FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission
file number
000-22113
EURO TECH HOLDINGS COMPANY LIMITED
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(Exact
name of Registrant as specified in its charter)
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(Translation
of Registrant’s name into English)
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British Virgin Islands
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(Jurisdiction
of incorporation or organization)
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Unit D, 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong
Kong
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(Address
of principal executive offices)
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T.C. Leung
FAX: 852-28734887
Unit D, 18/F Gee Chang Hong Centre
65 Wong Chuk Hang Road
Hong Kong
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(Name,
Telephone, Email and/or Facsimile number and Address of Company
Contact Person)
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Securities
registered or to be registered pursuant to
Section 12(b) of the Act.
Title of each class
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Trading Symbol
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Name of each exchange on which registered
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Ordinary
Shares, no par value
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CLWT
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NASDAQ
Capital Market
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Securities
registered or to be registered pursuant to
Section 12(g) of the Act.
Securities
for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Indicate
the number of issued and outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report 2,061,909 Ordinary
Shares
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
☐
Yes
☑
No
If this
report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
☐
Yes
☑
No
Note
— Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
☑
Yes
☐
No
Indicate
by check mark whether the registrant has submitted electronically
and posed on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files).
☑
Yes
☐
No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or an emerging
growth company. See definition of "large accelerated filer," "
accelerated filer," and " emerging growth company" in
Rule 12b-2 of the Exchange Act (Check one).
Large
accelerated filer
☐
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Accelerated
filer
☐
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Non-accelerated
filer
☑
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Emerging
Growth Company
☐
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If an
emerging growth company that prepares its financial statements in
accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards†
provided pursuant to Section 13(a) of the Exchange
Act.
†The
term “new or revised financial accounting standards”
refers to any update by the Financial Accounting Standards Board to
its accounting Standards Codification after April 5,
2012.
Indicate
by check mark which basis of accounting the registrant has used to
prepare the financial statements included in this
filing:
U.S.
GAAP
☑
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International
Financial Reporting Standards as issued by the International
Accounting Standards Board
☐
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Other
☐
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If
“Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow.
☐
Item 17
☐
Item 18
If this
is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
☐
Yes
☑
No
TABLE OF CONTENTS
In this
Form 20-F, references to ”us”, “we”, the
“Company” and “Euro Tech” are to Euro Tech
Holdings Company Limited and its subsidiaries unless otherwise
expressly stated or the context otherwise requires.
Forward Looking Statements
This
annual report contains forward looking statements. Additional
written or oral forward looking statements may be made by the
Company from time to time in filings with the Commission or
otherwise. Such forward looking statements are within the meaning
of that term in Section 21E of the Securities Exchange Act of
1934 (the “Exchange Act”). Such statements may include,
but not be limited to, projections of revenues, income, or loss,
capital expenditures, plans for future operations, financing needs
or plans, and plans relating to products or services of the
Company, as well as assumptions relating to the foregoing. The
words “believe,” “expect,”
“anticipate,” “estimate,”
“project,” and similar expressions identify forward
looking statements, which speak only as of the date the statement
was made. Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or
quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying
the forward looking statements. Statements in this Annual Report,
including those contained in the sections entitled
Part I, Item 3D. “Risk Factors” and Item 5.
“Operating and Financial Review and Prospects” and the
notes to the Company’s Consolidated Financial Statements,
describe factors, among others, that could contribute to or cause
such differences.
The
following glossary of terms may be helpful in understanding the
terminology used in this Annual Report.
Ambient
Air:
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Atmospheric
air (outdoor as opposed to indoor air).
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Anaerobic:
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Treating
waste water biologically in the absence of air.
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Atomic
Spectrometer:
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An
analytical instrument used to measure the presence of an element in
a substance by testing a sample which is aspirated into a flame and
atomized. The amount of light absorbed or emitted is measured. The
amount of energy absorbed or emitted is proportional to the
concentration of the element in the sample.
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Coalescer:
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A
process that coalesces smaller oil particles to form larger oil
particles that can readily float to a tank’s
surface.
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Colorimeter:
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An
analytical instrument that measures substance concentration by
color intensity when the substance reacts to a chemical
reagent.
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Human
Machine Interface Software:
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A type
of software to interface (or coordinate) the interaction between
machine or equipment and a human being.
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Lamella:
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Synthetic
media installed in a clarifier tank to assist in particle
flocculation (coming together in a “floc” or
“flakes”).
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Mass
Spectrometer:
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An
analytical instrument that separates and identifies chemical
constituents according to their mass-to-charge ratios and is used
to identify organic compounds.
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Membrane
Biological Reactor (MBR):
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A
suspended-growth bioreactor combined with a membrane liquid/solids
separation unit. The “MBR” uses an advanced membrane
technology that treats biological wastes to a quality level which
in many industries is sufficient for reuse or low-cost disposal to
sewers.
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Multi-Channel
Digital Recorder:
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A
device that measures and records more than one input of a digitized
signal (signal in the form of pulses).
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pH
Controller:
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A
process instrument that measures and controls the acidity or
alkalinity of a fluid.
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Reagent:
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A
chemical substance used to cause a chemical reaction and detect
another substance.
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Sequential
Batch Reactor (SBR):
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A
waste-water treatment process that combines aeration and settling
in one reactor tank thus saving on space. Used for the treatment of
industrial waste-water as well as municipal sewage. The SBR is a
batch process that is ideal for waste-waters of changing
characteristics.
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PART I
I
TEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This item does not apply to annual reports on Form
20-F
.
I
TEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
This item does not apply to annual reports on Form
20-F
.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(Amounts
expressed in thousands, except share and per share data and unless
otherwise stated)
The
selected consolidated statement of operations and comprehensive
income / (loss) data for years ended December 31, 2018, 2017, and
2016 and the selected consolidated balance sheet data as of
December 31, 2018 and 2017 set forth below are derived from audited
consolidated financial statements of the Company included herein
and should be read in conjunction with, and are qualified in their
entirety by reference to such financial statements, including the
notes thereto and “Item 5. Operating and Financial Review and
Prospects.” The selected consolidated statement of operations
and comprehensive income / (loss) data for the years ended December
31, 2015 and 2014 and the selected consolidated balance sheet data
as of December 31, 2016, 2015 and 2014 set forth below are derived
from audited consolidated financial statements of the Company which
are not included herein.
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Balance
Sheet Data:
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Cash and cash
equivalents
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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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4,857
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Working
capital(1)
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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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5,267
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Total
assets
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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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23,399
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Short-term
debt(2)
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0
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97
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720
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0
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0
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Net
assets
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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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17,530
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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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Revenue
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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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18,822
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Cost of
revenue
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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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(13,991
)
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Gross
profit
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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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4,831
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Finance
costs
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(7
)
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(11
)
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(19
)
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(4
)
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-
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Selling and
Administrative Expenses
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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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(5,802
)
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Operating
loss
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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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(971
)
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Interest
Income
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35
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24
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18
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45
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27
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Other income /
(losses), net
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58
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(14
)
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5
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9
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65
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Gain on disposal of
property, plant and equipment
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3
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-
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7
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-
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-
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(Loss) before
taxes
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(963
)
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(564
)
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(640
)
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(1,904
)
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(879
)
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Income taxes credit
/ (expense)
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312
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(28
)
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(228
)
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47
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(18
)
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Net gain on deemed
disposal of affiliate
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-
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128
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24
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-
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-
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Equity in (loss) /
income of affiliates
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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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605
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Gain on disposal of
affiliate
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1,522
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-
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-
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-
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-
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Net (loss) /
profit
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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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(292
)
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Add: net loss
attributable to non-controlling interests
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149
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106
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73
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391
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169
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Net profit / (loss)
attributable to the Company
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88
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473
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231
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(616
)
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(123
)
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Other comprehensive
income/(loss)
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Net (loss) /
profit
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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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(292
)
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Foreign exchange
translation adjustments
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(58
)
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122
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4
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(63
)
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(15
)
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Comprehensive
(loss) / income
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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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(307
)
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Add: Comprehensive
loss attributable to non-controlling interests
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182
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45
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127
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477
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176
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Comprehensive
income/(loss) attributable to the Company
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63
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534
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289
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(593
)
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(131
)
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Net income / (loss)
per Ordinary Share-Basic
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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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(0.06
)
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-Diluted
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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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(0.06
)
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Weighted Average
Number of Ordinary Shares Outstanding
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Basic
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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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2,069,223
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Diluted
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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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2,069,223
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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 2014
through 2018, the Renminbi has fluctuated and at the end of 2018,
2017, 2016, 2015 and 2014, the exchange rates were approximately
RMB 6.8785 = US$1.00, RMB 6.5040 = US$1.00, RMB 6.9445 = US$1.00,
RMB 6.4855 = US$ 1.00 and RMB 6.2069 = US$1.00, respectively. The
value of the Renminbi fluctuates and is subject to changes in the
People’s Republic of China’s (“PRC”)
political and economic conditions.
The
high, low and average exchange rates are set forth
below:
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US$ to
RMB
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Fiscal
2014
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6.2069
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6.0428
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6.2611
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6.1612
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Fiscal
2015
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6.4855
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6.1931
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6.4900
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6.2854
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Fiscal
2016
|
6.9445
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6.4571
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6.9593
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6.6444
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Fiscal
2017
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6.5040
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6.9651
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6.4347
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6.7371
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Fiscal
2018
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6.8785
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6.2460
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6.9783
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6.6353
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US$ to
HK$
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Fiscal
2014
|
7.7502
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7.7500
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7.7677
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7.7524
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Fiscal
2015
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7.7564
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7.7493
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7.8240
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7.7549
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Fiscal
2016
|
7.7555
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7.7504
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7.8267
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7.7624
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Fiscal
2017
|
7.8129
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7.7528
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7.8292
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7.7951
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Fiscal
2018
|
7.8316
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7.7928
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7.8504
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7.8376
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The Following Months
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US$ to
RMB
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October 2018
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6.8689
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6.9783
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6.9203
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November 2018
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6.8689
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6.9723
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6.9383
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December 2018
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6.8338
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6.9590
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6.8890
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January
2019
|
6.6955
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6.8839
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6.7943
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February
2019
|
6.6768
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6.7956
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6.7396
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March
2019
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6.6726
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6.7408
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6.7137
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US$ to
HK$
|
|
|
|
|
|
|
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October 2018
|
7.8231
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7.8476
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7.8373
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November 2018
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7.8125
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7.8441
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7.8286
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December 2018
|
7.8011
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7.8353
|
7.8213
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January
2019
|
7.8274
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7.8472
|
7.8409
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February
2019
|
7.8434
|
7.8499
|
7.8478
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March
2019
|
7.8452
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7.8504
|
7.8493
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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 6.6% GDP in 2018 as
the Chinese government focuses on raising the incomes of the
average citizen and seek a national economy less driven by
investment and more by domestic consumer demand. Although past
predictions have not always proven reliable, if these predictions
prove accurate, they, as well as future actions and policies of the
PRC government, could suffer a material adverse
effect.
Also,
financial reporting suggests a real estate “bubble”
exists in the PRC. If a real estate “bubble” truly
exists in the PRC and it bursts, the PRC’s economy and the
Company could suffer a material adverse effect.
The
success of the Company’s activities in the PRC depends on the
Company’s continued ability to overcome circumstances
specifically effecting the industrial sector, including the
relatively poor infrastructure, road transportation and
communications network and an uncertain legal and regulatory
environment.
Economic Reforms May Not Continue or Impact Positively On the
Company; Changing Business Environment.
Over
the past several years, the PRC’s government has pursued
economic reform policies including encouraging private economic
activities and decentralization of economic deregulation. It
appears that the PRC government may not continue to pursue these
policies or may significantly alter them to our detriment from time
to time without notice. Changes in policies by the PRC government
resulting in changes in laws, regulations, or their interpretation,
or the imposition of confiscatory taxes, restrictions on currency
conversion and imports could materially and adversely affect our
business and operating results. From 2016 through 2018, the annual
growth rates in imports and exports were -5.5%, 5.9%, 15.8% and
-7.7%, 7.9%, 9.9%, respectively. The nationalization or other
expropriations of private enterprises by the PRC government could
result in a loss of our investments in actual funds and time and
effort, in China.
The
Company’s results at times may also be adversely effected by:
(1) changes in political, economic and social conditions in
the PRC; (2) changes in government policies such as changes in
laws and regulations (or their interpretation); (3) the
introduction of additional measures to control inflation;
(4) changes in the rate or method of taxation;
(5) imposition of additional restrictions on currency
conversion remittances abroad; (6) reduction in tariff
protection and other import restrictions; and (7) a return to
the more centrally-planned economy that existed
previously.
We Are Subject To International Economic And Political Risks, Over
Which We Have Little Or No Control.
Doing
business entirely outside the United States subjects us to various
risks, including changing economic and political conditions,
exchange controls, currency fluctuations, armed conflicts and
unexpected changes in United States and foreign laws relating to
tariffs, trade restrictions, transportation regulations, foreign
investments and taxation. We have no control over most of these
risks and other unforeseeable risks and may be unable to anticipate
changes in international economic and political conditions and,
therefore, unable to alter our business practice in time to avoid
the adverse effect of any of these changes.
The International Financial Crisis and Economic Conditions May Have
A Material Adverse Impact on Our Business and Financial
Conditions.
With
deteriorating worldwide economies, global markets have experienced
significant turmoil and upheavals characterized by extreme
volatility and the volatility in prices and securities and
commodities, diminished credit availability, inability to access
capital markets, waves of bankruptcies, high unemployment and
declining consumer and business confidence. It appears that
international economic deterioration has negatively impacted our
revenue and other results of operation. We cannot predict the short
and long-term impact of these events on our business and financial
condition that may be materially and adversely affected in the
future.
Our Revenue and Net Income may be Materially and Adversely Affected
by any Economic Slowdown in China.
The PRC
government has in recent years implemented a number of measures to
control the rate of economic growth, including by raising interest
rates and adjusting deposit reserve ratios for commercial banks as
well as by implementing other measures designed to tighten credit
and liquidity. These measures have contributed to a slowdown of the
PRC economy. According to the National Bureau of Statistics of
China, China's GDP growth rate was 6.6% in 2018. Any continuing or
worsening slowdown could significantly reduce domestic commerce in
China. An economic downturn, whether actual or perceived, a further
decrease in economic growth rates or an otherwise uncertain
economic outlook in China or any other market in which we may
operate could have a material adverse effect on our business,
financial condition and results of operations.
We May be Impacted by Inflation in PRC
.
In
recent years, the PRC has not experienced significant inflation,
and thus inflation has not had a significant effect on our business
historically. In response to the increased inflation rate during
2004, the Chinese government announced measures to restrict lending
and investment in the PRC in order to reduce inflationary pressure
on the PRC’s economy; more recently, the average inflation
rate has increased by 1.9%, 1.4%, 2.0%, 1.6% and 2.1% in 2014,
2015, 2016, 2017 and 2018, respectively. Efforts by the PRC to curb
inflation may also curb economic growth, increase our overhead
costs and adversely affect our sales. Inflationary increases cause
a corresponding increase in our general overhead. If the PRC rate
of inflation continues to increases, the Chinese government may
introduce further measures intended to reduce the inflation rate in
the PRC. Any such measures adopted by the Chinese government may
not be successful in reducing or slowing the increase in the
PRC’s inflation rate. A sustained or increased inflation in
the PRC may have an adverse impact on the PRC’s economy and
may materially and adversely affect our business and financial
results.
The PRC legal system embodies uncertainties which could limit the
available legal protections and expand the government’s
power.
The PRC
legal system is a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal
cases have little precedential value. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations
governing economic matters in general. The overall effect of
legislation over the past three decades has significantly enhanced
the protections afforded to various forms of foreign investment in
China. However, these laws, regulations and legal requirements
change frequently, and their interpretation and enforcement involve
uncertainties. For example, we may have to resort to administrative
and court proceedings to enforce the legal protection that we enjoy
either by law or contract. However, since PRC administrative and
court authorities have significant discretion in interpreting and
implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court
proceedings and the level of legal protection we enjoy than in more
developed legal systems. In addition, such uncertainties, including
the inability to enforce our contracts, could materially and
adversely affect our business and operations. Furthermore, the PRC
legal system is based in part on government policies and internal
rules (some of which are not published on a timely basis or at all)
that may have a retroactive effect. As a result, we may not be
aware of our violation of these policies and rules until sometime
after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of
resources and management attention. Furthermore, intellectual
property rights and confidentiality protections in China may not be
as effective as in the United States or other countries.
Accordingly, we cannot predict the effect of future developments in
the PRC legal system, particularly with regard to the media,
ecommerce, education, advertising and retail industries, including
the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local
regulations by national laws. These uncertainties could limit the
legal protections available to us, and our foreign investors,
including you.
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 7% against the
U.S. dollar during this one-year period. In 2018, the Renminbi
depreciated approximately 1.1% against the U.S. dollar. With the
development of the foreign exchange market and progress towards
interest rate liberalization and Renminbi internationalization, the
PRC government may in the future announce further changes to the
exchange rate system and there is no guarantee that the RMB will
not appreciate or depreciate significantly in value against the
U.S. dollar in the future. It is difficult to predict how market
forces or PRC or U.S. government policy may impact the exchange
rate between the RMB and the U.S. dollar in the
future.
Significant
revaluation of the Renminbi may have a material and adverse effect
on your investment. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our ordinary
shares, repaying our U.S. dollar denominated notes or other payment
obligations or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on
the U.S. dollar amount available to us. In addition, appreciation
or depreciation in the value of the Renminbi relative to U.S.
dollars would affect our financial results reported in U.S. dollar
terms regardless of any underlying change in our business or
results of operations.
Very
limited hedging options are available in China to reduce our
exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may decide to
enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited and we may not be able
to adequately hedge our exposure or at all. In addition, our
currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert Renminbi into
foreign currency. As a result, fluctuations in exchange rates may
have a material adverse effect on your investment.
The PRC has had Turbulent Relations with the United States of
America (the “United States” or the
“U.S”).
Recently, the
United States and China have imposed new or higher tariffs on goods
imported from the other's country, and have threatened the
imposition of additional tariffs in retaliation. The adoption and
expansion of trade restrictions and tariffs, quotas and embargoes,
the occurrence of a trade war, or other governmental action related
to tariffs or trade agreements or policies, has the potential to
adversely impact costs and the world economy in general, which in
turn could have a material adverse effect on our business, results
of operations and financial condition. In addition, changes in
trade relations between the United States and China may trigger
negative customer sentiment or retaliation towards companies in
China with ties to the United States, potentially resulting in a
negative impact on our results of operations and financial
condition.
Differences between
the United States and PRC governments on some political issues
continue occasionally to color their relationship. These occasional
controversies could materially and adversely affect our business
and operations. Political or trade friction between the two
countries could also materially and adversely affect the market
price of our ordinary shares (“Ordinary Shares”),
whether or not they adversely affect our business.
Certain Risks Relating to the Company’s
Business.
Our Operating Results may Fluctuate Significantly from Year to
Year. We Cannot be Certain that we will Achieve or Maintain
Profitability in the Future.
Our
operating results historically have been difficult to predict and
have at times significantly fluctuated from year to year due to a
variety of factors, many of which are outside of our
control.
During Fiscal 2018, the Company had
revenues of approximately US$20,104,000, operating losses of
approximately US$1,059,000, and losses before income taxes,
equity in loss of affiliates and non-controlling interests of
approximately US$963,000. In addition, we had income tax credits of
US$312,000, equity in loss of affiliates of (US$932,000), and a
gain on the disposal of affiliate of US$1,522,000. As a result, we
had a net loss of $61,000 for Fiscal 2018 before giving effect to
the effect on our results attributable to our non-controlling
interests. The principal reason for the operating losses before
income taxes, equity in loss of affiliates and non-controlling
interests for Fiscal 2018 was
the decrease in the gross
profit margin percentage of contracts under the keen competitive
market condition
. After
giving effect to the net loss attributable to non-controlling
interest, other comprehensive income/(loss) and comprehensive loss
attributable to non-controlling interest, we had comprehensive
income attributable to the Company of $63,000 for Fiscal 2018.
During Fiscal 2017, the Company had revenues of approximately
US$17,350,000, operating losses of approximately US$574,000, and
losses before income taxes, equity in income of affiliates and
non-controlling interests of approximately US$564,000. In addition,
we had we had income tax expenses of US$28,000, a net gain on
deemed disposal of affiliate of US$128,000 and equity in income of
affiliates of US$831,000. As a result, we had a net profit of
US$367,000 for Fiscal 2017 before giving effect to the effect on
our results attributable to our non-controlling interests. The
principal reason for the operating losses before income taxes,
equity in income of affiliates and non-controlling interests for
Fiscal 2017 was decrease in revenue, and research and development
costs incurred of approximately US$163,000. After giving effect to
the net loss attributable to non-controlling interest, other
comprehensive income/(loss) and comprehensive loss attributable to
non-controlling interest, we had comprehensive income attributable
to the Company of $534,000 for Fiscal 2017. During Fiscal 2016, the
Company had revenues of approximately US$22,478,000, operating
losses of approximately US$670,000, and losses before income
taxes, equity in income of affiliates and non-controlling interests
of approximately US$640,000. In addition, we had income tax
expenses of US$228,000, a net gain on deemed disposal of affiliate
of $24,000 and equity in income of affiliates of US$1,002,000. As a
result, we had a net profit of US$158,000 for Fiscal 2016 before
giving effect to the effect on our results attributable to our
non-controlling interests. The principal reason for the operating
losses before income taxes, equity in income of affiliates and
non-controlling interests for Fiscal 2016 was research and
development costs of approximately US$475,000. After giving
effect to the net loss attributable to non-controlling interest,
other comprehensive income/(loss) and comprehensive loss
attributable to non-controlling interest, we had comprehensive
income attributable to the Company of $289,000 for Fiscal
2016.
As a
result of these factors, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future
performance. Our operating expenses do not always vary directly
with revenue and may be difficult to adjust in the short term. As a
result, if revenue for a particular year or quarter is below our
expectations, we may not be able to proportionately reduce
operating expenses for that period, and therefore such a revenue
shortfall would have a disproportionate effect on our operating
results for that period.
Future Plans to Increase Revenue, Decrease Losses and Achieve
Profitability are Uncertain.
The
Company has been attempting to stem the decline in revenue by
streamlining its activities. The Company has reduced its staff,
consolidated offices and is trying to improve staff efficiencies.
To date, this effort has not been successful, but the Company plans
to continue these economizing efforts. In addition, the
Company has obtained formal certification from
China’s Classification Society (“CCS”), and from
the U.S. Coast Guard for use as an Alternate Management
Systems (“AMS”) in U.S. waters, for its ballast
water treatment system (“BWTS”) models 200, 300, 500,
750, 1200 and 1250 Cubic Meters per hour, as well as RS type
approval (Russian Maritime Register) for its 300 Cubic Meters per
hour BWTS. The Company also received an anti-explosion certificate
from China National Quality Supervision and Test Centre for
Explosion Protected Electrical Products for its BWTS in
2017.
During
2015, the Company entered into a contract to supply a 300 Cubic
Meters per hour BWTS for a maritime institute in Jiangsu, and such
goods were delivered in 2016. It also received an order for one set
of P-300 BWTS for a scientific research ship from Russia in 2017
and completed in 2018. In addition, in 2018, it received a PRC
government grant for port ballast solution. The Company
is commencing a barge and
port R&D product development project as part of its efforts to
continue to be a pioneer of research and development for ballast
water technology in Asia.
The Company hopes to receive
revenues from both port (barge) and commercial vessels for ballast
water treatment including retrofit orders and new built orders.
However, the intake of retrofit orders may be affected by, among
other things, the decision of International Maritime Organization
(“IMO”),
a
specialized agency of the United Nations that serves as the global
standard-setting authority for the safety, security and
environmental performance of international shipping, to extend the
phase-in period for ballast water system retrofits until September
2019, the success of the Company’s marketing and sales
efforts, and by the acceptance of the Company’s products by
customers.
There can be no assurance that the
Company’s continued streamlining efforts, or that sales of
its ballast water treatment process, will be successful or, if
successful, that these efforts will result in a reduction in
losses, an increase in revenues and/or the achievement of
profitability by the Company.
Increases in manufacturing and operating costs and/or the ability
to achieve the savings anticipated from our structural cost
improvement initiative may affect operating results.
Our
costs are subject to fluctuations, particularly due to changes in
commodity prices, raw materials, energy and related utilities and
cost of labor. The achievement of our financial objectives is
reliant on our ability to manage these fluctuations through cost
savings or recovery actions and efficiency
initiatives.
We may
pursue a number of structural cost improvement initiatives from
time to time, but these efforts may not improve our financial
performance or produce the full efficiencies and benefits we expect
due to delays or other factors affecting our execution of these
initiatives.
We are subject to a variety of litigation and similar proceedings
in the course of our business that could adversely affect our
financial statements.
We may
be subject to various litigations and similar proceedings
incidental to our business that arise in the ordinary course of our
business, including claims for damages arising out of the use of
our products and claims relating to intellectual property matters,
employment matters, tax matters, commercial disputes, environmental
matters and personal injury. These lawsuits may include claims for
compensatory damages, punitive and consequential damages and/or
injunctive relief. The defense of these lawsuits may divert
management’s attention, we may incur significant expenses in
defending these lawsuits and we may be required to pay damage
awards or settlements or become subject to equitable remedies that
could adversely affect our consolidated financial statements.
Moreover, any insurance or indemnification rights that we have may
be insufficient or unavailable to protect us against such losses
and expenses. In addition, developments in legal proceedings in any
given period may require us to revise our expectations regarding
the outcome of certain matters or adjust the loss contingency
estimate that is recorded in our consolidated financial statements,
which could adversely affect our results of operations or cash
flows in any particular period. We cannot assure that our
liabilities in connection with litigation and similar proceedings
will not exceed estimates or adversely affect our consolidated
financial statements or reputation.
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.
Material Adverse Effect upon the Company of PRC’s Credit
Restrictions.
The
Company faces increasing competition from other distributors of
substantially similar products and manufacturers themselves, both
foreign and Chinese. The Company faces its principal competition
from foreign manufacturers and other distributors of their products
situated in Hong Kong and the PRC. Competition may cause purchaser
demands for price reductions and reduced profit
margin.
Competition with Vendors.
As the
Company assembles products of the kind that it presently
distributes, the Company may directly compete with certain of its
vendors. Any such direct competition may adversely affect its
relationship with its vendors.
Dependence on Vendors; Lack of Long Term Arrangements; Loss of
Vendors
.
The
Company distributes supplies manufactured by a number of vendors.
Thermo Fisher Scientific Group (“Thermo”), Stanford
Research Systems, Inc. (“Stanford”), Hach Company
(“Hach”) and Hioki E.E. Corp. (“Hioki”) are
among the Company’s largest suppliers, pursuant to short term
arrangements. Although alternative sources of supply exist, there
can be no assurance that the termination of the Company’s
relationship with any of the above or other vendors would not have
an adverse effect on the Company’s operations due to the
Company’s dependence on these vendors. A substantial number
of the Company’s suppliers have been selling their products
into China directly and through other distributors. During Fiscal
2016, our sales revenue from trading activities increased by
approximately 12%. During Fiscal 2017, our sales revenue from
trading activities decreased by approximately 20%. During Fiscal
2018, our sales revenue from trading activities increased by
approximately 25%. A loss of a substantial vendor or substantial
number of our other vendors and/or our competing with them would
have a material adverse effect on our revenues from trading
activities.
The loss of any of our key customers could reduce our revenues and
our profitability.
For the
year ended December 31, 2018, sales to our two largest customers
amounted in the aggregate to approximately 22% of our total
revenue. For the year ended December 31, 2017, sales to our four
largest customers amounted in the aggregate to approximately 27% of
our total revenue. For the year ended December 31, 2016, sales to
our three largest customers amounted in the aggregate to
approximately 25% of our total revenue. There can be no assurance
that we will maintain or improve the relationships with these
customers, or that we will be able to continue to supply these
customers at current levels or at all. Any failure to pay by these
customers could have a material negative effect on our
company’s business. In addition, having a relatively small
number of customers may cause our half yearly or annual results to
be inconsistent, depending upon when these customers pay for
outstanding invoices.
During
the years ended December 31, 2018, 2017 and 2016, respectively, we
had one customer that accounted for 10% or more of our
revenues.
Customer Name
|
|
Year
Ended
December 31,
2018
|
|
|
Year
Ended
December 31,
2017
|
|
|
Year
Ended
December 31,
2016
|
|
Customer
A
|
|
|
15
|
%
|
|
|
10
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If we
cannot maintain long-term relationships with this major customer,
the loss of our sales to them could have an adverse effect on our
business, financial condition and results of
operations.
Risks Relating To the Company Itself;
Control by T.C. Leung; Potential Conflict of
Interests.
T.C.
Leung, the Company’s Chairman of the Board and Chief
Executive Officer, as a practical matter, is able to nominate and
cause the election of all the members of the Company’s Board
of Directors, control the appointment of its officers and the
day-to-day affairs and management of the Company. As a consequence,
Mr. Leung can have the Company managed in a manner that would
be in his own interests and not in the interests of the other
shareholders of the Company. See – Item 6. “Directors,
Senior Management and Employees” and Item 7. “Major
Shareholders and Related Party Transactions.”
The Company does not control certain joint ventures or associated
companies in which it holds interests or invests, which could limit
Company’s ability to identify and manage risks.
Company
holds interests and has invested, and may continue to hold
interests and invest, in joint ventures or associated companies in
which it has a non-controlling interest; for example, Zhejiang
Tianlan Environmental Protection Technology Co., Ltd.. In these
cases, Company has limited influence over, and limited or no
control of, the governance, performance and cost of operations of
such entities. Some of these entities may represent significant
investments and potentially also use the Company’s brand.
These entities that Company does not control may make business,
financial or investment decisions contrary to Company’s
interests or may make decisions different from those that Company
itself may have made. Additionally, Company’s partners or
members of a joint venture or associated company may not be able to
meet their financial or other obligations, which could expose
Company to additional financial or other obligations, as well as
having a material adverse effect on the value of its investments in
those entities or potentially subjecting Company to additional
claims.
The Company’s inability to secure and maintain intellectual
property rights for products, whilst maintaining overall
competitiveness, could have a material adverse effect on its
results.
Company
is dependent on its ability to obtain and maintain trademarks,
patents, licenses and other intellectual property (IP) rights
covering its products and its design and manufacturing processes.
The IP portfolio is the result of an extensive patenting process
that could be influenced by a number of factors, including
innovation. The value of the IP portfolio is dependent on the
successful promotion and market acceptance of standards developed
or co-developed by Company. This is particularly applicable to the
Company’s PRC subsidiary, Shanghai Euro Tech Limited, which
engages in the development, production and sale of analytical and
testing instruments and equipment, and is applying for related
patents.
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$2.00 to US$11.73
per common share, and the last reported trading price on May 7,
2019 was US$4.43 per Ordinary Share. The market price of our
Ordinary Shares may fluctuate significantly in response to numerous
factors, many of which are beyond our control,
including:
●
changes in the
general environment and the outlook of the segments in which we
operate;
●
regulatory
developments in the segments in which we operate;
●
actual or
anticipated fluctuations in our half yearly or annual results of
operations;
●
changes in
financial estimates by securities research analysts;
●
negative market
studies or reports;
●
changes in
performance and valuation of our peer or comparable
companies;
●
announcements by us
or our competitors of new services, acquisitions, strategic
relationships, joint ventures or capital commitments;
●
changes in our
senior management;
●
sales or
anticipated sales of additional ordinary shares; and
●
fluctuations in the
exchange rate between the Renminbi and the U.S.
dollar.
In
addition, the securities markets in the United States, China and
elsewhere have from time to time experienced significant price and
volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may
also materially and adversely affect the market price of the
Ordinary Shares.
There Are Risks In Purchasing Low-Priced Securities.
If our
securities were to be suspended or delisted from NASDAQ, they could
be subject to rules under the Exchange Act which impose
additional sales practice requirements on broker-dealers who sell
such securities to persons other than established clients and
“accredited investors.” For transactions covered by
such rules, a broker-dealer must make a special suitability
determination of the purchaser and have received the
purchaser’s written consent to the transaction prior to the
sale. Consequently, such rules may affect the ability of
broker-dealers to sell our securities and the ability to sell any
of our securities in any secondary market that may develop for such
securities. In the event our securities are no longer listed on
NASDAQ or are not otherwise exempt from the provisions of the
SEC’s “penny stock” rules, such rules may
also affect the ability of broker-dealers and investors to sell our
securities.
We May Be Considered To Be A Passive Foreign Investment Company For
The 2018 Calendar Year And May Be A Passive Foreign Investment
Company For Future Years, Which Would Result In Adverse U.S.
Federal Income Tax Consequences To U.S. Holders Of Our Ordinary
Shares.
A
non-U.S. corporation will be considered a passive foreign
investment company (“PFIC”) for U.S. income tax
purposes, for any taxable year if either (i) at least 75% of
its gross income is passive income or (ii) at least 50% of the
value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income. The
annual PFIC determination to be made by a U.S. holder of our
ordinary shares is an inherently factual determination and there is
limited guidance regarding the application of the PFIC rules to
specific situations. We currently hold a substantial amount of cash
and cash equivalents, and investments in PRC enterprises, and the
value of our goodwill and other assets may be based in part on the
market price of our ordinary shares, which has experienced
significant fluctuations. Although the determination of PFIC status
is subject to factual uncertainties because it depends upon the
valuation of our ordinary shares, as well as our goodwill and other
assets and income, we are uncertain if we would be considered to be
a PFIC for 2018. In addition, as the determination of PFIC status
is made on an annual basis and depends on variables over which we
have limited control, there can be no assurance that we will not be
a PFIC for 2018 or any future years. If we are a PFIC in any year,
U.S. holders will be subject to certain adverse United States
federal income tax consequences, and are urged to consult with his
or her tax advisor. See—
Item 10. “Taxation—United
States Federal Income Taxation
.”
If We Become Directly Subject to the Recent Scrutiny Involving
U.S.-Listed Chinese Companies, We May Have to Expend Significant
Resources to Investigate and/or Defend the Matter, Which Could Harm
our Business Operations, Stock Price and Reputation and Could
Result in a Complete Loss of Your Investment in Us.
U.S.
listed companies that have substantial operations in China have
been the subject of intense scrutiny by investors, financial
commentators and regulatory agencies. Much of the scrutiny has
centered on financial and accounting irregularities and mistakes, a
lack of effective internal controls over financial reporting and,
in many cases, allegations of fraud. As a result of the scrutiny,
the publicly traded stock of many U.S. listed China-based companies
that have been the subject of such scrutiny has sharply decreased
in value. Many of these companies are now subject to shareholder
lawsuits and/or SEC enforcement actions that are conducting
internal and/or external investigations into the allegations. If we
become the subject of any unwarranted scrutiny, even allegations
that are not true, we may have to expend significant resources to
investigate such allegations and/or defend the Company. Such
investigations or allegations will be costly and time-consuming and
distract our management from our business plan and could result in
our reputation being harmed and our stock price could decline as a
result of such allegations, regardless of the truthfulness of the
allegations.
I
TEM 4.
INFORMATION ON THE
COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The
Company was organized under the laws of the BVI on
September 30, 1996 for the purposes of raising capital and for
acquiring all the outstanding capital stock of Euro Tech (Far East)
Limited ("Far East"), a Hong Kong corporation involved in the
distribution of advanced water treatment equipment. In
March 1997, the Company acquired all the issued and
outstanding capital stock of Far East and it became a wholly-owned
subsidiary and was the primary operational entity of the
Company.
Yixing
Pact Environmental Technology Company Limited
(“Yixing”) and Pact Asia Pacific Limited
(“Pact,” collectively with “Yixing”,
“Pact-Yixing”), companies engaged in the water and
waste-water treatment solution business, became our majority-owned
subsidiaries in 2005, and we acquired additional two percent (2%)
and five percent (5%) equity interests in Pact and Yixing in
January 2010 and July 2011, respectively.
Pact-Yixing,
situated in Shanghai, specialize in the design, manufacture and
operation of water and waste-water treatment plants in several
industries situated in China.
We
established Shanghai Euro Tech Environmental Engineering Company
Ltd. (“Shanghai Environmental”) as a wholly-owned
subsidiary under the laws of the PRC, to carry on our environmental
engineering department with that line of business and its personnel
transferred from our subsidiary, Far East. Shanghai Environmental
is focusing on our water and waste-water treatment engineering
business. We are scaling down this company to avoid duplication of
costs and efforts as we have a 58% equity interest in Pact-Yixing
which operate similar business activities. Shanghai Environmental
is just completing its outstanding projects and had made an
operating loss of approximately US$137,000 in Fiscal 2017 and
US$34,000 in Fiscal 2018 and we plan to wind it down upon
collection of outstanding accounts receivable.
China’s rapid
economic growth had led it to become one of the world’s
largest emitters of sulfur dioxide. The damage due to acid rain
caused by sulfur dioxide is vast, and is also affecting the
neighboring countries as air currents transport sulfur dioxide. To
tackle these environmental and geo-political issues, China has
established targets to reduce key pollutants, namely, sulfur
dioxide, nitrogen oxides and suspended particulates. Heavy
polluters are being warned to reduce their emissions or face
penalties. We believe that as a result, the demand of
desulphurization and dust removal equipment will increase
accordingly.
Far
East owns a 19.4% (2017: 19.4%, 2016:19.7%) equity interest in
Zhejiang Tianlan Environmental Protection Technology Co. Ltd.
(“Blue Sky”), founded in 2000. Blue Sky provides design
and general contracting services, equipment manufacturing,
installation, testing and operation management for the purification
treatment of industrial waste gases (specifically as
desulphurization, flue gas de-nitration, dust removal) emitted from
various boilers and industrial furnaces of power plants, steelworks
and chemical plants. By securing an equity stake in Blue
Sky’s business, we have a strategic partner to work within
China’s environmental protection business. With Blue
Sky’s technology and technical support, we believe we are
able to provide services and environmental solutions not only for
water and waste-water treatment but also for air pollution control
for industrial clients in China. Blue Sky's revenue decreased
during Fiscal 2016, increased during Fiscal 2017 and decreased
during Fiscal 2018, and its net income increased during Fiscal 2016
and 2017 and decreased significantly during Fiscal 2018
particularly due to the filing for bankruptcy liquidation of one of
its major customers. Blue Sky listed its shares on the New Third
Board since November 17, 2015 and it suspended trading from August
15, 2017 and resumed trading on February 2, 2018. The New Third
Board in the PRC, a national over-the-counter market in the PRC
regulated by the China Securities Regulatory Commission, serves as
a trading platform for small and medium-sized enterprises. Any new
issuance of Blue Sky's shares on the New Third Board will dilute
our ownership in Blue Sky. On the other hand, the New Third Board
provides us with an exit channel to sell our position in Blue Sky
if the price is attractive. At the first 2018 General Meeting of
Blue Sky’s shareholders held on January 25, 2018, it was
resolved that Blue Sky should sell all of its shareholding in its
wholly-owned subsidiary, Zhejiang Tianlan Environmental Engineering
and Design Company Limited (‘Blue Sky Engineering’) to
two of Blue Sky’s shareholders, including the major
shareholder. After the General Meeting, some shareholders and their
representatives (including the Company) expressed opposition to the
sale, based upon, among other things, the fact that Blue Sky
Engineering holds an Engineering design Qualification Certificate
(Class A) (the “Engineering Certificate”) in the PRC,
and if disposed, Blue Sky would thereby be rendered unable to
conduct any engineering design business. In light of such
opposition, management of Blue Sky sought the views of its
shareholders, who indicated preference for the termination of the
disposal of Blue Sky Engineering. As a result, the secretary of
Blue Sky’s board of directors has informed the Company that
Blue Sky would consult the related professional parties and duly
decide and resolve upon this matter in accordance with the law. No
final decision has been made with respect to this proposed
transaction.
We
previously had a 20% equity interest in Zhejiang Jia Huan
Electronic Co. Ltd., a company incorporated in the PRC (“Jia
Huan”), with total cost of investment US$2,486,000. Jia Huan
was engaged in the environmental protection business since 1969. On
March 5, 2018, we entered into an Equity Transfer Agreement to sell
this 20% equity stake of Jia Huan for a purchase price of
RMB31,312,500 to Ms. Jin Lijuan (the “Purchaser”), the
wife of the holder of the remaining 80% equity stake of Jia Huan.
In
accordance with the terms of the Agreement, all approvals and
registrations with the relevant governmental authorities were
obtained, the closing of the transaction has been completed, and
the Purchaser paid the purchase price to us, in full in May 2018.
As a result, we recognized a net gain of US$1,522,000 on the
disposal of our equity interest in Jia Huan.
In
Fiscal 2018, Blue Sky made a loss contribution of approximately
US$786,000, and Jia Huan made a loss contribution of approximately
US$146,000 (up to the date of disposal) to the Company. The loss
contribution from Blue Sky in Fiscal 2018 was principally caused by
a decrease in sales revenue as a result of the filing for
bankruptcy liquidation of one of Blue Sky’s major customers,
while the loss contribution from Jia Huan is only reflective of the
loss contribution of Jia Huan up to the date of its disposal in May
2018. In Fiscal 2017, Blue Sky and Jia Huan made income
contribution of approximately US$712,000 and US$119,000,
respectively, to the Company. In Fiscal 2016, Blue Sky and Jia
Huan made income contribution of approximately US$689,000 and
US$313,000, respectively, to the Company. China’s 13th
Five Year Plan promotes a cleaner and greener economy, with strong
commitments to environmental management and protection, clean
energy and emissions controls, ecological protection and security,
and the development of green industries. This demonstrates a clear
focus on charting a sustainable course for the economy in the
long-term and the desire to play a global role in curbing
greenhouse gas emissions. Thus, despite the loss contribution of
Blue Sky in Fiscal 2018, management believes the development in the
Chinese government policy will benefit our business as well as the
business of its affiliate, Blue Sky.
B. BUSINESS OVERVIEW
The
Company had been primarily a distributor of a wide range of
advanced water treatment equipment, laboratory instruments,
analyzers, test kits and related supplies and power generation
equipment (including recorders and power quality analyzers). The
Company acts as an exclusive and non-exclusive distributor for
well-known manufacturers of such equipment, primarily to commercial
customers and governmental agencies or instrumentalities in Hong
Kong and the PRC.
The
Company distributes products through its Hong Kong headquarters,
its trading companies and representative offices in Beijing,
Shanghai and Chongqing. The Company’s PRC trading
subsidiaries are Chongqing Euro Tech Rizhi Technology Co., Ltd. and
Rizhi Euro Tech Instrument (Shaanxi) Co., Ltd. Guangzhou Euro Tech
Environmental Equipment Co., Ltd. was closed on March 18,
2019.
Laboratory
instruments, analyzers and test kits are used to analyze the
chemical content and ascertain the level of impurities or other
contaminants in water. The Company distributes analytical re-agents
and chemicals to support testing systems of laboratory and portable
instruments, process analyzers and portable test kits and assist in
the analysis process. The Company offers a wide variety of test
kits to test water quality. The Company believes that these
portable test kits are easy to use and preadapted for rugged field
use. These test kits are used to monitor drinking water
distribution systems.
Laboratory and
portable instruments generally consist of analytical instruments
including, but not limited to the following: spectrophotometers,
colorimeters, turbidimeters, ion-selective electrodes, chemical
oxygen demand apparati, digestion apparati, and precision re-agent
dispensing devices which are used to test and monitor impurities
and contaminants in water systems. See
“Glossary.”
The
Company also distributes continuous-reading process analyzers,
process turbidimeters, pH controllers and analyzer accessories.
These products are generally used to monitor and control drinking
water quality to ensure that water treatment procedures comply with
regulatory standards. See –
“Glossary.”
In
2005, we acquired Pact-Yixing to allow the Company to bid on larger
water, waste-water and power generation projects. The Company
believes that the Pact-Yixing business is complementary to the
Company’s business as the Company expects to have a
competitive advantage by offering customers and potential customers
not only hardware but solutions to engineering problems as
well.
Pact-Yixing
completed a substantial number of industrial water and waste-water
treatment projects in the PRC. The majority of these projects are
for large multinational manufacturing facilities for clients from
the USA, Europe and Japan. Process design as well as mechanical and
electrical engineering are completed in-house and manufacturing
contracted to approved fabricators of components. Fabrication
drawings are also done in-house for submittal to said fabricators
under the supervision of Pact-Yixing’s quality control
engineers.
Pact-Yixing’s
clients cover a varied spectrum of industries covering
semiconductor, pharmaceutical, petrochemicals, auto and auto parts,
steel, food and beverage and beauty products.
The
water and waste-water treatment processes applied at Pact-Yixing
cover chemical, physical, biological and membrane separation.
Combinations of those processes are normally used to treat a
specific industrial process feed or effluent. With respect to the
water treatment side of Pact-Yixing’s business, they design
and build filtration equipment, ion-exchange softeners and
demineralizers, reverse osmosis, electro-deionization, chemical
treatment systems and package type mobile water treatment plants.
As for waste-water treatment, Pact-Yixing design and build
biological treatment systems, oil coalescers, dissolved air
flotation, lamella clarifiers, chemical reactor tanks,
ultrafiltration, microfiltration, dewatering systems and package
type mobile sewage treatment plants. Biological treatment plants
cover both aerobic and anaerobic processes. State-of-the-art
aerobic processes of SBR (sequential batch reactors) and MBR
(membrane biological reactors) are technologies also covered by
Pact-Yixing. See
– “Glossary.”
In
2006, Pact-Yixing commenced selling water and waste-water treatment
equipment. Pact and Engineering FZC (“PACTFZC”), a
Middle Eastern water treatment company based in Dubai, and a third
party formed a joint venture (the “JV”). Pact invested
US$300,000 and had a 60% controlling interest of the JV, PACTFZC,
majority owned by George Hayek, Pact-Yixing’s managing
director, and a third party each invested US$100,000 in
consideration for 20% interests. In 2013, The JV was liquidated and
its business has been taken over by Pact-Yixing.
We
continue the process of shifting our emphasis from the distribution
of instruments and equipment to engineering and manufacturing
activities. Revenues from our trading activities have fallen-off as
a substantial number of our suppliers have been selling their
products into China directly and through other distributors. Many
of these other distributors are local Chinese companies and can
operate with a lower overhead.
During
Fiscal 2016, there were increases in revenues from both trading and
engineering activities. Revenue from Pact-Yixing increased
significantly in 2016 to US$8,757,000, while Shanghai Environmental
incurred an operating loss of US$105,000. In addition, we incurred
research and development costs of approximately US$475,000 in 2016
relating to BWTS and Pact-Yixing incurred an operating loss of
approximately US$104,000. This resulted in operating loss from
engineering activities of approximately US$209,000. We continue to
scale down Shanghai Environmental to avoid duplication of costs and
efforts, as Pact-Yixing operate similar business activities, and we
plan to wind it down upon collection of outstanding accounts
receivable.
During
Fiscal 2017, there were decreases in revenues from both trading and
engineering activities. Revenue from Pact-Yixing decreased in 2017
to US$6,349,000, while Shanghai Environmental incurred an operating
loss of US$137,000. In addition, we incurred research and
development costs of approximately US$163,000 in 2017 relating to
BWTS and Pact-Yixing incurred an operating loss of approximately
US$169,000. This resulted in operating loss from engineering
activities of approximately US$306,000. We continue to scale down
Shanghai Environmental to avoid duplication of costs and efforts,
as Pact-Yixing operate similar business activities, and we plan to
wind it down upon collection of outstanding accounts
receivable.
During
Fiscal 2018, there was increase in revenues from trading and
manufacturing activities. Revenue from Pact-Yixing in 2018 was
US$6,354,000, while Shanghai Environmental incurred an operating
loss of US$
34,000. In addition, we incurred research and
development costs of approximately US$160,000 in 2018 relating to
BWTS and Pact-Yixing incurred an operating loss of approximately
US$787,000. This resulted in operating loss from engineering
activities of approximately US$821,000. We continue to scale down
Shanghai Environmental to avoid duplication of costs and efforts,
as Pact-Yixing operate similar business activities, and we plan to
wind it down upon collection of outstanding accounts
receivable.
Our
Growth Strategy
We are
focusing our trading activities in Hong Kong, Macau and Guangdong.
These cities are located close to our Hong Kong headquarters, our
customers are more concentrated in these cities rendering customer
support easier while incurring less travel expenses and while
supporting distributorships in these cities as opposed to
distributorships throughout China. We will continue our efforts to
control costs to enhance operational efficiency. At the same time
we will place greater focus at the manufacturing level on the
chemical reagent business that we believe is very profitable and
easier to sell. These chemical reagents are manufactured in our
plant in Shanghai. These reagents include but are not limited to
chemical oxygen demand (COD) analyzers, fine carbon tetrachloride,
total nitrogen and free chlorine. These reagents are used by water
and wastewater treatment plants and other industries such as
beverage, as consumables with the water analyzers to monitor the
quality of the water/ discharged water. To date, our existing
distribution network for these products has had modest success. In
2016, we received a contract worth about US$6.0 million from a
foreign mobile phone company that covers design, supply,
installation and the commissioning of industrial wastewater
treatment and scrubber systems for its OEM plants in Shanghai,
Shenzhen and Zhengzhou, China. This contract was completed in
Fiscal 2017. In 2018, the Company received a PRC government grant
for port ballast solution to fund the development of a prototype,
which prototype expected to be completed prior to the end of 2019.
The Company
is undertaking
marketing and promotion efforts related to the barge and port
product development project in order to seek orders for this
solution following its completion.
We are also currently
exploring ways to penetrate into the Russia market, although no
assurance can be given that we will be able to do so.
In addition, we also continue to
invest a portion of our resources to developing our BWTS for the
global market, and, based upon Pact-Yixing’s competitive
prices and the high quality of its services, feel positive about
our ability to expand our worldwide customer base by working
closely and actively with some international engineering companies.
However, no assurance can be given that these efforts will be
successful.
We also
maintain a website which provides us with the ability to offer
“on-line” product sales (via www.yibaynet.com.cn) at
lower prices than our competitors. To date, however, this website
has not generated any material income.
The
Company believes that by assembling the products it distributes it
may realize increased gross profit margins and greater revenues and
net income than if it remains only a product distributor. During
the next twelve months, we intend to continue to assemble and/or
manufacture additional products, and seek opportunities with our
suppliers to assemble their products, secure manufacturing and/or
assembly facilities. We continue to promote our BWTS products that
currently treat wastewater at rates of 200, 300, 500, 750, 1,200
and 1,250 cubic meters per hour.
We also
anticipate that, during Fiscal 2019, we will spend up to an
additional US$200,000 in research and development costs on
similar projects and potential research and development projects
for the development of BWTS, portable ballast water checker, water
testing equipment and monitoring equipment.
Future Planning and Expansion
We
continuously search for products and equipment with substantial
market potential for design and development. For example,
international shipping ballast water cargo stowaway species and
microorganisms that create unpredictable ecosystem contaminations
as ballast water tanks are emptied or refilled at ports of call.
Pact has been attempting to develop a non-chemical BWTS since late
2010. In 2012, Pact successfully completed and passed the land
based test requirement, and, in 2014, Pact passed ship board
testing and obtained CCS certification in the PRC and
compliance with the IMO convention. In September 2016, the
International Maritime Organization received acceptance from 52
States, representing approximately 35% of world merchant shipping
tonnage. This triggered the applicability of the entry into force
of the Ballast Water Management Convention, which occurred on
September 8, 2017. In July 2017, IMO de
cided that the phase-in period for
ballast water system retrofits will start on September 8,
2019.
The Company is continuing to look for strategic
investors who are interested in providing financing for the
application of
the United States Coast Guard
(“USCG”) Type Approval for its
BWTS in order to
enlarge is market coverage.
We
anticipate that the costs of any such acquisition or product
development would be drawn from our general working capital and,
possibly, by seeking strategic partners such as companies in the
BWM Convention shipping industries or funding raising from
substantial investors, and by private sales of our securities. We
have no commitments or received no indications of interest for the
private sales of our securities.
Product Distribution and Other Services
Scientific Instruments
.
The Company distributes
analytical instruments, environmental quality monitoring
instruments, sample pre-treatment equipment and general purpose
laboratory instruments. Analytical instruments include, but are not
limited to, chromatographs, mass spectrometers, flow injector
analyzers, automated sample preparation workstations and atomic
spectrometers. Environmental monitoring instruments include both
air and water quality monitoring instruments. Air quality
monitoring instruments are generally divided into those which
monitor ambient (i.e., atmospheric) air, and those which monitor
pollution sources. The revenue from sales of air quality monitoring
instruments is nominal as the Company has not been able to acquire
a distributorship for air quality instruments from brand name
manufactures that we believe engage in direct customer sales or
rely on their existing distributors. Sample pre-treatment
equipment is used to clean-up the sample prior to chemical analysis
for checking pesticides and drug residues in food. Additionally,
the Company offers general purpose laboratory instruments including
a variety of water quality monitoring and analysis equipment, such
as continuous reading process analyzers, process turbidimeters, pH
controllers, and test kits for monitoring chemical content in water
(i.e., chlorine, fluorides, etc.). See –
“Glossary.”
Customers for the
analytical instruments include government agencies, academic and
research institutions, major laboratories and beverage producers,
including analytical system to the Hong Kong Government Laboratory
for analysis of persistent organic pollutants (POPs) and pesticides
in the environment. Customers for water quality monitoring
instruments also include government agencies. Customers for sample
pre-treatment equipment are mainly different laboratories of major
cities under the Administration of Quality Supervision, Inspection
and Quarantine in the PRC. The Company derived approximately 70.4%,
67.5% and 75.0% of its revenues from the sale of scientific
instruments during Fiscal 2018, 2017 and 2016, respectively.
Power Solutions and Process Automation
Products.
The Company distributes general testing and
measuring equipment including multi-channel digital and analogue
recorders, signal amplifiers and calibration equipment for energy
conservation, renewable energy equipment, power quality analyzers,
continuous emissions monitoring systems and air pollution control
systems to industries including power plants, railway and
aero-space industries, utilities, educational institutions and
telecommunications companies.
The
Company also provides process control systems specifically designed
for the industrial needs of clients including sensors, temperature
gauges, pressure gauges, power and energy consumption meters, flow
meters, valves, temperature and pressure transmitters and control
devices, temperature and pressure calibrators, moisture, power,
energy and harmonic analyzers. Customers for the foregoing
distributed products include government water supply agencies,
water treatment facilities, power and electric companies,
petrochemical plants and instrument
manufacturers.
In
conjunction with the distribution of products such as programmable
logic controllers, telemetry units and supervisory control and data
acquisition (SCADA) systems and software, the Company also provides
systems engineering to government agencies, waste-water treatment
and power generation plants and beverage producers. Specific
services provided include automated control system design, the
operation and management of various waste-water, water and power
generation projects. We endeavor to introduce, develop, and promote
new and advanced technologies, products, and appropriate technical
developments from abroad. We have also been cooperating with
established technology companies and engage in systems and special
projects in Programmable Logic Control, Telemetry unit, SCADA
systems, Human Machine Interface Software and Sequential Event
Recording.
The
Company derived approximately 28.5%, 31.2% and 23.6% of revenues
from the sale of power solutions and process during Fiscal 2018,
2017 and 2016, respectively.
Technical Support.
The
Company’s technical support staff provides customers with
maintenance, installation assistance, and calibration services, and
assists sales personnel in giving technical advice to and
performing product demonstrations for customers. The Company
derived approximately 1.1%, 1.3% and 1.4% of its revenues from
technical support operations during Fiscal 2018, 2017 and 2016,
respectively.
Customers.
During Fiscal 2018, the
Company distributed products to approximately 1,000 customers,
located in Hong Kong, the PRC and Macau such as the Hong Kong Food
and Environmental Hygiene Department, Hong Kong Water Supplies
Department, Government Laboratory, Drainage Services Department,
and various Environmental Monitoring Centers in the PRC. For the
year ended December 31, 2018, sales to our two largest customers
amounted in the aggregate to approximately 22% of our total
revenue, with one of such customers accounting for 15% of our total
revenue.
Manufacturing and Product Assembly Operations
The
Company, through its PRC subsidiary, Shanghai Euro Tech Limited
located in the Pudong Jin Qiao Export Processing Zone of Shanghai,
engages in the development, production, sales and servicing of
environmental equipment, including the development of modern
laboratory analyzers, on-line measuring equipment and other
analyzers for chemicals. Our products are “tailor-made”
for the diversified needs of equipment users. Main products include
infrared photometric oil analyzer (“IPOA”), COD
analyzers, total organic carbon (“TOC”) analyzer,
turbidity meters, total suspended solid analyzers, dissolved oxygen
analyzers, various types of spectrophotometers as well as a full
spectrum of matching chemical reagents. We also offer turbidity
meters manufactured by the Company and directed at water treatment
plants, environmental monitoring status, and hydrological stations.
We also offer our own TOC analytical instrument that measures the
degree of the pollution. We have also upgraded other existing
instruments and developed a quick response COD test instrument for
use on surface water, underground water and domestic and industrial
wastewater. Additionally, we offer a flue gas emissions analyzer
for use in environmental compliance monitoring. We also
developed energy meters (devices measuring electric energy
consumption and corresponding carbon dioxide emissions) and water
toxicity analysis instruments. Although it takes substantial time,
effort and expense to develop, test and market a product, our sales
of the TOC analyzer and the flue gas emissions analyzer have been
nominal to date. We have been unable to find a suitable market to
sell the energy meters. We have developed evaporator for extraction
of organic solvents to remove the impurities prior to chemical
analysis and are developing a larger size evaporator. Our customers
are analyzing environmental pollutants, toxic substances such as
pesticides and drug residues in food, drugs in clinical or forensic
applications. We started test sale of this product in second half
of fiscal 2015 and received orders of 11, 14 and 9 sets in Fiscal
2018, 2017 and 2016, respectively. The Company has developed a
handheld ballast water checker which is the first handheld rapid
indicative compliance instrument made in China, based on well
accepted PAM fluorescence Technology. The instrument is a very
powerful screening tool for ship owners, compliance officers, ship
builders and BWTS providers. The company was one of the few
qualified local and foreign candidates to participate in China
Marine Safety Administration’s (“MSA”) evaluation
of indicative testing instruments to be used by Port State Control
officers for compliance test according to IMO D2 standard. The
unofficial reports of comparison data between our instrument and
lab test results indicated that our instrument readings trend
followed the actual lab test results closely. We obtained patent
approval in China and got the environmental testing certificate
according to Chinese Standard GB/T 11606-2007 from Shanghai
Institute of Measurement and Technology. We are going to carry out
testing of this instrument at the land-based test facility of one
of the Chinese National Engineering Laboratories for Ballast Water
Testing and type approval according to IMO guidelines in order to
get a certified test report from this approved
laboratory.
We are doing
the ground work of promoting our instrument to ship owners,
shipping service and equipment providers, ship builders, BWTS
manufacturers and local MSA. We also participated in a number of
trade shows and exhibitions. Although the regulation is not
enforced now, we are getting market awareness of our product
application. Shanghai Euro Tech Limited achieved its economic
breakeven point in Fiscal 2014.
Sources of Supply
The
Company distributes products manufactured by a substantial number
of major American, European and Japanese corporations, including
Thermo, Stanford, Hach and Hioki, which are the Company’s
largest suppliers, with purchases from them accounting for
approximately 63%, 7%, 5% and 4% during fiscal 2016, 45%, 10%, 9%
and 5% during Fiscal 2017, and 55%, 8%, 7% and 7% during Fiscal
2018, respectively. The Company has exclusivity agreements for
specified geographic areas with many of its suppliers for certain
products. Those agreements do not encompass all products
distributed by the Company or all of the market areas serviced by
the Company. In addition, some of these agreements are memorialized
not as formal contracts but rather through other acknowledgements
or correspondence which may contain a vague, if any, description of
the terms and conditions of such agreement or arrangement, and
therefore may be unenforceable. The Company has
agreements and has an Authorization Letter from Hach appointing the
Company as Hach’s distributor in Hong Kong and Macau which is
valid until January 4, 2020. The Company has an Agreement with
Thermo granting the Company rights to sell Thermo’s Mass Spec
Products to the Government and hospitals in Hong Kong which is
valid until March 31, 2020. The Company has only an Authorization
Letter from Stanford appointing the Company as Stanford’s
sales representative in the PRC and Hong Kong. The Company has only
an Authorization Letter from Hioki appointing the Company as
Hioki’s sole agent in Hong Kong and Macau. Although
alternative sources of supply exist, there can be no assurance that
the termination of the Company’s relationship with any of the
above or other vendors would not have an adverse effect on
operations.
Regu
l
atory
Environment
Concerns about and
awareness of pollution problems and environmental issues have grown
at all levels of PRC government as the PRC experienced economic
growth. Environmental protection laws and strict regulations have
been enacted and are buttressed by increased budget allocations for
environmental regulation, monitoring and enforcement. The
PRC’s primary environmental protection agency is the Ministry
of Ecology and Environment (“MEE”) which replaced the
Ministry of Environmental Protection (“MEP”) after the
13
th
National People’s
Congress was held in March 2018. The new streamlined ministry is a
sign of China’s upgraded dedication to the task of improving
its environment. As of 2015, there were 2,810 monitoring centers in
China. In the 19
th
Five-Year
Program (2016-2020), MEE launched three major campaigns of
prevention and control of environment, including action plans for
control of air pollution, water pollution and soil pollution.
Special action was also taken in the Beijing-Tianjin-Hebei region
and the Yangtze River economic belt for air and water pollution
control, respectively. Major indicators to assess air quality are
SO2, NOX, PM10 and PM2.5. Indicators for water are COD, petroleum
oil, total nitrogen, total phosphorus and ammonia nitrogen. We have
designed and built instruments to detect these indicators. In-depth
investigation of soil environment quality, building monitoring
network and improvement of soil quality information management are
ongoing. The government’s goal is to have 90% safe
utilization of polluted farmland. The government has outsourced
testing to commercial testing labs. Heavy metals and organic
pollutants are being analyzed. Our concentrator automates
evaporation and improves data quality for organic analysis. There
can be no assurance that the agencies will continue to use our
products for these purposes, or that other market competitors will
not enter the market with superior products, distribution systems
or more competitive prices. See –
“Competition.”
Competition
The
Company faces competition from other distributors of substantially
similar products as well as the manufacturers of such products, and
in both foreign and Chinese markets. The Company faces its
principal competition from manufacturers and other distributors of
its core products located in Hong Kong and the PRC. Moreover, the
Company has implemented plans to assemble products of the kind that
it presently distributes (see – “Manufacturing and
Product Assembly Operations”). Assembly operations have
developed to the stage where some products have already been
presented to the market and the Company is in direct and
unavoidable competition with certain of its vendors. There can be
no assurance that the existence of this direct competition will not
impair the Company’s ability or such competitor’s
willingness to continue providing other products for continued
distribution by the Company and that such a development would not
materially adversely affect the Company’s core
business.
During
Fiscal 2018, 2017 and 2016, the Company’s gross profit
margins were approximately 18%, 25% and 22%, respectively. The
Company believes that it competes with the PRC manufacturers on the
basis of quality and technology. The Company believes it offers
foreign-manufactured products which are of higher quality and use
more advanced technology than products manufactured in the PRC. The
Company believes that it competes with foreign manufacturers and
other distributors of their products on the basis of the
Company’s more extensive distribution network and an
established reputation. Pact-Yixing focuses on a market of
providing water and waste water treatment services to multinational
companies. The Company competes in this market based upon the
quality of its products and having a knowledgeable staff, but faces
competition from large PRC and multinational engineering companies,
that, in the Company’s view, market their services based upon
low pricing as opposed to quality of service.
Website
The
Company has an internet platform located at
http://www.chinah2o.com. The website is directed toward
environmental businesses in China. The website provides
environmental news, directories of western suppliers, potential
clients in China, and advertisement space but has not generated
sufficient external revenue.
The
Company, through its subsidiary, Euro Tech Trading (Shanghai)
Limited, a PRC corporation, has an internet platform. The website
is located at http://www.yibaynet.com.cn. The website is an
instrument sourcing platform under which potential customers can
ask for sales quotations and place orders via internet. It can
replace some functions of the closed retail shops.
Sales and Marketing
The
Company distributes products through its principal office located
in Hong Kong, and its wholly-owned trading company in Shanghai.
During Fiscal 2016, the Company had a marketing and sales force
of 21 people who are paid a salary plus a sales-based
commission. During Fiscal 2017, the Company had a
marketing and sales force of 16 people who are paid a salary plus a
sales-based commission. During Fiscal 2018, the Company had a
marketing and sales force of 15 people who are paid a salary plus a
sales-based commission. Our sales staff assists customers in
selecting the equipment, auxiliary parts and products to suit
customer specifications.
Our
remaining sales subsidiaries are located in: Shanghai, Chongqing
and Xi’an. We are now closing Chongqing and Xi’an
subsidiaries.
Our
remaining representative office is located in Beijing, which is a
sales office of Shanghai Euro Tech Limited.
Litigation
From
time to time, we are subject to legal proceedings, investigations
and claims incidental to the conduct of our business. We are not
currently a party to any legal proceeding or investigation which,
in the opinion of our management, is likely to have a material
adverse effect on our business, financial condition or results of
operations. Shanghai Euro Tech Environmental Engineering Company
Limited (“Shanghai Environmental”), our wholly-owned
subsidiary, filed a civil action claim in the Baise Intermediate
People’s Court of Guangxi Zhaung Autonomous Region against
GuangXi Tiandong Industrial Investment Development Co., Ltd., for
outstanding accounts receivable debts of approximately of
US$334,000. The litigation has not been concluded.
C. ORGANIZATIONAL STRUCTURE
Euro
Tech Holdings Company Limited was incorporated in the British
Virgin Islands on September 30, 1996.
Far
East is the principal operating subsidiary of the
Company. It is principally engaged in the marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems in Hong Kong and in the
PRC.
Details
of the Company’s current significant subsidiaries are
summarized as follows:
Name
|
|
Percentage of equity ownership
|
|
Place of incorporation
|
|
Principal activities
|
|
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
Tech (Far East) Limited
|
|
100%
|
|
Hong
Kong
|
|
Marketing
and trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
|
|
Euro
Tech Trading (Shanghai) Limited
|
|
100%
|
|
PRC
|
|
Marketing
and trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
|
|
Shanghai Euro Tech
Limited
|
|
100%
|
|
PRC
|
|
Manufacturing
of analytical and testing equipment
|
|
|
|
|
|
|
|
Shanghai Euro Tech
Environmental Engineering Company Limited
|
|
100%
|
|
PRC
|
|
Undertaking
water and waste-water treatment engineering projects
|
|
|
|
|
|
|
|
Yixing
Pact Environmental Technology Co., Ltd
|
|
58%
|
|
PRC
|
|
Design,
manufacturing and operation of water and waste water treatment
machinery and equipment
|
|
|
|
|
|
|
|
Pact
Asia Pacific Limited
|
|
58%
|
|
British
Virgin Islands
|
|
Selling
of environmental protection equipment, undertaking environment
protection projects and providing relevant technology advice,
training and services
|
|
|
|
|
|
|
|
Affiliate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhejiang Tianlan
Environmental Protection Technology Co. Ltd.
|
|
19.4%
|
|
PRC
|
|
Design,
general contract, equipment manufacturing, installation, testing
and operation management of the treatment of waste gases
emitted
|
|
|
|
|
|
|
|
D. PROPERTY, PLANT AND EQUIPMENT
The
Company has various operating lease agreements for office and
industrial premises. Rental expenses for the year ended December
31, 2018 were approximately US$276,000. Future minimum rental
payments as of December 31, 2018, under the agreements classified
as operating leases with non-cancellable terms amounted to
US$87,000, of which US$87,000 are payable in the year 2019 and
US$Nil are payable within years 2020 to 2024.
The
Company maintains an executive office at Unit C and D, 18/F Gee
Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company
occupies approximately 7,000 square feet of office and warehouse
storage space under a two year lease that expires in May 2019
with a monthly rental payment of approximately US$7,282. The
warehouse storage space is used to hold products for distribution
to our customers via common carriers.
The
Company owns approximately 1,200 square feet of space in a building
in Hong Kong. This property is now rented out to a third
party.
Euro
Tech Trading (Shanghai) Limited has two offices rented pursuant to
short term leases, at an aggregate monthly rent of approximately
US$1,160. Shanghai Euro Tech Limited’s premises are rented
pursuant to a short term lease for a monthly rent of approximately
US$4,735. Shanghai Euro Tech Environmental Engineering Company
Limited's premises are also rented pursuant to a short term lease
for a monthly rent of approximately US$554.
Yixing
occupies a 700 square meter facility in Shanghai, pursuant to a
three year lease expiring in January 2020, providing for a
monthly rent of approximately US$5,613.
ITEM 4A.
U
NRESOLVED STAFF COMMENTS
None.
ITEM 5.
O
PERATING AND FINANCIAL REVIEW AND
PROSPECTS
Overview
. The Company is engaged in two
different major segments, namely trading and manufacturing and
engineering.
For the
trading and manufacturing segment, the Company is a distributor of
a wide range of advanced water treatment equipment, laboratory
instruments, analyzers, test kits and related supplies and power
generation equipment (including recorders and power quality
analyzers), and its PRC subsidiary, Shanghai Euro Tech Limited,
which is located in the Pudong Jin Qiao Export Processing Zone of
Shanghai, engages in the development, engineering, production,
sales and servicing of environmental protection equipment, and
energy conservation and related products.
For the
engineering segment, the Company, through its majority owned
subsidiaries, Pact-Yixing, its wholly-owned subsidiary, Shanghai
Environmental, and its minority owned affiliate, Blue Sky, also
engages in water and waste-water treatment engineering and air
pollution control business.
A. OPERATING RESULTS
Background - Political and Economic Conditions in Hong Kong and the
PRC
The
Company’s operations are located almost entirely within, and
revenues are almost entirely generated from Hong Kong and the PRC.
Set forth below are the approximate percentage of the
Company’s sales made to customers in the PRC and Hong Kong
for the fiscal years indicated:
|
|
|
|
|
|
2016
|
47
%
|
52
%
|
2017
|
45
%
|
53
%
|
2018
|
40
%
|
56
%
|
Sales
to customers situated in Macau and elsewhere through Fiscal 2018
were nominal. This makes the Company particularly susceptible to
changes in the political and economic climate of either Hong Kong
or the PRC.
Hong Kong.
Hong Kong has been one
of the prime centers for commercial activity and economic
development recently in Southeast Asia. On July 1, 1997,
sovereignty over Hong Kong was transferred from the United Kingdom
to the PRC. As provided in the Sino-British Joint Declaration and
the Basic Law, the Hong Kong SAR is provided a high degree of
autonomy except in foreign and defense affairs. The Basic Law
provides that the Hong Kong SAR is to have its own legislature,
legal and judicial system and full economic autonomy for 50 years
after the transfer of sovereignty. Based on the current political
conditions and the Company’s understanding of the Basic Law,
the Company does not believe that the transfer of sovereignty over
Hong Kong has had or will have an adverse impact on its financial
and operating environment. Although the Chinese government has
pledged to maintain the economic and political autonomy of Hong
Kong over its internal affairs, there is no assurance that such
pledge will continue to be honored if there are changes in the
Chinese political or economic climate. Sales in Hong Kong,
expressed as a percentage of our revenue, increased by 4% in Fiscal
2016 as compared with Fiscal 2015. Sales in Hong Kong,
expressed as a percentage of our revenue, increased by 1% in Fiscal
2017 as compared with Fiscal 2016. Sales in Hong Kong,
expressed as a percentage of our revenue, increased by 3% in Fiscal
2018 as compared with Fiscal 2017. See – Item 3D.
“Key Information — Risk Factors.”
PRC.
The PRC has been a socialist
state since 1949. For more than half a century, the PRC’s
economy has been, and presently continues to be, a socialist
economy operating under government controls promulgated under
various state plans adopted by central Chinese government
authorities and implemented, to a large extent, by provincial and
local authorities who may set production and development targets.
However, since approximately the early 1980s, the PRC’s
national government has undertaken certain reforms to permit
greater provincial and local economic autonomy and private economic
activities. Any change in political or economic conditions may
substantially adversely affect these reform initiatives and, in
turn, the Company. Sales in the PRC, expressed as a percentage of
total revenue, decreased by 4% in Fiscal 2016 as compared with
Fiscal 2015. The decrease was primarily due to the fact that the
increase in sales in PRC were less than the overall increase in
sales of the Company. Sales in the PRC, expressed as a percentage
of total revenue, decreased by 2% in Fiscal 2017 as compared with
Fiscal 2016. The decrease was primarily due to a decrease in
engineering revenue in PRC. Sales in the PRC, expressed as a
percentage of total revenue, decreased by 5% in Fiscal 2018 as
compared with Fiscal 2017. The decrease was primarily due to the
increase in sales in PRC were less than the overall increase in
sales of the Company. See – Item 3D. “Key Information
— Risk Factors.”
Results from Operations
The
following operating and financial review should be read in
conjunction with the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Annual Report. All financial
data referred to in the following discussion has been prepared in
accordance with accounting principles generally accepted in the
United States (“US GAAP”).
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
|
$
20,104
|
100
%
|
|
$
17,350
|
100
%
|
|
$
22,478
|
100
%
|
|
$
18,302
|
100
%
|
|
$
18,822
|
100
%
|
Cost of revenue
|
$
16,405
|
81.6
%
|
|
$
12,937
|
74.6
%
|
|
$
17,527
|
78.0
%
|
|
$
14,259
|
77.9
%
|
|
$
13,991
|
74.3
%
|
Gross Profit
|
$
3,699
|
18.4
%
|
|
$
4,413
|
25.4
%
|
|
$
4,951
|
22.0
%
|
|
$
4,043
|
22.1
%
|
|
$
4,831
|
25.7
%
|
Selling and administrative
expenses
|
$
4,751
|
23.6
%
|
|
$
4,976
|
28.7
%
|
|
$
5,602
|
24.9
%
|
|
$
5,997
|
32.8
%
|
|
$
5,802
|
30.8
%
|
Loss before income
Taxes
|
$
(963
)
|
-4.8
%
|
|
$
(564
)
|
-3.3
%
|
|
$
(640
)
|
-2.8
%
|
|
$
(1,904
)
|
-10.4
%
|
|
$
(879
)
|
-4.7
%
|
Income taxes credit /
(expense)
|
$
312
|
1.6
%
|
|
$
(28
)
|
-0.2
%
|
|
$
(228
)
|
-1.0
%
|
|
$
47
|
0.3
%
|
|
$
(18
)
|
-0.1
%
|
Equity in (loss) / income of
affiliates
|
$
(932
)
|
-4.6
%
|
|
$
831
|
4.8
%
|
|
$
1,002
|
4.5
%
|
|
$
850
|
4.6
%
|
|
$
605
|
3.2
%
|
Net gain on disposal of
affiliate
|
$
1,522
|
7.6
%
|
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
|
-
|
-
|
Net (loss) /
profit
|
$
(61
)
|
-0.3
%
|
|
$
367
|
2.1
%
|
|
$
158
|
0.7
%
|
|
$
(1,007
)
|
-5.5
%
|
|
$
(292
)
|
-1.6
%
|
Net loss attributable to
non-controlling interest
|
$
149
|
0.7
%
|
|
$
106
|
0.6
%
|
|
$
73
|
0.3
%
|
|
$
391
|
2.1
%
|
|
$
169
|
0.9
%
|
Net profit / (loss) attributable to
the Company
|
$
88
|
0.4
%
|
|
$
473
|
2.7
%
|
|
$
231
|
1.0
%
|
|
$
(616
)
|
-3.4
%
|
|
$
(123
)
|
-0.7
%
|
Fiscal Year Ended December 31, 2018 Compared to Fiscal Year
Ended December 31, 2017
Revenue; Gross Profit and Cost of Revenue.
Revenue increased by approximately US$2,754,000 or 15.9% to
approximately US$20,104,000 in Fiscal 2018 from approximately
US$17,350,000 in Fiscal 2017. Revenue from trading and
manufacturing activities and engineering activities increased by
approximately US$2,769,000 and decreased by US$15,000,
respectively. The increase in revenues from trading and
manufacturing activities was principally due to increase in big
system sales. Pact-Yixing’s revenues of approximately
US$6,354,000 and US$6,349,000 were included in our revenues in
Fiscal 2018 and Fiscal 2017, respectively.
Gross
profits decreased by approximately US$714,000 or 16.2% to
approximately US$3,699,000 for Fiscal 2018 as compared to
approximately US$4,413,000 for Fiscal 2017. During
Fiscal 2018, the Company’s cost of revenues was approximately
US$16,405,000 or 81.6% of revenues, in comparison to approximately
US$12,937,000 or 74.6% for Fiscal 2017. Cost of revenue expressed
as a percentage of revenue increased by 7.0% in Fiscal 2018 as
compared with Fiscal 2017. Cost of revenues from trading and
manufacturing activities and engineering activities increased by
approximately US$2,573,000 and US$895,000, respectively. The
overall change was principally due to increase in trading
activities of big system sales which were of lower gross margin and
the decrease in the gross profit margin percentage of engineering
contracts under the keen competitive market condition. Pact-Yixing
contributed approximately US$1,113,000 to our gross profit in
Fiscal 2018, a decrease of approximately US$1,975,000 from Fiscal
2017.
Selling and Administrative Expenses.
Selling and administrative expenses were approximately US$4,751,000
in Fiscal 2018, a decrease of approximately US$225,000 or 4.5% from
approximately US$4,976,000 in Fiscal 2017. The decrease was largely
due to tight control over overheads spent. The research and
development expenses increased from approximately US$163,000 in
Fiscal 2017 to approximately US$184,000 in Fiscal
2018.
Equity in (Loss) / Income of Affiliates.
Equity in loss of affiliates was approximately loss of (US$932,000)
in Fiscal 2018, a decrease of approximately US$1,763,000 from
income of affiliates of approximately US$831,000 in Fiscal 2017.
The Fiscal 2018 results included a loss contribution from Blue Sky
of US$786,000 principally caused by a decrease in sales revenue as
a result of the filing for bankruptcy liquidation of one of Blue
Sky’s major customers, and a loss contribution from Jia Huan
of US$146,000.
Net Gain on Disposal of Affiliate.
Net gain on disposal
of affiliate was approximately US$1,522,000 in Fiscal 2018
resulting from the disposal of our equity interest in Jia
Huan.
Interest Income.
Interest income in Fiscal 2018 was
approximately US$35,000 as compared to approximately US$24,000 in
Fiscal 2017.
Other income / (losses).
Other income increased by
approximately US$72,000 to approximately US$58,000 in Fiscal 2018
from approximately US$(14,000) in Fiscal 2017. The increase in
other income was principally due to increase in exchange gain of
US$53,000.
Income Taxes.
Tax credit of approximately
US$312,000 in Fiscal 2018 as compared to tax expenses of
approximately US$(28,000) in Fiscal 2017. This change was
primarily the result of overcharge of tax expenses in previous
years.
Net Income.
Profit from continuing operations was
approximately US$88,000 in Fiscal 2018 as compared
to approximately US$473,000 in Fiscal 2017. This decrease was
primarily due to an increase in operating loss resulting primarily
from higher costs of revenue in our trading and manufacturing
activities and engineering activities, coupled with the negative
contribution from affiliates, which was partially offset by a gain
on disposal of equity in an affiliate.
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year
Ended December 31, 2016
Revenue; Gross Profit and Cost of Revenue.
Revenue decreased by approximately US$5,128,000 or 22.8% to
approximately US$17,350,000 in Fiscal 2017 from approximately
US$22,478,000 in Fiscal 2016. Revenue from trading and
manufacturing activities and engineering activities decreased by
approximately US$2,720,000 and US$2,408,000, respectively. The
decrease in revenues from trading and manufacturing activities was
principally due to drop in big system sales. The decrease in
revenues from engineering activities was principally because there
was a big contract from a foreign mobile phone company received in
Fiscal 2016. Pact-Yixing’s revenues of approximately
US$6,349,000 and US$8,757,000 were included in our revenues in
Fiscal 2017 and Fiscal 2016, respectively.
Gross
profits decreased by approximately US$538,000 or 10.9% to
approximately US$4,413,000 for Fiscal 2017 as compared to
approximately US$4,951,000 for Fiscal 2016. During
Fiscal 2017, the Company’s cost of revenue was approximately
US$12,937,000 or 74.6% of revenues, in comparison to approximately
US$17,527,000 or 78.0% for Fiscal 2016. Cost of revenue expressed
as a percentage of revenue decreased by 3.4% in Fiscal 2017 as
compared with Fiscal 2016. This change was principally due to drop
in trading activities of big system sales which were of lower gross
margin. Pact-Yixing contributed approximately US$1,975,000 to our
gross profit in Fiscal 2017, a decrease of approximately US$601,000
from Fiscal 2016.
Selling and Administrative Expenses.
Selling and administrative expenses were approximately US$4,976,000
in Fiscal 2017, a decrease of approximately US $626,000 or 11.2%
from approximately US$5,602,000 in Fiscal 2016. The decrease was
largely due to tight control over overheads spent. The research and
development expenses decreased from approximately US$475,000 in
Fiscal 2016 to approximately US$163,000 in Fiscal
2017.
Equity in Income of Affiliates.
Equity
in income of affiliates was approximately US$831,000 in Fiscal
2017, a decrease of approximately US$171,000 or 17.1% from
approximately US$1,002,000 in Fiscal 2016 because of decrease in
contribution for Jia Huan.
Interest Income.
Interest income in Fiscal 2017 was
approximately US$24,000 as compared to approximately US$18,000 in
Fiscal 2016.
Other (losses) / income.
Other income decreased by
approximately US$19,000 to approximately US$(14,000) in Fiscal 2017
from approximately US$5,000 in Fiscal 2016. The decrease in other
income was principally due to decrease in rental income of
US$48,000 as one property was vacant during Fiscal
2017.
Income Taxes.
Tax expenses of approximately
US$28,000 in Fiscal 2017 as compared to approximately US$228,000 in
Fiscal 2016. This change was primarily the result of a
decrease in net taxable income for Fiscal 2017.
Net Income.
Profit from continuing operations was
approximately US$473,000 in Fiscal 2017 as compared
to approximately US$231,000 in Fiscal 2016. This change was
primarily due to decrease in operating loss and income
taxes.
B. LIQUIDITY AND CAPITAL RESOURCES
The
Company has primarily used its own funds to finance receivables,
net, contract assets, inventories, and capital expenditures
including purchases of property, office furniture and equipment,
computers and calibration equipment. The Company has historically
met its cash requirements from cash flows from operations,
short-term borrowings, bank lines of credit, and long-term mortgage
bank loans. The Company expects, but can make no assurances that
its present cash reserves, cash from operations and existing
available bank credit facilities exercises would be sufficient to
fund its future capital expenditure requirements. Working capital
at the end of Fiscal 2018 and Fiscal 2017 were approximately
US$6,013,000 and US$2,986,000, respectively.
As of
December 31, 2018, we had approximately US$5,267,000 in cash
and cash equivalents, compared to approximately US$3,380,000 in
cash and cash equivalents as of December 31, 2017. Net cash
(used in) / provided by operating activities was (US$1,345,000) for
the year ended December 31, 2018 as compared to US$652,000 for the
year ended December 31, 2017 and US$153,000 for the year ended
December 31, 2016. Net cash provided by investing activities was
US$5,083,000, US$272,000 and US$199,000 for the years ended
December 31, 2018, 2017 and 2016, respectively. The major items of
cash provided by / (used in) in Fiscal 2018 were net cash inflow of
approximately US$4,889,000 as a result of the sale of our equity
interest in Jia Huan. Net cash (used in) / provided by financing
activities was (US$1,540,000) for the year ended December 31, 2018
as a result of repayment of bank borrowings related to finance
trade purchases
, and dividend
payment of approximately (US$1,443,000)
, as compared to
(US$623,000) for the year ended December 31, 2017 and US$720,000
for the year ended December 31, 2016.
The
Company had various banking facilities available for overdraft,
import and export credits and foreign exchange contracts
from which the Company could have accessed up to approximately
US$897,000 at December 31, 2018. These credit facilities were
obtained on the conditions that, among other things, the Company
pledge rented out property of approximately 1,200 square feet in
Hong Kong as security, not create a charge or lien on its other
assets in favor of third parties without such bank’s consent,
and the Company maintaining a certain level of net
worth.
Cash
increased from approximately US$3,380,000 at the end of Fiscal 2017
to US$5,267,000 at the end of Fiscal 2018. The principal reason for
the increase in cash was net cash inflow from investing
activities.
The
Company’s receivables, net increased from
approximately US$3,808,000 at the end of Fiscal 2017 to
US$5,089,000 at the end of Fiscal 2018. The amount of receivables
subject to collection is expected to be received under normal
commercial trading terms.
The
Company’s inventories decreased from approximately US$496,000
at the end of Fiscal 2017 to US$401,000 at the end of Fiscal
2018.
The
Company’s capital expenditures were approximately US$85,000
and US$18,000 in Fiscal 2018 and Fiscal 2017, respectively. Capital
expenditures during Fiscal 2018 and Fiscal 2017 were incurred
primarily in connection with the purchase of office equipment,
furniture and fixtures, and motor vehicles. The Company continues
to develop new products, for example, non-chemical ballast water
treatment system. If such products developments are indeed made,
the Company may expect to incur significantly larger capital
expenditures, for which the Company presently intends, but as to
which no assurance can be made, to use existing cash reserves, cash
from operations and available bank credit facilities.
Goodwill
Goodwill related to
the engineering segment which is profitable. As of
December 31, 2018, we completed the annual impairment test.
Based on the result of the first step of the test, the Company
determined that there was no impairment of goodwill.
Anticipated Future Resources and Uses of Cash
The
Company has historically funded its working capital, capital
expenditure, investing and expansions needs from operations,
available bank credit facilities and proceeds from the issuances of
our ordinary shares and expects to continue funding these
requirements from operations and available bank credit facilities.
The Company may use its funds to form strategic alliances with
third parties, invest in product research and development, or
expand its sales offices or, with third parties, seek to acquire
new products or form strategic alliances. The Company expects, but
can make no assurances that its present cash reserves, cash from
operations and existing available bank credit facilities would be
sufficient to fund its future cash requirements.
Inflation
The
Company believes generally that past declining rates of inflation
in the PRC have had a positive effect on its results from
operations. As a result of the recent rise in the rate of inflation
in the PRC, we anticipate increases in the overhead costs of our
PRC affiliates and offices. The Company believes, although no
assurance can be given, that as credit restrictions are gradually
lifted, it will be able to increase prices in the market for its
products and thus realize increased profit margins.
Critical Accounting Policies and Estimate
Basis of Consolidation
The
consolidated financial statements include the financial statements
of Euro Tech Holdings Company Limited and its subsidiaries (the
“Group”). The financial statements of variable interest
entities (“VIEs”), as defined by the Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Subtopic 810-10,
Consolidation, are included in the consolidated financial
statements, if applicable. All significant intercompany balances
and transactions have been eliminated on
consolidation.
The
Group identified that a retail shop established in the PRC
qualified as a variable interest entity as defined in ASC 810-10.
This retail shop was principally engaged in the retailing business
of water and waste water related process control, analytical and
testing instruments, disinfection equipment, supplies and related
automation systems. The Company is the primary beneficiary of this
retail shop and, accordingly, consolidated their financial
statements. The Company has a controlling financial interest in
this retail shop and is subject to a majority of the risk of loss
from the retailing activities, and is entitled to receive a
majority of the retail shop’s residual returns. This VIE had
ceased operation since October 2016.
Subsidiaries and affiliates
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders.
Investments in
companies in which the Group has significant influence (ownership
interest of between 20% and 50%) but less than controlling
interests, are accounted for by the equity method. Income on
intercompany sales, not yet realized outside of the Group, was
eliminated. The Group also reviews these investments for impairment
whenever events indicate the carrying amount may not be
recoverable.
In
accordance with ASC Topic 323-10-40-1, a change in the Group's
proportionate share of an investee's equity, resulting from
issuance of shares by the investee to third parties, is accounted
for as if the Group had sold a proportionate share of its
investment. Any gain or loss resulting from an investee's share
issuance is recognized in earnings.
Management
evaluates investments in affiliated companies, for evidence of
other-that-temporary declines in value. Such evaluation is
dependent on the specific facts and circumstances and includes
analysis of relevant financial information (e.g. budgets, business
plans, financial statements, etc.). During the years ended December
31, 2018, 2017 and 2016, no impairment was identified.
Revenue Recognition
The
Group’s revenue are under two segments: Trading and
Manufacturing, and Engineering.
(i)
The
Trading and Manufacturing segment refers to the distribution by the
Group of a wide range of advanced water treatment equipment,
laboratory instruments, analyzers, test kits and related supplies
and power generation equipment (including recorders and power
quality analyzers), as well as the development, engineering,
production, sales and servicing of environmental protection
equipment, and energy conservation and related
products.
Under
the Trading and Manufacturing segment, sales are recognized when or
as the Group satisfies a performance obligation by transferring
control of a product or service to a customer, in an amount that
reflects the consideration to which the Group expect to be entitled
in exchange for the product or service. The Group considers a
number of factors in determining when the Group has transferred
control to a customer, including the following: (i) our present
right to payment; (ii) the customer’s legal title to the
asset; (iii) physical possession of the asset; (iv) the
customer’s significant risks and rewards of ownership of the
asset; and (v) the customer’s acceptance of the
asset.
Generally, payment
terms with the Group's customers are consistent with those used in
their industries and the regions in which the Group
operates.
(ii)
The
Engineering segment refers to the Group’s water and
waste-water treatment engineering and air pollution control
business.
Under the
Engineering segment, the Group's revenues
are recognized as
performance obligations are satisfied over time (formerly known as
percentage-of-completion method), using the output method. Output
method is used because management considers it to be the best
available measure of progress on these contracts. Contract costs
include all direct material, labor, subcontract and other costs and
those indirect costs determined to relate to contract performance,
such as indirect salaries and wages, equipment repairs and
depreciation and insurance. Administrative and general expenses are
charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions,
estimated profitability and associated change orders and claims,
including those changes arising from contract penalty provisions
and final contract settlements, may result in revisions to costs
and income and are recognized in the period in which the revisions
are determined.
Our
contracts generally take 12 to 36 months to complete. The Group
generally provides a one- to two-year warranty for workmanship
under its contracts when completed.
Change
orders are modifications of an original contract that effectively
change the existing provisions of the contract without adding new
provisions or terms. Change orders may include changes in
specifications or designs, manner of performance, facilities,
equipment, materials, sites and period of completion of the work.
Either the Group or their customers may initiate change
orders.
The
Group considers unapproved change orders to be contract variations
for which the Group has customer approval for a change of scope but
a price change associated with the scope change has not yet been
agreed upon. Costs associated with unapproved change orders are
included in the estimated costs to complete the contracts and are
treated as project costs as incurred. The Group recognizes revenue
equal to costs incurred on unapproved change orders when management
determines approval to be probable. Unapproved change orders
involve the use of estimates, and it is reasonably possible that
revisions to the estimated costs and recoverable amounts may be
required in future reporting periods to reflect changes in
estimates or final agreements with customers. Change orders that
are unapproved as to both price and scope are evaluated as
claims.
Research and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately US$184,000,
US$163,000 and US$475,000 for the years ended December 31, 2018,
2017 and 2016 respectively and were included in “Selling and
Administrative expenses”
in the Group’s consolidated
statements of operations and comprehensive income /
(loss).
Income Taxes
The
Group accounts for income and deferred tax under the provision of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognized for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be
realized.
In
accordance with ASC 740-10, the Group recognizes tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits. The Group recognizes interest and/or penalties, if any,
related to income tax matters in income tax expense (Nil for the
years ended December 31, 2018, 2017 and 2016). The Group did not
have such uncertain tax positions in 2018, 2017 and 2016. The Group
is subject to examination of tax authorities in the United States
of America (open for audit for 2016 to 2018), Hong Kong (open for
audit for 2012 to 2018) and PRC (open for audit for 2016 to
2018).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in the consolidated statements of operations and
comprehensive income / (loss) for the period that includes the
enactment date.
Evaluating Impairment for Long Lived Assets
When
events or changes in circumstances indicate that long-lived assets
may be impaired, an evaluation is performed. The evaluation would
be based on estimated undiscounted cash flows associated with the
assets as compared to the asset’s carrying amount to
determine if a write-down to fair value is required. There was no
impairment in 2018, 2017 and 2016. Management believes that there
are no additional events or changes in circumstances which have
indicated that other long-lived assets may be
impaired.
Goodwill
Goodwill represents
the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Accounting principles
generally accepted in the United States of America
(“GAAP”) requires that: (1) goodwill not be amortized,
and (2) goodwill is to be tested for impairment at least annually
at the reporting unit level.
Foreign Currency Translation
The
Company maintains its books and records in United States dollars.
Its subsidiaries and affiliates maintain their books and records
either in Hong Kong dollars or Chinese Renminbi (“functional
currencies”). Foreign currency transactions during the year
are translated into the respective functional currencies at the
applicable rates of exchange at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are translated into the respective functional currencies using the
exchange rates prevailing at the balance sheet dates. Gains or
losses from foreign currency transactions are recognized in the
consolidated statements of operations and comprehensive income /
(loss) during the year in which they occur. Translation adjustments
on subsidiaries’ equity are included as accumulated
comprehensive income or loss.
Use of Estimates
The
preparation of the accompanying consolidated financial statements
in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Certain of the
Group’s accounting policies require higher degrees of
judgment than others in their application. These include the
recognition of revenue and earnings from construction contracts
over time, the valuation of income taxes, goodwill, valuation
allowance for the deferred tax assets, stock compensation, useful
lives of long live assets, impairment of long lived assets,
receivables, net and inventories written down. Management
continually evaluates all of its estimates and judgments based on
available information and experience; however, actual results could
differ from these estimates.
Related Parties
Related
parties are affiliates of the Group; entities for which
investments are accounted for by the equity method by the Group;
trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship
of management; principal owners of the Group; its management;
members of the immediate families of principal owners of the Group
and its management; and other parties with which the Group may deal
if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests. Another party also is a related party if it can
significantly influence the management or operating policies of the
transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be
prevented from fully pursuing its own separate
interests.
Recent
Accounting Pronouncements
The
Group considers the applicability and impact of all
accounting
standards updates (“ASUs”)
. The Group, based on
its assessment, determined that any recently issued or proposed
ASUs not listed below are either not applicable to the Group or may
have minimal impact on its consolidated financial
statements.
Recently
Adopted Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2014-09, “Revenue from Contracts with
Customers (Topic 606)”. We adopted the requirements of the
new pronouncement effective January 1, 2018. See Note 3 to the
consolidated financial statements for further information related
to the Group’s accounting policy and transition disclosures
associated with the adoption of this pronouncement.
In
January 2017, the FASB issued ASU No. 2017-01, “Business
Combinations (Topic 805)”: Clarifying the Definition of a
Business, which clarified the definition of a business with the
objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The Group adopted this ASU on a
prospective basis in January 2018 and there was no effect on the
Group’s financial position, results of operations or cash
flows.
Recently Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments”. The amendments in this ASU require
the measurement and recognition of expected credit losses for
financial assets held at amortized cost. The amendments in this ASU
replace the existing incurred loss impairment model with an
expected loss methodology, which will result in more timely
recognition of credit losses. In November 2018, the FASB issued ASU
No. 2018-19, “Codification Improvements to Topic 326,
Financial Instruments-Credit Losses”, which among other
things, clarifies that receivables arising from operating leases
are not within the scope of Subtopic 326-20. Instead, impairment of
receivables arising from operating leases should be accounted for
in accordance with Topic 842, Leases. The guidance is effective for
the annual reporting periods beginning after December 15, 2020,
including interim periods within those fiscal years. The Group is
currently evaluating the impact on its consolidated financial
position and results of operations upon adopting these
amendments.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The
amendments in this ASU eliminate, add and modify certain disclosure
requirements for fair value measurements. The amendments in this
ASU, among other things, require public companies to disclose the
range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The amendments in this
ASU are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019, and entities are permitted to early adopt either the entire
standard or only the provisions that eliminate or modify the
requirements. The Group does not expect the adoption of these
amendments to have a material impact on its consolidated financial
position and results of operations.
In
August 2016, the FASB issued guidance in ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments”. This update
addresses specific cash flow issues with the objective of reducing
existing diversity in practice. Early adoption is permitted for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. The Group expects to adopt this
guidance as required and does not expect a material impact to the
consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04, “Intangibles
— Goodwill and Other (Topic 350)”: Simplifying the Test
for Goodwill Impairment, which simplifies the subsequent
measurement of goodwill, through elimination of Step 2 from the
goodwill impairment test. Instead, an entity should perform its
annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. The update is
effective for any annual or interim goodwill impairment tests in
fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The guidance requires
application on a prospective basis. The Group does not expect that
this pronouncement will have a significant impact on its
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)”. The amendments under this pronouncement will
change the way all leases with durations in excess of one year are
treated. Under this guidance, lessees will be required to recognize
virtually all leases on the balance sheet as a right-of-use asset
and an associated financing lease liability or capital lease
liability. The right-of-use asset represents the lessee’s
right to use, or control the use of, a specified asset for the
specified lease term. The lease liability represents the
lessee’s obligation to make lease payments arising from the
lease, measured on a discounted basis. Based on certain
characteristics, leases are classified as financing leases or
operating leases. Financing lease liabilities, which contain
provisions similar to capitalized leases, are amortized like
capital leases under current accounting, as amortization expense
and interest expense in the statement of operations and
comprehensive income / (loss). Operating lease liabilities are
amortized on a straight-line basis over the life of the lease as
lease expense in the statement of operations and comprehensive
income / (loss). This update is effective for annual reporting
periods, and interim periods within those reporting periods,
beginning after December 15, 2018. The Group intends to adopt this
new guidance using the cumulative effect method, which would apply
to all new lease contracts initiated on or after January 1, 2019.
For existing lease contracts that have remaining obligations as of
January 1, 2019, the difference between the recognition criteria in
the new guidance and the Company’s current practices would be
recognized using a cumulative effect adjustment to the opening
balance of retained earnings
.
The
Group continues to evaluate the impact that this pronouncement, and
all amendments relating to this pronouncement, will have on its
policies and procedures pertaining to its existing and future lease
arrangements, disclosure requirements and on the Group’s
consolidated financial statements. When this pronouncement is
adopted in 2019, the Group expects that most existing operating
lease commitments that extend beyond twelve months at the time of
adoption will be recognized as lease liabilities and right-of-use
(“ROU”) assets upon adoption. Based on preliminary
evaluations, the Group estimates that the value of lease
liabilities will be insignificant upon adoption with corresponding
ROU assets of the same amount based on the present value of the
remaining minimum lease payments under current leasing standards.
Additionally, the Group expects to elect the ’package of
practical expedients,’ which permits the Group to not
reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs. The
Group currently does not expect to elect the use of the hindsight
practical expedient or the practical expedient pertaining to land
easements. The Group, however, expects to elect the short-term
lease recognition exemption for all leases that qualify. This
means, for those leases that qualify, the Group will not recognize
ROU assets or lease liabilities, and this includes not recognizing
ROU assets or lease liabilities for existing short-term leases of
those assets in transition. The Group also currently expects to
elect the practical expedient to not separate lease and non-lease
components for our real estate leases. While the Group is still
evaluating the requirements of this update, it currently does not
expect the adoption to have a material impact on the recognition,
measurement or presentation of lease expenses within the
consolidated statements of operations and comprehensive income or
consolidated statements of cash flows.
C. RESEARCH AND DEVELOPMENT, PATENTS AND
LICENSES, ETC.
During
Fiscal 2018, 2017 and 2016, the Company expensed approximately
US$184,000, US$163,000 and US$475,000, respectively, on the
research and development of its products.
D. TREND INFORMATION
There
are increasing demands in the PRC for clean water, clean air,
greater industrial pollution controls, waste management and
electricity. We also see additional distributors competing with us.
However, given the political situation in the PRC, trends could
quickly disappear and we do not know if they will continue in the
future. We note that, as evidenced by our acquisition of
Pact-Yixing, we are placing greater emphasis on developing our
engineering solution business in an effort to capitalize on these
increased demands (clean water, pollution controls and waste
management).
The
Company believes that the expenses incurred in product development
may result in increases in revenue but such increases are unlikely
to allow for a recovery of the expenses for approximately the next
two years.
E. OFF-BALANCE SHEET ARRANGEMENTS
We have
not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We do not
have any retained or contingent interest in assets transferred to
an unconsolidated entity that serves as credit, liquidity or market
risk support to such entity. We do not have any obligation under a
derivative instrument. We do not have any obligation arising out of
a variable interest in any unconsolidated entity that is held by,
and material to, us which provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or
research and development services with us.
F. TABULAR DISCLOSURE OF CONTRACTUAL
OBLIGATIONS
The following table sets forth our contractual
obligations by specified categories as of December 31,
2018.
Payment Due By Period
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
US$87,000
|
|
US$87,000
|
|
—
|
—
|
—
|
|
|
|
|
Total Contractual
Cash Obligations
|
|
US$87,000
|
|
US$87,000
|
|
—
|
—
|
—
|
ITEM 6.
D
IRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Information
concerning the Directors and Executive Officers of the Company are
as follows:
Name
|
|
Age
|
|
Position
|
T.C.
Leung
|
|
75
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
|
|
|
|
Jerry
Wong
|
|
60
|
|
Director
and Chief Financial Officer
|
|
|
|
|
|
Alex
Sham
|
|
55
|
|
Director
|
|
|
|
|
|
Y.K.
Liang
|
|
89
|
|
Director
|
|
|
|
|
|
Fu Ming
Chen
|
|
70
|
|
Director
|
|
|
|
|
|
Janet
Cheang
|
|
63
|
|
Director
|
|
|
|
|
|
David
YL Leung
|
|
45
|
|
Director
|
Set
forth below is a brief background of the executive officers and
directors based upon the information supplied by them to the
Company:
T.C. Leung
has been Chief
Executive Officer and Chairman of the Board of Directors of both
the Company and Far East since their inception. Before establishing
Far East, Mr. Leung was an engineer for English Electric in
England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong,
from 1968 to 1970. Mr. Leung also served as managing director
of Eurotherm (Far East) Ltd. (“Eurotherm”) between 1971
and 1992. From 1988 until he retired in February 2005,
Mr. Leung had also served as managing director of Eurotherm
Hong Kong. Mr. Leung received a Master’s degree in
Business Administration from the University of East Asia, Macau in
1986 and is a Chartered Engineer, a title bestowed upon a member of
the Council of Engineering Institutions in the United
Kingdom.
Jerry Wong
has served as Director
and Chief Financial Officer of Far East since 1994 and has been
with Far East since 1987. Mr. Wong has been the Chief
Financial Officer and a Director of the Company since its
inception. From 1985 until 1987, Mr. Wong worked for MUA
Agencies Ltd., a subsidiary of a Hong Kong publicly listed company
engaged in the insurance business, as deputy manager of its
secretarial, legal and accounting department. From 1981 until 1985,
Mr. Wong served as a senior accountant in Price
Waterhouse-Hong Kong. He is a Fellow of the Association of
Chartered Certified Accountants in the United Kingdom and a
Certified Public Accountant in Hong Kong.
Alex Sham
has been a Director of
the Company since its inception. Mr. Sham joined Far East in
1988 and has been its Sales Manager since 1993 and became a
Director of Far East in 1996. Mr. Sham received a Bachelor of
Science in Applied Chemistry from Hong Kong Baptist University in
1990. Prior to joining Far East, Mr. Sham was employed by the
Environmental Protection Department of the Hong Kong Government
from 1986 until 1988. Mr. Sham received a Master’s
Degree in Business Administration from the University of Adelaide
in 2003.
Y.K. Liang
has been a Director of
the Company since February 1998. Mr. Liang was a director
of Wong Liang Consultants Ltd. (“Consultants”) and a
member of the certified public accounting firm of Y.K.
Liang & Co. (“LCO”). Mr. Liang has been a
director of Sammy Lau CPA Limited for more than the past six years.
Consultants is a general business consulting
firm.
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.
David YL Leung
is the General
Manager of Yixing Pact Environmental Technology Co., Ltd, Shanghai.
His responsibility includes management of engineering, sales,
marketing, projects, and procurement. Before joining Yixing, he was
the Business Development Manager of Far East, the parent company of
Yixing Pact in Hong Kong, and has been working for the parent
company for more than 10 years. Mr. Leung has gained a solid sales
and marketing experience in distributing power, analytical and
scientific testing equipment in Hong Kong and Macau. He has also
worked for a high tech Japanese company focused on power and
electrical testing instrument in Japan from 2000 and 2001 as a
trainee. Mr. Leung is an environmental studies graduate from
Carleton University, Ottawa, Canada (1997) with a special focus on
Environmental Impact Assessment, and a Master of Management
graduate from Macquarie Graduate School of Management, Sydney
Australia (2010). Mr. David YL Leung is the son of Mr. T.C. Leung,
the Company’s Chief Executive Officer and Chairman of the
Board.
B. COMPENSATION.
From
the Company and its subsidiaries, for services rendered in all
capacities to the Company and its subsidiaries during Fiscal 2018,
T.C. Leung, the Chairman of the Board and Chief Executive Officer
received a yearly salary of US$193,000 (2017: US$ 194,000, 2016:
US$ 195,000), Jerry Wong, Chief Financial Officer received a yearly
salary of US$107,000 (2017: US$ 108,000, 2016: US$ 108,000) and
George Hayek, a Key Employee of Yixing, received a yearly salary of
US$59,000 (2017: US$ 62,000, 2016: US$66,000). David YL Leung, a
Key Employee of Yixing receives an annual salary of US$136,000
(2017: US$ 131,000, 2016: US$ 130,000) and is reimbursed for actual
travel and lodging expenses in Shanghai. There is no other
information with respect to the compensation paid by the Company
and its subsidiaries, for services rendered in all capacities to
the Company and its subsidiaries during Fiscal 2018 to the Chairman
of the Board and Chief Executive Officer and a Key Employee of the
Company. No other executive officer or employee received in excess
of US$100,000 as compensation during Fiscal 2018.
Compensation of
Directors
.
Directors of the Company do not receive compensation for
their services as directors; however, Board of Directors authorize
the payment of compensation to the Directors for their attendance
at regular and annual meetings of the Board and for attendance at
committee meetings of the Board as is customary for similar
companies. Directors are reimbursed for their reasonable
out-of-pocket expenses in connection with their duties to the
Company.
Pension Plan.
Prior to
December 1, 2000, Far East had only one defined contribution
pension plan for all its Hong Kong employees. Under this plan, all
employees were entitled to pension benefits equal to their own
contributions 50% to 100% of individual fund account balances
contributed by Far East, depending on their years of service with
Far East. Far East was required to make specific contributions at
approximately 10% of the basic salaries of the employees to an
independent fund management company.
With
the introduction of the Mandatory Provident Fund Scheme, a defined
contribution scheme managed by an independent trustee on
December 1, 2000, Far East and its employees who joined Far
East subsequently makes monthly contributions to the scheme at 5%
of the employee’s cash income as defined under the Mandatory
Provident Fund Schemes Ordinance. Contributions of both Far East
and its employees are subject to a cap of monthly relevant income
of HK$30,000 and thereafter contributions are voluntary and are not
subject to any limitation. Far East and its employees made their
first contributions in December 2000.
As
stipulated by the rules and regulations in the PRC, the PRC
subsidiaries contribute to state-sponsored retirement plans for its
employees in the PRC. PRC subsidiaries' contribution range from 14%
to 20% of the basic salaries of its employees, and has no further
obligations for the actual payment of pension or post-retirement
benefits beyond the annual contributions. The state-sponsored
retirement plans are responsible for the entire pension obligations
payable to retired employees.
During
the year ended December 31, 2018, the aggregate contribution
of the Company to the aforementioned pension plans and retirement
benefit schemes was approximately US$278,000.
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.
Other
Stock Option Plans
Effective on
November 22, 2014, the Company entered into a stock option contract
with a Business Development Manager of Yixing-Pact, granting the
optionee the right to purchase 20,692 Ordinary Shares, 1% of the
Company’s issued and outstanding shares, at an exercise price
of $3.44 per share. The exercise price was determined by the
average closing price of the Company’s Ordinary Shares as
reported by NASDAQ for a ten day period prior to the end of the
Business Development Manager’s probationary period on
November 22, 2014, the effective date of the stock option contract.
The stock options granted are exercisable three years after the
effective date and terminate five years after the effective date.
In the event of the optionee’s termination, except for his
resignation, the options may be exercisable within three months of
the termination. In the event of optionee’s death, retirement
or disability, he or his legal representative shall have up to one
year to exercise the option.
Changes
in outstanding stock options under plans mentioned above, during
the year ended December 31, 2018, were as follows:
|
|
|
|
|
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
-
|
-
|
-
|
-
|
20,692
|
3.44
|
Cancelled
|
-
|
-
|
-
|
-
|
(20,692
)
|
(3.44
)
|
|
|
|
|
|
|
|
Outstanding, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Exercisable, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
As of
December 31, 2018, there were no options outstanding.
C. BOARD PRACTICES
The
term of each of the Company’s directors expires at the
election and qualification of their successors at the next annual
meeting of the Company’s shareholders, anticipated to be held
in September of this year. One director was appointed in March 2019
as an addition to the existing Board
of Directors
. The Company’s other six directors
were re-elected at the Company’s last annual meeting of
shareholders in November 2018. The Board has a standing Audit
Committee to assist the Board in carrying out its duties. The Audit
Committee has a written charter approved by the Board. The chair of
the Audit Committee determines the meeting agenda of the Audit
Committee. The Audit Committee members receive materials in advance
of Committee meetings allowing them to prepare for the
meeting.
The
Company had two meetings of its Board of Directors during Fiscal
2018, while its Audit Committee had three meetings during Fiscal
2018.
The
Audit Committee assists the Board in monitoring the Company’s
financial accounting, internal controls, planning and reporting.
Among its duties, the Audit Committee:
●
reviews the
Company’s auditing, accounting and financial reporting
process;
●
reviews the
adequacy of the Company’s internal controls;
●
reviews the
independence, fee arrangements, audit scope, and performance of the
Company’s independent auditors, and recommends the
appointment or replacement of independent auditors to the Board of
Directors;
●
reviews and
approves all non-audit work, if any, to be performed by the
auditors;
●
reviews the
adequacy of the organizational structure;
●
reviews, before
release, the audited consolidated financial statements and
operating and financial review and prospects contained in the
Company’s Annual Report on Form 20-F, and recommends that the
Board of Directors submit these items to the shareholders’
meeting for approval;
●
provides an open
avenue of communication among the Company’s independent
auditors, financial and senior management, and the Board of
Directors;
●
reviews and updates
the Company’s Code of Business Conduct and Ethics and ensure
that there is a system to enforce the same and that this Code
complies with all applicable rules and regulations;
●
ensures that the
Company’s management and auditors assess current financial
reporting issues and practices; and
●
reviews and
pre-approves both audit and non-audit services to be provided by
the Company’s auditors.
The
Audit Committee is currently composed of Y.K. Liang, Janet Cheang
and Fu Ming Chen. The Audit Committee’s “financial
expert” is Y.K. Liang. The Board has determined that the
membership of the Audit Committee meets the current independence
requirements of the NASDAQ listing standards as same applies to
private foreign issuers and the applicable rules and
regulations of the SEC because they are not currently employed by
us, and do not fall into any of the enumerated categories of who
cannot be considered independent in NASDAQ’s listing
standards.
D. EMPLOYEES
At May
7, 2019, the Company (exclusive of Yixing-Pact) had approximately
54 full-time employees. At December 31, 2018, 2017 and 2016,
staffing levels at the Company (exclusive of Yixing-Pact) were
approximately as follows:
|
|
|
|
Marketing and
sales
|
15
|
16
|
21
|
Administrative
|
22
|
27
|
28
|
Technical
|
17
|
16
|
16
|
Total full time
employees
|
54
|
59
|
65
|
At May
7, 2019, Pact-Yixing had approximately 36 full-time
employees. In addition, as of December 31, 2018,
2017 and 2016, respectively, staffing levels at Pact-Yixing were
approximately as follows: Engineers - 27, 30 and 41; Administrative
Persons - 8, 8 and 8.
The
Company is not subject to any collective bargaining agreement and
believes that its relations with its employees are good. The
Company’s Management consists of its officers and
directors.
E. SHARE OWNERSHIP
With
respect to the share ownership of the directors and senior
management of the Company, reference is made to Items 7
“Major Shareholders” and 7B. “Related Party
Transactions.”
ITEM 7.
MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The
following table sets forth, as of May 7, 2019, certain
information concerning beneficial ownership of the Company’s
voting shares that date, with respect to (i) each person known
to the Company to own 5% or more of the outstanding Ordinary
Shares, (ii) each director and executive officer of the
Company, and (iii) all officers and directors of the Company
as a group. Based upon 2,061,909 shares of the Company’s
Ordinary Shares outstanding as of May 7, 2019. The
Company’s major shareholders do not have different voting
rights.
|
Amount and
Nature of
Beneficial
Ownership(4)
|
Approximate
Percentage
Of Ordinary
Shares Owned
|
T.C. Leung
(1)
|
1,059,924
|
51.4
%
|
|
|
|
Alex
Sham(1)
|
53,722
|
2.6
%
|
|
|
|
Jerry
Wong(1)
|
34,866
|
1.7
%
|
|
|
|
Y.K.
Liang(1)
|
*
|
*
|
|
|
|
Fu Ming
Chen(1)
|
*
|
*
|
|
|
|
Janet
Cheang(1)
|
*
|
*
|
|
|
|
David YL
Leung
|
*
|
*
|
|
|
|
All Executive
Officers And Directors of the Company as a group (7
persons)
|
1,148,512
|
55.7
%
|
*
Denotes Nil
(1)
|
The
address for the Company’s officers and directors is c/o Euro
Tech (Far East) Ltd., Unit D, 18/F Gee Chang Hong Centre, 65 Wong
Chuk Hang Road, Hong Kong.
|
B. RELATED PARTY TRANSACTIONS
See
– Item 6B. Compensation.
C. INTERESTS OF EXPERTS AND COUNSEL
This item does not apply to annual reports on Form
20-F
.
ITEM 8.
F
INANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION
Item
8A.1
|
See
– Item 18.
|
|
|
Item
8A.2
|
See
– Item 18.
|
|
|
Item
8A.3
|
See
– Report of Independent Registered Public Accounting Firms,
pages F-2 and F-3.
|
|
|
Item
8A.4
|
We have
complied with this requirement.
|
|
|
Item
8A.5
|
Not
applicable.
|
|
|
Item
8A.6
|
Not
applicable.
|
|
|
Item
8A.7
|
Legal
Proceedings. See – Item 4B. Business
Overview-Litigation.
|
|
|
Item
8A.8
|
Dividend
Policy.
|
On June 1, 2018, we declared a special cash
dividend of an aggregate of $1,443,336.30, which dividend was paid
to all holders of our outstanding ordinary shares as of June 15,
2018.
The payment of cash dividends, if any, in the future is
within the discretion of the Board of Directors. The payment of
cash dividends, if any, in the future will depend upon the
Company’s earnings, capital requirements and financial
conditions and other relevant factors. The Company’s Board of
Directors does not presently intend to declare any cash dividends
in the foreseeable future, but instead intends to retain all
earnings, if any, for use in the Company and Far East’s
business operations.
B. SIGNIFICANT CHANGES
Except
as disclosed elsewhere in this annual report, we have not
experienced any significant changes since the date of our audited
consolidated financial statements included in this annual
report.
ITEM 9. THE
O
FFER AND LISTING
A. OFFER AND LISTING DETAILS
The
Company has one class of securities presently registered: Ordinary
Shares. These securities are presently traded on the NASDAQ’s
Capital Market under the trading symbols
“CLWT”.
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,
|
|
|
|
|
|
|
|
|
2014
|
2.56
|
6.24
|
2015
|
2.04
|
4.41
|
2016
|
1.46
|
4.43
|
2017
|
2.70
|
5.65
|
2018
|
2.00
|
8.45
|
2019 (through May
7, 2019)
|
2.58
|
11.73
|
Quarters Ended
|
|
|
|
|
|
March 31,
2017
|
3.35
|
4.15
|
June 30,
2017
|
2.70
|
4.50
|
September 30,
2017
|
2.75
|
3.50
|
December 31,
2017
|
3.15
|
5.65
|
March 31,
2018
|
2.50
|
4.45
|
June 30,
2018
|
2.00
|
8.45
|
September 30,
2018
|
3.45
|
5.90
|
December 31,
2018
|
2.25
|
5.07
|
|
|
|
The Following Months
|
|
|
|
|
|
November
2018
|
3.18
|
4.48
|
December
2018
|
2.25
|
3.41
|
January 2019
|
2.58
|
3.23
|
February 2019
|
3.02
|
3.99
|
March
2019
|
3.03
|
11.73
|
April
2019
|
4.10
|
6.50
|
Based
upon information received from its transfer agent, the Company
believes that it has approximately 25 shareholders of record
including 1,309 beneficial owners of its Ordinary Shares held in
nominee names by large clearing houses.
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.
A
DDITIONAL 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 2018 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 at a rate of
25% in 2017 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, 2018, ETTS
had an assessable loss carried forward of US$801,751 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 2018. As of December 31,
2018, SET had an assessable loss carried forward of US$317,098 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”) provides
for the PRC Enterprise Income Tax of 25% in 2018. As of December
31, 2018, SETEE had an assessable loss carried forward of
US$854,388 as agreed by the local tax authority to offset its
profit for the forth coming 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 2018, 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.
Guangzhou Euro Tech Environmental Equipment Co., Ltd. was closed on
March 18, 2019
Yixing
Pact Environmental Technology Co., Ltd is registered in Shanghai as
a Foreign Owned Enterprise that is entitled to Enterprise Income
Tax rate of 25% in 2018. As of December 31, 2018, Yixing had an
assessable loss carried forward of US$1,228,223 as agreed by the
local tax authority to offset its profit for the forth coming years
(2017: US$ 512,252 ). Such loss will expire in 5
years.
Variable Interest
Entity ("VIE") of the Group provide for PRC Enterprise Income Tax
at a rate of 25% in 2017, 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.
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, 2018
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
principle reconciling items from income tax computed at the
statutory tax rates and at the effective income tax rates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
(254
)
|
(94
)
|
(136
)
|
Change in valuation
allowances
|
68
|
120
|
350
|
Over-provision for
income tax in prior years
|
(131
)
|
-
|
-
|
Non deductible
expenses
|
5
|
2
|
14
|
Total (credit) /
provision for income tax at effective tax rate
|
(312
)
|
28
|
228
|
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,
2018.
(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.
Q
UANTITATIVE 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 sales 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 sales. 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 2018. The Company does not currently anticipate entering
into interest rate swaps and/or similar instruments.
ITEM 12.
D
ESCRIPTION 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.
PART II
ITEM 13.
D
EFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
None.
ITEM 14.
M
ATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
In November
2011 and February 2012 the Company restated its Memorandum and
Articles of Association. In January of 2012, the Company combined
or reverse split each eleven of its outstanding Ordinary Shares
into two shares of its Ordinary Shares. The reason for the
foregoing was to comply with NASDAQ Listing Rules.
On
September 20, 2011, the Company received a deficiency letter from
NASDAQ that the Company was no longer 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 order to regain compliance, in January 2012, the Company
effected a combination or reverse split of its Ordinary
Shares.
To
facilitate the combination, Company changed the par value of its
Ordinary Shares from US$0.01 per share to no par
value.
The
Company had been originally incorporated under the International
Business Companies Act (the “IBC” Act). On January 1,
2005 the BVI Business Companies Act, (as amended, the “BC
Act”) came into force, with the objective of replacing the
IBC Act over a 2 year transitional period.
On
January 1, 2007, the Company was automatically re-registered under
the BC Act as a BVI Business Company. Companies that were so
automatically re-registered were not required to submit new
Memorandum and Articles of Association and certain key sections of
the IBC Act were “grandfathered” into the BC Act. See
– Item 10B. Memorandum and Articles of Association. In
December 2011 and January 2012, the Company filed Amended and
Restated Memorandum and Articles of Association with the Registry
of Corporate Affairs of the BVI Financial Services Commission 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.
ITEM 15.
C
ONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management,
including our Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period
covered by this annual report. Disclosure controls and procedures
are defined under SEC rules as controls and other procedures that
are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within
required time periods. Disclosure controls and procedures include
controls and procedures designed to ensure that information is
accumulated and communicated to the issuer's management, including
its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosures.
There
are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their
control objectives.
Based
upon that evaluation, our Chief Executive Officer and Interim Chief
Financial Officer has concluded that our disclosure controls and
procedures were effective as of December 31, 2018.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act.
Our internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation and fair presentation of our consolidated financial
statements for external purposes in accordance with generally
accepted accounting principles. Our Chief Executive Officer and
Chief Financial Officer assessed the effectiveness of our internal
control over financial reporting as of December 31, 2018. In making
this assessment, they used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
Based on this assessment, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2018, our
internal control over financial reporting is
effective.
Notwithstanding the
foregoing, all internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems
were determined to be effective they may not prevent or detect
misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
There
were no changes in our internal controls that occurred during the
period covered by this annual report that has materially affected,
or is reasonably likely to materially affect our internal control
over financial reporting.
I
TEM 16A. AUDIT COMMITTEE
FINANCIAL EXPERT
The
Committee includes one non-employee director who meets the
independence and “financial expert” requirements and
two other members who meet the independence requirements of the
NASDAQ listing standards and the rules and regulations of the
SEC. The Committee includes Mr. Y.K. Liang the
“financial expert” on that committee. See Mr.
Liang’s biographical data in “Item 6A. Directors
and Senior Management” contained in this
Report.
Our
Audit Committee is comprised of Messrs. Y.K. Liang, Janet
Cheang, and Fu Ming Chen. Our board of directors has determined
Mr. Y.K. Liang as an "audit committee financial expert" as
such term is defined in Item 407 of Regulation S-K promulgated by
the SEC. Our board of directors has also determined both Janet
Cheang and Fu Ming Chen are independent directors as defined in
Rule 10A-3 of the Exchange Act and the NASDAQ listing
rules.
Our
Board of Directors has adopted a code of business conduct and
ethics that applies to our directors, officers and employees,
including certain provisions that specifically apply to our chief
executive officer, chief financial officer and any other persons
who perform similar functions for us. The Company agrees to
undertake to provide to any person without charge, a copy of our
code of business conduct and ethics within ten working days after
we receive such person’s written request addressed to our
offices set forth on the cover page of this Report.
ITEM 16C.
P
RINCIPAL
ACCOUNTANT FEES AND SERVICES
The
following table sets forth the aggregate fees by categories
specified below in connection with certain professional services
rendered by Union Power HK CPA Limited who were the principal
external auditors for fiscal years 2018 and 2017,
respectively.
|
For the Year Ended December 31
|
|
|
|
|
|
|
Audit
fees(1)
|
165,000
|
150,000
|
Audit-related
fees(2)
|
|
|
Tax
fees(3)
|
|
|
All other
fees
|
|
|
Our
Audit Committee has adopted a pre-approval policy for the
engagement of our independent accountant to perform permitted audit
and non-audit services. Under this policy, which is designed to
assure that such engagements do not impair the independence of our
auditors, the Audit Committee pre-approves annually a range of
specific audit and non-audit services in the categories of Audit
Service, Audit-Related Services, Tax Services and other services
that may be performed by our independent accountants, and the
maximum pre-approved fees that may be paid as compensation for each
pre-approved service in those categories. Any proposed services
exceeding the maximum pre-approved fees require specific approval
by the Audit Committee.
(1)
|
“Audit
fees” means the aggregate fees billed in each of the fiscal
years listed for professional services rendered by our principal
auditors for the audit of our annual financial
statements.
|
(2)
|
“Audit-related
fees” means the aggregate fees billed in each of the fiscal
years listed for assurance and related services by our principal
auditors that are reasonably related to the performance of the
audit or review of our financial statements and are not reported
under “Audit fees.” Services comprising the fees
disclosed under the category of “Audit-related fees”
involve principally the performance of certain agreed upon
procedures for the years ended December 31, 2018 and 2017,
respectively.
|
(3)
|
“Tax
fees” means the aggregated fees billed in each of the years
listed for professional services rendered by our principal auditors
for tax compliance, tax advice and tax planning.
|
ITEM 16D.
E
XEMPTIONS FROM
THE LISTING STANDARDS FOR AUDIT COMMITTEES
The
Company is a “Controlled Company” as defined in
NASDAQ’s corporate governance rules as a majority of our
shares are owned by a “control person,” T.C. Leung, who
has disclosed his “control person” status in his
filings with the Commission. So long as that “controlled
company” status remains in effect, the Company will be exempt
from certain NASDAQ corporate governance rules that, including
among other things, would require: (a) a majority of our
directors be independent; (b) the compensation of our chief
executive officer be determined or recommended by independent
directors; and (c) director nominations be determined or
recommended by independent directors.
The
Company believes it is in compliance with NASDAQ’s corporate
governance rules as in effect and intends to comply with the
changes to said rules no later than the date that they become
effective.
ITEM 16E.
P
URCHASES OF
EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
There
were no purchases of registered equity securities in 2018 and
2017.
ITEM 16F.
CHANGE IN
REGISTRANT'S CERTIFYING ACCOUNTANT
Not
applicable.
ITEM 16G.
CORPORATE
GOVERNANCE
Not
applicable.
ITEM 16H.
MINE SAFETY
DISCLOSURE
Not
applicable.
PART III
ITEM 17.
F
INANCIAL STATEMENTS
We have
elected to provide financial statements pursuant to Item
18.
ITEM 18.
F
INANCIAL STATEMENTS
The
following financial statements are filed as part of this annual
report on Form 20-F.
Euro Tech Holdings Company Limited
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated Balance Sheets As Of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Income / (Loss) for the
Years Ended December 31, 2018, 2017 and
2016
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
|
|
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
|
|
Notes to the Consolidated Financial Statements
|
|
|
|
Zhejiang Tianlan Environmental Protection Technology Company Limited
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated Balance Sheets As Of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and
2016
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018,
2017 and 2016
|
|
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
|
|
Notes to the Consolidated Financial Statements
|
|
Lists
of Exhibits
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Amended
and Restated Memorandum and Articles of Association
(1)
|
|
|
|
3.2
|
|
Amendments
to Exhibit 3.1 ( 2)
|
|
|
|
4.11
|
|
Registrant’s
Audit Committee Charter (3)
|
|
|
|
12.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
12.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
13.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
13.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
|
|
|
|
|
|
List of Subsidiaries *
|
|
|
|
101
.INS*
|
|
XBRL
Instance Document
|
|
|
|
101
.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
101
.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101
.DBF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
101
.LAB*
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
101
.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
* Filed
with this Annual Report on Form 20-F.
1. Incorporated
by reference, previously filed as an Exhibit to
Registrant’s Form 6-K on November 30, 2011.
2. Incorporated
by reference, previously filed as an Exhibit to
Registrant’s Form 6-K on February 6, 2012.
3. Incorporated
by reference, previously filed as an Exhibit to
Registrant’s Form 20-F filed on August 19,
2002
Pursuant to the
requirements of Section 12 of the Securities Exchange Act of
1934, the registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly
caused and authorize the undersigned to sign this annual report on
its behalf.
|
EURO TECH HOLDINGS COMPANY LIMITED
|
|
|
(REGISTRANT)
|
|
|
|
|
|
May 14,
2019
|
By:
|
/s/ T.C.
Leung
|
|
|
|
T.C.
Leung
|
|
|
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
|
|
|
(Principal
Executive Officer)
|
|
EURO TECH HOLDINGS COMPANY LIMITED
Consolidated Financial Statements
Table of Contents
|
Page
|
Reports
of Independent Registered Public Accounting Firm
|
F-2 to
F-3
|
Consolidated
Balance Sheets As Of December 31, 2018 and 2017
|
F-4
|
Consolidated
Statements of Operations and Comprehensive Income / (Loss) for the
Years Ended December 31, 2018, 2017 and 2016
|
F-4 to
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2018,
2017 and 2016
|
F-7
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended
December 31, 2018, 2017 and 2016
|
F-8
|
Notes
to the Consolidated Financial Statements
|
F-9 to
F-41
|
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Shareholders of
Euro Tech Holdings Company Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Euro Tech Holdings Company Limited (the “Company”) and
its subsidiaries (hereinafter collectively referred to as the
“Group”) as of December 31, 2018 and 2017, and the
related consolidated statements of operations and comprehensive
income / (loss), shareholders’ equity and cash flows for the
two years in the period ended December 31, 2018, 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, 2018 and 2017,
the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2018, 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 audit 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
May 14, 2019
Report of Independent Registered Public Accounting
Firm
To the Directors and Stockholders of
Euro Tech Holdings Company Limited
We have audited the accompanying consolidated statements of
operations and comprehensive income / (loss), changes in
shareholders’ equity and cash flows of Euro Tech Holdings
Company Limited (the “Company”) and its subsidiaries
(hereinafter collectively referred to as the “Group”)
for the year ended December 31, 2016. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United
States). 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. The Company is not required to have, nor were we
engaged to perform, an audit of the Company’s internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
results of their operations and their cash flows of the Company and
its subsidiaries for the year ended December 31, 2016, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Centurion ZD CPA Ltd.
Centurion ZD CPA Ltd. (fka
DCAW (CPA) Ltd. as successor to
Dominic K.F. Chan & Co.)
Certified Public Accountants
Hong Kong, April 26, 2017
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2017
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
5,267
|
3,380
|
Restricted
cash
|
1,330
|
1,072
|
Receivables,
net
|
5,089
|
3,808
|
Prepayments and
other current assets
|
547
|
666
|
Contract
assets
|
899
|
194
|
Inventories,
net
|
401
|
496
|
Total current
assets
|
13,533
|
9,616
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
754
|
734
|
|
|
|
Interests in
affiliates
|
7,583
|
12,158
|
|
|
|
Goodwill
|
1,071
|
1,071
|
|
|
|
Deferred tax
assets
|
124
|
158
|
Total non-current
assets
|
9,532
|
14,121
|
|
|
|
Total
assets
|
23,065
|
23,737
|
|
|
|
Liabilities and
shareholders’ equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
4,900
|
3,680
|
Bank
borrowings
|
-
|
97
|
Contract
liabilities
|
1,370
|
1,720
|
Other payables and
accrued expenses
|
1,250
|
1,001
|
Taxes
payable
|
-
|
132
|
Total current
liabilities
|
7,520
|
6,630
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
Ordinary
share,
20,000,000 (2017:
20,000,000) shares authorized;
2,229,609 (2017:
2,229,609) shares issued
|
123
|
123
|
Additional paid-in
capital
|
9,551
|
9,551
|
Treasury stock,
167,700 shares at cost as of December 31, 2018 and 2017,
respectively
|
(786
)
|
(786
)
|
PRC statutory
reserves
|
316
|
352
|
Accumulated other
comprehensive income
|
893
|
918
|
Retained
earnings
|
4,492
|
5,811
|
Equity attributable
to shareholders of Euro Tech
|
14,589
|
15,969
|
Non-controlling
interests
|
956
|
1,138
|
Total
shareholders’ equity
|
15,545
|
17,107
|
|
|
|
Total liabilities
and shareholders’ equity
|
23,065
|
23,737
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME/(LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Trading and
manufacturing
|
13,770
|
11,001
|
13,721
|
Engineering
|
6,334
|
6,349
|
8,757
|
Total
revenues
|
20,104
|
17,350
|
22,478
|
|
|
|
|
Cost of
revenues
|
|
|
|
Trading and
manufacturing
|
(11,136
)
|
(8,563
)
|
(11,331
)
|
Engineering
|
(5,269
)
|
(4,374
)
|
(6,196
)
|
Total cost of
revenues
|
(16,405
)
|
(12,937
)
|
(17,527
)
|
Gross
profit
|
3,699
|
4,413
|
4,951
|
|
|
|
|
Finance
costs
|
(7
)
|
(11
)
|
(19
)
|
Selling and
administrative expenses
|
(4,751
)
|
(4,976
)
|
(5,602
)
|
Operating
loss
|
(1,059
)
|
(574
)
|
(670
)
|
Interest
income
|
35
|
24
|
18
|
Other income /
(losses), net
|
58
|
(14
)
|
5
|
Gain on disposal of
property, plant and equipment
|
3
|
-
|
7
|
Loss before income
taxes, equity in (loss) / income of affiliates and non-controlling
interests
|
(963
)
|
(564
)
|
(640
)
|
|
|
|
|
Income taxes credit
/ (expense)
|
312
|
(28
)
|
(228
)
|
|
|
|
|
Net gain on deemed
disposal of affiliate
|
-
|
128
|
24
|
Equity in (loss) /
income of affiliates
|
(932
)
|
831
|
1,002
|
Net gain on
disposal of affiliate
|
1,522
|
-
|
-
|
Net (loss) / profit
for the year
|
(61
)
|
367
|
158
|
|
|
|
|
Add: net loss
attributable to non-controlling interests
|
149
|
106
|
73
|
Net profit
attributable to the Company
|
88
|
473
|
231
|
Other comprehensive
income / (loss)
|
|
|
|
Net
(loss) / profit
|
(61
)
|
367
|
158
|
Foreign
exchange translation adjustments
|
(58
)
|
122
|
4
|
Comprehensive
(loss) / income
|
(119
)
|
489
|
162
|
Add: Comprehensive
loss attributable to non-controlling interests
|
182
|
45
|
127
|
Comprehensive
income attributable to the Company
|
63
|
534
|
289
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME/(LOSS) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
|
|
|
|
|
|
|
Net income per
ordinary share
|
|
|
|
-
Basic
|
$
US0.04
|
$
US0.23
|
$
US0.11
|
-
Diluted
|
$
US0.04
|
$
US0.23
|
$
US0.11
|
Weighted average
number of ordinary shares outstanding
|
|
|
|
-
Basic
|
2,061,909
|
2,061,909
|
2,061,909
|
-
Diluted
|
2,061,909
|
2,061,909
|
2,061,909
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net income
attributable to the Company
|
88
|
473
|
231
|
Adjustments to
reconcile net income to net cash (used in) / provided by operating
activities:
|
|
|
|
Depreciation of
property, plant and equipment
|
60
|
61
|
55
|
Gain on disposal of
property, plant and equipment
|
(3
)
|
-
|
(7
)
|
Net gain on
disposal of affiliate
|
(1,522
)
|
-
|
-
|
Net gain on deemed
disposal of affiliate
|
-
|
(128
)
|
(24
)
|
Non-controlling
interests in (loss) of subsidiaries
|
(149
)
|
(106
)
|
(73
)
|
Equity in loss /
(profit) of affiliates
|
932
|
(831
)
|
(1,002
)
|
Deferred tax
expenses
|
34
|
28
|
16
|
Decrease /
(increase) in current assets:
|
|
|
|
Receivables,
net
|
(1,281
)
|
585
|
107
|
Prepayments and
other current assets
|
119
|
(194
)
|
(116
)
|
Contract
assets
|
(705
)
|
149
|
(199
)
|
Inventories
|
95
|
(152
)
|
213
|
Increase /
(decrease) in current liabilities:
|
|
|
|
Accounts
payable
|
1,220
|
507
|
119
|
Other payables and
accrued expenses
|
249
|
(181
)
|
632
|
Contract
liabilities
|
(350
)
|
644
|
-
|
Taxes
payable
|
(132
)
|
(203
)
|
201
|
Net cash (used in)
/ provided by operating activities
|
(1,345
)
|
652
|
153
|
Cash flows from
investing activities:
|
|
|
|
Purchase of
property, plant and equipment
|
(85
)
|
(18
)
|
(60
)
|
Proceeds on
disposal of property, plant and equipment
|
3
|
-
|
10
|
Dividend received
from affiliates
|
276
|
290
|
249
|
Net proceeds on
disposal of affiliate
|
4,889
|
-
|
-
|
Net cash provided
by investing activities
|
5,083
|
272
|
199
|
Cash flows from
financing activities:
|
|
|
|
|
(1,443
)
|
-
|
-
|
(Decrease) /
increase in bank borrowings
|
(97
)
|
(623
)
|
720
|
Net cash (used in)
/ provided by financing activities
|
(1,540
)
|
(623
)
|
720
|
Effect of exchange
rate changes on cash and cash equivalents
|
(53
)
|
116
|
8
|
|
|
|
|
Net increase in
cash and cash equivalents and restricted cash
|
2,145
|
417
|
1,080
|
Cash, cash
equivalents and restricted cash, beginning of year
|
4,452
|
4,035
|
2,955
|
Cash, cash
equivalents and restricted cash, end of year
|
6,597
|
4,452
|
4,035
|
|
|
|
|
Cash
breakdown
|
|
|
|
Cash and cash
equivalents
|
5,267
|
3,380
|
3,751
|
Restricted
cash
|
1,330
|
1,072
|
284
|
|
6,597
|
4,452
|
4,035
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid during
the period for income taxes
|
-
|
203
|
70
|
Cash paid during
the period for interest
|
7
|
11
|
13
|
|
|
|
|
Supplemental
disclosure of noncash activities:
|
|
|
|
Net gain on deemed
disposal of affiliate
|
-
|
128
|
24
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
EURO TECH
HOLDINGS COMPANY LIMITED SHARHOLDERS
|
|
|
|
|
|
Additional
paid-in
capital
|
|
Accumulated
other
com-
prehensive
income
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1,
2016
|
2,229,609
|
123
|
9,551
|
(786
)
|
799
|
315
|
5,144
|
1,310
|
16,456
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
231
|
(73
)
|
158
|
Other comprehensive income /
(loss): Foreign exchange translation adjustment
|
-
|
-
|
-
|
-
|
58
|
-
|
-
|
(54
)
|
4
|
Appropriation of
reserves
|
-
|
-
|
-
|
-
|
-
|
37
|
(37
)
|
-
|
-
|
Balance as of December 31,
2016
|
2,229,609
|
123
|
9,551
|
(786
)
|
857
|
352
|
5,338
|
1,183
|
16,618
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
473
|
(106
)
|
367
|
Other comprehensive income /
(loss): Foreign exchange translation adjustment
|
-
|
-
|
-
|
-
|
61
|
-
|
-
|
61
|
122
|
Balance as of December 31,
2017
|
2,229,609
|
123
|
9,551
|
(786
)
|
918
|
352
|
5,811
|
1,138
|
17,107
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
88
|
(149
)
|
(61
)
|
Other comprehensive loss: Foreign
exchange translation adjustment
|
-
|
-
|
-
|
-
|
(25
)
|
-
|
-
|
(33
)
|
(58
)
|
Appropriation of
reserves
|
-
|
-
|
-
|
-
|
-
|
(36
)
|
36
|
-
|
-
|
Dividend paid
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,443
)
|
-
|
(1,443
)
|
Balance as of
December 31, 2018
|
2,229,609
|
123
|
9,551
|
(786
)
|
893
|
316
|
4,492
|
956
|
15,545
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities
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”).
Details
of the Company’s significant subsidiaries and affiliates are
summarised as follows:
Name
|
Percentage of equity ownership
|
Place of incorporation
|
Principal activities
|
|
2018
|
2017
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
|
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%
|
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%
|
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
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities (Continued)
Name
|
Percentage of equity ownership
|
Place of incorporation
|
Principal activities
|
|
2018
|
2017
|
|
|
|
|
|
|
|
Guangzhou Euro Tech
Environmental Equipment Co., Ltd
|
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
|
|
|
|
|
|
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
|
|
|
|
|
|
Affiliates:
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Zhejiang Jiahuan
Electronic Co. Ltd.
|
-***
|
20%
|
The
PRC
|
Design
and manufacturing of automatic control systems and electric voltage
control equipment for electrostatic precipitators (air purification
equipment)
|
* 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.
** This
company was closed on March 18, 2019.
***
This affiliate was disposed on May 15, 2018.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(a)
Basis
of Consolidation
The
consolidated financial statements include the financial statements
of Euro Tech Holdings Company Limited and its subsidiaries (the
“Group”). The financial statements of variable interest
entities (“VIEs”), as defined by the Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Subtopic 810-10,
Consolidation, are included in the consolidated financial
statements, if applicable. All significant intercompany balances
and transactions have been eliminated on
consolidation.
The
Group identified that a retail shop established in the PRC
qualified as a variable interest entity as defined in ASC 810-10.
This retail shop was principally engaged in the retailing business
of water and waste water related process control, analytical and
testing instruments, disinfection equipment, supplies and related
automation systems. The Company is the primary beneficiary of
thisretail shop and, accordingly, consolidated their financial
statements. The Company has a controlling financial interest in
this retail shop and is subject to a majority of the risk of loss
from the retailing activities, and is entitled to receive a
majority of the retail shop’s residual returns. This VIE had
ceased operation since October 2016.
(b)
Subsidiaries
and affiliates
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders.
Investments
in companies in which the Group has significant influence
(ownership interest of between 20% and 50%) but less than
controlling interests, are accounted for by the equity
method. Income on intercompany sales, not yet realized
outside of the Group, was eliminated. The Group also reviews
these investments for impairment whenever events indicate the
carrying amount may not be recoverable.
In
accordance with ASC Topic 323-10-40-1, a change in the
Group’s proportionate share of an investee’s equity,
resulting from issuance of shares by the investee to third parties,
is accounted for as if the Group had sold a proportionate share of
its investment. Any gain or loss resulting from an investee’s
share issuance is recognized in earnings.
Management
evaluates investments in affiliated companies, for evidence of
other-than-temporary declines in value. Such evaluation is
dependent on the specific facts and circumstances and includes
analysis of relevant financial information (e.g. budgets, business
plans, financial statements, etc.). During the years ended December
31, 2018, 2017 and 2016, no impairment was
identified.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
The
Group’s revenue are under two segments: Trading and
manufacturing, and Engineering.
(i) Trading and
manufacturing segment referred to the sale of water and waste water
related process control, analytical and testing instruments,
disinfection equipment, supplies and related automation
systems.
Sales
are recognized when or as the Group satisfy a performance
obligation by transferring control of a product or service to a
customer, in an amount that reflects the consideration to which the
Group expect to be entitled in exchange for the product or service.
The Group considers a number of factors in determining when the
Group has transferred control to a customer, including the
following: (i) our present right to payment; (ii) the
customer’s legal title to the asset; (iii) physical
possession of the asset; (iv) the customer’s significant
risks and rewards of ownership of the asset; and (v) the
customer’s acceptance of the asset.
Generally, payment
terms with the Group’s customers are consistent with those
used in their industries and the regions in which the Group
operate.
(ii)
Under the
engineering segment, revenues are recognized as performance
obligations are satisfied over time (formerly known as
percentage-of-completion method), using the output method. Output
method is used because management considers it to be the best
available measure of progress on these contracts. Contract costs
include all direct material, labor, subcontract and other costs and
those indirect costs determined to relate to contract performance,
such as indirect salaries and wages, equipment repairs and
depreciation and insurance. Administrative and general expenses are
charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions,
estimated profitability and associated change orders and claims,
including those changes arising from contract penalty provisions
and final contract settlements, may result in revisions to costs
and income and are recognized in the period in which the revisions
are determined.
Our
contracts generally take 12 to 36 months to complete. The Group
generally provides a one- to two-year warranty for workmanship
under its contracts when completed.
Change
orders are modifications of an original contract that effectively
change the existing provisions of the contract without adding new
provisions or terms. Change orders may include changes in
specifications or designs, manner of performance, facilities,
equipment, materials, sites and period of completion of the work.
Either the Group or their customers may initiate change
orders.
The
Group considers unapproved change orders to be contract variations
for which the Group have customer approval for a change of scope
but a price change associated with the scope change has not yet
been agreed upon. Costs associated with unapproved change orders
are included in the estimated costs to complete the contracts and
are treated as project costs as incurred. The Group recognizes
revenue equal to costs incurred on unapproved change orders when
management determines approval to be probable. Unapproved change
orders involve the use of estimates, and it is reasonably possible
that revisions to the estimated costs and recoverable amounts may
be required in future reporting periods to reflect changes in
estimates or final agreements with customers. Change orders that
are unapproved as to both price and scope are evaluated as
claims.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(d)
Research
and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately US$184,000,
US$163,000 and US$475,000 for the years ended December 31, 2018,
2017 and 2016 respectively and were included in “Selling and
Administrative expenses”
in the Group’s consolidated
statements of operations and comprehensive income /
(loss).
(e)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately
US$16,000, US$13,000 and US$13,000 for the years ended December 31,
2018, 2017 and 2016 respectively and were included in
“Selling and Administrative expenses”
in the Group’s consolidated
statements of operations and comprehensive income /
(loss).
The
Group accounts for income and deferred tax under the provisions of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognised for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognised for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be realised
.
In
accordance with ASC 740-10, the Group recognises tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits. The Group recognises interest and/or penalties, if any,
related to income tax matters in income tax expense (Nil for the
three years ended December 31, 2018, 2017 and 2016). The Group did
not have such uncertain tax positions in 2018, 2017 and 2016. The
Group is subject to examination of tax authorities in the Unites
States of America (open for audit for 2016 to 2018), Hong Kong
(open for audit for 2012 to 2018) and PRC (open for audit for 2016
to 2018).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognised in the consolidated statements of operations and
comprehensive income / (loss) for the period that includes the
enactment date.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(g)
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, 2018 and 2017.
Restricted cash
represents cash deposits retained with banks in the PRC for
issuance of performance guarantees to the customers. The
amount is expected to be released within one year after the balance
sheet date.
(i)
Fair Value of Financial Assets and
Liabilities
The
fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between
willing parties. The Group’s financial instruments are cash
and cash equivalents, restricted cash, receivables, net,
prepayments and other current assets, contract assets, accounts
payable, bank borrowings, other payables and accrued expenses and
contract liabilities. The recorded values approximate their fair
values based on their liquidity and/or short-term nature. The Group
provides credit in the normal course of business, and performs
ongoing credit evaluations, as deemed necessary, but generally does
not require collateral to support such receivables.
The
Group’s debt is recorded at its carrying amount, which
approximates the fair values, in the consolidated balance
sheets.
Receivables are
generally based on amounts billed to the customer in accordance
with the provisions of the agreement.
Receivables are
written off based on individual credit evaluation and specific
circumstances of the customer, when such treatment is warranted.
The Group performs a review of outstanding receivables, historical
collection information and existing economic conditions to
determine if there are potential uncollectible receivables. For
receivables, net, which were overdue with greater than or equal to
91 days, the Group will review existing economic conditions of each
individual debtor to determine if there are potential uncollectible
receivables. At December 31, 2018 and 2017, our allowance for
doubtful accounts against receivable was minimal.
Inventories are
stated at the lower of cost, on the first-in, first-out method, or
net realizable value. Costs include purchase and related costs
incurred in bringing each product to its present location and
condition. Net realizable value is calculated based on the
estimated normal selling price, less further costs expected to be
incurred for disposal. Allowance is made for obsolete, slow moving
or defective items, where appropriate.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(l)
Property,
Plant and Equipment
Property, plant and
equipment are stated at cost less accumulated depreciation. Gains
or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalised. All
ordinary repair and maintenance costs are expensed as incurred.
Depreciation of property, plant and equipment is computed using the
straight-line method over the assets’ estimated useful lives
as follows:
Office
premises
|
47 to 51
years
|
Leasehold
improvements
|
over terms of the
leases or the useful lives whichever is less
|
Furniture, fixtures
and office equipment
|
3 to 5
years
|
Motor
vehicles
|
4
years
|
Testing
equipment
|
3
years
|
|
|
(m)
Evaluating
impairment for long lived assets
When
events or changes in circumstances indicate that long-lived assets
may be impaired, an evaluation is performed. The evaluation would
be based on estimated undiscounted cash flows associated with the
assets as compared to the asset’s carrying amount to
determine if a write-down to fair value is required. There was no
impairment in 2018, 2017 and 2016. Management believes that there
are no additional events or changes in circumstances which have
indicated that other long-lived assets may be
impaired.
The
Group leases property in the ordinary course of its business. The
leases have varying terms. Some may include renewal options,
escalation clauses, restrictions, penalties or other obligations
that the Group considers in determining minimum lease payments. The
leases are classified as either operating leases or capital leases,
as appropriate. Through December 31, 2018, the Group recognized
rent expense related to operating leases on a straight-line basis
over the terms of the leases
.
Goodwill represents
the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition. Accounting principles
generally accepted in the United States of America ("GAAP")
requires that: (1) goodwill not be amortized, and (2) goodwill is
to be tested for impairment at least annually at the reporting unit
level. Refer to Note 14 for the disclosure regarding goodwill
impairment testing
.
(p)
Foreign
Currency Translation
The Company maintains its books and records in United States
dollars. Its subsidiaries and affiliates maintain their books and
records either in Hong Kong dollars or Chinese Renminbi
(“functional currencies”). Foreign currency
transactions during the year are translated into the respective
functional currencies at the applicable rates of exchange at the
dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into the
respective functional currencies using the exchange rates
prevailing at the balance sheet dates. Gains or losses from foreign
currency transactions are recognised in the consolidated statements
of operations and comprehensive income / (loss) during the year in
which they occur. Translation adjustments on subsidiaries’
equity are included as accumulated comprehensive income or
loss.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(q)
Comprehensive
Income / (Loss)
The
Group has adopted FASB ASC Subtopic 220-10, Comprehensive Income,
which requires the Group to report all changes in equity during a
period, except for those resulting from investment by owners and
distribution to owners, in the financial statements for the period
in which they are recognised. The Group has presented comprehensive
income, which encompasses net income and foreign currency
translation adjustments, in the consolidated statement of
shareholders’ equity.
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.
(s)
Net
income per Ordinary Share
Net
income per ordinary share is computed in accordance with FASB ASC
Subtopic 260-10, Earnings Per Share, by dividing the net income by
the weighted average number of ordinary share outstanding during
the period. The Company 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.
(t)
Stock-based
Compensation
The Group accounts for stock-based compensation in
accordance with ASC 718, “Compensation-Stock
Compensation”. ASC 718 requires companies to estimate the
fair value of equity-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Group's
consolidated statement of operations
and comprehensive
income / (loss)
.
The Group recognizes compensation expenses for the value of its
awards, based on the straight-line method over the requisite
service period of each of the awards, net of estimated forfeitures.
ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
The
preparation of the accompanying consolidated financial statements
in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Certain of the
Group’s accounting policies require higher degrees of
judgment than others in their application. These include the
recognition of revenue and earnings from engineering contracts over
time, the valuation of income taxes, goodwill, valuation allowance
for the deferred tax assets, stock compensation, useful lives of
long lived assets, impairment of long lived assets, receivables,
net and inventories written down. Management continually evaluates
all of its estimates and judgments based on available information
and experience; however, actual results could differ from these
estimates.
Related parties
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.
The
Group’s segment reporting is prepared in accordance with FASB
ASC Subtopic 280-10, Segment Reporting. The management approach
required by ASC 280-10 designates that the internal reporting
structure that is used by management for making operating decisions
and assessing performance should be used as the source for
presenting the Group’s reportable segments. The Group
categorises its operations into two business segments: Trading and
manufacturing, and Engineering.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recent
Accounting Pronouncements
The
Group considers the applicability and impact of all
accounting
standards updates (“ASUs”)
. The Group, based on
its assessment, determined that any recently issued or proposed
ASUs not listed below are either not applicable to the Group or may
have minimal impact on its consolidated financial
statements.
Recently
Adopted Accounting Pronouncements
In May
2014, the FASB issues ASU No. 2014-09, "Revenue from Contracts with
Customers (Topic 606)". We adopted the requirement of the new
pronouncement effective January 1, 2018. See Note 3 for further
information related to the Group's accounting policy and transition
disclosures associated with the adoption of this
pronouncement.
In
January 2017, the FASB issued ASU No. 2017-01, “Business
Combinations (Topic 805)”: Clarifying the Definition of a
Business, which clarified the definition of a business with the
objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The Group adopted this ASU on a
prospective basis in January 2018 and there was no effect on the
Group’s financial position, results of operations or cash
flows.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recent
Accounting Pronouncements (Continued)
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
February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)”. The amendments under this pronouncement will
change the way all leases with durations in excess of one year are
treated. Under this guidance, lessees will be required to recognize
virtually all leases on the balance sheet as a right-of-use asset
and an associated financing lease liability or capital lease
liability. The right-of-use asset represents the lessee’s
right to use, or control the use of, a specified asset for the
specified lease term. The lease liability represents the
lessee’s obligation to make lease payments arising from the
lease, measured on a discounted basis. Based on certain
characteristics, leases are classified as financing leases or
operating leases. Financing lease liabilities, which contain
provisions similar to capitalized leases, are amortized like
capital leases under current accounting, as amortization expense
and interest expense in the statement of operations and
comprehensive income / (loss). Operating lease liabilities are
amortized on a straight-line basis over the life of the lease as
lease expense in the statement of operations and comprehensive
income / (loss). This update is effective for annual reporting
periods, and interim periods within those reporting periods,
beginning after December 15, 2018. The Group intends to adopt this
new guidance using the cumulative effect method, which would apply
to all new lease contracts initiated on or after January 1, 2019.
For existing lease contracts that have remaining obligations as of
January 1, 2019, the difference between the recognition criteria in
the new guidance and the Company’s current practices would be
recognized using a cumulative effect adjustment to the opening
balance of retained earnings
.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recent
Accounting Pronouncements (Continued)
Recently Issued Accounting
Pronouncements
The
Group continues to evaluate the impact that this pronouncement, and
all amendments relating to this pronouncement, will have on its
policies and procedures pertaining to its existing and future lease
arrangements, disclosure requirements and on the Group’s
consolidated financial statements. When this pronouncement is
adopted in 2019, the Group expects that most existing operating
lease commitments that extend beyond twelve months at the time of
adoption will be recognized as lease liabilities and right-of-use
(“ROU”) assets upon adoption. Based on preliminary
evaluations, the Group estimates that the value of lease
liabilities will be insignificant upon adoption with corresponding
ROU assets of the same amount based on the present value of the
remaining minimum lease payments under current leasing standards.
Additionally, the Group expects to elect the ’package of
practical expedients,’ which permits the Group to not
reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs. The
Group currently does not expect to elect the use of the hindsight
practical expedient or the practical expedient pertaining to land
easements. The Group, however, expects to elect the short-term
lease recognition exemption for all leases that qualify. This
means, for those leases that qualify, the Group will not recognize
ROU assets or lease liabilities, and this includes not recognizing
ROU assets or lease liabilities for existing short-term leases of
those assets in transition. The Group also currently expects to
elect the practical expedient to not separate lease and non-lease
components for our real estate leases. While the Group is still
evaluating the requirements of this update, it currently does not
expect the adoption to have a material impact on the recognition,
measurement or presentation of lease expenses within the
consolidated statements of operations and comprehensive income /
(loss) or consolidated statements of cash flows.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments”. The amendments in this ASU require
the measurement and recognition of expected credit losses for
financial assets held at amortized cost. The amendments in this ASU
replace the existing incurred loss impairment model with an
expected loss methodology, which will result in more timely
recognition of credit losses. In November 2018, the FASB issued ASU
No. 2018-19, “Codification Improvements to Topic 326,
Financial Instruments-Credit Losses”, which among other
things, clarifies that receivables arising from operating leases
are not within the scope of Subtopic 326-20. Instead, impairment of
receivables arising from operating leases should be accounted for
in accordance with Topic 842, Leases. The guidance is effective for
the annual reporting periods beginning after December 15, 2020,
including interim periods within those fiscal years. The Group is
currently evaluating the impact on its consolidated financial
position and results of operations upon adopting these
amendments.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The
amendments in this ASU eliminate, add and modify certain disclosure
requirements for fair value measurements. The amendments in this
ASU, among other things, require public companies to disclose the
range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The amendments in this
ASU are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019, and entities are permitted to early adopt either the entire
standard or only the provisions that eliminate or modify the
requirements. The Group does not expect the adoption of these
amendments to have a material impact on its consolidated financial
position and results of operations.
In
August 2016, the FASB issued guidance in ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments”. This update
addresses specific cash flow issues with the objective of reducing
existing diversity in practice. Early adoption is permitted for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. The Group expects to adopt this
guidance as required and does not expect a material impact to the
consolidated financial statements.
(y)
Concentration of credit risk
Financial
instruments that potentially subject the Group to significant
concentration of credit risk primarily consist of cash and cash
equivalents, restricted cash, receivables, net, contract assets and
prepayments. The maximum exposure of such assets to credit risk is
their carrying amounts as of the balance sheet dates.
As
of December 31, 2018 and 2017, all of the Group’s cash
and cash equivalents, and restricted cash were deposited in
financial institutions located in the PRC and Hong Kong, which
management believes are of high credit quality.
Receivables,
net, and contract assets are typically unsecured and are derived
from revenue earned from the customers. The risk with respect to
receivables, net and contract assets are mitigated by credit
evaluations the Group performs on its customers and its ongoing
monitoring of outstanding balances.
As
December 31, 2018 and 2017, there were two customers (2017: one
customer) who owned the Group amounts greater than 10% of the
receivables, net and one customer (2017: one customer) who owned
the Group amount greater than 10% of contract
assets.
Prepayments
made to suppliers are typically unsecured and arise from deposits
paid in advance for future purchases. Due to the Group’s
concentration of prepayments made to a limited number of suppliers
and the significant prepayments that are made to them, any negative
events or deterioration in financial strength with respect to the
Group’s suppliers may cause material loss to the Group and
have a material adverse effect on the Group’s financial
condition and results of operations. The risk with respect to
prepayments made to suppliers is mitigated by credit evaluations
that the Group performs on its suppliers prior to making any
prepayments and the ongoing monitoring of its suppliers’
performance.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
Debt
issuance costs related to a recognized debt liability be presented
in the consolidated balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts.
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.
(ab)
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.
Reclassifications
have been made to historical financial data in our consolidated
financial statements to conform to our current year
presentation.
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)
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.
The majority of the Group's 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, not distinct. Some of the contracts have
multiple performance obligations, most commonly due to the contract
covering multiple phases of the project life cycle (design,
installation and commissioning). For contracts with multiple
performance obligations, the Group allocates the contract
transaction price to each performance obligation using its best
estimate of the standalone selling price of each distinct good or
service in the contract. The primary method used to estimate
standalone selling price is the expected cost plus a margin
approach, under which the Group forecasts the expected costs of
satisfying a performance obligation and then adds an appropriate
margin for that distinct good or service.
(i)
Performance
Obligations Satisfied Over Time
Revenue
for the Group's engineering segment contracts that satisfy the
criteria for over time recognition (formerly known as percentage-of
completion method) is recognized as the work progresses. The
majority of the revenue is derived from long-term, engineering
contracts and projects that typically span between 12 to 36
months,. These engineering contracts will continue to be recognized
over time 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. Under the new revenue standard, the measure of
progress continues to best depict the transfer of control of assets
to the customer.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(ii)
Performance
Obligations Satisfied at a Point in Time
Revenue
that do not satisfy the criteria for over time recognition is
recognized at a point in time. Upon fulfillment of the performance
obligation, the customer is provided an invoice (or equivalent)
demonstrating transfer of control to the customer.
Contract
modifications are routine in the performance of the Group's
contracts. Contracts are often modified to account for changes in
the contract specifications or requirements. In most instances,
contract modifications are for goods or services that are not
distinct, and, therefore, are accounted for as part of the existing
contract.
Pre-contract costs
are generally charged to expense as incurred, but in certain cases
their recognition may be deferred if specific probability criteria
are met. The Group had no significant deferred pre-contract costs
as at December 31, 2018.
Remaining
performance obligation, which is also referred to as backlog. The
Group expects to recognize approximately 85% of its backlog as
revenue during the next twelve months, and the balance
thereafter.
Accounting for
long-term contracts and programs involves the use of various
techniques to estimate total contract revenue and costs. For
long-term contracts, the Group estimates the profit on a contract
as the difference between the total estimated revenue and expected
costs to complete a contract and recognizes that profit over the
life of the contract.
Contract estimates
are based on various assumptions to project the outcome of future
events that often span several years. These assumptions include
labor productivity and availability, the complexity of the work to
be performed, the cost and availability of materials and the
performance of subcontractors.
Changes
in job performance, job conditions and estimated profitability,
including those changes arising from contract penalty provisions
and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are
determined.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(af)
Contract
Estimates (Continued)
Variable
Consideration
The
transaction price for contracts may include variable consideration,
which includes increases to transaction price for approved and
unapproved change orders, claims and incentives, and reductions to
transaction price for liquidated damages. Change orders, claims and
incentives are generally not distinct from the existing contract
due to the significant integration service provided in the context
of the contract and are accounted for as a modification of the
existing contract and performance obligation. Change orders may
include changes in specifications or designs, manner of
performance, facilities, equipment, materials, sites and period of
completion of the work. Either the Group or its customers may
initiate change orders. Change orders that are unapproved as to
both price and scope are evaluated as claims. 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
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 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.
The
Group has projects that it is in the process of negotiating, or
awaiting final approval of, unapproved change orders and claims
with its customers. The Group is proceeding with its contractual
rights to recoup additional costs incurred from its customers based
on completing work associated with change orders, including change
orders with pending change order pricing, or claims related to
significant changes in scope which resulted in substantial delays
and additional costs in completing the work. Unapproved change
order and claim information has been provided to the Group's
customers and negotiations with the customers are
ongoing.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3.
Revenue
from Contracts with Customers
(a)
Change
in Accounting Policy
On
January 1, 2018, the Group adopted ASU No. 2014-09, “Revenue
from Contracts with Customers (Topic 606)” using the modified
retrospective method for contracts that were not completed as of
January 1, 2018. Results on the consolidated statement of
operations and comprehensive income / (loss) for reporting periods
beginning after December 31, 2017 are presented under this new
pronouncement, while prior period amounts reported on the
consolidated statement of operations and comprehensive income /
(loss) are not adjusted and continue to be reported under the
accounting standard Revenue Recognition Topic 605, which was in
effect for prior periods. In connection with the adoption of this
ASU, certain changes have been made to the consolidated balance
sheet. The accounts previously named “Costs and estimated
earnings in excess of billings on uncompleted contracts” and
“Billings in excess of costs and estimated earnings on
uncompleted contracts” have been renamed “Contract
assets” and “Contract liabilities”, respectively.
The adoption of this pronouncement did not have a material impact
on financial position, results of operation, or cash
flows.
(b)
Disaggregation
of Revenue
A
majority of the Group’s revenues are earned through contracts
with customers that normally provide for payment upon completion of
specified work or delivery of goods as identified in the contract.
Although there is considerable variation in the terms of these
contracts, they are primarily structured as fixed-price contracts,
under which the Group agrees to do the entire project for a fixed
amount, or delivery of goods, under which the Group agrees to
deliver certain goods as specified in the contract.
The
component of the Group’s revenue for the year ended December
31, 2018 were as follows:
The
timing of revenue recognition, billings and cash collections
results in receivables, net and costs and estimated earnings in
excess of billings on uncompleted contracts (contract assets) on
the consolidated balance sheet. In the Group's engineering segment,
amounts are billed as work progresses in accordance with
agreed-upon contractual terms, either at periodic intervals or upon
achievement of contractual milestones. Generally, billing occurs
subsequent to revenue recognition, resulting in contract assets.
However, the Group sometimes receives advances or deposits from its
customers, before revenue is recognized, resulting in billings in
excess of costs and estimated earnings on uncompleted contracts
(contract liabilities). These assets and liabilities are reported
on the consolidated balance sheet on a contract-by-contract basis
at the end of each reporting period. Changes in the contract asset
and liability balances during the year ended December 31, 2018 and
2017, were not materially impacted by any other
factors.
The two
tables below set forth the costs incurred and earnings accrued on
uncompleted contracts (revenues) compared with the billings on
those contracts through December 31, 2018 and 2017 and reconcile
the net excess billings to the amounts included in the consolidated
balance sheets at those dates.
|
|
|
|
|
|
|
|
|
Costs incurred and
estimated earnings on uncompleted contracts
|
6,354
|
6,342
|
Billings on
uncompleted contracts
|
(6,825
)
|
(7,868
)
|
Excess of billings
over costs incurred and estimated earnings
|
(471
)
|
(1,526
)
|
|
|
|
|
|
|
|
|
|
Costs and estimated
earnings in excess of billings on uncompleted
contracts
|
899
|
194
|
Billings in excess
of costs and estimated earnings on uncompleted
contracts
|
(1,370
)
|
(1,720
)
|
Net amount of
billings in excess of costs and estimated earnings on uncompleted
contracts
|
(471
)
|
(1,526
)
|
Revenues recognized
and billings on uncompleted contracts include cumulative amounts
recognized as revenues and billings in prior years.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Other
income / (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
Exchange gain /
(loss), net
|
7
|
(46
)
|
(75
)
|
Rental
income
|
51
|
32
|
80
|
|
58
|
(14
)
|
5
|
No
income tax arose in the United States of America by the Group for
the years ended December 31, 2018, 2017 and 2016.
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 2018 (2017 and 2016: 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 at a rate of
25% (2017 and 2016: 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, 2018, ETTS had an assessable loss carried forward
of US$801,751 as agreed by the local tax authority to offset its
profit for the forth coming years (2017: US$703,650 and 2016:
US$746,808). 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% (2017 and 2016: 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, 2018, SET had an
assessable loss carried forward of US$317,098 as agreed by the
local tax authority to offset its profit for the forth coming years
(2017: US$254,265 and 2016: US$256,664). 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% (2017 and 2016: 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, 2018, SETEE had an assessable loss carried forward
of US$854,388 as agreed by the local tax authority to offset its
profit for the forth coming years (2017: US$895,579 and 2016:
US$1,074,609). Such loss will expire in 5 years.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
Income
taxes (Continued)
Yixing
Pact Environmental Technology Co. Ltd. (“Yixing”), a
subsidiary of Far East, provides for PRC Enterprise Income Tax at a
rate of 25% (2017 and 2016: 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, 2018, Yixing had an assessable loss carried forward
of US$1,228,223 as agreed by the local tax authority to offset its
profit for the forth coming years (2017: US$ 512,252 ). Such loss
will expire in 5 years.
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% (2017 and 2016: 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$135,479,
US$ Nil and US$ Nil respectively as agreed by the local tax
authority to offset its profit for the forth coming years (2017:
US$121,674, US$ Nil and US$298,448). Such loss will expire in 5
years.
VIEs of
the Group provide for PRC Enterprise Income Tax at a rate of 25%
for year 2016, 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.
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, 2018
(2017: US$0.5 million and 2016: US$1.2 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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
Income
taxes (Continued)
Loss
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
The PRC and Hong
Kong
|
(963
)
|
(564
)
|
(640
)
|
The
(credit) / provision for income taxes consist of:
|
|
|
|
|
|
|
|
Current tax
expenses:
|
|
|
|
The PRC and Hong
Kong
|
(346
)
|
-
|
212
|
Total current
(credit) / provision
|
(346
)
|
-
|
212
|
|
|
|
|
Deferred tax
expenses:
|
|
|
|
The PRC and Hong
Kong
|
34
|
28
|
16
|
Total deferred
provision
|
34
|
28
|
16
|
|
|
|
|
Total (credit) /
provision
|
(312
)
|
28
|
228
|
The
principal reconciling items from income taxes computed at the
statutory tax rates and at the effective income taxes rates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
(254
)
|
(94
)
|
(136
)
|
Change in valuation
allowances
|
68
|
120
|
350
|
Over-provision for
income taxes in prior years
|
(131
)
|
-
|
-
|
Non-deductible
expenses
|
5
|
2
|
14
|
Total (credit) /
provision for income taxes at effective tax rate
|
(312
)
|
28
|
228
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
Income
taxes (Continued)
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
Tax
losses
|
975
|
958
|
Temporary
differences
|
(17
)
|
(6
)
|
Less: Valuation
allowances
|
(834
)
|
(794
)
|
Net deferred tax
assets
|
124
|
158
|
6
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
|
2,061,909
|
2,061,909
|
2,061,909
|
|
|
|
|
|
|
|
|
|
Receivables
|
5,201
|
3,917
|
Less: Allowance for
doubtful debts
|
(112
)
|
(109
)
|
|
5,089
|
3,808
|
The
following is an aging analysis of receivables, net as of December
31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Current
|
4,485
|
1,816
|
Past
due
|
|
|
1-30
days
|
200
|
1,076
|
31-60
days
|
38
|
288
|
61-90
days
|
17
|
-
|
Greater than or
equal to 91 days
|
349
|
628
|
|
5,089
|
3,808
|
There
is a receivable due from a PRC government-owned entity with net
amount of approximately US$334,000 which the PRC court awarded
judgment for the Group and required the entity to settle the
receivable. The said amount has not yet recovered by the reporting
date.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8
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
|
259
|
85
|
Prepayments
|
59
|
475
|
Other
receivables
|
156
|
104
|
Other tax
recoverable
|
73
|
2
|
|
547
|
666
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
96
|
132
|
Work in
progress
|
21
|
48
|
Finished
goods
|
284
|
316
|
|
401
|
496
|
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,
2018, and 2017, write-down of inventories amounted to (US$5,000)
and US$68,000, respectively, which were (credited) / charged to
cost of revenue in consolidated statements of operations and
comprehensive income / (loss).
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
Property,
plant and equipment, net
|
|
|
|
|
|
|
|
|
Office
premises*
|
1,866
|
1,866
|
Leasehold
improvements
|
156
|
157
|
Furniture, fixtures
and office equipment
|
591
|
612
|
Motor
vehicles
|
173
|
191
|
Testing
equipment
|
37
|
37
|
|
2,823
|
2,863
|
|
|
|
Less: Accumulated
depreciation
|
(2,069
)
|
(2,129
)
|
|
754
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
60
|
61
|
55
|
* 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, 2018
is approximately US$100,000 (2017: US$104,000).
11
Interests
in affiliates
Investments in
affiliates are accounted for using the equity method of
accounting.
Far
East is holding 19.4% (2017: 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 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
year 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
11
Interests
in affiliates (Continued)
A
summary of the financial information of the affiliate, Blue Sky, is
set forth below:
|
|
|
Balance
Sheet:
|
|
|
|
|
|
Current
assets
|
46,925
|
56,911
|
|
|
|
Non-current
assets
|
19,450
|
26,544
|
Total
assets
|
66,375
|
83,455
|
|
|
|
Total
liabilities
|
(40,330
)
|
(36,948
)
|
Total
shareholders’ equity
|
26,045
|
46,507
|
|
|
|
Operating
results:
|
|
|
|
|
|
Net
sales
|
50,165
|
62,234
|
|
|
|
Operating (loss) /
income
|
(5,194
)
|
4,439
|
|
|
|
Net (loss) /
income
|
(4,048
)
|
3,863
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11
Interests
in affiliates (Continued)
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.
A
summary of the financial information of the affiliate, Jia Huan,
for the year 2017 is set forth below:
|
|
Balance
Sheet:
|
|
|
|
Current
assets
|
21,374
|
|
|
Non-current
assets
|
4,570
|
Total
assets
|
25,944
|
|
|
Total
liabilities
|
(10,215
)
|
Total
shareholders’ equity
|
15,729
|
|
|
Operating
results:
|
|
|
|
Net
sales
|
16,301
|
|
|
Operating
income
|
32
|
|
|
Net
income
|
597
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
Other
payables and accrued expenses
Other
payables and accrued expenses mainly represent deposits received
from customers and accruals for operating expenses.
|
|
|
|
|
|
|
|
|
Dividend
payables
|
80
|
84
|
Deposits received
from customers
|
73
|
157
|
Rental deposit
received
|
5
|
7
|
Amounts due to
related parties
|
-
|
20
|
Other
payables
|
1,068
|
723
|
Other tax
payables
|
24
|
10
|
|
1,250
|
1,001
|
During
the years ended December 31, 2018 and 2017, there was no movement
with the Company’s issued ordinary shares and outstanding
shares.
Number
of outstanding shares at years end of:
|
|
|
|
|
|
Shares
issued
|
2,229,609
|
2,229,609
|
Less: shares under
treasury stock
|
(167,700
)
|
(167,700
)
|
|
2,061,909
|
2,061,909
|
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, 2018, 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, 2018). Based on management’s assessment, the Group
determined that there was no impairment of goodwill as of December
31, 2018 and 2017.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
Company authorised a stock buyback program in January 2015 pursuant
to which up to 60,000 shares, but not to exceed US$150,000 in
value, of the Company’s ordinary share could be purchased in
the open market from time to time as market and business conditions
warrant. The Company repurchased a total of 7,314 shares of
ordinary share during 2015 for total consideration of approximately
US$20,000.
16
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, 2018 (2017: US$3,520,000 and 2016:
US$3,520,000).
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate 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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2014
Officers’ Stock Option and Incentive Plan
Effective on
November 22, 2014, the Company entered into a stock option contract
with a Business Development Manager of Yixing Pact Environmental
Technology Co., Ltd, granting the optionee the right to purchase
20,692 Ordinary Shares, 1% of the Company’s issued and
outstanding shares, at an exercise price of $3.44 per share. The
exercise price was determined by the average closing price of the
Company’s ordinary shares as reported by NASDAQ for a ten day
period prior to the end of the Business Development Manager’s
probationary period on November 22, 2014, the effective date of the
stock option contract. The stock options granted are exercisable
three years after the effective date and terminate five years after
the effective date. In the event of the optionee’s
termination, except for his resignation, the options may be
exercisable within three months of the termination. In the event of
optionee’s death, retirement or disability, he or his legal
representative shall have up to one year to exercise the
option.
The
Company estimate the fair value of the options granted under the
Binomial pricing model.
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
|
-
|
-
|
-
|
-
|
20,692
|
3.44
|
Cancelled
|
-
|
-
|
-
|
-
|
(20,692
)
|
(3.44
)
|
Outstanding, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Exercisable, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
As of
December 31, 2018, 2017 and 2016, there was no unrecognised
stock-based compensation expense related to unvested stock
options.
The
Group adopted the provisions of ASC 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
17
Stock
options (Continued)
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.
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 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, 2018, 2017 and 2016, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately US$278,000,
US$281,000 and US$314,000 respectively.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial risk
factors
The
Group’s activities expose it to a variety of financial risks:
credit risk and foreign exchange rate 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$73,000, respectively per bank per each depositor.
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 transactions are limited to high credit quality
banks.
There
is no policy for requiring collateral for the credit risk of
financial instruments by the Group (2017: Nil).
(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 dollar, Renminbi and Euro.
Foreign exchange risk arises from committed and unmatched future
commercial transactions, such as confirmed import purchase orders
and sales orders, recognised 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 2018, 2017 and 2016.
21
Commitments
and contingencies
The
Group has various lease agreements for office and industrial
premises. Rental expenses for the years ended December 31, 2018,
2017 and 2016 were approximately US$276,000, US$324,000 and
US$297,000, respectively. Future minimum rental payments as of
December 31, 2018, under agreements classified as operating leases
with non-cancellable terms amounted to US$87,000 of which US$87,000
are payable in the year 2019 and US$Nil are payable within years
2020 to 2024.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21
Commitments
and contingencies (Continued)
As at
December 31, 2018 and 2017, 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$195,000 and US$230,000 was 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
and various blanket counter indemnities and counter indemnities.
The weighted average interest rate for import loans as at December
31, 2018 was 4% per annum (December 31, 2017: 4% per annum). For
the years ended December 31, 2018 and 2017, the average dollar
amount of the bank borrowings was approximately US$125,000 and
US$302,000 respectively and average interest rates were
approximately 4% per annum for the years ended December 31, 2018
and 2017.
(iii)
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.
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.
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.
Shanghai
Euro Tech Environmental Engineering Company Limited is a defendant
in civil actions claiming from the plaintiffs for outstanding debts
of approximately of US$291,000. The litigation has not been
concluded, but having taken legal advice, the directors are of the
opinion that sufficient provision was made in the consolidated
financial statements.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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
|
13,770
|
11,001
|
13,721
|
Engineering
|
6,334
|
6,349
|
8,757
|
|
20,104
|
17,350
|
22,478
|
Operating
loss
|
|
|
|
Trading and
manufacturing
|
(119
)
|
(153
)
|
(346
)
|
Engineering
|
(821
)
|
(306
)
|
(209
)
|
Unallocated
corporate expenses
|
(119
)
|
(115
)
|
(115
)
|
|
(1,059
)
|
(574
)
|
(670
)
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
Trading and
manufacturing
|
43
|
41
|
43
|
Engineering
|
17
|
20
|
12
|
|
60
|
61
|
55
|
Capital
Expenditures, Gross
|
|
|
|
Trading and
manufacturing
|
79
|
13
|
12
|
Engineering
|
6
|
5
|
48
|
|
85
|
18
|
60
|
|
|
|
|
|
|
Assets
|
|
|
Trading and
manufacturing
|
9,951
|
5,049
|
Engineering
|
13,114
|
18,688
|
|
23,065
|
23,737
|
Liabilities
|
|
|
Trading and
manufacturing
|
4,233
|
2,806
|
Engineering
|
3,287
|
3,824
|
|
7,520
|
6,630
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22
Segment
information (Continued)
(ii)
Geographical
analysis of revenue by customer location is as
follows:
|
|
|
|
|
|
|
|
Revenue
-
|
|
|
|
The
PRC
|
8,026
|
7,740
|
10,604
|
Hong
Kong
|
11,169
|
9,270
|
11,687
|
Others
|
909
|
340
|
187
|
|
20,104
|
17,350
|
22,478
|
(iii)
Long-lived assets
(1)
Geographical
analysis of long-lived assets is as follows:
|
|
|
|
|
|
|
|
|
Hong
Kong
|
504
|
460
|
The
PRC
|
250
|
274
|
|
754
|
734
|
(1)
Long-lived assets
represent property, plant and equipment, net.
Details
of individual suppliers accounting for more than 5% of the
Group’s purchases are as follows:
|
|
|
|
Supplier
A
|
55%
|
45%
|
63%
|
Supplier
B
|
8%
|
10%
|
7%
|
Supplier
C
|
7%
|
9%
|
5%
|
Supplier
D
|
7%
|
4%
|
5%
|
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22
Segment
information (Continued)
Details
of individual customers accounting for more than 5% of the
Group’s revenue are as follows:
|
|
|
|
|
|
|
|
Customer
A
|
15
%
|
10
%
|
13
%
|
Customer
B
|
7
%
|
-
|
-
|
Customer
C
|
-
|
7
%
|
-
|
Customer
D
|
-
|
5
%
|
-
|
Customer
E
|
-
|
5
%
|
6
%
|
Customer
F
|
-
|
-
|
6
%
|
Customer
G
|
-
|
-
|
6
%
|
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.
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
23
Subsequent
events, (Continued)
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-thecounter 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.
ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION
TECHNOLOGY COMPANY LIMITED
Consolidated Financial Statements
Table
of Contents
|
|
Page
|
|
|
Reports of
Independent Registered Public Accounting Firm
|
F-43 to F-44
|
Consolidated
Balance Sheets As Of December 31, 2018 and 2017
|
F-45
|
Consolidated
Statements of Operations for the Years Ended December 31, 2018,
2017 and 2016
|
F-46
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2018,
2017 and 2016
|
F-47
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended
December 31, 2018, 2017 and 2016
|
F-48
|
Notes to the
Consolidated Financial Statements
|
F-49 to F-71
|
|
|
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, 2018 and 2017, and the related consolidated
statements of operations, shareholders’ equity and cash flows
for the two years in the period ended December 31, 2018, 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, 2018 and 2017,
the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2018, 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 audit 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
May 14, 2019
Report of Independent Registered Public Accounting
Firm
To the Directors and Stockholders of
Zhejiang Tianlan Environmental Protection Technology Company
Limited
We have audited the accompanying consolidated statements of
operations, changes in shareholders’ equity and cash flows of
Zhejiang Tianlan Environmental Protection Technology Company
Limited (the “Company”) and its subsidiaries
(hereinafter collectively referred to as the “Group”)
for the year ended December 31, 2016. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United
States). 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. The Company is not required to have, nor were we
engaged to perform, an audit of the Company’s internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
results of their operations and cash flows for the year ended
December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Centurion ZD CPA Ltd.
Centurion ZD CPA Ltd. (fka
DCAW (CPA) Ltd. as successor to
Dominic K.F. Chan & Co.)
Certified Public Accountants
Hong Kong, April 26, 2017
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2017
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
25,184
|
25,785
|
Receivables,
net
|
153,585
|
180,518
|
Prepayments and
other current assets
|
28,978
|
30,381
|
Contract
assets
|
100,994
|
119,256
|
Inventories
|
11,963
|
15,117
|
|
|
|
Total current
assets
|
320,704
|
371,057
|
|
|
|
Property, plant and
equipment, net
|
92,778
|
140,479
|
Intangible assets,
net
|
1,079
|
1,223
|
Land use right,
net
|
5,440
|
5,598
|
Deferred tax
assets
|
14,238
|
6,269
|
Other non-current
assets
|
17,512
|
17,512
|
Long term
investments
|
1,880
|
1,991
|
|
|
|
Total non-current
assets
|
132,927
|
173,072
|
|
|
|
Total
assets
|
453,631
|
544,129
|
|
|
|
Liabilities and
shareholders’ equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
Bank
borrowings
|
45,000
|
33,000
|
Accounts
payable
|
106,644
|
127,429
|
Other payables and
accrued expenses
|
16,378
|
19,673
|
Contract
liabilities
|
41,046
|
52,777
|
Other taxes
payable
|
11,108
|
11,086
|
Borrowings-current
portion
|
32,275
|
29,438
|
Income tax
payable
|
-
|
4,782
|
|
|
|
Total current
liabilities
|
252,451
|
278,185
|
|
|
|
Non-current
liabilities:
|
|
|
Borrowings-non-current
portion
|
23,178
|
54,630
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Total
liabilities
|
275,629
|
332,815
|
|
|
|
Shareholders’
equity:
|
|
|
Share
capital
82,572,000
(2017: 82,572,000) shares authorised, issued and
outstanding
|
82,572
|
82,572
|
Capital
reserve
|
35,566
|
32,480
|
PRC statutory
reserves
|
13,903
|
14,122
|
Retained
earnings
|
42,099
|
79,646
|
|
|
|
Equity attributable
to shareholders of Zhejiang Tianlan Environmental Protection
Technology Company Limited
|
174,140
|
208,820
|
Non-controlling
interests
|
3,862
|
2,494
|
|
|
|
Total
shareholders’ equity
|
178,002
|
211,314
|
|
|
|
|
|
|
Total liabilities
and shareholders’ equity
|
453,631
|
544,129
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
330,244
|
422,323
|
289,086
|
|
|
|
|
Cost of
revenue
|
(274,062
)
|
(339,488
)
|
(202,869
)
|
Gross
profit
|
56,182
|
82,835
|
86,217
|
|
|
|
|
Selling and
administrative expenses
|
(48,546
)
|
(52,713
)
|
(60,528
)
|
Operating
income
|
7,636
|
30,122
|
25,689
|
|
|
|
|
Loss on disposal of
a subsidiary
|
-
|
-
|
(35
)
|
Interest
income
|
53
|
75
|
70
|
Interest
expenses
|
(2,998
)
|
(2,037
)
|
(1,577
)
|
Other income,
net
|
8,561
|
1,887
|
3,456
|
Other
losses
|
(47,446
)
|
-
|
-
|
(Loss)/income
before income taxes
|
(34,194
)
|
30,047
|
27,603
|
|
|
|
|
Income taxes
credit/(expense)
|
7,967
|
(3,832
)
|
(4,961
)
|
Net
(loss)/income
|
(26,227
)
|
26,215
|
22,642
|
Net (loss)/income
attributable to non-controlling interests
|
(419
)
|
19
|
586
|
Net (loss)/income
attributable to shareholders of Zhejiang Tianlan Environmental
Protection Technology Company Limited
|
(26,646
)
|
26,234
|
23,228
|
|
|
|
|
Net (loss)/income
per ordinary share
|
|
|
|
|
|
|
|
Weighted average
number of ordinary shares outstanding
|
82,572,000
|
82,539,123
|
80,744,055
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net (loss)/income
attributable to the Company
|
(26,227
)
|
26,215
|
22,642
|
Adjustments to
reconcile net (loss)/income to net cash provided by operating
activities:
|
|
|
|
Depreciation of
property, plant and equipment
|
11,755
|
12,647
|
14,144
|
Amortisation of
intangible assets
|
152
|
152
|
575
|
Amortisation of
land use right
|
149
|
149
|
149
|
Loss on disposal of
property, plant and equipment
|
-
|
-
|
15
|
Impairment loss on
property, plant and equipment
|
33,500
|
-
|
-
|
Bad debts written
off
|
13,946
|
-
|
-
|
Property, plant and
equipment written off
|
6
|
-
|
-
|
Deferred tax
credit
|
(7,969
)
|
(405
)
|
(1,337
)
|
Other non-current
assets
|
-
|
-
|
(17,512
)
|
(Increase) /
decrease in current assets:
|
|
|
|
Receivables,
net
|
12,987
|
(15,418
)
|
42,807
|
Prepayments and
other current assets
|
1,403
|
9,890
|
(18,353
)
|
Contract
assets
|
18,262
|
(48,470
)
|
26,859
|
Other tax
receivables
|
-
|
215
|
(215
)
|
Inventories
|
3,154
|
(2,012
)
|
(994
)
|
Increase /
(decrease) in current liabilities:
|
|
|
|
Accounts
payable
|
(20,785
)
|
9,490
|
(59,042
)
|
Other payables and
accrued expenses
|
(3,295
)
|
3,715
|
1,932
|
Contract
liabilities
|
(11,731
)
|
17,552
|
8,476
|
Other taxes
payable
|
22
|
3,596
|
(933
)
|
|
(8,796
)
|
1,520
|
2,268
|
|
|
|
|
Net cash provided
by operating activities
|
16,533
|
18,836
|
21,481
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of
intangible assets
|
(8
)
|
-
|
(402
)
|
Purchase of
property, plant and equipment
|
(913
)
|
(3,535
)
|
(3,368
)
|
Payment for long
term investments
|
(111
)
|
(1,991
)
|
-
|
Sales proceeds from
disposal of long term investments
|
133
|
-
|
-
|
Sales proceeds from
disposal of subsidiaries
|
7,717
|
-
|
1,000
|
Sales proceeds from
disposal of property, plant and equipment
|
121
|
249
|
1,100
|
|
|
|
|
Net cash provided
by /(used in) investing activities
|
6,939
|
(5,277
)
|
(1,670
)
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds from
issuance of shares
|
2,450
|
7,800
|
3,360
|
Repayment of bank
borrowings
|
(53,000
)
|
(48,000
)
|
(70,000
)
|
Proceeds from bank
borrowings
|
65,000
|
56,000
|
50,000
|
Dividend paid to
shareholders
|
(9,908
)
|
(9,496
)
|
(9,220
)
|
(Repayment of) /
proceeds from borrowings
|
(28,615
)
|
(27,623
)
|
3,959
|
|
|
|
|
Net cash used in
financing activities
|
(24,073
)
|
(21,319
)
|
(21,901
)
|
|
|
|
|
|
|
|
|
Net decrease in
cash and cash equivalents
|
(601
)
|
(7,760
)
|
(2,090
)
|
Cash and cash
equivalents, beginning of year
|
25,785
|
33,545
|
35,635
|
|
|
|
|
Cash and cash
equivalents, end of year
|
25,184
|
25,785
|
33,545
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash paid during
the period for interest
|
2,924
|
1,966
|
1,577
|
Cash paid during
the period for income taxes
|
9,843
|
4,961
|
4,245
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
ZHEJIANG TIANLAN
ENVIRONMENTAL PROTECTION
TECHNOLOGY
COMPANY LIMITED
SHAREHOLDERS
|
|
|
|
|
|
|
|
Non-controlling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of
January 1,
2016
|
80,172
|
24,217
|
9,094
|
53,928
|
1,602
|
169,013
|
Net income /
(loss)
|
-
|
-
|
-
|
23,228
|
(586
)
|
22,642
|
Dividend
paid
|
-
|
-
|
-
|
(9,220
)
|
-
|
(9,220
)
|
Appropriation of
reserves
|
-
|
-
|
2,542
|
(2,542
)
|
-
|
-
|
Deemed disposal of
subsidiary
|
-
|
103
|
-
|
-
|
897
|
1,000
|
Issue share
capital
|
1,200
|
2,160
|
-
|
-
|
-
|
3,360
|
Balance as
of
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
)
|
-
|
-
|
Issue share
capital
|
1,200
|
6,000
|
-
|
-
|
600
|
7,800
|
Balance as
of
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
)
|
-
|
-
|
Issue share
capital
|
-
|
-
|
-
|
-
|
2,450
|
2,450
|
Balance as
of
December 31,
2018
|
82,572
|
35,566
|
13,903
|
42,099
|
3,862
|
178,002
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities
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.
Details
of the Company’s significant subsidiaries are summarised as
follows:
Name
|
Percentage of
equity ownership
|
Place of
incorporation
|
Principal
activities
|
|
|
|
|
|
Zhejiang Tianlan
Environmental Engineering and Design Company Limited
|
-*
|
100
%
|
PRC
|
Provision of
maintenance services of environmental protection
equipment
|
Hangzhou Tianlan
Environmental Protection Equipment Company Limited
|
51
%
|
51
%
|
PRC
|
Manufacturing and
installation services of environmental protection
equipment
|
Shihezi Tianlan
Environmental Protection Technology Company Limited
|
- **
|
100
%
|
PRC
|
Provision of
maintenance services of environmental protection
equipment
|
Hangzhou Tianlian
Environmental Testing Technology Company Limited
|
-*
|
80
%
|
PRC
|
Provision of
testing services of environmental protection equipment
|
Hangzhou Tianlan
Pure Environmental Protection Technology Company
Limited
|
51
%
|
-
|
PRC
|
Manufacturing of
environmental protection equipment
|
Hangzhou Tiancan
Environmental Technology Company Limited
|
100
%
|
-
|
PRC
|
Manufacturing of
environmental protection equipment
|
* These
companies were disposed on January to February, 2018.
** This
company was de-registration on February, 2018.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(a)
Basis
of consolidation
The
consolidated financial statements include the financial statements
of
Zhejiang Tianlan Environmental
Protection Technology Company Limited
and its subsidiaries
(the “Group”). In preparing the consolidated financial
statements presented herewith, all significant intercompany
balances and transactions have been eliminated on
consolidation.
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders.
Sales
are recognized when or as the Group satisfy a performance
obligation by transferring control of a product or service to a
customer, in an amount that reflects the consideration to which the
Group expect to be entitled in exchange for the product or service.
The Group considers a number of factors in determining when the
Group has transferred control to a customer, including the
following: (i) our present right to payment; (ii) the
customer’s legal title to the asset; (iii) physical
possession of the asset; (iv) the customer’s significant
risks and rewards of ownership of the asset; and (v) the
customer’s acceptance of the asset.
Generally, payment
terms with the Group’s customers are consistent with those
used in their industries and the regions in which the Group
operate.
(ii)
Construction
and installation services
Revenues are
recognized as performance obligations are satisfied over time
(formerly known as percentage-of-completion method), using the
ratio of costs incurred to estimated total costs for each contract.
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 and those indirect costs determined to relate to
contract performance, such as indirect salaries and wages,
equipment repairs and depreciation and insurance. Administrative
and general expenses are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability and associated
change orders and claims, including those changes arising from
contract penalty provisions and final contract settlements, may
result in revisions to costs and income and are recognized in the
period in which the revisions are determined.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(ii) Construction
and installation services
Change
orders are modifications of an original contract that effectively
change the existing provisions of the contract without adding new
provisions or terms. Change orders may include changes in
specifications or designs, manner of performance, facilities,
equipment, materials, sites and period of completion of the work.
Either the Group or its customers may initiate change
orders.
The
Group considers unapproved change orders to be contract variations
for which the Group have customer approval for a change of scope
but a price change associated with the scope change has not yet
been agreed upon. Costs associated with unapproved change orders
are included in the estimated costs to complete the contracts and
are treated as project costs as incurred. The Group recognizes
revenue equal to costs incurred on unapproved change orders when
management determines approval to be probable. Unapproved change
orders involve the use of estimates, and it is reasonably possible
that revisions to the estimated costs and recoverable amounts may
be required in future reporting periods to reflect changes in
estimates or final agreements with customers. Change orders that
are unapproved as to both price and scope are evaluated as claims.
The Group considers claims to be amounts in excess of approved
contract prices that the Group seek 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. Claims are
included in the calculation of revenue when realization is probable
and amounts can be reliably determined to the extent costs are
incurred. To support these requirements, the existence of the
following items must be satisfied: (i) the contract or other
evidence provides a legal basis for the claim; or a legal opinion
has been obtained, stating that under the circumstances there is a
reasonable basis to support the claim; (ii) additional costs are
caused by circumstances that were unforeseen at the contract date
and are not the result of deficiencies in the contractor’s
performance; (iii) costs associated with the claim are identifiable
or otherwise determinable and are reasonable in view of the work
performed; and (iv) the evidence supporting the claim is objective
and verifiable, not based on management’s feel for the
situation or on unsupported representations. Revenue in excess of
contract costs incurred on claims is recognized when an agreement
is reached with customers as to the value of the claims, which in
some instances may not occur until after completion of work under
the contract. Costs associated with claims are included in the
estimated costs to complete the contracts and are treated as
project costs when incurred. The Group has projects where we are in
the process of negotiating, or awaiting final approval of,
unapproved change orders and claims with its customers. The Group
is proceeding with its contractual rights to recoup additional
costs incurred from its customers based on completing work
associated with change orders, including change orders with pending
change order pricing, or claims related to significant changes in
scope which resulted in substantial delays and additional costs in
completing the work. Unapproved change order and claim information
has been provided to its customers and negotiations with the
customers are ongoing. If additional progress with an acceptable
resolution is not reached, legal action will be taken.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(d)
Research
and development costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately
RMB14,363,000, RMB12,873,000 and RMB13,808,000 for the years ended
December 31, 2018, 2017 and 2016 respectively and were included in
“Selling and Administrative expenses” in the
Group’s consolidated statements of operations.
(e)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately RMB
Nil, RMB4,000 and RMB58,000 for the years ended December 31, 2018,
2017 and 2016 respectively and were included in “Selling and
Administrative expenses” in the Group’s consolidated
statements of operations.
The
Group accounts for income and deferred tax under the provisions of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognised for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognised for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be
realised.
In
accordance with ASC 740-10, the Group recognises tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits. The Group recognises interest and/or penalties, if any,
related to income tax matters in income tax expense. The Group did
not have such uncertain tax positions in 2018, 2017 and 2016. The
Group is subject to examination of relevant tax authorities in PRC
(open for audit for 2016 to 2018).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognised in the consolidated statements of operations for the
period that includes the enactment date.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(g)
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, 2018 and 2017.
Receivables are
generally based on amounts billed to the customer in accordance
with the provisions of the agreement.
Receivables are
written off based on individual credit evaluation and specific
circumstances of the customer, when such treatment is warranted.
The Group performs a review of outstanding receivables, historical
collection information and existing economic conditions to
determine if there are potential uncollectible
receivables.
As of
December 31, 2018, accounts receivable in exceed of one year
amounted to approximately RMB34,352,000 (2017:
RMB52,105,000).
Inventories are
stated at the lower of cost or net realizable value determined
using the weighted average method which approximates cost and
estimated net realizable value. Cost of work in progress and
finished goods comprise direct material, direct production costs
and an allocated portion of production overhead costs based on
normal operating capacity.
(j)
Property,
plant and equipment and land use right, net
Property, plant and
equipment are stated at cost less accumulated depreciation. Gains
or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalised. All
ordinary repair and maintenance costs are expensed as incurred.
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 for 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
|
Office
premises
|
|
47-50 years, with
5% residual value
|
Leasehold
improvements
|
|
over terms of the
leases or the useful lives whichever is less, with 5% residual
value
|
Plant and
machineries
|
|
5 to 10 years, with
5% residual value
|
Furniture, fixtures
and office
equipment
|
|
3 to 5 years, with
5% residual value
|
Motor
vehicles
|
|
1 to 8 years, with
5% residual value
|
ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(k)
Intangible
assets, net
The
Group amortizes its intangible assets with definite lives over
their estimated useful lives and reviews these assets for
impairment. The Group is currently amortizing its acquired
intangible assets with definite lives over periods generally
ranging between five to twenty years.
(l)
Evaluating
impairment for long lived assets
When
events or changes in circumstances indicate that long-lived assets
may be impaired, an evaluation is performed. The evaluation would
be based on estimated undiscounted cash flows associated with the
assets as compared to the asset’s carrying amount to
determine if a write-down to fair value is required. There was
impairment in 2018 and no impairment in 2017 and 2016. Management
believes that there are no additional events or changes in
circumstances which have indicated that other long-lived assets may
be impaired.
(m)
Government
grant income
Government grant
income consisted of receipt of funds to subsidize the investment
cost of information technology system development and market
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.
Leases
of property, plant and equipment where the Group, as lessee, has
substantially all the risks and rewards of ownership are classified
as finance leases. Finance leases are capitalized at the
lease’s inception at the fair value of the leased property,
plant and equipment or, if lower, the present value of the minimum
lease payments. The corresponding rental obligations, net of
finance charges, are included in other short-term and long-term
payables. Each lease payment is allocated between the liability and
finance cost. The finance cost is charged to the consolidated
statements of operations over the lease period so as to produce a
constant periodic rate of interest on the remaining balance of the
liability for each period. The property, plant and equipment
acquired under finance leases is depreciated over the asset’s
useful life or over the shorter of the asset’s useful life
and the lease term if there is no reasonable certainty that the
Group will obtain ownership ar the end of the lease
term.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
Paid
in capital refers to the registered capital paid up by the
shareholders of the Company.
On
June 2, 2016, the Company increased the number of paid up shares by
1,200,000 in the aggregative amount to gross proceeds of RMB
3,360,000 to the existing shareholders.
On
January 10, 2017, the Company increased the number of paid up
shares by 1,200,000 in the aggregative amount to gross proceeds of
RMB 7,200,000 to the existing shareholders.
At
the year end of December 31, 2018, there were 82,572,000 shares
(2017: 82,572,000 shares) issued.
The
preparation of the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the
United States of America ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Certain of the Group’s accounting policies require
higher degrees of judgment than others in their application. These
include the recognition of revenue and earnings from contracts over
time, the valuation of income taxes, valuation allowance for the
deferred tax assets, useful lives of long lived assets, impairment
of long lived assets and receivables, net. Management continually
evaluates all of its estimates and judgments based on available
information and experience; however, actual results could differ
from these estimates.
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.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(r)
Fair
value of financial assets and liabilities
The
fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between
willing parties. The Group’s financial instruments are cash
and cash equivalents, receivables, net, prepayments and other
current assets, contract assets, bank borrowings, accounts payable,
other payables and accrued expenses, contract liabilities and
borrowings. The recorded values approximate their fair values based
on their liquidity and/or short-term nature. The Group provides
credit in the normal course of business, and performs ongoing
credit evaluations, as deemed necessary, but generally does not
require collateral to support such receivables.
The
Group’s debt is recorded at its carrying amount, which
approximates the fair values, in the consolidated balance
sheets.
(s)
Recent
accounting pronouncements
The
Group considers the applicability and impact of all
accounting
standards updates (“ASUs”).
The Group, based on
its assessment, determined that any recently issued or proposed
ASUs not listed below are either not applicable to the Group or may
have minimal impact on its consolidated financial
statements.
Recently
adopted accounting pronouncements
In May
2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)”. We adopted the
requirement of the new pronouncement effective January 1, 2018. See
Note 3 for further information related to the Group’s
accounting policy and transition disclosures associated with the
adoption of this pronouncement.
In
January 2017, the FASB issued ASU No. 2017-01, "Business
Combinations (Topic 805)": Clarifying the Definition of a Business,
which clarified the definition of a business with the objective of
adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The Group adopted this ASU on a
prospective basis in January 2018 and there was no effect on the
Group's financial position results of operations or cash
flows.
Recently
issued accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)”. The amendments under this pronouncement will
change the way all leases with durations in excess of one year are
treated. Under this guidance, lessees will be required to recognize
virtually all leases on the balance sheet as a right-of-use asset
and an associated financing lease liability or capital lease
liability. The right-of-use asset represents the lessee’s
right to use, or control the use of, a specified asset for the
specified lease term. The lease liability represents the
lessee’s obligation to make lease payments arising from the
lease, measured on a discounted basis. Based on certain
characteristics, leases are classified as financing leases or
operating leases. Financing lease liabilities, which contain
provisions similar to capitalized leases, are amortized like
capital leases under current accounting, as amortization expense
and interest expense in the statement of operations and
comprehensive income / (loss). Operating lease liabilities are
amortized on a straight-line basis over the life of the lease as
lease expense in the statement of operations and comprehensive
income / (loss). This update is effective for annual reporting
periods, and interim periods within those reporting periods,
beginning after December 15, 2018. The Group intends to adopt this
new guidance using the cumulative effect method, which would apply
to all new lease contracts initiated on or after January 1, 2019.
For existing lease contracts that have remaining obligations as of
January 1, 2019, the difference between the recognition criteria in
the new guidance and the Company’s current practices would be
recognized using a cumulative effect adjustment to the opening
balance of retained earnings
.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(s)
Recent
accounting pronouncements
Recently
issued accounting pronouncements
The
Group continues to evaluate the impact that this pronouncement, and
all amendments relating to this pronouncement, will have on its
policies and procedures pertaining to its existing and future lease
arrangements, disclosure requirements and on the Group’s
consolidated financial statements. When this pronouncement is
adopted in 2019, the Group expects that most existing operating
lease commitments that extend beyond twelve months at the time of
adoption will be recognized as lease liabilities and right-of-use
(“ROU”) assets upon adoption. Based on preliminary
evaluations, the Group estimates that the value of lease
liabilities will be insignificant upon adoption with corresponding
ROU assets of the same amount based on the present value of the
remaining minimum lease payments under current leasing standards.
Additionally, the Group expects to elect the ’package of
practical expedients,’ which permits the Group to not
reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs. The
Group currently does not expect to elect the use of the hindsight
practical expedient or the practical expedient pertaining to land
easements. The Group, however, expects to elect the short-term
lease recognition exemption for all leases that qualify. This
means, for those leases that qualify, the Group will not recognize
ROU assets or lease liabilities, and this includes not recognizing
ROU assets or lease liabilities for existing short-term leases of
those assets in transition. The Group also currently expects to
elect the practical expedient to not separate lease and non-lease
components for our real estate leases. While the Group is still
evaluating the requirements of this update, it currently does not
expect the adoption to have a material impact on the recognition,
measurement or presentation of lease expenses within the
consolidated statements of operations and comprehensive income /
(loss) or consolidated statements of cash flows.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments”. The amendments in this ASU require
the measurement and recognition of expected credit losses for
financial assets held at amortized cost. The amendments in this ASU
replace the existing incurred loss impairment model with an
expected loss methodology, which will result in more timely
recognition of credit losses. In November 2018, the FASB issued ASU
No. 2018-19, “Codification Improvements to Topic 326,
Financial Instruments-Credit Losses”, which among other
things, clarifies that receivables arising from operating leases
are not within the scope of Subtopic 326-20. Instead, impairment of
receivables arising from operating leases should be accounted for
in accordance with Topic 842, Leases. The guidance is effective for
the annual reporting periods beginning after December 15, 2020,
including interim periods within those fiscal years. The Group is
currently evaluating the impact on its consolidated financial
position and results of operations upon adopting these
amendments.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The
amendments in this ASU eliminate, add and modify certain disclosure
requirements for fair value measurements. The amendments in this
ASU, among other things, require public companies to disclose the
range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The amendments in this
ASU are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019, and entities are permitted to early adopt either the entire
standard or only the provisions that eliminate or modify the
requirements. The Group does not expect the adoption of these
amendments to have a material impact on its consolidated financial
position and results of operations.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(s)
Recent
accounting pronouncements
Recently
issued accounting pronouncements
In
August 2016, the FASB issued guidance in ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments”. This update
addresses specific cash flow issues with the objective of reducing
existing diversity in practice. Early adoption is permitted for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. The Group expects to adopt this
guidance as required and does not expect a material impact to the
consolidated financial statements.
(t)
Net
income per ordinary share
Net
income per ordinary share is computed in accordance with FASB ASC
Subtopic 260-10, Earnings Per Share, by dividing the net income 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.
Debt
issuance costs related to a recognized debt liability be presented
in the consolidated balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(x)
Concentration of credit risk
Financial
instruments that potentially subject the Group to significant
concentration of credit risk primarily consist of cash and cash
equivalents, receivables, net, contract assets and prepayments. The
maximum exposure of such assets to credit risk is their carrying
amounts as of the balance sheet dates.
As
of December 31, 2018 and 2017, all of the Group’s cash
and cash equivalents were deposited in financial institutions
located in the PRC, which management believes are of high credit
quality.
Receivables,
net and contract assets are typically unsecured and are derived
from revenue earned from the customers. The risk with respect to
receivables, net and contract assets is mitigated by credit
evaluations the Group performs on its customers and its ongoing
monitoring of outstanding balances.
As December 31, 2018 and 2017, there were none customers who owed
the Group amounts greater than 10% of receivables, net and contract
assets.
Prepayments
made to suppliers are typically unsecured and arise from deposits
paid in advance for future purchases. Due to the Group’s
concentration of prepayments made to a limited number of suppliers
and the significant prepayments that are made to them, any negative
events or deterioration in financial strength with respect to the
Group’s suppliers may cause material loss to the Group and
have a material adverse effect on the Group’s financial
condition and results of operations. The risk with respect to
prepayments made to suppliers is mitigated by credit evaluations
that the Group performs on its suppliers prior to making any
prepayments and the ongoing monitoring of its suppliers’
performance.
Reclassifications
have been made to historical financial data in our consolidated
financial statements to conform to our current year
presentation.
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.
(aa)
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.
The majority of the Group's 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, not distinct. Some of the contracts have
multiple performance obligations, most commonly due to the contract
covering multiple phases of the project life cycle (design,
installation and commissioning). For contracts with multiple
performance obligations, the Group allocates the contract
transaction price to each performance obligation using its best
estimate of the standalone selling price of each distinct good or
service in the contract. The primary method used to estimate
standalone selling price is the expected cost plus a margin
approach, under which the Group forecasts the expected costs of
satisfying a performance obligation and then adds an appropriate
margin for that distinct good or service.
(i)
Performance
obligations satisfied over time
Revenue
for the Group's construction and installation services contracts
that satisfy the criteria for over time recognition (formerly known
as percentage-of completion method) is recognized as the work
progresses. The majority of the revenue is derived from long-term,
construction contracts and projects that typically span between 12
to 36 months,. These engineering contracts will continue to be
recognized over time 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. Under the new revenue standard,
the measure of progress continues to best depict the transfer of
control of assets to the customer.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(aa)
Performance
obligations
(ii) Performance
obligations satisfied at a point in time
Revenue
that do not satisfy the criteria for over time recognition is
recognized at a point in time. Upon fulfillment of the performance
obligation, the customer is provided an invoice (or equivalent)
demonstrating transfer of control to the customer.
Contract
modifications are routine in the performance of the Group's
contracts. Contracts are often modified to account for changes in
the contract specifications or requirements. In most instances,
contract modifications are for goods or services that are not
distinct, and, therefore, are accounted for as part of the existing
contract.
Pre-contract costs
are generally charged to expense as incurred, but in certain cases
their recognition may be deferred if specific probability criteria
are met. The Group had no significant deferred pre-contract costs
as at December 31, 2018.
(iii)
Backlog
Remaining
performance obligation, which is also referred to as backlog. The
Group expects to recognize approximately 85% of its backlog as
revenue during the next twelve months, and the balance
thereafter.
Accounting for
long-term contracts and programs involves the use of various
techniques to estimate total contract revenue and costs. For
long-term contracts, the Group estimates the profit on a contract
as the difference between the total estimated revenue and expected
costs to complete a contract and recognizes that profit over the
life of the contract.
Contract estimates
are based on various assumptions to project the outcome of future
events that often span several years. These assumptions include
labor productivity and availability, the complexity of the work to
be performed, the cost and availability of materials and the
performance of subcontractors.
Changes
in job performance, job conditions and estimated profitability,
including those changes arising from contract penalty provisions
and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are
determined.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Variable
Consideration
The
transaction price for contracts may include variable consideration,
which includes increases to transaction price for approved and
unapproved change orders, claims and incentives, and reductions to
transaction price for liquidated damages. Change orders, claims and
incentives are generally not distinct from the existing contract
due to the significant integration service provided in the context
of the contract and are accounted for as a modification of the
existing contract and performance obligation. Change orders may
include changes in specifications or designs, manner of
performance, facilities, equipment, materials, sites and period of
completion of the work. Either the Group or its customers may
initiate change orders. Change orders that are unapproved as to
both price and scope are evaluated as claims. 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
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 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.
The
Group has projects that it is in the process of negotiating, or
awaiting final approval of, unapproved change orders and claims
with its customers. The Group is proceeding with its contractual
rights to recoup additional costs incurred from its customers based
on completing work associated with change orders, including change
orders with pending change order pricing, or claims related to
significant changes in scope which resulted in substantial delays
and additional costs in completing the work. Unapproved change
order and claim information has been provided to the Group's
customers and negotiations with the customers are
ongoing.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
Revenue
from contracts with customers
(a)
Change
in accounting policy
On
January 1, 2018, the Group adopted ASU No. 2014-09, “Revenue
from Contracts with Customers (Topic 606)” using the modified
retrospective method for contracts that were not completed as of
January 1, 2018. Results on the consolidated statement of
operations for reporting periods beginning after December 31, 2017
are presented under this new pronouncement, while prior period
amounts reported on the consolidated statement of operations are
not adjusted and continue to be reported under the accounting
standard Revenue Recognition Topic 605, which was in effect for
prior periods. In connection with the adoption of this ASU, certain
changes have been made to the consolidated balance sheet. The
accounts previously named “Costs and estimated earnings in
excess of billings on uncompleted contracts” and
“Billings in excess of costs and estimated earnings on
uncompleted contracts” have been renamed “Contract
assets” and “Contract liabilities”, respectively.
The adoption of this pronouncement did not have a material impact
on financial position, results of operation, or cash
flows.
The
timing of revenue recognition, billings and cash collections
results in receivables, net and costs and estimated earnings in
excess of billings on uncompleted contracts (contract assets) on
the consolidated balance sheet. In the Group's construction and
installation segment, amounts are billed as work progresses in
accordance with agreed-upon contractual terms, either at periodic
intervals or upon achievement of contractual milestones. Generally,
billing occurs subsequent to revenue recognition, resulting in
contract assets. However, the Group sometimes receives advances or
deposits from its customers, before revenue is recognized,
resulting in billings in excess of costs and estimated earnings on
uncompleted contracts (contract liabilities). These assets and
liabilities are reported on the consolidated balance sheet on a
contract-by-contract basis at the end of each reporting period.
Changes in the contract asset and liability balances during the
year ended December 31, 2018 and 2017, were not materially impacted
by any other factors.
4
Other
income, net and other losses
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of
property, plant and equipment
|
-
|
-
|
(15
)
|
Subsidy
income
|
5,537
|
2,262
|
3,360
|
Sales of scrapped
materials
|
-
|
37
|
3
|
Investment
income
|
1,661
|
(405
)
|
412
|
Others
|
1,363
|
(7
)
|
(304
)
|
|
|
|
|
|
8,561
|
1,887
|
3,456
|
Other
losses
|
|
|
|
|
|
|
|
|
|
|
|
Bad debts written
off
|
13,946
|
-
|
-
|
Impairment loss on
property, plant and equipment
|
33,500
|
-
|
-
|
|
|
|
|
|
47,446
|
-
|
-
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
Income
taxes (credit)/expense
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, 2018 and 2017, 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
10%
only.
The
provision for income taxes (credit)/expense consists
of:
|
|
|
|
|
|
|
|
Current PRC
EIT:
|
|
|
|
Domestic
|
2
|
4,237
|
6,298
|
|
|
|
|
Income
taxes
|
2
|
4,237
|
6,298
|
|
|
|
|
|
|
|
|
Deferred tax
benefit:
|
(7,969
)
|
(405
)
|
(1,337
)
|
|
|
|
|
Total deferred
taxes
|
(7,969
)
|
(405
)
|
(1,337
)
|
|
|
|
|
Total
|
(7,967
)
|
3,832
|
4,961
|
|
|
|
|
The
principal reconciling items from income taxes computed at the
statutory rates and at the effective income tax rates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income
before income taxes
|
(34,194
)
|
30,047
|
27,603
|
Computed tax using
respective companies’ statutory tax rates
|
(4,987
)
|
4,548
|
4,078
|
(Over)-provision
for income taxes in prior years
|
-
|
(29
)
|
57
|
Permanent
difference
|
-
|
(459
)
|
(82
)
|
Temporary
differences
|
(272
)
|
(405
)
|
(1,337
)
|
Tax effect of
revenue not subject to tax
|
(3,024
)
|
(1,438
)
|
(901
)
|
Tax effect of
expenses not deductible for tax purposes
|
316
|
1,435
|
2,732
|
Tax effect of
unused tax losses not recognized
|
-
|
180
|
414
|
Income taxes
(credit)/expense at effective tax rate
|
(7,967
)
|
3,832
|
4,961
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
Income
taxes - Continued
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
Allowance for
doubtful debts
|
13,201
|
6,269
|
Tax
losses
|
1,037
|
-
|
|
|
|
Total deferred tax
assets
|
14,238
|
6,269
|
Other
taxes payable mainly comprise Valued-Added Tax (“VAT”).
The Group is subject to output VAT levied at the rate of 16% or 10%
since May 1, 2018 (2017: 17% or 11%) 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.
7
Other
non-current assets
Other
non-current assets represent deposits for sales and leaseback
agreement amounted to approximately to RMB17,512,000 (2017:
RMB17,512,000).
|
|
|
|
|
|
|
|
|
Receivables
|
177, 632
|
222,279
|
Less: Allowance for
doubtful debts
|
(24,047
)
|
(41,761
)
|
|
|
|
|
153,585
|
180,518
|
The
following is an aging analysis of receivables, net as of December
31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Within 1
year
|
119,233
|
128,413
|
1 year - 2
years
|
21,182
|
37,934
|
2 years - 3
years
|
9,492
|
9,158
|
3 years - 4
years
|
3,225
|
4,120
|
|
453
|
893
|
|
|
|
|
153,585
|
180,518
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8
Receivables,
net (Continued)
At
December 31, 2018, the receivables, net pledged as security for the
Company’s bank loans and third party’s loans amounted
to approximately RMB21,634,000 (2017: RMB24,363,000).
9
Prepayments
and other current assets
Prepayments and
other current assets mainly represent deposits for bidding
projects, deposits for purchases and services and prepaid
expenses.
|
|
|
|
|
|
|
|
|
Prepayments
|
18,702
|
19,606
|
Other
receivables
|
8,791
|
10,775
|
Other current
assets
|
1,485
|
-
|
|
|
|
|
28,978
|
30,381
|
|
|
|
|
|
|
|
|
|
Contracts costs
incurred plus estimated earnings
|
236,044
|
330,322
|
Less: Progress
billings
|
(135,050
)
|
(211,066
)
|
|
|
|
Cost and estimated
earnings in excess of billings
|
100,994
|
119,256
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
11,963
|
4,741
|
Work in
progress
|
-
|
6,452
|
Finished
goods
|
-
|
3,924
|
|
|
|
|
11,963
|
15,117
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building and
leasehold improvements
|
|
56,665
|
56,665
|
Furniture, fixtures
and office equipment
|
|
11,090
|
10,911
|
Motor
vehicles
|
|
4,390
|
4,410
|
Plant and
machineries
|
|
111,928
|
115,349
|
|
|
|
|
Total
|
|
184,073
|
187,335
|
|
|
|
|
Less: Accumulated
depreciation
|
|
(57,795
)
|
(46,856
)
|
Accumulated
impairment losses
|
|
(33,500
)
|
-
|
|
|
|
|
Total
|
|
(91,295
)
|
(46,856
)
|
|
|
|
|
Net
|
|
92,778
|
140,479
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
11,755
|
12,647
|
14,144
|
At
December 31, 2018, the net book value of property, plant and
equipment pledged as security for the Company’s bank loans
and third party’s loans amounted to approximately
RMB90,248,000 (2017: RMB99,406,000).
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13
Intangible
assets, net
|
|
|
|
|
|
|
|
|
Patents
|
2,400
|
2,400
|
Others
|
575
|
567
|
|
|
|
|
2,975
|
2,967
|
|
|
|
Less: Accumulated
amortization
|
(1,896
)
|
(1,744
)
|
|
|
|
|
1,079
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
152
|
152
|
575
|
The
useful lives of intangible assets, net of the Group are normally
10-20 years. The following table represents the total estimated
amortization of intangible assets, net for the five succeeding
fiscal years to December 31, 2018:
For
the Twelve Months Ending December 31,
|
Estimated
Amortization Expenses
|
|
|
|
|
2019
|
152
|
2020
|
152
|
2021
|
152
|
2022
|
152
|
2023
|
152
|
Thereafter
|
319
|
|
|
|
1,079
|
|
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Land use
right
|
7,361
|
7,361
|
Less: Accumulated
amortization
|
(1,921
)
|
(1,763
)
|
|
|
|
|
5,440
|
5,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
149
|
149
|
149
|
At
December 31, 2018, the land use right pledged as security for the
Company’s bank loans and third party’s loans amounted
to approximately RMB5,440,000 (2017: RMB1,645,000).
For
the Twelve Months Ending December 31,
|
Estimated
Amortization Expenses
|
|
|
|
|
2019
|
149
|
2020
|
149
|
2021
|
149
|
2022
|
149
|
2023
|
149
|
Thereafter
|
4,695
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan borrowed
by the Company (note i)
|
40,000
|
28,000
|
Bank loan borrowed
by a subsidiary of the Company
(note
ii)
|
5,000
|
5,000
|
|
|
|
|
45,000
|
33,000
|
(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, 2018 bears interest
at fixed rates ranged from 5.0025% to 6.74% (2017: 4.87% and 5.22%)
per annum. Interest paid during the year ended December 31, 2018
was approximately RMB2,089,000 (2017: RMB1,720,000 and 2016:
RMB1,221,000).
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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,
2018 bears interest at fixed rates 5.66% (2017: 5.39%) 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, 2018 was approximately RMB278,000 (2017:
RMB272,000 and 2016: RMB154,000).
16
Other
payables and accrued expenses
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
5,348
|
10,751
|
Other
payables
|
1,829
|
1,076
|
Deferred
income
|
9,201
|
7,846
|
|
|
|
|
16,378
|
19,673
|
|
|
|
|
|
|
|
|
|
Current
portion
|
32,275
|
29,438
|
Non-current
portion
|
23,178
|
54,630
|
|
|
|
Total borrowings by
the Company
|
55,453
|
84,068
|
|
|
|
(i)
On May 15, 2015,
the Company signed a sales and leaseback agreement with lessor A
with total principal of RMB66,700,000 and is repayable within 5
years. The third party loan is denominated in Renminbi. The third
party loan borrowed by the Company as of December 31, 2018 bears
interest at fixed rates 5.27% (2017: 5.27%) per annum
and is secured by the Company’s
machinery A. Interest paid during the year ended December 31, 2018
was approximately RMB1,206,000 (2017: RMB2,027,000 and 2016:
RMB2,011,000) and was included in “Cost of revenue” in
the Group’s consolidated statements of
operations.
(ii)
On December 9,
2015, the Company signed a sales and leaseback agreement with
lessor B with total principal of RMB87,560,000 and is repayable
within 5 years. The third party loan is denominated in Renminbi.
The third party loan borrowed by the Company as of December 31,
2018 bears interest at fixed rates 4.83% (2017: 4.83%) per
annum
and are secured by
the Company’s machinery B and the franchise, income and
account receivables generated from Machinery B. Interest paid
during the year ended December 31, 2018 was approximately
RMB2,437,000 (2017: RMB3,273,000 and 2016: RMB3,192,000) and was
included in “Cost of revenue” in the Group’s
consolidated statements of operations.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
Group's long-term investments consist of minority ownership
interests in two limited liability companies, 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.
19
PRC
statutory reserves
Under
the relevant PRC laws and regulations, the Group is required to
appropriate a certain percentage of its respective net income to
two statutory funds, namely the statutory reserve fund and the
statutory staff welfare fund.
(i)
Statutory reserve
fund
Pursuant to
applicable PRC laws and regulations, the Group is 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.
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the Group is required to
allocate certain amount of its net income to the statutory staff
welfare fund determined by them. 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
Group.
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.
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, 2018, 2017 and 2016, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately RMB4,692,000,
RMB4,298,000 and RMB3,905,000 respectively.
ZHEJIANG
TIANLAN
ENVIRONMENTAL PROTECTION TECHNOLOGY
COMPANY LIMITED
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS
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.
There
is no policy for requiring collateral for the credit risk of
financial instruments by the Group (2017: Nil).
23
Related
party transaction
There
were sales of subsidiaries to the shareholders of the Company with
gross sale proceeds of RMB10,140,000 in the year 2018 with none in
2017.
24
Commitments
and contingencies
(i)
Operating
leases
The
Group has no rental expense during the year ended December 31, 2018
(2017 and 2016: RMB Nil). As of December 31, 2018, the Group has no
future minimum lease payments under non-cancellable operating
leases.
(ii)
Litigation
The
Group is not currently a party to any legal proceeding,
investigation or claim which, in the opinion of the management, is
likely to have a material adverse effect on the business, financial
conditions or results of operations.
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