no longer be
recoverable.
The
excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as goodwill.
After a qualitative analysis indicates an impairment test is
needed, the Group completes a two-step goodwill impairment test.
The first step is to compare the fair values of each reporting unit
to its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill is not
considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value,
the second step is to compare the implied fair value of goodwill to
the carrying value of a reporting unit’s goodwill. The
implied fair value of goodwill is determined in a manner similar to
accounting for a business combination with the allocation of the
assessed fair value determined in the first step to the assets and
liabilities of the reporting unit. The excess of the fair value of
the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. An impairment
loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the
primary technique being a discounted cash flow.
The
Group performed the annual impairment tests on December 31 of each
year. Based on the Group’s assessment, the Group recorded no
goodwill impairment losses during the years ended December 31,
2019, 2018 and 2017, respectively.
(r)
Functional
currencies and foreign currency translation
For
foreign operations where substantially all monetary transactions
are in the local currency, we use the local currency as our
functional currency. The effects of translating financial
statements of foreign operations into our reporting currency are
recognized as a cumulative translation adjustment, net of tax in
“Accumulated other comprehensive income” in the
consolidated statements of shareholders’ equity. Gains or
losses on foreign currency transactions are recorded in income in
the period in which they are incurred.
(s)
Comprehensive
income / (loss)
We
account for comprehensive income in accordance with ASC No. 220,
“Comprehensive Income”, which specifies the
computation, presentation and disclosure requirements for
comprehensive income / (loss). Comprehensive income / (loss)
consists of net income / (loss) and foreign currency translation
adjustments, primarily from fluctuations in foreign currency
exchange rates of our foreign subsidiaries with a functional
currency other than the U.S. dollar.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(t)
Ordinary
share
On
November 22, 2011, the Company filed Amended and Restated
Memorandum and Articles of Association with the Registry of
Corporate Affairs of the BVI Financial Services Commission that on
November 29, 2011 became effective as of the filing date to amend
the Company’s ordinary shares of US$0.01 par value capital
stock to no par value capital stock. Treasury stock is accounted
for using the cost method. When treasury stock is reissued, the
value is computed and recorded using a weighted-average
basis.
On
October 8, 2019, the Company issued bonus shares at the rate of one
ordinary share for every two ordinary shares held, creating
1,030,950 new shares of common stock.
(u)
Net
income per ordinary share
The
Group computes net income per ordinary share using the treasury
stock method. Under the treasury stock method, basic earnings per
share attributable to Euro Tech Holdings Company Limited are
computed by dividing net income attributable to Euro Tech Holdings
Company Limited by the weighted average number of ordinary shares
outstanding during the period. The Group reports both basic
earnings per share, which is based on the weighted average number
of ordinary shares outstanding, and diluted earnings per share,
which is based on the weighted average number of ordinary shares
outstanding and all dilutive potential ordinary shares
outstanding.
Outstanding stock
options are the only dilutive potential shares of the
Company.
(v)
Stock-based
compensation
The
Group determines compensation expense for stock-based awards based
on the estimated fair values at the grant date and recognizes the
related compensation expense over the vesting period. The Group
uses the straight-line amortization method to recognize
compensation expense related to stock-based awards that have only
service conditions. This method recognizes stock compensation
expense on a straight-line basis over the requisite service period
for the entire award.
(w)
Use
of estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
revenue and expenses in the consolidated financial statements and
accompanying notes. Significant accounting estimates reflected in
the Group’s consolidated financial statements include
accounts receivable, net, equity method investment, impairment of
goodwill and long-lived assets (useful life of long-lived assets
disclosed in note 2(n)), income taxes, share-based compensation,
contract assets and contract liabilities. Actual results could
differ from those estimates.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(x)
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.
(y)
Segment
information
The Group reports segment information based on the
“management” approach. The management approach
designates the internal reporting used by management for making
decisions and assessing performance as the source of the
Group’s reportable segments. The Group categorises its
operations into two business segments: Trading and manufacturing,
and Engineering.
(z)
Concentration
Financial
instruments that potentially subject the Group to a concentration
of credit risk consist principally of cash and cash equivalents and
accounts receivable, net. The Group maintains substantially all of
its cash and cash equivalent balances with large financial
institutions which are believed to be high quality
institutions.
The Group is subject to a concentration of risk
because it derives a significant portion of its revenues from a few
customers. The Group’s top customers accounting for
more than 5% of the Group’s revenue generated approximately 34%, 22%, and 27% of consolidated
revenues for the years ended December 31, 2019, 2018 and 2017,
respectively. For the years ended December 31, 2019, 2018 and 2017,
two customers (Customer A : 19%; Customer B : 10%) (2018: one
customer (Customer A : 15%) and 2017: one customer (Customer A : 10%) ) accounted for
more than 10.0% of annual revenues.
The
Group grants trade credit under contractual payment terms,
generally without collateral, to its customers, which include high
credit quality electric utilities, general contractors, owners and
managers of industrial properties and government
departments.
Consequently,
the Group is subject to potential credit risk related to changes in
business and economic factors. At December 31, 2019 and 2018, one
of the Group’s customers individually exceeded 10.0% of
accounts receivable, net. The Group believes the terms and
conditions in its contracts, billing and collection policies are
adequate to minimize the potential credit risk.
(aa)
Finance costs
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(ab)
Warranties
The
suppliers of the Group offer a standard one-year warranty to end
customers of the Group. The Group only provides labour service to
repair or replace parts. The Group does not maintain a general
warranty reserve because historically labour costs for such repair
or replacement have been de minimis.
(ac)
Shipping
and handling costs
Amounts
billed to customers related to shipping and handling are classified
as revenues, and the Group’s shipping and handling costs are
included in cost of revenues.
(ad)
Statutory
reserves
The
Group is required to make appropriation to reserve funds,
comprising the statutory reserve fund and statutory staff welfare
fund, based on after-tax net income determined with generally
accepted accounting principles of the PRC (“PRC
GAAP”).
Appropriations
to the statutory reserve fund is required to be at least 10% of the
after tax net income determined in accordance with PRC GAAP until
the reserve fund is equal to 50% of the entities’ registered
capital.
(ae)
Fair
value measurement
Fair
value is considered to be the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the
Group considers the principal or most advantageous market in which
it would transact and considers assumptions that market
participants would use when pricing the asset or liability. The
established fair value hierarchy requires an entity to maximize the
use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument's
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
The
three levels of inputs to be used to measure fair value
include:
Level 1
Applies
to assets or liabilities for which there are quoted prices in
active markets for identical assets or liabilities.
Level 2
Applies
to assets or liabilities for which there are inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level 3
Applies
to assets or liabilities for which there are unobservable inputs to
the valuation methodology that are significant to the measurement
of the fair value of the assets or liabilities.
Financial
instruments include cash and cash equivalents, restricted cash,
accounts receivable, net, prepayments and other current assets,
contract assets without readily determinable fair value, equity
method investment, accounts payable, bank borrowings, contract
liabilities and other payables and accrued expenses.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(ae)
Fair
value measurement (Cont’d)
The
carrying values of cash and cash equivalents, restricted cash,
accounts receivable, net, prepayments and other current assets,
contract assets, accounts payable, bank borrowings, contract
liabilities and other payables and accrued expenses approximate
their fair value due to their short-term maturities.
(af) Going
concern
As
shown in the Note 23 (iii) of accompanying consolidated financial
statements, the operations and business results of the Group could
be materially adversely affected by coronavirus, which creates an
uncertainty about the Group's ability to continue as a going
concern. Management's plan with new contracts with customers will
alleviate such uncertainty.
(ag)
Recent
accounting pronouncements
Changes
to GAAP are typically established by the FASB in the form of
accounting standards updates (“ASUs”) to the
FASB’s ASC. The Group considers the applicability and impact
of all 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
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The amendments under this pronouncement changed the way all leases
with durations in excess of one year are treated. Under this
guidance, lessees are required to recognize virtually all leases on
the balance sheet as a right-of-use asset and an associated finance
lease liability or operating 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 finance
leases or operating leases. Finance lease liabilities, which
contain provisions similar to capitalized leases under the prior
accounting standards, are amortized as amortization expense and
interest expense in the statement of operations.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(ag)
Recent
accounting pronouncements (Cont’d)
Recently issued
accounting pronouncements
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 June
2016, the FASB issued ASU No. 2016-13, Financial Instruments -
Credit Losses (Topic 326), Measurement of Credit Losses on
Financial Instruments, which introduced an expected credit loss
methodology for the measurement and recognition of credit losses on
most financial instruments, including trade receivables and
off-balance sheet credit exposures. Under this guidance, an entity
is required to consider a broader range of information to estimate
expected credit losses, which may result in earlier recognition of
losses. This ASU also requires disclosure of information regarding
how a company developed its allowance, including changes in the
factors that influenced management’s estimate of expected
credit losses and the reasons for those changes. The ASU and its
related clarifying updates are effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years, with early adoption permitted. The adoption of this standard
will be through a cumulative-effect adjustment to retained earnings
as of the effective date. Based on our historical experience, the
Group does not expect that this pronouncement will have a
significant impact in its consolidated financial statements or on
the estimate of the allowance for uncollectable
accounts.
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, which modifies
the disclosure requirements for Level 1, Level 2 and Level 3
instruments in the fair value hierarchy. The guidance is effective
for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years, with early adoption permitted
for any eliminated or modified disclosures. The adoption of this
standard is not expected to have a material impact on the
Group’s consolidated financial statements or
disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes, which simplifies the accounting for
income taxes, eliminates certain exceptions within ASC No. 740,
Income Taxes, and clarifies certain aspects of the current guidance
to promote consistent application among reporting entities. The
guidance is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years, with early
adoption permitted. Upon adoption, the Group must apply certain
aspects of this standard retrospectively for all periods presented
while other aspects are applied on a modified retrospective basis
through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. The Group is
evaluating the impact this update will have on its consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
3
Lease
obligations
Change
in accounting policy
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments are recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases. The Group elected the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, the Group did not recognize right-of-use assets or
lease liabilities, including not recognizing right-of-use assets or
lease liabilities for existing short-term leases of those assets in
transition. The Group also elected to separate lease and non-lease
components for our real estate leases. Adoption of the new standard
resulted in the recording of additional operating right-of-use
assets and operating lease liabilities of approximately US$133,000,
as of January 1, 2019. The adoption of Topic 842 did not impact the
Group’s retained earnings, consolidated net loss or cash
flows.
The
following is a summary of the lease-related assets and liabilities
recorded as of December 31, 2019:
|
|
Classification on the consolidated balance sheet
|
|
|
|
|
|
|
|
US$’000
|
|
|
Asset
|
|
|
|
|
|
Operating
lease right-of-use assets
|
Operating lease
right-of-use assets
|
|
|
406
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
lease obligations
|
Current
portion of operating lease obligations
|
|
|
170
|
|
|
Non-current
|
|
|
|
|
|
|
Operating
lease obligations
|
Operating lease
obligations, net of current maturities
|
|
|
216
|
|
|
Total
lease obligations
|
|
|
|
386
|
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
3
Lease
obligations (Cont’d)
Change
in accounting policy (Cont’d)
The
following is a summary of the lease terms and discount rates as of
December 31, 2019:
|
Weighted-average
remaining lease term – operating leases
|
|
|
|
|
|
Weighted-average
discount rate - operating
|
5%
|
The
following is a summary of certain information related to the lease
costs for operating leases for the year ended December 31,
2019:
|
|
|
|
|
|
|
Operating lease
cost
|
193
|
|
Short-term lease
cost
|
153
|
|
|
|
|
Total lease
cost
|
346
|
The
following is a summary of other information and supplemental cash
flow information related to operating leases for the year ended
December 31, 2019:
|
Other
information
|
|
|
|
|
|
|
|
|
Cash paid for
amounts included in the measurement of lease
liabilities
|
|
|
Operating cash
flows from operating leases
|
346
|
|
Right-of-use asset
obtained in exchange for new operating lease
obligations
|
460
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
3
Lease
obligations (Cont’d)
Change
in accounting policy (Cont’d)
The
future undiscounted minimum lease payments, as reconciled to the
discounted minimum lease obligation indicated on the Group’s
consolidated balance sheets, under current portion of operating
lease obligations and operating lease obligations, net of current
maturities, as of December 31, 2019 were as follows:
|
|
Operating
lease obligations
|
|
|
|
|
|
|
|
2020
|
196
|
|
2021
|
138
|
|
2022
|
96
|
|
Total minimum lease
payments
|
430
|
|
Financing
component
|
(44)
|
|
Net present value
of minimum lease payments
|
386
|
|
Less: current
portion of operating lease obligations
|
(170)
|
|
Long-term operating
lease obligations
|
216
|
The
financing component for operating lease obligations represents the
effect of discounting the lease payments to their present
value.
The
future minimum lease payments required under operating leases as of
December 31, 2018 as reported in the Group's Annual Report on Form
20-F for the year ended December 31, 2018 under previous ASC 840
guidance were as follows:
|
|
Operating
lease obligations
|
|
|
|
|
|
|
|
2019
|
87
|
|
Total minimum lease
payments
|
87
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
4
Accounts
receivable, net
Accounts
receivable, net consisted of the following at December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
receivables
|
3,622
|
5,201
|
|
Less: allowance for
doubtful accounts
|
(36)
|
(112)
|
|
|
3,586
|
5,089
|
The
roll-forward of activity in the allowance for doubtful accounts was
as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
112
|
109
|
|
(Less) / add:
(reversal in) / provision for allowances
|
(76)
|
3
|
|
Balance at end of
period
|
36
|
112
|
The
following is an aging analysis of accounts receivable, net at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
1,495
|
4,485
|
|
Past
due
|
|
|
|
1-30
days
|
41
|
200
|
|
31-60
days
|
1,343
|
38
|
|
61-90
days
|
99
|
17
|
|
Greater than or
equal to 91 days
|
608
|
349
|
|
|
2,091
|
604
|
|
|
3,586
|
5,089
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
5
Prepayments
and other current assets
Prepayment and
other current assets mainly represent deposits for purchases and
services, rental and utilities deposits, and prepaid
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
paid
|
344
|
259
|
|
Prepayments
|
151
|
59
|
|
Other
receivables
|
251
|
156
|
|
Other tax
recoverable
|
2
|
73
|
|
|
748
|
547
|
6
Contract
assets and liabilities
Contracts with
customers usually stipulate the timing of payment, which is defined
by the terms found within the various contracts under which work
was performed during the period. Therefore, contract assets and
liabilities are created when the timing of costs incurred on work
performed does not coincide with the billing terms.
The
Group’s consolidated balance sheets present contract assets
which contains unbilled revenue (previously identified as costs and
estimated earnings in excess of billings) associated with contract
work that has been completed but not paid by customers, that are
generally due once the job is completed and approved.
Contract assets
consisted of the following at December 31:
The
Group’s consolidated balance sheets present contract
liabilities which contains deferred revenue (previously identified
as billings in excess of costs and estimated earnings on
uncompleted contracts).
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
6
Contract
assets and liabilities (Cont’d)
Contract
liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
869
|
1,370
|
The
following table provides information about contract assets and
contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
assets
|
441
|
899
|
|
Contract
liabilities
|
(869)
|
(1,370)
|
|
Net contract
liabilities
|
(428)
|
(471)
|
The
difference between the opening and closing balances of the
Group’s contract assets and contract liabilities primarily
results from the timing of the Group’s billings in relation
to its performance of work. The amounts of revenue recognized in
the period that were included in the opening contract liability
balances were US$1,225,000 and US$1,247,000 for the years ended
December 31, 2019 and 2018, respectively. The revenue consists
primarily of work performed on previous billings to
customers.
The net
liabilities position for contracts in process consisted of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and estimated
earnings on uncompleted contracts
|
5,150
|
6,354
|
|
Less: billings to
date
|
(5,578)
|
(6,825)
|
|
|
(428)
|
(471)
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
6
Contract
assets and liabilities (Cont’d)
The net
liabilities position for contracts in process is included within
the contract asset and contract liability in the accompanying
consolidated balance sheets as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled
revenue
|
441
|
899
|
|
Deferred
revenue
|
(869)
|
(1,370)
|
|
|
(428)
|
(471)
|
7
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
85
|
96
|
|
Work in
progress
|
29
|
21
|
|
Finished
goods
|
472
|
284
|
|
|
586
|
401
|
Management
continuously reviews obsolete and slow moving inventories and
assesses the inventory valuation to determine if the write-down of
inventories is deemed appropriate. For the years ended December 31,
2019, and 2018, write-down of inventories amounted to US$35,000 and
(US$5,000), respectively, which were charged / (credited) to cost
of revenue in consolidated statements of operations and
comprehensive income / (loss).
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
8
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
premises*
|
1,866
|
1,866
|
|
Leasehold
improvements
|
155
|
156
|
|
Furniture, fixtures
and office equipment
|
511
|
591
|
|
Motor
vehicles
|
173
|
173
|
|
Testing
equipment
|
37
|
37
|
|
|
2,742
|
2,823
|
|
|
|
|
|
Less: Accumulated
depreciation
|
(2,042)
|
(2,069)
|
|
|
700
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
69
|
60
|
61
|
* Far
East earns rental income from a property in Beijing, PRC for which
it does not hold the title. Far East is investigating various ways
in which to obtain the title but has not formulated a specific plan
as of the date of issuance of this consolidated financial
statements. The net book value of the property at December 31, 2019
is approximately US$96,000 (2018: US$100,000).
9
Interests
in affiliates
Investments in
affiliates are accounted for using the equity method of
accounting.
Far
East is holding 19.4% (2018: 19.4%) equity interests in Blue Sky, a
company incorporated in the PRC, with total cost of investment
US$5,540,000. Blue Sky provides a comprehensive service for design,
general contract, equipment manufacturing, installation, testing
and operation management of the treatment of waste gases emitted
from various boilers and industrial furnaces of power plants, steel
works and chemical plants since 2000.
Blue
Sky has listed its shares on the New Third Board in the PRC since
November 17, 2015 and suspended trading from August 15, 2017 and
resumed trading on February 2, 2018.
The
Group’s interest in Blue Sky has been counted for as an
affiliate using the equity method as the Group has representation
on both the Board and Executive Committee of Blue Sky, and the
ability to participate in the decision-making process.
During
the year ended December 31, 2017, the Group’s equity in Blue
Sky was diluted subsequent to the issuance of new ordinary shares
by Blue Sky to other shareholders. A net profit on deemed disposal
of an affiliate of US$128,000 had been recognized in the
consolidated statement of operations and comprehensive income /
(loss) for that year.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
9
Interests
in affiliates (Cont’d)
A
summary of the financial information of the affiliate, Blue Sky, is
set forth below:
|
|
|
|
|
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
Current
assets
|
41,614
|
46,925
|
|
|
|
|
|
Non-current
assets
|
15,666
|
19,450
|
|
Total
assets
|
57,280
|
66,375
|
|
|
|
|
|
Total
liabilities
|
(31,108)
|
(40,330)
|
|
Total
shareholders’ equity
|
26,172
|
26,045
|
|
|
|
|
|
|
|
|
Operating
results:
|
|
|
|
|
|
|
|
Net
sales
|
40,348
|
50,165
|
|
|
|
|
|
Operating income /
(loss)
|
677
|
(5,194)
|
|
|
|
|
|
Net income /
(loss)
|
704
|
(4,048)
|
Far
East previously held 20% equity interests in Zhejiang Jia Huan
Electronic Co. Ltd. (“Jia Huan”), a company
incorporated in the PRC, with total cost of investment
US$2,486,000. Jia Huan provides a comprehensive service for
environmental protection business since 1969 and is based in Jin
Hua, Zhejiang. On March
5, 2018, Far East 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 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 the Company, in full in May 2018. The Company made gain of
US$1,522,000 on this disposal.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
10
Other
payables and accrued expenses
Other
payables and accrued expenses mainly represent deposits received
from customers and accruals for operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
payables
|
80
|
80
|
|
Deposits received
from customers
|
31
|
73
|
|
Rental deposit
received
|
12
|
5
|
|
Other
payables
|
941
|
1,068
|
|
Other tax
payables
|
78
|
24
|
|
|
1,142
|
1,250
|
11
Ordinary
share
On
October 8, 2019, the Company issued bonus shares at the rate of one
ordinary share for every two ordinary shares held, creating
1,030,950 new shares of common stock.
During
the year ended December 31 2018, there was no movement with the
Company’s issued ordinary shares and outstanding
shares.
Number
of outstanding shares at year end of:
|
|
|
|
|
|
|
|
|
Shares
issued
|
3,260,559
|
2,229,609
|
|
Less: shares under
treasury stock
|
(167,700)
|
(167,700)
|
|
|
3,092,859
|
2,061,909
|
12
Goodwill
The
Group accounts for acquisitions of subsidiaries in accordance with
FASB ASC Subtopic 805-10, Business Combinations. Goodwill
represents the excess of acquisition cost over the estimated fair
value of net assets acquired in relation to the acquisition of
Yixing Pact Environmental Technology Co., Ltd. and Pact Asia
Pacific Limited in 2005.
As of
December 31, 2019, the Group completed the annual impairment test
(i.e. comparing the carrying amount of the net assets, including
goodwill, with the fair value of Yixing Pact Environmental
Technology Co., Ltd. and Pact Asia Pacific Limited as of December
31, 2019).
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
13
PRC
statutory reserves
Under
the relevant PRC laws and regulations, the PRC subsidiaries are
required to appropriate a certain percentage of their respective
net income to two statutory funds i.e. the statutory reserve fund
and the statutory staff welfare fund. The PRC subsidiaries can also
appropriate certain amount of its net income to the enterprise
expansion fund.
(i)
Statutory reserve
fund
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate at least 10% of its net income to the
statutory reserve fund until such fund reaches 50% of its
registered capital. The statutory reserve fund can be utilised upon
the approval by the relevant authorities, to offset accumulated
losses or to increase its registered capital, provided that such
fund be maintained at a minimum of 25% of its registered
capital.
Under
the PRC laws and regulations, the PRC subsidiaries are restricted
in their ability to transfer certain of its net assets in the form
of dividend payments, loans or advances. The amounts restricted
include paid-in capital and statutory reserves, as determined
pursuant to PRC generally accepted accounting principles, totaling
US$3,174,000 as at December 31, 2019 (2018: US$3,174,000 and 2017:
US$3,520,000).
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate a certain amount of its net income to the
statutory staff welfare fund determined by it. The statutory staff
welfare fund can only be used to provide staff welfare facilities
and other collective benefits to its employees. This fund is
non-distributable other than upon liquidation of the PRC
subsidiaries.
(iii)
Enterprise
expansion fund
The
enterprise expansion fund shall only be used to make up losses,
expand the PRC subsidiaries’ production operations, or
increase the capital of the subsidiaries. The enterprise expansion
fund can be utilised upon approval by relevant authorities, to
convert into registered capital and issue bonus capital to existing
investors, provided that such fund be maintained at a minimum of
25% of its registered capital.
14
Other
income / (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange (loss) /
gain, net
|
(30)
|
7
|
(46)
|
|
Rental
income
|
82
|
51
|
32
|
|
|
52
|
58
|
(14)
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
15
Income
taxes
No
income tax arose in the United States of America by the Group for
the years ended December 31, 2019, 2018 and 2017.
The
Company and Pact Asia Pacific Limited are exempt from taxation in
the British Virgin Islands (“BVI”).
Far
East and Euro Tech (China) Limited provided for Hong Kong profits
tax at a rate of 16.5% in year 2019 (2018 and 2017: 16.5%) on the
basis of their income for financial reporting purposes, adjusting
for income and expense items which are not assessable or deductible
for profits tax purposes.
Euro
Tech Trading (Shanghai) Limited (“ETTS”), a subsidiary
of Far East, provides for PRC Enterprise Income Tax
(“EIT”) at a rate of 25% (2018 and 2017: 25%), after
offsetting losses brought forward, if any, on the basis of its
income for financial reporting purposes, adjusting for income and
expense items which are not assessable or deductible for PRC
Enterprise Income Tax purposes. As of December 31, 2019, ETTS had
an assessable loss carried forward of US$518,328 as agreed by the
local tax authority to offset its profit for the forth coming years
(2018: US$801,751 and 2017: US$703,650). Such loss will expire in 5
years.
Shanghai Euro Tech
Limited (“SET”), a subsidiary of Far East, provides for
PRC Enterprise Income Tax at a rate of 25% (2018 and 2017: 25%),
after offsetting losses brought forward, if any, on the basis of
its income for financial reporting purposes, adjusting for income
and expense items which are not assessable or deductible for PRC
Enterprise Income Tax purposes. As of December 31, 2019, SET had an
assessable loss carried forward of US$444,192 as agreed by the
local tax authority to offset its profit for the forth coming years
(2018: US$317,098 and 2017: US$254,265). Such loss will expire in 5
years.
Shanghai Euro Tech
Environmental Engineering Company Limited (“SETEE”), a
subsidiary of Far East, provides for PRC Enterprise Income Tax at a
rate of 25% (2018 and 2017: 25%), after offsetting losses brought
forward, if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax purposes. As
of December 31, 2019, SETEE had an assessable loss carried forward
of US$380,591 as agreed by the local tax authority to offset its
profit for the forth coming years (2018: US$854,388 and 2017:
US$895,579). Such loss will expire in 5 years.
Yixing
Pact Environmental Technology Co. Ltd. (“Yixing”), a
subsidiary of Far East, provides for PRC Enterprise Income Tax at a
rate of 25% (2018 and 2017: 25%), after offsetting losses brought
forward, if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax purposes. As
of December 31, 2019, Yixing had an assessable loss carried forward
of US$1,664,275 as agreed by the local tax authority to offset its
profit for the forth coming years (2018: US$1,228,223 and 2017:
US$512,252). Such loss will expire in 5 years.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
15
Income
taxes (Cont’d)
Chongqing Euro Tech
Rizhi Technology Co., Ltd. (“CQ”), Rizhi Euro Tech
Instrument (Shaanxi) Co., Ltd. (“RZ”) and Guangzhou
Euro Tech Environmental Equipment Co., Ltd. (“GZ”),
subsidiaries of Far East, provide for PRC Enterprise Income Tax at
a rate of 25% (2018 and 2017: 25%), after offsetting losses brought
forward, if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax purposes.
CQ, RZ and GZ had an assessable loss carried forward of US$ Nil,
US$ Nil and US$ Nil respectively as agreed by the local tax
authority to offset its profit for the forth coming years (2018:
US$135,479, US$ Nil and US$ Nil). Such loss will expire in 5
years.
Under
the New Enterprise Income Tax Law and the implementation rules,
profits of the PRC subsidiaries earned on or after January 1, 2008
and distributed by the PRC subsidiaries to foreign holding company
are subject to a withholding tax at a rate of 10% unless reduced by
tax treaty. Aggregate undistributed earnings of Far East’s
subsidiaries located in the PRC that are available for distribution
to Far East of approximately US$0.6 million at December 31, 2019
(2018: US$0.6 million and 2017: US$0.5 million) are intended to be
reinvested, and accordingly, no deferred taxation has been made for
the PRC dividend withholding taxes that would be payable upon the
distribution of those amounts to Far East. Distributions made out
of pre January 1, 2008 retained earnings will not be subject to the
withholding tax.
The
Company and its subsidiaries are based in Hong Kong and PRC and
file Hong Kong profits tax return and PRC EIT return, respectively.
The components of the provision / (credit) for income taxes expense
/ (credit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
expense
|
|
|
|
|
Hong Kong profits
tax and the PRC EIT
|
-
|
(346)
|
-
|
|
Income tax
credit
|
-
|
(346)
|
-
|
|
|
|
|
|
|
Deferred tax
expenses
|
|
|
|
|
Hong Kong and the
PRC
|
37
|
34
|
28
|
|
Total deferred tax
expense
|
37
|
34
|
28
|
|
|
|
|
|
|
Total expense /
(credit)
|
37
|
(312)
|
28
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
15
Income
taxes (Cont’d)
The
items comprising the difference between income taxes computed at
the Hong Kong profits tax and PRC EIT statutory tax rates in effect
for 2019, 2018 and 2017 and our effective tax rates were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
(310)
|
(963)
|
(564)
|
|
Computed tax using
respective companies’ statutory tax rates
|
(69)
|
(254)
|
(94)
|
|
Change in valuation
allowances
|
(30)
|
68
|
120
|
|
Under /
(over-provision) for income taxes in prior years
|
5
|
(131)
|
-
|
|
Non-deductible
expenses
|
131
|
5
|
2
|
|
Income taxes
expense / (credit) at effective tax rate
|
37
|
(312)
|
28
|
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
losses
|
858
|
975
|
|
Temporary
differences
|
(19)
|
(17)
|
|
Less: Valuation
allowances
|
(752)
|
(834)
|
|
Net deferred tax
assets
|
87
|
124
|
16
Net
income per ordinary share
The
calculation of the basic and diluted net income per ordinary share
is based on the following data:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of ordinary shares for the purposes of basic and diluted net
income per share
|
2,301,993
|
2,061,909
|
2,061,909
|
The
common stock equivalents are anti-dilutive because of the loss for
the year.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
17
Stock
options
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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
17
Stock
options (Cont’d)
2019
Stock option and incentive plan (Cont’d)
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.
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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
17
Stock
options (Cont’d)
2019
Stock option and incentive plan (Cont’d)
During
the year ended December 31, 2019, the Company granted such options
to its officers, directors and employees, which allow them to
purchase up to 51,000 ordinary shares. The exercise price of all
options granted is US$2.60 per share. The stock options granted are
exercisable on January 1, 2022 and terminate on April 18,
2029.
The
Company estimate the fair value of the options granted under the
Binomial pricing model at US$2.324 per share.
Changes
in outstanding options under various plans mentioned above were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Granted
|
51,000
|
2.60
|
-
|
-
|
-
|
-
|
|
Outstanding, end of
year
|
51,000
|
2.60
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Exercisable, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
As of
December 31, 2019, 2018 and 2017, there was no unrecognized
stock-based compensation expense related to unvested stock options.
The compensation expense for the year is
US$10,358.
The
Group applies the provisions of ASC No. 718-10, which requires to
recognise expense related to the fair value of stock-based
compensation awards, including employee stock options.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
17
Stock
options (Cont’d)
The
Binomial option-pricing model is used to estimate the fair value of
the options granted. This requires the input of subjective
assumptions, including the expected volatility of stock price,
expected option term, expected risk-free rate over the expected
option term and expected dividend yield rate over the expected
option term. Because changes in subjective input assumptions can
materially affect the fair value estimate, in directors’
opinion, the existing model may not necessarily provide a
realisable measure of the fair value of the stock options. Expected
volatility is based on historical volatility in the 180 days prior
to the issue of the options. Expected option term and dividend
yield rate are based on historical trends. Expected risk-free rate
is based on US Treasury securities with similar maturities as the
expected terms of the options at the date of grant.
18
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 plus 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 (“MPF
scheme”), a defined contribution scheme managed by an
independent trustee on December 1, 2000, Far East and its employees
who joined Far East subsequently make monthly contributions to the
scheme at 5% of the employee’s cash income as defined under
the Mandatory Provident Fund Schemes Ordinance. Under the MPF
scheme, the employer and its employees are each required to make
contributions to the plan at 5% of the employees' relevant income,
subject to a cap of monthly relevant income of HK$30,000.
Contributions to the plan vest immediately.
During
the years ended December 31, 2019, 2018 and 2017, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately US$332,000,
US$278,000 and US$281,000 respectively.
As
stipulated by the rules and regulations in the PRC, the PRC’s
subsidiaries contributes to state-sponsored retirement plans for
its employees in Mainland China. PRC’s subsidiaries’
contribution range from 14% to 20% of the basic salaries of its
employees, and have 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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
19
Risk
factors
Financial risk
factors
The
Group’s activities expose it to a variety of financial risks:
credit risk and foreign exchange rate risk.
(i)
Credit
risk
The
Group has no significant concentration of credit risk, cash in
banks in Hong Kong and PRC is insured with limit of approximately
US$64,000 and US$72,000, respectively per bank per each depositor.
Cash transactions are limited to high credit quality
banks.
(ii)
Foreign
exchange rate risk
The
Group 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 dollars, Renminbi and Euros.
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.
20
Related
party transactions
Other
than compensation to directors and stock options available to the
directors, there were no transactions with other related parties in
the years 2019, 2018 and 2017.
21
Commitments
and contingencies
(i)
Banking
facilities
As at
December 31, 2019 and 2018, the Group had various banking
facilities available for overdraft and import and export credits
from which the Group can draw up to approximately US$897,000 and
US$897,000 respectively, of which approximately US$778,000 and US$195,000 were utilised for
issuance of bank guarantees as security for the performance of
various contracts with customers and import loans. The various
banking facilities are secured by a property located in Hong Kong
(replaced by a bank deposit of approximately US$900,000 after the
sale of this property in February 2020) and various blanket counter
indemnities and counter indemnities. The weighted average interest
rate for import loans as at December 31, 2019 was 4.9% per annum
(December 31, 2018: 4% per annum). For the years ended December 31,
2019 and 2018, the average dollar amount of the bank borrowings was
approximately US$92,000 and US$125,000 respectively and average
interest rates were approximately 4.9% and 4% per annum
respectively for the years ended December 31, 2019 and
2018.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
21
Commitments
and contingencies (Cont’d)
(ii)
Non-controlling
interest put option
The
Group granted the non-controlling interest of Yixing Pact
Environmental Technology Co., Ltd. and Pact Asia Pacific Limited a
put option, which is effective from 2009, requiring the Group to
acquire part or all remaining shares of these two companies at a
purchase price per share calculated by 5.2 times of their average
net income for the three prior fiscal years divided by total number
of shares outstanding at the time of exercise of such option. Such
put option did not have an expiry date.
(iii)
Insurance
The
Group carries insurance policies to cover various risks, primarily
general liability, automobile liability, workers compensation and
employee medical expenses under which the Group’s related
risks will be covered for the agreed coverage from the insurance
companies.
(iv)
Purchase
commitments
To
manage the risk of changes in material prices and subcontracting
costs used in tendering bids for engineering contracts, most of the
time, the Group obtains firm quotations from suppliers and
subcontractors before submitting a bid. These quotations do not
include any quantity guarantees. As soon as the Group is advised
that its bid is successful, the Group enters into firm contracts
with most of its materials suppliers and sub-contractors, thereby
mitigating the risk of future price variations affecting the
contract costs.
(v)
Pending
litigations
In the
ordinary course of business, the Group is from time to time
involved in legal proceedings and litigation relating to disputes. There are no legal proceedings and litigations that have in the recent past had, or to the Group's
knowledge, are reasonably possible to have, a
material impact on the Group's consolidated financial
positions, results of operations or cash flows. The Group did not
accrue any loss
contingencies in this
respect as of December 31, 2019, 2018 and 2017 as the Group did not
consider an unfavorable outcome in any material respects in these legal
proceedings and litigations to be probable.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
22
Segment
information
(i)
The
Group reports under two segments: Trading and manufacturing, and
Engineering.
Operating income
represents total revenues less operating expenses, excluding other
expense, interest and income taxes. The identifiable assets by
segment are those used in each segment’s operations.
Intersegment transactions are not significant and have been
eliminated to arrive at consolidated totals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
Trading and
manufacturing
|
11,877
|
13,770
|
11,001
|
|
Engineering
|
5,522
|
6,334
|
6,349
|
|
|
17,399
|
20,104
|
17,350
|
|
Operating
loss
|
|
|
|
|
Trading and
manufacturing
|
(102)
|
(119)
|
(153)
|
|
Engineering
|
(158)
|
(821)
|
(306)
|
|
Unallocated
corporate expenses
|
(180)
|
(119)
|
(115)
|
|
|
(440)
|
(1,059)
|
(574)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
Trading and
manufacturing
|
54
|
43
|
41
|
|
Engineering
|
15
|
17
|
20
|
|
|
69
|
60
|
61
|
|
Capital
expenditures, gross
|
|
|
|
|
Trading and
manufacturing
|
17
|
79
|
13
|
|
Engineering
|
4
|
6
|
5
|
|
|
21
|
85
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Trading and
manufacturing
|
9,843
|
9,951
|
|
Engineering
|
12,370
|
13,114
|
|
|
22,213
|
23,065
|
|
Liabilities
|
|
|
|
Trading and
manufacturing
|
4,319
|
4,233
|
|
Engineering
|
2,557
|
3,287
|
|
|
6,876
|
7,520
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
22
Segment
information (Cont’d)
(ii)
Geographical
analysis of revenue by customer location is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
-
|
|
|
|
|
The
PRC
|
6,886
|
8,026
|
7,740
|
|
Hong
Kong
|
10,169
|
11,169
|
9,270
|
|
Others
|
344
|
909
|
340
|
|
|
17,399
|
20,104
|
17,350
|
(iii)
Long-lived assets
(1)
Geographical
analysis of long-lived assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Kong
|
478
|
504
|
|
The
PRC
|
222
|
250
|
|
|
700
|
754
|
(1)
Long-lived assets
represent property, plant and equipment, net.
(iv)
Major
suppliers
Details
of individual suppliers accounting for more than 5% of the
Group’s purchases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier
A
|
53%
|
55%
|
45%
|
|
Supplier
B
|
7%
|
8%
|
10%
|
|
Supplier
C
|
6%
|
7%
|
9%
|
|
Supplier
D
|
6%
|
7%
|
4%
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
22
Segment
information (Cont’d)
(v)
Major
customers
Details
of individual customers accounting for more than 5% of the
Group’s revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
19%
|
15%
|
10%
|
|
Customer
B
|
10%
|
-
|
7%
|
|
Customer
C
|
5%
|
-
|
-
|
|
Customer
D
|
-
|
7%
|
-
|
|
Customer
E
|
-
|
-
|
5%
|
|
Customer
F
|
-
|
-
|
5%
|
23
Subsequent
events
(i)
In
February 2020, the Group sold a property in Hong Kong for a total
consideration of approximately US$1,859,000 with gain on disposal
of approximately US$1,429,000.
(ii)
On
March 6, 2020, the Group declared a special cash dividend of an
aggregate US$1,299,001, which dividend was paid to all holders of
record of our ordinary shares as of March 20, 2020.
(iii)
In December 2019, a novel strain of coronavirus surfaced, and has
spread around the world, with resulting business and social
disruption. The coronavirus was declared a Public Health Emergency
of International Concern by the World Health Organization on
January 30, 2020. The operations and business results of the Group
could be materially adversely affected. The extent to which the
coronavirus may impact business activity will depend on future
developments, which are uncertain and cannot be predicted,
including new information which may emerge concerining the severity
of the coronavirus and the actions required to contain the
coronavirus or treat its impact, among others.
ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION
TECHNOLOGY COMPANY LIMITED
Consolidated Financial Statements
|
Table of Contents
|
|
|
|
Page
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-46
|
|
Consolidated
Balance Sheets As Of December 31, 2019 and 2018
|
F-47
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2019,
2018 and 2017
|
F-48
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2019,
2018 and 2017
|
F-49
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended
December 31, 2019, 2018 and 2017
|
F-50
|
|
Notes
to the Consolidated Financial Statements
|
F-51
to F-73
|
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Shareholders of
Zhejiang Tianlan Environmental Protection Technology Company
Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Zhejiang Tianlan Environmental Protection Technology Company
Limited (the “Company”) and its subsidiaries
(hereinafter collectively referred to as the “Group”)
as of December 31, 2019 and 2018, and the related consolidated
statements of operations, shareholders’ equity and cash flows
for the two years in the period ended December 31, 2019, and the
related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the
financial position of the Group as of December 31, 2019 and 2018,
the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2019, in conformity with
the accounting principles generally accepted in the United States
of America.
Basis for opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Group’s consolidated financial statements
based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Group in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Group is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our
audit, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ Union Power HK CPA Limited
We have served as the Company’s auditor since
2018.
Hong Kong, the People’s Republic of China
June 5, 2020
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
11,614
|
25,184
|
|
Accounts
receivable, net
|
138,778
|
153,585
|
|
Prepayments and
other current assets
|
52,859
|
28,978
|
|
Contract
assets
|
80,961
|
100,994
|
|
Inventories
|
5,755
|
11,963
|
|
Short-term
investments
|
800
|
-
|
|
|
|
|
|
Total current
assets
|
290,767
|
320,704
|
|
|
|
|
|
Property, plant and
equipment, net
|
87,781
|
92,778
|
|
Intangible assets,
net
|
927
|
1,079
|
|
Land use right,
net
|
5,291
|
5,440
|
|
Deferred tax
assets
|
13,970
|
14,238
|
|
Other non-current
assets
|
-
|
17,512
|
|
Long-term
investments
|
1,492
|
1,880
|
|
|
|
|
|
Total non-current
assets
|
109,461
|
132,927
|
|
|
|
|
|
Total
assets
|
400,228
|
453,631
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
Current
liabilities:
|
|
|
|
Bank
borrowings
|
26,841
|
45,000
|
|
Accounts
payable
|
89,372
|
106,644
|
|
Other payables and
accrued expenses
|
7,583
|
16,378
|
|
Contract
liabilities
|
55,898
|
41,046
|
|
Other taxes
payable
|
9,531
|
11,108
|
|
Current portion of
finance lease obligations
|
25,785
|
32,275
|
|
|
|
|
|
Total current
liabilities
|
215,010
|
252,451
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
Finance lease
obligations, net of current maturities
|
-
|
23,178
|
|
Deferred government
grant
|
2,349
|
-
|
|
|
|
|
|
Total non-current
liabilities
|
2,349
|
23,178
|
|
|
|
|
|
Total
liabilities
|
217,359
|
275,629
|
|
|
|
|
|
Commitments and
contingencies (Note 22)
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
Share
capital
82,572,000
(2018: 82,572,000) no par value shares authorised, issued and
outstanding
|
82,572
|
82,572
|
|
Capital
reserve
|
35,510
|
35,566
|
|
PRC statutory
reserve
|
14,421
|
13,903
|
|
Retained
earnings
|
46,423
|
42,099
|
|
|
|
|
|
Total
shareholders’ equity attributable to Zhejiang Tianlan
Environmental Protection Technology Company Limited
|
178,926
|
174,140
|
|
Non-controlling
interests
|
3,943
|
3,862
|
|
|
|
|
|
Total
shareholders’ equity
|
182,869
|
178,002
|
|
|
|
|
|
|
|
|
|
Total liabilities
and shareholders’ equity
|
400,228
|
453,631
|
The
accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial
statements.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
277,581
|
330,244
|
422,323
|
|
|
|
|
|
|
Cost of
revenue
|
(227,632)
|
(274,062)
|
(339,488)
|
|
|
|
|
|
|
Gross
profit
|
49,949
|
56,182
|
82,835
|
|
|
|
|
|
|
Selling and
administrative expenses
|
(43,739)
|
(48,546)
|
(52,713)
|
|
|
|
|
|
|
Operating
income
|
6,210
|
7,636
|
30,122
|
|
|
|
|
|
|
Interest
income
|
50
|
53
|
75
|
|
Interest
expense
|
(2,258)
|
(2,998)
|
(2,037)
|
|
Other income,
net
|
6,276
|
8,561
|
1,887
|
|
Other
losses
|
(5,624)
|
(47,446)
|
-
|
|
|
|
|
|
|
Income/(loss)
before income tax
|
4,654
|
(34,194)
|
30,047
|
|
|
|
|
|
|
Income taxes
(expense)/credit
|
(296)
|
7,967
|
(3,832)
|
|
|
|
|
|
|
Net
income/(loss)
|
4,358
|
(26,227)
|
26,215
|
|
Net income/(loss)
attributable to non-controlling interests
|
484
|
(419)
|
19
|
|
Net income/(loss)
attributable to Zhejiang Tianlan Environmental Protection
Technology Company Limited’s shareholders
|
4,842
|
(26,646)
|
26,234
|
|
|
|
|
|
|
Net income/(loss)
per ordinary share attributable to Zhejiang Tianlan Environmental
Protection Technology Company Limited’s
shareholders
|
|
|
|
|
|
|
|
|
|
Weighted average
ordinary shares outstanding
|
82,572,000
|
82,572,000
|
82,539,123
|
|
|
|
|
|
The
accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial
statements.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income/(loss)
|
4,358
|
(26,227)
|
26,215
|
|
Adjustments to
reconcile net income/(loss) to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
|
6,556
|
11,755
|
12,647
|
|
Amortisation of
intangible assets
|
152
|
152
|
152
|
|
Amortisation of
land use right
|
149
|
149
|
149
|
|
Gain on disposal of
property, plant and equipment
|
(39)
|
-
|
-
|
|
Impairment loss on
property, plant and equipment
|
-
|
33,500
|
-
|
|
Bad debts written
off
|
5,383
|
13,946
|
-
|
|
Proceeds from
deferred government grant
|
2,349
|
-
|
-
|
|
Property, plant and
equipment written off
|
14
|
6
|
-
|
|
Deferred tax
assets
|
268
|
(7,969)
|
(405)
|
|
Investment
loss
|
241
|
-
|
-
|
|
Increase in
allowance for doubtful accounts
|
2,437
|
-
|
-
|
|
(Increase)/decrease
in current assets:
|
|
|
|
|
Accounts
receivable, net
|
11,432
|
12,987
|
(15,418)
|
|
Prepayments and
other current assets
|
(6,369)
|
1,403
|
9,890
|
|
Contract
assets
|
20,033
|
18,262
|
(48,470)
|
|
Other tax
receivables
|
-
|
-
|
215
|
|
Inventories
|
6,208
|
3,154
|
(2,012)
|
|
Increase/(decrease)
in current liabilities:
|
|
|
|
|
Accounts
payable
|
(17,272)
|
(20,785)
|
9,490
|
|
Other payables and
accrued expenses
|
(8,795)
|
(3,295)
|
3,715
|
|
Contract
liabilities
|
14,852
|
(11,731)
|
17,552
|
|
Other taxes
payable
|
(1,577)
|
22
|
3,596
|
|
Income tax
(paid)/refunded
|
(4,299)
|
(8,796)
|
1,520
|
|
|
|
|
|
|
Net cash provided
by operating activities
|
36,081
|
16,533
|
18,836
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of
intangible assets
|
-
|
(8)
|
-
|
|
Purchase of
property, plant and equipment
|
(1,584)
|
(913)
|
(3,535)
|
|
Purchase of
long-term investments
|
-
|
(111)
|
(1,991)
|
|
Proceeds from sale
of long-term investments
|
-
|
133
|
-
|
|
Proceeds from sale
of subsidiaries
|
-
|
7,717
|
-
|
|
Proceeds from sale
of partial shareholding in a subsidiary
|
510
|
-
|
-
|
|
Proceeds from sale
of property, plant and equipment
|
50
|
121
|
249
|
|
Purchase of
short-term investments
|
(800)
|
-
|
-
|
|
|
|
|
|
|
Net cash (used
in)/provided by investing activities
|
(1,824)
|
6,939
|
(5,277)
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of shares
|
-
|
2,450
|
7,800
|
|
Repayments of bank
borrowings
|
(63,000)
|
(53,000)
|
(48,000)
|
|
Proceeds from bank
borrowings
|
44,841
|
65,000
|
56,000
|
|
Dividend paid to
shareholders
|
-
|
(9,908)
|
(9,496)
|
|
Payment of
principal obligations under finance leases
|
(29,668)
|
(28,615)
|
(27,623)
|
|
|
|
|
|
|
Net cash used in
financing activities
|
(45,827)
|
(24,073)
|
(21,319)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in
cash and cash equivalents
|
(13,570)
|
(601)
|
(7,760)
|
|
Cash and cash
equivalents
|
|
|
|
|
Beginning of
year
|
25,184
|
25,785
|
33,545
|
|
|
|
|
|
|
End of
year
|
11,614
|
25,184
|
25,785
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
|
Interest
payment
|
2,258
|
2,924
|
1,966
|
|
Income tax
payments
|
5,237
|
8,796
|
1,520
|
Finance
leases (disclosed in accompanying Note 3)
The
accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial
statements.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION
TECHNOLOGY COMPANY LIMITED’S
SHAREHOLDERS
|
|
|
|
|
|
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
December 31,
2016
|
81,372
|
26,480
|
11,636
|
65,394
|
1,913
|
186,795
|
|
Net income /
(loss)
|
-
|
-
|
-
|
26,234
|
(19)
|
26,215
|
|
Dividend
paid
|
-
|
-
|
-
|
(9,496)
|
-
|
(9,496)
|
|
Appropriation of
reserves
|
-
|
-
|
2,486
|
(2,486)
|
-
|
-
|
|
Issuance of
share
|
1,200
|
6,000
|
-
|
-
|
600
|
7,800
|
|
Balance
at
December 31,
2017
|
82,572
|
32,480
|
14,122
|
79,646
|
2,494
|
211,314
|
|
Net income /
(loss)
|
-
|
-
|
-
|
(26,646)
|
419
|
(26,227)
|
|
Dividend
paid
|
-
|
-
|
-
|
(9,908)
|
-
|
(9,908)
|
|
Capitalization of
gain on disposal of subsidiaries to the shareholders
|
-
|
1,874
|
-
|
-
|
(1,501)
|
373
|
|
Appropriation of
reserves
|
-
|
1,212
|
(219)
|
(993)
|
-
|
-
|
|
Issuance of
share
|
-
|
-
|
-
|
-
|
2,450
|
2,450
|
|
Balance
at
December 31,
2018
|
82,572
|
35,566
|
13,903
|
42,099
|
3,862
|
178,002
|
|
Net income /
(loss)
|
-
|
-
|
-
|
4,842
|
(484)
|
4,358
|
|
Appropriation of
reserves
|
-
|
-
|
518
|
(518)
|
-
|
-
|
|
Others
|
-
|
(56)
|
-
|
-
|
565
|
509
|
|
Balance
at
December 31,
2019
|
82,572
|
35,510
|
14,421
|
46,423
|
3,943
|
182,869
|
|
|
|
|
|
|
|
|
The
accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial
statements.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organization
and business
Zhejiang Tianlan Environmental Protection
Technology Company Limited (the “Company”) was
incorporated in Hangzhou City,
Zhejiang Province, the People's Republic of China
(“PRC”) on May 18, 2000. The Company is a limited
liability company by shares with an operating period up to long
term.
The
Company provides a comprehensive service for design, general
contract, equipment manufacturing, installation, testing and
operation management of the treatment of waste gases emitted from
various boilers and industrial furnaces of power plants, steel
works and chemical plants since 2000.
The
Company has listed its shares on the New Third Board in the PRC
since November 17, 2015 and suspended trading from August 15, 2017
and resumed trading on February 2, 2018.
The
Group’s principal subsidiaries at December 31, 2019 are set
out below.
|
Name of
entity
|
Ownership interest
held by the Group
|
Place of
incorporation and principal place of operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hangzhou Tianlan
Environmental Protection Equipment Company Limited
|
51%
|
51%
|
PRC
|
Manufacturing and
installation services of environmental protection
equipment
|
|
Hangzhou Tianlan
Pure Environmental Protection Technology Company
Limited
|
40.8%
|
51%
|
PRC
|
Manufacturing of
environmental protection equipmen
|
|
Hangzhou Tiancan
Environmental Technology Company Limited
|
100%
|
100%
|
PRC
|
Manufacturing of
environmental protection equipment
|
2
Summary
of significant accounting policies
(a)
Basis
of presentation
The
accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”) and the financial statement
rules and regulations of the Securities and Exchange Commission
(“SEC”). References for Financial Accounting Standards
Board (“FASB”) standards are made to the FASB
Accounting Standards Codification (“ASC”).
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(b)
Basis
of consolidation
The
accompanying consolidated financial statements include the results
of operations of the Company and its subsidiaries. Significant
intercompany transactions and balances have been eliminated.
Certain reclassifications were made to prior year amounts to
conform to the current year presentation.
Subsidiaries are
all entities over which the Group has control; has the power to
appoint or remove the majority of the members of the board of
directors; has the right 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.
Our
revenue is derived from long-term contracts for customers in our
construction and installation services and short-term contracts for
sales activities. Accounting treatment for these contracts in
accordance with ASU No. 2014-09 ASC Topic 606, Revenue from
Contracts with Customers), is as follows:
(i)
Performance
obligations satisfied over time (Construction and installation
services)
Recognition of
performance obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer, and is the unit of
account in the new revenue standard. The contract transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Construction and installation services projects typically span
between 12 to 36 months. The majority of our contracts have a
single performance obligation as the promise to transfer the
individual goods or services is not separately identifiable from
other promises in the contracts and, therefore, is not distinct.
Some contracts have multiple performance obligations, most commonly
due to the contract covering multiple phases of the project life
cycle (design and construction).
Revenues are
recognized as our obligations are satisfied over time, using the
ratio of project costs incurred to estimated total costs for each
contract (i.e. input method) because of the continuous transfer of
control to the customer as all of the work is performed at the
customer’s site and, therefore, the customer controls the
asset as it is being constructed. This continuous transfer of
control to the customer is further supported by clauses in the
contract that allow the customer to unilaterally terminate the
contract for convenience, pay the Group for costs incurred plus a
reasonable profit and take control of any work in process. This
cost-to-cost measure 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.
Items
excluded from cost-to-cost
Pre-contract costs
are generally not material and are charged to expense as incurred,
but in certain cases pre-contract recognition may be deferred if
specific probability criteria are met.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(d)
Revenue
recognition (Cont’d)
(i)
Performance
obligations satisfied over time (Construction and installation
services) (Cont’d)
Variable
consideration
Contract
modifications through change orders, claims and incentives are
routine in the performance of the Group’s contracts to
account for changes in the contract specifications or requirements.
In most instances, contract modifications are not distinct from the
existing contract due to the significant integration service
provided in the contract and are accounted for as a modification of
the existing contract and performance obligation. Either the Group
or its customers may initiate change orders, which may include
changes in specifications or designs, manner of performance,
facilities, equipment, materials, sites and period of completion of
the work. Change orders that are unapproved as to both price and
scope are evaluated as claims. The Group considers claims to be
amounts in excess of approved contract prices that the Group seeks
to collect from its customers or others for customer - caused
delays, errors in specifications and designs, contract
terminations, change orders that are either in dispute or are
unapproved as to both scope and price, or other causes of
unanticipated additional contract costs. The Group estimates
variable consideration for a performance obligation at the most
likely amount to which the Group expects to be entitled (or the
most likely amount the Group expects to incur in the case of
liquidated damages), utilizing estimation methods that best predict
the amount of consideration to which the Group will be entitled (or
will be incurred in the case of liquidated damages). The Group
includes variable consideration in the estimated transaction price
to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur or when the
uncertainty associated with the variable consideration is resolved.
The Group’s estimates of variable consideration and
determination of whether to include estimated amounts in
transaction price are based largely on an assessment of its
anticipated performance and all information (historical, current
and forecasted) that is reasonably available to the
Group.
The
effect of variable consideration on the transaction price of a
performance obligation is recognized as an adjustment to revenue on
a cumulative catch-up basis. To the extent unapproved change orders
and claims reflected in transaction price (or excluded from
transaction price in the case of liquidated damages) are not
resolved in the Group’s favor, or to the extent incentives
reflected in transaction price are not earned, there could be
reductions in, or reversals of, previously recognized
revenue.
(ii)
Performance
obligations satisfied at a point-in-time (Sales of
equipment)
Revenue
for our sales contracts is recognized at a point in time. The Group
recognizes revenue at the amount to which it expects to be entitled
when control of the products is transferred to its customers.
Control is generally transferred when the Group has a present right
to payment and title and the significant risks and rewards of
ownership of products are transferred to its customers. For most of
the Group’s products sales, control transfers when products
are delivered to the customer. Payment for products sales is
collected within a short period following transfer of control, as
applicable.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(e)
Research
and development costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately
RMB19,018,000, RMB14,363,000 and RMB12,873,000 for the years ended
December 31, 2019, 2018 and 2017 respectively and were included in
“Selling and administrative expenses” in the
Group’s consolidated statements of operations.
(f)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately RMB
Nil, RMB Nil and RMB4,000 for the years ended December 31, 2019,
2018 and 2017 respectively and were included in “Selling and
administrative expenses” in the Group’s consolidated
statements of operations.
The
Group follows the liability method of accounting for income tax.
Under this method, deferred tax assets and liabilities are recorded
for future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are expected
to be in effect when the underlying assets or liabilities are
recovered or settled. The Group also evaluates whether the recorded
deferred tax assets and valuation allowances can be realized and,
when necessary, reduces the amounts to what is expected to be
realized.
(h)
Cash
and cash equivalents
Cash
and cash equivalents consist of bank deposits with original
maturities of three months or less, all of which are unrestricted
as to withdrawal and uninsured. There were no cash equivalents as
of December 31, 2019 and 2018.
(i)
Accounts
receivable and allowance for doubtful accounts
The
Group does not charge interest to its customers and carries its
customer receivables at their face amounts, less an allowance for
doubtful accounts. As is common practice in the industry, the Group
classifies all accounts receivable as current assets.
The
Group grants trade credit, on a non-collateralized basis, to its
customers and is subject to potential credit risk related to
changes in business and overall economic activity. The Group
analyzes specific accounts receivable balances, historical bad
debts, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. In the event that a customer
balance is deemed to be uncollectible, the account balance is
written-off against the allowance for doubtful
accounts.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(j)
Contracts
in progress
The
timing of revenue recognition, billings and costs incurred results
in billed accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts (contract assets) on
the consolidated balance sheet. For performance obligations
satisfied over time, amounts are billed as work progresses in
accordance with agreed-upon contractual terms, either at periodic
intervals (e.g. weekly or monthly) or upon achievement of
contractual milestones. Typically, bills for advances or deposits
from customers, before revenue is recognized, result in billings in
excess of costs and estimated earnings on uncompleted contracts
(contract liabilities). However, the Group occasionally bills
subsequent to revenue recognition, resulting in contract assets.
These assets and liabilities are reported on the consolidated
balance sheet on a contract-by-contract basis at the end of each
reporting period.
Inventories are
measured using the weighted average method and are stated at the
lower of cost or net realizable value. Cost of finished goods
comprise direct material, direct production costs and an allocated
portion of production overhead costs based on normal operating
capacity.
(l)
Property,
plant and equipment and land use right, net
Property, plant and
equipment is carried at cost. Major modifications or refurbishments
which extend the useful life of the assets are capitalized and
depreciated over the adjusted remaining useful life of the assets.
Upon retirement or disposition of property, plant and equipment,
the cost and related accumulated depreciation are removed and any
resulting gain or loss is recognized in consolidated income from
operations. The cost of maintenance and repairs is charged to
expense as incurred. Property, plant and equipment is reviewed for
impairment and tested for recoverability whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. If the carrying value of property, plant and equipment
exceeds its fair value, an impairment charge would be recorded in
the consolidated statement of operations.
Land in
the PRC is owned by the PRC government. The government in the PRC,
according to PRC Law, may sell the right to use the land for a
specific period of time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are
classified as land use right.
Depreciation of
property, plant and equipment and amortization of land use right
are computed using the straight-line method over the assets’
estimated useful lives as follows:
|
Land use
right
|
Over terms of the
leases
|
|
Buildings and
leasehold improvements
|
11
to 50 years, with 5% residual value
|
|
Plant and
machineries
|
5
to 10 years, with 5% residual value
|
|
Furniture, fixtures
and office equipment
|
5
years, with 5% residual value
|
|
Motor
vehicles
|
5
years, with 5% residual value
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(m)
Intangible
assets, net
The
Group is currently amortizing its acquired intangible assets,
consisted of patents and others, with finite-lived over periods
generally ranging between three to twenty years.
(n)
Evaluating
impairment of intangible assets
Our
finite-lived intangible assets are amortized over their estimated
remaining useful economic lives. When events or changes in
circumstances indicate that finite-lived intangible assets may be
impaired, an evaluation is performed. If the asset or asset group
fails the recoverability test, we perform a fair value measurement
to determine and record an impairment charge. No impairment loss of
intangible assets for the years ended December 31, 2019, 2018 and
2017 respectively.
(o)
Government
grant income
Government grant
income consists of receipt of funds to subsidize the investment
cost of technical development in China. No present or future
obligation arises from the receipt of such amount.
Government grants
are recognized in the consolidated balance sheet initially when
there is reasonable assurance that they will be received and that
the Group will comply with the conditions attaching to them. Grants
that compensate the Group for expenses incurred are recognized as
income in the consolidated statement of operations on a systematic
basis in the same periods in which the expenses are incurred.
Grants that compensate the Group for the cost of an asset are
deducted from the carrying amount of the asset and consequently are
effectively recognized in the consolidated statement of operations
over the useful life of the asset by way of reduced depreciation
expenses.
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments are recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases.
The
Group enters into non-cancelable leases for some of our facility
and equipment needs.
The
Group’s leases have remaining terms within one year.
Currently, all the Group’s leases contain fixed payment
terms. The Group may decide to cancel or terminate a lease before
the end of its term, in which case we are typically liable to the
lessor for the remaining lease payments under the term of the
lease. Typically, the Group has purchase options on the facility
and equipment underlying its finance leases. The Group may exercise
some of these purchase options when the need for equipment is
on-going and the purchase option price is attractive. Leases are
accounted for as operating or finance leases, depending on the
terms of the lease.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
Finance
leases
The
Group leases certain facility and equipment under finance leases.
The economic substance of the leases is a financing transaction for
acquisition of the facility and equipment. Accordingly, the
right-of-use assets for these leases are included on the
Group’s consolidated balance sheets in property, plant and
equipment, net of accumulated depreciation and impairment losses,
with a corresponding amount recorded in current portion of finance
lease obligations or finance lease obligations, net of current
maturities, as appropriate. The finance lease assets are amortized
over the useful life of the leased asset with a purchase option
that is reasonably certain of exercise, on a straight-line basis
and included in depreciation expense. The financing component
associated with finance lease obligations is included in interest
expense. Generally, for the Group’s finance leases an
implicit rate to calculate present value is provided in the lease
agreement.
Prior
to January, 2019 the Group accounted for its leases in accordance
with Leases (Topic 840). Leases with the characteristics of capital
leases were recorded at fair value on the Group’s
consolidated balance sheets. The asset portion was included in
property, plant and equipment on the Group’s consolidated
balance sheets and was amortized as depreciation expense on the
Group’s consolidated statements of operations. The liability
portion was included on the Group’s consolidated balance
sheets as current and long term portions of capital leases. These
liabilities were amortized as interest expense and lease expense on
the Group’s consolidated statements of
operations.
Paid
in capital refers to the registered capital paid up by the
shareholders of the Company.
At
December 31, 2019, there were 82,572,000 shares (2018: 82,572,000
shares) issued.
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
revenue and expenses in the consolidated financial statements and
accompanying notes. Significant accounting estimates reflected in
the Group’s consolidated financial statements include
accounts receivable, net, equity method investment, impairment of
goodwill and long-lived assets, income taxes, share-based
compensation, contract assets and contract liabilities. Actual
results could differ from those estimates.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
Entities are
considered to be related to the Group if the parties, directly or
indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Group. Related
parties also include 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. A party which 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 is also a related party.
(t)
Net
income per ordinary share
The
Group computes net income per ordinary share using the treasury
stock method. Under the treasury stock method, basic earnings per
share attributable to Zhejiang Tianlan Environmental Protection
Technology Company Limited are computed by dividing net income
attributable to Zhejiang Tianlan Environmental Protection
Technology Company Limited by the weighted average number of
ordinary shares outstanding during the period.
The
suppliers of the Group offer a standard one-year warranty to end
customer of the Group. The Group only provides labour service to
repair or replace parts. The Group does not maintain a general
warranty reserve because historically labour costs for such repair
or replacement have been de minimis.
(v)
Shipping
and handling costs
Amounts
billed to customers related to shipping and handling are classified
as revenues, and the Group’s shipping and handling costs are
included in cost of revenues.
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
Financial
instruments that potentially subject the Group to a concentration
of credit risk consist principally of cash and cash equivalents and
accounts receivable, net. The Group maintains substantially all of
its cash and cash equivalent balances with large financial
institutions which are believed to be high quality
institutions.
The
Group is subject to a concentration of risk because it derives a
significant portion of its revenues from a few customers. The
Group’s top five customers accounted for approximately
40.48%, 31.02%, and 34.91% of consolidated revenues for the years
ended December 31, 2019, 2018 and 2017, respectively. For the years
ended December 31, 2019, 2018 and 2017, one customer accounted for
16.7%, 13.5% and 12% of annual revenues, respectively.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(x)
Concentrations (Cont’d)
The
Group grants trade credit under contractual payment terms,
generally without collateral, to its customers, which include high
credit quality electric utilities, general contractors, owners and
managers of industrial properties.
Consequently,
the Group is subject to potential credit risk related to changes in
business and economic factors. At December 31, 2019 and 2018, none
of the Group’s customers individually exceeded 10.0% of
accounts receivable. The Group believes the terms and conditions in
its contracts, billing and collection policies are adequate to
minimize the potential credit risk.
The
Group is required to make appropriation to reserve, comprising the
PRC statutory reserve, based on after-tax net income determined
with generally accepted accounting principles of the PRC
(“PRC GAAP”).
Appropriations
to the PRC statutory reserve are required to be at least 10% of the
after tax net income determined in accordance with PRC GAAP until
the reserveis equal to 50% of the entities’ registered
capital.
As
shown in the Note 23 of accompanying consolidated financial
statements, the operations and business results of the Group could
be materially adversely affected by coronavirus, which creates an
uncertainty about the Group’s ability to continue as a going
concern. Management’s plan with new contracts with customers
will alleviate such uncertainty.
(aa)
Fair
value measurement
Fair
value is considered to be the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the
Group considers the principal or most advantageous market in which
it would transact and considers assumptions that market
participants would use when pricing the asset or liability. The
established fair value hierarchy requires an entity to maximize the
use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument's
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
The
three levels of inputs to be used to measure fair value
include:
Level
1
Applies to assets
or liabilities for which there are quoted prices in active markets
for identical assets or liabilities.
Level
2
Applies to assets
or liabilities for which there are inputs other than quoted prices
included within Level 1 that are observable for the asset or
liability such as quoted prices for similar assets or liabilities
in active markets; quoted prices for identical assets or
liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level
3
Applies to assets
or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of
the fair value of the assets or liabilities.
Financial
instruments include cash and cash equivalents, accounts receivable,
net, prepayments and other current assets, contract assets without
readily determinable fair value, bank borrowings, accounts payable,
other payables and accrued expenses and contract
liabilities.
The
carrying values of cash and cash equivalents, accounts receivable,
net, prepayments and other current assets, contract assets, bank
borrowings, accounts payable, other payables and accrued expenses
and contract liabilities approximate their fair value due to their
short-term maturities.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
2
Summary
of significant accounting policies (Cont’d)
(ab)
Long-term investments
The
Group has elected to apply the measurement alternative to equity
securities without readily determinable fair values. As such, the
Group's non-marketable equity securities are measured at cost, less
any impairment, and are adjusted for changes in fair value
resulting from observable transactions for identical or similar
investments of the investee.
(ac)
Recent
accounting pronouncements
Changes
to GAAP are typically established by the FASB in the form of
accounting standards updates (“ASUs”) to the
FASB’s ASC. The Group considers the applicability and impact
of all 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
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The amendments under this pronouncement changed the way all leases
with durations in excess of one year are treated. Under this
guidance, lessees are required to recognize virtually all leases on
the balance sheet as a right-of-use asset and an associated finance
lease liability or operating 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 finance
leases or operating leases. Finance lease liabilities, which
contain provisions similar to capitalized leases under the prior
accounting standards, are amortized as amortization expense and
interest expense in the statement of operations.
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, which introduced an expected credit loss
methodology for the measurement and recognition of credit losses on
most financial instruments, including trade receivables and
off-balance sheet credit exposures. Under this guidance, an entity
is required to consider a broader range of information to estimate
expected credit losses, which may result in earlier recognition of
losses. This ASU also requires disclosure of information regarding
how a company developed its allowance, including changes in the
factors that influenced management’s estimate of expected
credit losses and the reasons for those changes. The ASU and its
related clarifying updates are effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years, with early adoption permitted. The adoption of this standard
will be through a cumulative-effect adjustment to retained earnings
as of the effective date. Based on our historical experience, the
Group does not expect that this pronouncement will have a
significant impact in its consolidated financial statements or on
the estimate of the allowance for uncollectable
accounts.
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, which modifies
the disclosure requirements for Level 1, Level 2 and Level 3
instruments in the fair value hierarchy. The guidance is effective
for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years, with early adoption permitted
for any eliminated or modified disclosures. The adoption of this
standard is not expected to have a material impact on the
Group’s consolidated financial statements or
disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes, which simplifies the accounting for
income taxes, eliminates certain exceptions within ASC 740, Income
Taxes, and clarifies certain aspects of the current guidance to
promote consistent application among reporting entities. The
guidance is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years, with early
adoption permitted. Upon adoption, the Group must apply certain
aspects of this standard retrospectively for all periods presented
while other aspects are applied on a modified retrospective basis
through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. The Group is
evaluating the impact this update will have on its consolidated
financial statements.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
Change
in accounting policy
On
January 1, 2019, the Group adopted ASU No. 2016-02, Leases (Topic
842) using the modified retrospective method. Under this guidance,
the net present value of future lease payments is recorded as
right-of-use assets and liabilities. In addition, the Group elected
the ‘package of practical expedients’ permitted under
the transition guidance within the new standard, which among other
things, allowed the Group to carry forward the historical lease
classification. In addition, the Group elected not to utilize the
hindsight practical expedient to determine the lease term for
existing leases. The adoption of Topic 842 did not impact the
Group’s retained earnings, consolidated net earnings or cash
flows.
The
following is a summary of the lease-related assets and liabilities
recorded at December 31, 2019:
|
|
Classification on
the consolidated balance sheet
|
|
|
|
|
|
|
Asset
|
|
|
|
Finance lease
right-of-use assets
|
Property and
equipment, net of accumulated depreciation and impairment
losses
|
33,067
|
|
Liability
|
|
|
|
Current
|
|
|
|
Finance lease
obligations
|
Current portion of
finance lease obligations
|
25,785
|
The
following is a summary of the lease term and discount rate at
December 31, 2019:
|
Weighted-average
remaining lease term - finance leases
|
|
|
|
|
|
Weighted-average
discount rate - finance leases
|
5.9%
|
|
|
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
3
Lease
obligations (Cont’d)
Change
in accounting policy (Cont’d)
The
following is a summary of certain information related to the lease
costs for finance leases for the year ended December 31,
2019:
|
|
|
|
Lease
cost:
|
|
|
Finance lease
cost:
|
|
|
Amortization of
right-of-use assets
|
10,001
|
|
Interest on lease
liabilities included under cost of revenue and selling and
administrative expenses
|
2,214
|
|
|
|
|
Total lease
cost
|
12,215
|
The
future undiscounted minimum lease payments, as reconciled to the
discounted minimum lease obligation indicated on the Group’s
consolidated balance sheets, under current portion of finance lease
obligations, at December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
2020
|
37,070
|
|
|
|
|
Total minimum lease
payments
|
37,070
|
|
|
|
|
Financing
component
|
(11,285)
|
|
|
|
|
Net present value
of minimum lease payments
|
25,785
|
|
|
|
|
Less: current
portion of finance lease obligations
|
(25,785)
|
|
|
|
|
Long-term finance
lease obligations
|
-
|
The
financing component for finance lease obligations represents the
interest component of finance leases that will be recognized as
interest expense in future periods.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
3
Lease
obligations (Cont’d)
Change
in accounting policy (Cont’d)
Capital
leases
Prior
to the adoption of ASU No. 2016-02, Leases (Topic 842), certain of
the Group’s facilities and equipment leases met the
characteristics of capital leases. The economic substance of these
leases was a financing transaction for acquisition of the
facilities and equipment and, accordingly, the leases were included
in the consolidated balance sheets in property, plant and
equipment, net of accumulated depreciation and impairment losses,
with a corresponding amount recorded in current portion of lease
obligations or lease obligations, net of current maturities, as
appropriate. The capital lease assets were amortized on a
straight-line basis over the life of the leased asset, and were
included in depreciation expense in the consolidated statements of
operations. The interest associated with capital leases was
included in cost of revenue and selling and administrative expenses
in the consolidated statements of operations.
At
December 31, 2018, the Group had RMB55,453,000 of capital lease
obligations outstanding, RMB32,275,000 of which was classified as a
current liability. At December 31, 2018, RMB43,068,000 of leased
assets were capitalized in property and equipment, net of
accumulated depreciation and impairment losses.
4
Accounts
receivable, net
Accounts
receivable, net consisted of the following at December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
receivables
|
165,262
|
177,632
|
|
Less: allowance for
doubtful accounts
|
(26,484)
|
(24,047)
|
|
|
|
|
|
|
138,778
|
153,585
|
The
roll-forward of activity in the allowance for doubtful accounts was
as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period
|
24,047
|
41,761
|
|
Add/(less):
provision for/(reduction in) allowances
|
2,437
|
(17,714)
|
|
|
|
|
|
Balance at end of
period
|
26,484
|
24,047
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
4
Accounts
receivable, net (Cont’d)
The
following is an aging analysis of accounts receivable, net at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1
year
|
96,456
|
119,233
|
|
1 year - 2
years
|
30,252
|
21,182
|
|
2 years - 3
years
|
6,260
|
9,492
|
|
3 years - 4
years
|
5,179
|
3,225
|
|
4 years - 5
years
|
631
|
453
|
|
|
|
|
|
|
138,778
|
153,585
|
At
December 31, 2019, the accounts receivable, net pledged as security
for the Company’s bank loans and third party loans amounted
to approximately RMB11,575,000 (2018: RMB21,634,000).
5
Prepayments
and other current assets
Prepayments and
other current assets mainly represent deposits for bidding
projects, purchases, services and finance leases and prepaid
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments
|
19,962
|
18,702
|
|
Other
receivables
|
13,988
|
8,791
|
|
Deposits for
finance leases
|
17,512
|
-
|
|
Other current
assets
|
1,397
|
1,485
|
|
|
|
|
|
|
52,859
|
28,978
|
6
Contract
assets and liabilities
Contracts with
customers usually stipulate the timing of payment, which is defined
by the terms found within the various contracts under which work
was performed during the period. Therefore, contract assets and
liabilities are created when the timing of costs incurred on work
performed does not coincide with the billing terms.
The
Group’s consolidated balance sheets present contract assets
which contain unbilled revenue (previously identified as costs and
estimated earnings in excess of billings) associated with contract
work that has been completed and billed but not paid by customers,
that are generally due once the job is completed and
approved.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
6
Contract
assets and liabilities (Cont’d)
Contract assets
consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled
revenue
|
80,961
|
100,994
|
|
|
|
|
The
Group’s consolidated balance sheets present contract
liabilities which contain deferred revenue (previously identified
as billings in excess of costs and estimated earnings on
uncompleted contracts).
Contract
liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
55,898
|
41,046
|
|
|
|
|
The
following table provides information about contract assets and
contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
assets
|
80,961
|
100,994
|
|
Contract
liabilities
|
(55,898)
|
(41,046)
|
|
|
|
|
|
Net contract
assets
|
25,063
|
59,948
|
The
difference between the opening and closing balances of the
Group’s contract assets and contract liabilities primarily
results from the timing of the Group’s billings in relation
to its performance of work.
The net
asset position for contracts in process consisted of the following
at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated
earnings on uncompleted contracts
|
433,195
|
236,044
|
|
Less: billings to
date
|
(352,234)
|
(135,050)
|
|
|
|
|
|
|
80,961
|
100,994
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
5,742
|
11,963
|
|
Finished
goods
|
13
|
-
|
|
|
|
|
|
|
5,755
|
11,963
|
8
Short-term
and long-term investments
The
Group's short-term investments consist of wealth management
products and long-term investments consist of minority ownership
interests in one (2018: two) limited liability company, generally
from private equity arrangements. These investments are carried
under the equity method of accounting, with changes in the carrying
value reported as realized gains or losses in the consolidated
financial statements.
9
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building and
leasehold improvements
|
167,874
|
56,665
|
|
Furniture, fixtures
and office equipment
|
3,543
|
11,090
|
|
Motor
vehicles
|
4,808
|
4,390
|
|
Plant and
machineries
|
8,937
|
111,928
|
|
|
|
|
|
Total
|
185,162
|
184,073
|
|
|
|
|
|
Less: Accumulated
depreciation and amortization
|
(63,881)
|
(57,795)
|
|
Accumulated
impairment losses
|
(33,500)
|
(33,500)
|
|
|
|
|
|
Total
|
(97,381)
|
(91,295)
|
|
|
|
|
|
Net
|
87,781
|
92,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
6,556
|
11,755
|
12,647
|
At
December 31, 2019, the net book value of property, plant and
equipment pledged as security for the Company’s bank loans
and third party loans amounted to approximately RMB84,598,000
(2018: RMB90,248,000).
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
10
Intangible
assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable
intangible assets
|
|
|
|
|
|
|
|
Gross carrying
amount
|
|
|
|
Patents
|
2,400
|
2,400
|
|
Others
|
165
|
575
|
|
|
|
|
|
|
2,565
|
2,975
|
|
|
|
|
|
Less: Accumulated
amortization
|
(1,638)
|
(1,896)
|
|
|
|
|
|
Net carrying
amount
|
927
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
152
|
152
|
152
|
At
December 31, 2019, estimated future intangible asset amortization
expense for the each of the next five years and thereafter was as
follows:
|
|
Future amortization
expense
|
|
|
|
|
|
|
|
2020
|
152
|
|
2021
|
152
|
|
2022
|
152
|
|
2023
|
152
|
|
2024
|
152
|
|
Thereafter
|
167
|
|
|
|
|
Total
|
927
|
|
|
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying
amount
|
|
|
|
|
|
|
|
Land use
right
|
7,361
|
7,361
|
|
Less: Accumulated
amortization
|
(2,070)
|
(1,921)
|
|
|
|
|
|
Net carrying
amount
|
5,291
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
149
|
149
|
149
|
At
December 31, 2019, the land use right pledged as security for the
Company’s bank loans and third party’s loans amounted
to approximately RMB5,291,000 (2018: RMB5,440,000).
As of
December 31, 2019, estimated future land use right amortization
expense for the each of the next five years and thereafter was as
follows:
|
|
Future amortization
expense
|
|
|
|
|
|
|
|
2020
|
149
|
|
2021
|
149
|
|
2022
|
149
|
|
2023
|
149
|
|
2024
|
149
|
|
Thereafter
|
4,546
|
|
|
|
|
Total
|
5,291
|
|
|
|
12
Other
non-current assets
Other
non-current assets represent deposits for finance leases amounting
to approximately RMB17,512,000 in 2018. These amounting were
included in deposits for finance leases under note 5 in
2019.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan borrowed
by the Company (note i)
|
21,834
|
40,000
|
|
Bank loan borrowed
by a subsidiary of the Company
(note
ii)
|
5,007
|
5,000
|
|
|
|
|
|
|
26,841
|
45,000
|
(i)
The bank loan is
denominated in Renminbi and is repayable within 1 year. The bank
loan borrowed by the Company as of December 31, 2019 bears interest
at fixed rates ranging from 4.57% to 6.33% (2018: 5.0025% to 6.74%)
per annum. Interest paid during the year ended December 31, 2019
was approximately RMB1,991,000 (2018: RMB2,089,000 and 2017:
RMB1,720,000).
(ii)
The bank loan is
denominated in Renminbi and is repayable within 1 year. The bank
loan borrowed by a subsidiary of the Company as of December 31,
2019 bears interest at a fixed rate of 5.22% (2018: 5.66%) per
annum and is secured by the subsidiary’s office premises and
leasehold improvements and land use right. Interest paid during the
year ended December 31, 2019 was approximately RMB246,000 (2018:
RMB278,000 and 2017: RMB272,000).
14
Other
payables and accrued expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
5,312
|
5,348
|
|
Other
payables
|
2,271
|
1,829
|
|
Deferred
income
|
-
|
9,201
|
|
|
|
|
|
|
7,583
|
16,378
|
Other
taxes payable mainly comprise Valued-Added Tax (“VAT”).
The Group is subject to output VAT levied at the rate of 13% or 9%
since April 1, 2019 (2018: 16% or 10%) of the revenue from sales of
equipment. The input VAT paid on purchases of materials and other
direct inputs can be used to offset the output VAT levied on
operating revenue to determine the net VAT payable or
recoverable.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
Capital
reserve represents capital contributions from shareholders in
excess of the paid-in capital amount and capitalization of gain on
disposal of subsidiaries to the shareholders.
17
Other
income, net and other losses
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of
property, plant and equipment
|
39
|
-
|
-
|
|
Subsidy
income
|
5,957
|
5,537
|
2,262
|
|
Sales of scrapped
materials
|
-
|
-
|
37
|
|
Investment
income
|
-
|
1,661
|
(405)
|
|
Others
|
280
|
1,363
|
(7)
|
|
|
|
|
|
|
|
6,276
|
8,561
|
1,887
|
Other
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debts written
off
|
5,383
|
13,946
|
-
|
|
Impairment loss on
property, plant and equipment
|
-
|
33,500
|
-
|
|
Investment
loss
|
241
|
-
|
-
|
|
|
|
|
|
|
|
5,624
|
47,446
|
-
|
18
Income
tax expense/(credit)
According to
relevant PRC tax laws and regulations, entities incorporated in the
PRC are subject to Enterprise Income Tax (“EIT”) at a
statutory rate of 25% or reduced national EIT rates of 15% for
certain High and New Technology Enterprises (“HNTE”) on
PRC taxable income. Zhejiang Tianlan Environmental Protection
Technology Company Limited and Hangzhou Tianlan Environmental
Protection Equipment Company Limited are classified as HNTE which
enjoy a preferential tax rate of 15%.
During
the years ended December 31, 2019 and 2018, the PRC tax laws and
regulations have launched a tax reduction scheme for small
enterprises, Hangzhou Tianlan Pure Environmental Protection
Technology Company Limited, Hangzhou Tiancan Environmental
Technology Company Limited and Zhejiang Tianlan Environmental
Engineering and Design Company Limited are entitled to enjoy this
tax benefit. As such, they are subjects to Enterprise Income Tax
rate of 20%
only.
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
18
Income
tax expense/(credit)
The
Company and its subsidiaries are based in the PRC and file an EIT
return. The components of the provision for income tax
expense/(credit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax
expense
|
|
|
|
|
PRC
EIT
|
28
|
2
|
4,237
|
|
|
|
|
|
|
Income tax
expense
|
28
|
2
|
4,237
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
expense/(credit)
|
268
|
(7,969)
|
(405)
|
|
|
|
|
|
|
Total deferred tax
expense/(credit)
|
268
|
(7,969)
|
(405)
|
|
|
|
|
|
|
Total
expense/(credit)
|
296
|
(7,967)
|
3,832
|
The
items comprising the difference between income tax computed at the
EIT statutory rates in effect for 2019, 2018 and 2017 and our
effective tax rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income tax
|
4,654
|
(34,194)
|
30,047
|
|
Computed tax using
respective companies’ statutory tax rates
|
642
|
(4,987)
|
4,548
|
|
(Over)-provision
for income tax in prior years
|
-
|
-
|
(29)
|
|
Permanent
difference
|
-
|
-
|
(459)
|
|
Temporary
differences
|
202
|
(272)
|
(405)
|
|
Tax effect of
revenue not subject to tax
|
-
|
(3,024)
|
(1,438)
|
|
Tax effect of
expenses not deductible for tax purposes
|
693
|
316
|
1,435
|
|
Tax effect of
unused tax losses not recognized
|
-
|
-
|
180
|
|
Tax effect of
special deduction for research and development costs
|
(2,103)
|
-
|
-
|
|
Others
|
862
|
-
|
-
|
|
Income taxes
expense/(credit) at effective tax rate
|
296
|
(7,967)
|
3,832
|
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
18
Income
tax expense/(credit) (Cont’d)
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
7,464
|
13,201
|
|
Impairment losses
on assets
|
5,025
|
-
|
|
Tax
losses
|
1,481
|
1,037
|
|
|
|
|
|
Total deferred tax
assets
|
13,970
|
14,238
|
As
stipulated by the rules and regulations in the PRC, the Group
contributes to state-sponsored retirement plans for its employees
in Mainland China. The Group contributes approximately 12% to
14% 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 years ended December 31, 2019, 2018 and 2017, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately RMB5,449,000,
RMB4,692,000 and RMB4,298,000 respectively.
The
Group’s activities expose it mainly to credit
risk.
The
Group has no significant concentration of credit risk. The Group
has policies in place to ensure that sales of products are made to
customers with an appropriate credit history. The Group has
policies that limit the amount of credit exposure to any customers.
Cash in banks is insured in PRC.
21
Related
party transaction
There
were sales of certain shareholding in a subsidiary/subsidiaries to
the related company/ shareholders of the Company with gross sale
proceeds of RMB510,000 in 2019 (2018: RMB10,140,000).
ZHEJIANG TIANLAN ENVIRONMENTAL
PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT’D)
22
Commitments
and contingencies
(i) Operating
leases
The
Group has no operating leases expense during the year ended
December 31, 2019 (2018 and 2017: RMB Nil). At December 31, 2019,
the Group has no future minimum lease payments under
non-cancellable operating leases.
(ii) Litigation
and other legal matter
The
Group is from time-to-time party to various lawsuits, claims, and
other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract,
property damages, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, the Group records reserves
when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. The Group does not
believe that any of these proceedings, separately or in the
aggregate, would be expected to have a material adverse effect on
the Group’s consolidated financial position, results of
operation or cash flows.
The
Group is routinely subject to other civil claims, litigation and
arbitration, and regulatory investigations arising in the ordinary
course of our present business. Some of these claims and
litigations include claims related to the Group’s current
services and operations, the Group believes that it has strong
defenses to these claims. These claims have not had a material
impact on the Group to date, and the Group believes that the
likelihood that a future material adverse outcome will result from
these claims is remote. However, if facts and circumstances change
in the future, the Group cannot be certain that an adverse outcome
of one or more of these claims would not have a material adverse
effect on the Group’s consolidated financial condition,
results of operations or cash flows.
In
December 2019, a novel strain of coronavirus surfaced, and has
spread around the world, with resulting business and social
disruption. The coronavirus was declared a Public Health Emergency
of International Concern by the World Health Organization on
January 30, 2020. The operations and business results of the Group
could be materially adversely affected. The extent to which the
coronavirus may impact business activity will depend on future
developments, which are uncertain and cannot be predicted,
including new information which may emerge concerning the severity
of the coronavirus and the actions required to contain the
coronavirus or treat its impact, among others.
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