The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020 (UNAUDITED) AND DECEMBER
31, 2019
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China Recycling Energy Corporation (the “Company”
or “CREG”) is incorporated in Nevada state. The Company, through its subsidiaries, provides energy saving solutions
and services, including selling and leasing energy saving systems and equipment to customers, and project investment in the Peoples
Republic of China (“PRC”).
The Company’s organizational chart as of March 31, 2020
is as follows:
Erdos TCH – Joint Venture
On April 14, 2009, the Company formed a joint venture (the “JV”)
with Erdos Metallurgy Co., Ltd. (“Erdos”) to recycle waste heat from Erdos’ metal refining plants to generate
power and steam to be sold back to Erdos. The name of the JV was Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd. (“Erdos
TCH”) with a term of 20 years. Total investment for the project was estimated at $79 million (RMB 500 million) with an initial
investment of $17.55 million (RMB 120 million). Erdos contributed 7% of the total investment of the project, and Xi’an TCH
Energy Technology Co., Ltd. (“Xi’an TCH”) contributed 93%. On June 15, 2013, Xi’an TCH and Erdos entered
into a share transfer agreement, pursuant to which Erdos sold its 7% ownership interest in the JV to Xi’an TCH for $1.29
million (RMB 8 million), plus certain accumulated profits as described below. Xi’an TCH paid the $1.29 million in July 2013
and, as a result, became the sole stockholder of the JV. Erdos TCH currently has two power generation systems in Phase I with a
total of 18 MW power capacity, and three power generation systems in Phase II with a total of 27 MW power capacity. On April 28,
2016, Erdos TCH and Erdos entered into a supplemental agreement, effective May 1, 2016, whereby Erdos TCH cancelled monthly minimum
lease payments from Erdos, and started to charge Erdos based on actual electricity sold at RMB 0.30 / KWH. The selling price of
each KWH is determined annually based on prevailing market conditions. The Company evaluated the modified terms for payments based
on actual electricity sold as minimum lease payments as defined in ASC 840-10-25-4, since lease payments that depend on a factor
directly related to the future use of the leased property are contingent rentals and, accordingly, are excluded from minimum lease
payments in their entirety. The Company wrote off the net investment receivables of these leases at the lease modification date.
Since May 2019, Erdos TCH has ceased its operations due to renovations and furnace safety upgrades of Erdos, and the Company expects
the resumption of operations in July 2020. During this period, Erdos will compensate Erdos TCH RMB 1 million ($145,460) per month,
until operations resume.
In addition, Erdos TCH has 30% ownership in DaTangShiDai (BinZhou)
Energy Savings Technology Co., Ltd. (“BinZhou Energy Savings”), 30% ownership in DaTangShiDai DaTong Recycling Energy
Technology Co., Ltd. (“DaTong Recycling Energy”), and 40% ownership in DaTang ShiDai TianYu XuZhou Recycling Energy
Technology Co, Ltd. (“TianYu XuZhou Recycling Energy”). These companies were incorporated in 2012 but there have not
been any operations since then nor has any registered capital contribution been made.
Pucheng Biomass Power Generation Projects
On June 29, 2010, Xi’an TCH entered into a Biomass Power
Generation (“BMPG”) Project Lease Agreement with Pucheng XinHengYuan Biomass Power Generation Co., Ltd. (“Pucheng”),
a limited liability company incorporated in China. Under this lease agreement, Xi’an TCH leased a set of 12 MW BMPG systems
to Pucheng at a minimum of $279,400 (RMB 1,900,000) per month for 15 years (“Pucheng Phase I”).
On September 11, 2013, Xi’an TCH entered into a BMPG Asset
Transfer Agreement (the “Pucheng Transfer Agreement”) with Pucheng. The Pucheng Transfer Agreement provided for the
sale by Pucheng to Xi’an TCH of a set of 12 MW BMPG systems with completion of system transformation for RMB 100 million
($16.48 million) in the form of 87,666 shares (post-reverse stock split) of common stock of the Company at $187.0 per share (post-reverse
stock price). Also on September 11, 2013, Xi’an TCH entered into a BMPG Project Lease Agreement with Pucheng (the “Pucheng
Lease”). Under the Pucheng Lease, Xi’an TCH leases this same set of 12 MW BMPG systems to Pucheng, and combined this
lease with the lease for the 12 MW BMPG station of Pucheng Phase I project, under a single lease to Pucheng for RMB 3.8 million
($0.63 million) per month (the “Pucheng Phase II Project”). The term for the combined lease is from September 2013
to June 2025. The lease agreement for the 12 MW station from the Pucheng Phase I project terminated upon the effective date of
the Pucheng Lease. The ownership of the two 12 MW BMPG systems will transfer to Pucheng at no additional charge when the Pucheng
Lease expires.
On September 29, 2019, Xi’an TCH
entered into a Termination Agreement of the Lease Agreement of the Biomass Power Generation Project (the “Termination Agreement”)
with Pucheng.
Pucheng failed to pay fees it owed to Xi’an TCH for leasing
two biomass power generation systems from Xi’an TCH, due to its long suspension of production resulting from the significant
reduction of raw material supplies for its biomass power generation operation in Pucheng County, which caused the biomass power
generation project to no longer be suitable. Pursuant to the Termination Agreement, the parties agreed that: (i) Pucheng shall
pay outstanding lease fees of RMB 97.6 million ($14 million) owed as of December 31, 2018 to Xi’an TCH before January 15,
2020; (ii) Xi’an TCH will waive the lease fees owed after January 1, 2019; (iii) Xi’an TCH will not return RMB 3.8
million ($542,857) in cash deposits paid by Pucheng; (iv) Xi’an TCH will transfer the Project to Pucheng at no additional
cost after receiving RMB 97.6 million ($14 million) from Pucheng, and the original lease agreement between the parties will be
formally terminated; and (v) if Pucheng fails to pay off RMB 97.6 million ($14 million) to Xi’an TCH before January 15, 2020,
Xi’an TCH will still hold ownership of the Project and the original lease agreement shall still be valid. The Company recorded
an additional $2.67 million bad debt expense for Pucheng during the year ended December 31, 2019. Xi’an TCH received RMB
97.6 million ($14 million) in full on January 14, 2020 and the ownership of the system was transferred.
Shenqiu Yuneng Biomass Power Generation Projects
On September 28, 2011, Xi’an TCH and Shenqiu entered into
a BMPG Project Lease Agreement (the “2011 Shenqiu Lease”). Under the 2011 Shenqiu Lease, Xi’an TCH agreed to
lease a set of 12 MW BMPG systems to Shenqiu at a monthly rental of $286,000 (RMB 1,800,000) for 11 years.
On March 30, 2013, Xi’an TCH and Shenqiu entered into
a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”). Under the 2013 Shenqiu Lease, Xi’an TCH agreed to
lease the second set of 12 MW BMPG systems to Shenqiu for $239,000 (RMB 1.5 million) per month for 9.5 years.
As repayment for a loan made by Xi’an Zhonghong to Beijing
Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”) on January 10, 2019 (see further discussion in Note
9); on January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai (or “Mr. Bai”), a resident of
China, entered into a Projects Transfer Agreement (the “Agreement”), pursuant to which Xi’an TCH transferred
two BMGP in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB 127,066,000 ($18.55 million). As consideration
for the transfer of the Shenqiu Phase I and II Projects to Mr. Bai (Note 9), Mr. Bai transferred all the equity shares of his wholly
owned company, Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”) to Beijing Hongyuan
Recycling Energy Investment Center, LLP (the “HYREF”) as repayment for a loan made by Xi’an Zhonghong to HYREF
on January 10, 2019. The transfer of the projects was completed on February 15, 2019. The Company recorded $208,359 loss from the
transfer during the year ended December 31, 2019. Xi’an Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin
New Energy Co., Ltd for the repayment of Shenqiu system and Huayu system. However, Xi’an Hanneng was not able to obtain all
the Huaxin shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr.
Bai and all the related parties therefore agreed to have Mr. Bai instead paying in cash for the transfer price of Shenqiu (see
Note 9 for detail).
The Fund Management Company
On June 25, 2013, Xi’an TCH and Hongyuan Huifu Venture
Capital Co. Ltd. (“Hongyuan Huifu”) established Beijing Hongyuan Recycling Energy Investment Management Company Ltd.
(the “Fund Management Company”) with registered capital of RMB 10 million ($1.45 million). Xi’an TCH made an
initial capital contribution of RMB 4 million ($650,000) and held a 40% ownership interest in the Fund Management Company. With
respect to the Fund Management Company, voting rights and dividend rights are allocated 80% and 20% between Hongyuan Huifu and
Xi’an TCH, respectively.
The Fund Management Company is the general partner of Beijing
Hongyuan Recycling Energy Investment Center, LLP (the “HYREF Fund”), a limited liability partnership established on
July 18, 2013 in Beijing. The Fund Management Company made an initial capital contribution of RMB 5 million ($830,000) to the HYREF
Fund. RMB 460 million ($77 million) was fully subscribed by all partners for the HYREF Fund. The HYREF Fund has three limited partners:
(1) China Orient Asset Management Co., Ltd., which made an initial capital contribution of RMB 280 million ($46.67 million) to
the HYREF Fund and is a preferred limited partner; (2) Hongyuan Huifu, which made an initial capital contribution of RMB 100 million
($16.67 million) to the HYREF Fund and is an ordinary limited partner; and (3) the Company’s wholly-owned subsidiary, Xi’an
TCH, which made an initial capital contribution of RMB 75 million ($12.5 million) to the HYREF Fund and is a secondary limited
partner. In addition, Xi’an TCH and Hongyuan Huifu formed Beijing Hongyuan Recycling Energy Investment Management Company
Ltd. to manage this Fund, which also subscribed in the amount of RMB 5 million ($830,000) from the Fund. The term of the HYREF
Fund’s partnership is six years from the date of its establishment, expiring July 18, 2019. However, the HYREF Fund’s
partnership will not terminate until the HYREF loan is fully repaid and the buy-back period is over pursuant to the Buy-back Agreement
entered on December 29, 2018 (see Note 9). The term is four years from the date of contribution for the preferred limited partner,
and four years from the date of contribution for the ordinary limited partner. The total size of the HYREF Fund is RMB 460 million
($77 million). The HYREF Fund was formed to invest in Xi’an Zhonghong New Energy Technology Co., Ltd., a then 90% owned subsidiary
of Xi’an TCH, for the construction of two coke dry quenching (“CDQ”) Waste Heat Power Generation (“WHPG”)
stations with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”) and one CDQ WHPG station with Boxing County
Chengli Gas Supply Co., Ltd. (“Chengli”).
On December 29, 2018, Xi’an TCH entered into a Share Transfer
Agreement with Hongyuan Huifu, pursuant to which Xi’an TCH transferred its 40% ownership in the Fund Management Company to
Hongyuan Huifu for RMB 3,453,867 ($0.53 million). The transfer was completed January 22, 2019. The Company recorded approximately
$46,500 loss from the sale of a 40% equity interest in Fund Management Company. The Company does not have any ownership in the
Fund Management Company after this transaction.
Chengli Waste Heat Power Generation Projects
On July 19, 2013, Xi’an TCH formed a new company, “Xi’an
Zhonghong New Energy Technology Co., Ltd.” (“Zhonghong”), with registered capital of RMB 30 million ($4.85 million).
Xi’an TCH paid RMB 27 million ($4.37 million) and owns 90% of Zhonghong. Zhonghong is engaged to provide energy saving solution
and services, including constructing, selling and leasing energy saving systems and equipment to customers. On December 29, 2018,
Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF transferred its 10% ownership in Xi’an
Zhonghong to Shanghai TCH for RMB 3 million ($0.44 million). The transfer was completed on January 22, 2019. The Company owns
100% of Xi’an Zhonghong after the transaction.
On July 24, 2013, Zhonghong entered into a Cooperative Agreement
of CDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power Generation Project) with Boxing County Chengli Gas Supply Co.,
Ltd. (“Chengli”). The parties entered into a supplement agreement on July 26, 2013. Pursuant to these agreements, Zhonghong
will design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli will pay energy
saving fees (the “Chengli Project”).
On December 29, 2018, Xi’an Zhonghong, Xi’an TCH,
HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi’an
Zhonghong transferred Chengli CDQ WHPG station as the repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF. Xi’an
Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai also agreed to buy back the CDQ WHPG Station when conditions under the
Buy Back Agreement are met (see Note 9). The transfer of the Station was completed January 22, 2019, the Company recorded $624,133
loss from this transfer. Since the original terms of Buy Back Agreement are still valid, and the Buy Back possibility could
occur; therefore, the loan principal and interest and the corresponding asset of Chengli CDQ WHPG station cannot be derecognized
due to the existence of Buy Back clauses (see Note 5 for detail).
Tianyu Waste Heat Power Generation Project
On July 19, 2013, Zhonghong entered into a Cooperative Agreement
(the “Tianyu Agreement”) for Energy Management of CDQ and CDQ WHPG Projects with Jiangsu Tianyu Energy and Chemical
Group Co., Ltd. (“Tianyu”). Pursuant to the Tianyu Agreement, Zhonghong will design, build, operate and maintain two
sets of 25 MW CDQ systems and CDQ WHPG systems for two subsidiaries of Tianyu – Xuzhou Tian’an Chemical Co., Ltd. (“Xuzhou
Tian’an”) and Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu”) – to be located at Xuzhou Tian’an
and Xuzhou Huayu’s respective locations (the “Tianyu Project”). Upon completion of the Tianyu Project, Zhonghong
will charge Tianyu an energy saving fee of RMB 0.534 ($0.087) per kilowatt hour (excluding tax). The term of the Tianyu Agreement
is 20 years. The construction of the Xuzhou Tian’an Project is anticipated to be completed by the second quarter of 2020.
The Xuzhou Huayu Project has been on hold due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents on certain
pollution-related issues.
On January 4, 2019, Xi’an Zhonghong, Xi’an TCH,
and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the “Agreement”), pursuant to which Xi’an Zhonghong
transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu
Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million). Mr. Bai agreed that as consideration for the transfer of the Xuzhou
Huayu Project to him (Note 9), he would transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF
as repayment for the loan made by Xi’an Zhonghong to HYREF. The transfer of the project was completed on February 15, 2019.
The Company recorded $397,033 loss from this transfer during the year ended December 31, 2019. On January 10, 2019, Mr. Chonggong
Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan. Xi’an
Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd for the repayment of Huayu system and Shenqiu
system. As of September 30, 2019, Xi’an Hanneng already owned 29,948,000 shares of Huaxin, but was not able to obtain the
remaining 17,202,000 shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report. On December 20,
2019, Mr. Bai and all the related parties agreed to have Mr. Bai instead pay in cash for the transfer price of Huayu (see Note
9 for detail).
On January 10, 2020, Zhonghong, Tianyu and Huaxin signed a transfer
agreement to transfer all assets under construction and related rights and interests of Xuzhou Tian’an Project to Tianyu
for RMB 170 million including VAT ($24.37 million) in three installment payments. The 1st installment payment of RMB 50 million
($7.17 million) to be paid within 20 working days after the contract is signed. The 2nd installment payment of RMB 50 million ($7.17
million) is to be paid within 20 working days after completion of the project construction but no later than July 31, 2020. The
final installment payment of RMB 70 million ($10.03 million) is to be paid before December 31, 2020. On March 11, 2020, the Company
received the 1st installment payment.
Zhongtai Waste Heat Power Generation Energy Management Cooperative
Agreement
On December 6, 2013, Xi’an TCH entered into a CDQ and
WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”) with Xuzhou Zhongtai Energy Technology Co.,
Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu Province, China.
Pursuant to the Zhongtai Agreement, Xi’an TCH was to design,
build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG system and sell the power to Zhongtai, and Xi’an TCH
is also to build a furnace to generate steam from the smoke pipeline’s waste heat and sell the steam to Zhongtai.
The construction period of the Project was expected to be 18
months from the date when conditions are ready for construction to begin. Zhongtai is to start to pay an energy saving service
fee from the date when the WHPG station passes the required 72-hour test run. The payment term is 20 years. For the first 10 years,
Zhongtai shall pay an energy saving fee at RMB 0.534 ($0.089) per kilowatt hour (KWH) (including value added tax) for the power
generated from the system. For the second 10 years, Zhongtai shall pay an energy saving fee at RMB 0.402 ($0.067) per KWH (including
value added tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change
of local grid electricity price. Zhongtai shall also pay an energy saving fee for the steam supplied by Xi’an TCH at RMB
100 ($16.67) per ton (including value added tax). Zhongtai and its parent company will provide guarantees to ensure Zhongtai will
fulfill its obligations under the Agreement. Upon the completion of the term, Xi’an TCH will transfer the systems to Zhongtai
for RMB 1 ($0.16). Zhongtai shall provide waste heat to the systems for no less than 8,000 hours per year and waste gas volume
no less than 150,000 Normal Meter Cubed (Nm3) per hour, with a temperature no less than 950°C. If these requirements are not
met, the term of the Agreement will be extended accordingly. If Zhongtai wants to terminate the Zhongtai Agreement early, it shall
provide Xi’an TCH with a 60 day notice and pay the termination fee and compensation for the damages to Xi’an TCH according
to the following formula: (1) if it is less than five years into the term when Zhongtai requests termination, Zhongtai shall pay:
Xi’an TCH’s total investment amount plus Xi’an TCH’s annual investment return times five years minus the
years in which the system has already operated; or 2) if it is more than five years into the term when Zhongtai requests the termination,
Zhongtai shall pay: Xi’an TCH’s total investment amount minus total amortization cost (the amortization period is 10
years).
In March 2016, Xi’an TCH entered into a Transfer Agreement
of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin (the “Transfer Agreement”). Under the Transfer Agreement,
Xi’an TCH agreed to transfer to Zhongtai all of the assets associated with the CDQ Waste Heat Power Generation Project (the
“Project”), which is under construction pursuant to the Zhongtai Agreement. Additionally, Xi’an TCH agreed to
transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation
Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. Xi’an Huaxin will
continue to construct and complete the Project and Xi’an TCH agreed to transfer all its rights and obligations under the
EPC Contract to Zhongtai. As consideration for the transfer of the Project, Zhongtai agreed to pay to Xi’an TCH RMB 167,360,000
($25.77 million) including (i) RMB 152,360,000 ($23.46 million) for the construction of the Project; and (ii) RMB 15,000,000 ($2.31
million) as payment for partial loan interest accrued during the construction period. Those amounts have been, or will be, paid
by Zhongtai to Xi’an TCH according to the following schedule: (a) RMB 50,000,000 ($7.70 million) was to be paid within 20
business days after the Transfer Agreement was signed; (b) RMB 30,000,000 ($4.32 million) was to be paid within 20 business days
after the Project was completed, but no later than July 30, 2016; and (c) RMB 87,360,000 ($13.45 million) was to be paid no later
than July 30, 2017. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou Taifa”) guaranteed the payments from Zhongtai
to Xi’an TCH. The ownership of the Project was conditionally transferred to Zhongtai following the initial payment of RMB
50,000,000 ($7.70 million) by Zhongtai to Xi’an TCH and the full ownership of the Project will be officially transferred
to Zhongtai after it completes all payments pursuant to the Transfer Agreement. The Company recorded a $2.82 million loss from
this transaction in 2016. In 2016, Xi’an TCH had received the first payment of $7.70 million and the second payment of $4.32
million. However, the Company received a repayment commitment letter from Zhongtai on February 23, 2018, in which Zhongtai committed
to pay the remaining payment of RMB 87,360,000 ($13.45 million) no later than the end of July 2018; in July 2018, Zhongtai and
the Company reached a further oral agreement to extend the repayment term of RMB 87,360,000 ($13.45 million) by another two to
three months. As of March 31, 2020, the Company had gross receivable from Zhongtai for $5.65 million (with bad debt allowance of
$5.65 million). In January 2020, Zhongtai paid RMB 10 million ($1.41 million); in March 2020, Zhongtai paid RMB 20 million ($2.82
million). Zhongtai is committed to pay in full the remaining balance of RMB 40 million ($5.65 million) no later than the end of
2020.
Formation of Zhongxun
On March 24, 2014, Xi’an TCH incorporated a subsidiary,
Zhongxun Energy Investment (Beijing) Co., Ltd. (“Zhongxun”) with registered capital of $5,695,502 (RMB 35,000,000),
which must be contributed before October 1, 2028. Zhongxun is 100% owned by Xi’an TCH and will be mainly engaged in project
investment, investment management, economic information consulting, and technical services. Zhongxun has not yet commenced operations
nor has any capital contribution been made as of the date of this report.
Formation of Yinghua
On February 11, 2015, the Company incorporated a subsidiary,
Shanghai Yinghua Financial Leasing Co., Ltd. (“Yinghua”) with registered capital of $30,000,000, to be paid within
10 years from the date the business license is issued. Yinghua is 100% owned by the Company and will be mainly engaged in financial
leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial
leasing transactions, and related factoring business. Yinghua has not yet commenced operations nor has any capital contribution
been made as of the date of this report.
Other Events
On September 9, 2019, the Company entered
into a letter of intent to acquire a controlling interest in Xi’an Yineng Zhihui Technology Co., Ltd. (“YNZH”),
a next generation energy storage solution provider in China. YNZH is a leading comprehensive high-tech intelligent energy service
company integrated with energy efficiency improvement and storage management in China. The energy efficiency management is to fully
use big data cloud computing technology, effectively adopt the combination of the mature international and domestic clean energy
technologies to make the customers’ energy management more efficient, more economical, more secure and more scientific. The
terms of this proposed transaction are currently being negotiated.
On April 13, 2020, the Company filed a certificate of
change (“Certificate of Change”) with the Secretary of State of the State of Nevada, pursuant to which, on April 13,
2020, the Company effected a reverse stock split of its common stock, $0.001 per share at a rate of 1-for-10, accompanied by a
corresponding decrease in the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”).
The consolidated financial statements as of March 31, 2020 and December 31, 2019, and for the three months ended March 31, 2020
and 2019 were retroactively restated to reflect this reverse stock split.
In December 2019, a novel strain of
coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public
Health Emergency of International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting
supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and
travel and logistics restrictions in connection with the outbreak. However, as a result of PRC government’s effort on disease
control, some cities in China started to reopen in mid-March, the outbreak in China is now fully under the control; based on PRC
government’s statistic, as of April 15th, 2020, the reopening rate for nation-wide industrial enterprises was
99% and the rate of its employees returning to work was 94%, the small and medium size companies’ work resume rate was 84%.
The Company disposed all of its systems and currently holds only five power generating systems through Erdos TCH, and expects to
resume production of these five power generating systems in July 2020 from the renovation and furnace safety upgrade, the impact
of COVID-19 to the Company was not material. There are some new Covid-19 cases discovered in a few provinces of China including
Beijing, no new case has been discovered in Xi’an province where the Company is located as of today.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The consolidated financial statements (“CFS”) were
prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The interim consolidated financial information as of March
31, 2020 and for the three-month periods ended March 31, 2020 and 2019 was prepared without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally
included in CFS prepared in accordance with U.S. GAAP were not included. The interim consolidated financial information should
be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2019, previously filed with the SEC on May 14, 2020.
In the opinion of management, all adjustments (which include
all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial
position as of March 31, 2020, its consolidated results of operations and cash flows for the three months ended March 31, 2020
and 2019, as applicable, were made.
Basis of Consolidation
The CFS include the accounts of CREG and its subsidiaries, Shanghai
Yinghua Financial Leasing Co., Ltd. (“Yinghua”) and Sifang Holdings; Sifang Holdings’ wholly owned subsidiaries,
Huahong New Energy Technology Co., Ltd. (“Huahong”) and Shanghai TCH Energy Tech Co., Ltd. (“Shanghai TCH”);
Shanghai TCH’s wholly-owned subsidiary, Xi’an TCH Energy Tech Co., Ltd. (“Xi’an TCH”); and Xi’an
TCH’s subsidiaries, 1) Erdos TCH Energy Saving Development Co., Ltd (“Erdos TCH”), 100% owned by Xi’an
TCH (See note 1), 2) Zhonghong, 90% owned by Xi’an TCH and 10% owned by Shanghai TCH, and 3) Zhongxun, 100% owned by Xi’an
TCH. Substantially all the Company’s revenues are derived from the operations of Shanghai TCH and its subsidiaries, which
represent substantially all the Company’s consolidated assets and liabilities as of March 31, 2020. All significant inter-company
accounts and transactions were eliminated in consolidation.
Uses and Sources of Liquidity
For the three months ended March 31, 2020, the Company had a
net loss of $0.60 million. For the year ended December 31, 2019, the Company had net loss of $8.78 million. The Company has an
accumulated deficit of $47.05 million as of March 31, 2020. The Company is in the process of transforming and expanding into an
energy storage integrated solution provider. The Company plans to pursue disciplined and targeted expansion strategies for market
areas the Company currently does not serve. The Company actively seeks and explores opportunities to apply energy storage technologies
to new industries or segments with high growth potential, including industrial and commercial complexes, large scale photovoltaic
(PV) and wind power stations, remote islands without electricity, and smart energy cities with multi-energy supplies. Management
also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. The
Company’s cash flow forecast indicate it will have sufficient cash to funds its operations for the next 12 months from the
date of issuance of these financial statements.
The historical operating results indicate substantial doubt
exists related to the Company’s ability to continue as a going concern. However, the Company had $55.03 million cash on hand
at March 31, 2020. The Company believes that the actions discussed above are probable of occurring and the occurrence, mitigate
the substantial doubt raised by its historical operating results.
While the Company believes in the viability
of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions,
there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s
ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way
of a public or private offering, or debt financing including bank loans. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Use of Estimates
In preparing these CFS in accordance with US GAAP, management
makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues
and expenses during the period reported. Actual results may differ from these estimates. On an on-going basis, management
evaluates their estimates, including those related to allowances for bad debt and inventory obsolescence, impairment loss on fixed
assets and construction in progress, income taxes, and contingencies and litigation. Management bases their estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources.
Revenue Recognition
A) Sales-type Leasing and Related Revenue Recognition
On January 1, 2019, the Company adopted Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using the modified retrospective
transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure
requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while prior period amounts
have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. (See Operating
lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue recognition fall
under ASC 842. During the three months ended March 31, 2020 and 2019, the Company did not sell any new power generating projects.
The Company constructs and leases waste energy recycling power
generating projects to its customers. The Company typically transfers legal ownership of the waste energy recycling power generating
projects to its customers at the end of the lease. Prior to January 1, 2019, the investment in these projects was recorded as investment
in sales-type leases in accordance with ASC Topic 840, “Leases,” and its various amendments and
interpretations.
The Company finances construction of waste energy recycling
power generating projects. The sales and cost of sales are recognized at the inception of the lease, which is when the control
is transferred to the lessee. The Company accounts for the transfer of control as a sales type lease in accordance with ASC 842-10-25-2.
The underlying asset is derecognized, and revenue is recorded when collection of payments is probable. This is in accordance with
the revenue recognition principle in ASC 606 - Revenue from contracts with customers. The investment in sales-type leases consists
of the sum of the minimum lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments
are part of the lease agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit
in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross
lease payments net of executory costs and contingent rentals, if any. Unearned interest is amortized to income over the lease term
to produce a constant periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the
lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income and reduction
of receivables. Revenue is recognized net of sales tax.
B) Contingent Rental Income
The Company records income from actual electricity generated
of each project in the period the income is earned, which is when the electricity is generated. Contingent rent is not part of
minimum lease payments.
Operating Leases
On January 1, 2019, the Company adopted Topic 842 using the
modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application.
Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while
prior period amounts have not been adjusted and continue to be reported in accordance with its historical accounting under Topic
840. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease
liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company elected the package of practical expedients permitted
under the transition guidance, which allowed it to carry forward its historical lease classification, its assessment on whether
a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. The Company
also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the
balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over
the lease term.
The company leased an office in Xi’an, China as the Company’s
headquarter; upon adoption, the Company recognized total Right of Use Asset (“ROU”) of $116,917, with corresponding
liabilities of $116,917 on the consolidated balance sheets. The ROU assets include adjustments for prepayments and accrued lease
payments. The adoption did not impact its beginning retained earnings, or its prior year consolidated statements of income and
statements of cash flows. At March 31, 2020, the ROU was $37,499.
Under Topic 842, the Company determines if an arrangement is
a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease
payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time
of commencement. As most of its leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. The Company’s incremental borrowing rate
is a hypothetical rate based on its understanding of what its credit rating would be. The ROU asset also includes any lease payments
made prior to commencement and is recorded net of any lease incentives received. The Company’s lease terms may include options
to extend or terminate the lease when it is reasonably certain that it will exercise such options.
Operating leases are included in operating lease right-of-use
assets and operating lease liabilities (current and non-current), on the consolidated balance sheets.
Cash
Cash include cash on hand, demand deposits placed with banks
or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase
date of such investments.
Accounts Receivable
The Company’s accounts receivable arise from sale of systems
and sale of electricity of Erdos. The Company does not expect to collect receivables more than one year from the time of sale.
The Company’s policy is to maintain an allowance for potential
credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate
the adequacy of these reserves.
As of March 31, 2020, the Company had gross
accounts receivable of $45.91 million; of which, $20.76 million was for transferring the ownership of Huayu and Shenqiu Phase I
and II systems to Mr. Bai; $5.65 million was from the sales of CDQ and a CDQ WHPG system to Zhongtai, $16.94 million was from transferring
the ownership of Tian’an project to Tianyu, and $2.57 million accounts receivable of Erdos TCH for electricity sold. As of
December 31, 2019, the Company had gross accounts receivable of $48.06 million; of which, $35.42 million was for transferring the
ownership of Huayu and Shenqiu Phase I and II systems to Mr. Bai; $10.03 million was from the sales of CDQ and a CDQ WHPG system
to Zhongtai, and $2.61 million accounts receivable of Erdos TCH for electricity sold. As of March 31, 2020, the Company had bad
debt allowance of $5,645,651 for Zhongtai and $257,412 for Erdos TCH due to not making the payments as scheduled. As of December
31, 2019, the Company had bad debt allowance of $5,733,781 for Zhongtai and $261,430 for Erdos TCH due to not making the payments
as scheduled. In June 2020, Erdos TCH collected RMB 4 million ($0.56 million) accounts receivable.
|
|
2020
|
|
2019
|
Xuzhou Zhongtai project
|
|
$
|
5,645,651
|
|
|
$
|
10,034,116
|
|
Bai Chonggong (for Shenqiu and Huayu projects)
|
|
|
20,757,082
|
|
|
|
35,415,556
|
|
Xuzhou Tian’an project
|
|
|
16,936,952
|
|
|
|
-
|
|
Receivable of electricity sales of Erdos
|
|
|
2,574,117
|
|
|
|
2,614,299
|
|
Total accounts receivable
|
|
|
45,913,802
|
|
|
|
48,063,971
|
|
Bad debt allowance
|
|
|
(5,903,063
|
)
|
|
|
(5,995,210
|
)
|
Accounts receivable, net
|
|
$
|
40,010,739
|
|
|
$
|
42,068,761
|
|
Interest Receivable on Sales Type Leases
As of March 31, 2020, the interest receivable on sales type
leases was $0. As of December 31, 2019, the interest receivable on sales type leases was $5,245,244, mainly from recognized but
not yet collected interest income for the Pucheng systems. The ownership of Pucheng systems was transferred to Pucheng as a result
of full payment received by Xi’an TCH in January 2020.
Investment in sales-type leases, net
As of March 31, 2020 and December 31, 2019, the Company had
net investment in sales-type leases of $0 and $8,287,560, respectively. The Company maintains reserves for potential credit losses
on receivables. Management reviews the composition of receivables and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
As of March 31, 2020 and December 31, 2019, the Company had bad debt allowance for net investment receivable on sales-type leases
of $0 and $24,416,441 for the Pucheng system. Xi’an TCH received RMB 97.6 million ($14 million) in full for Pucheng system
on January 14, 2020 and the ownership of the system was transferred.
Concentration of Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained
within China. Balances at financial institutions within China are not covered by insurance. The Company has not experienced any
losses in such accounts.
Certain other financial instruments, which subject the Company
to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security
to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment
practices to minimize collection risk on accounts receivable.
The operations of the Company are in the PRC. Accordingly, the
Company’s business, financial condition and results of operations may be influenced by the political, economic and legal
environments in the PRC.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized.
When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from
the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using
the straight-line method over the estimated lives as follows:
Building
|
|
|
20 years
|
|
Vehicles
|
|
|
2 - 5 years
|
|
Office and Other Equipment
|
|
|
2 - 5 years
|
|
Software
|
|
|
2 - 3 years
|
|
Impairment of Long-lived Assets
In accordance with FASB ASC Topic 360, “Property,
Plant, and Equipment,” the Company reviews its long-lived assets, including property and equipment, for impairment whenever
events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total
expected undiscounted future net cash flows are less than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying amount of the asset. The Company recorded $0 asset impairment loss for the three months ended
March 31, 2020. The Company recorded asset impairment of construction in progress of Xuzhou Tian’an of $876,660 for
the year ended December 31, 2019, which is the difference between the book value and disposal price of the asset.
Notes Payable – Banker’s Acceptances
The Company endorses banker’s acceptances that are issued
from a bank to vendors as payment for its obligations. Most of the banker’s acceptances have maturity dates of less than
six months following their issuance.
Cost of Sales
Cost of sales consists primarily of the direct material of the
power generating system and expenses incurred directly for project construction for sales-type leasing and sales tax and additions
for contingent rental income.
Income Taxes
Income taxes are accounted for using an asset and liability
method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows FASB ASC Topic 740, which prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes
in interim periods, and income tax disclosures.
Under the provisions of FASB ASC Topic 740, when tax returns
are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities
upon examination.
Statement of Cash Flows
In accordance with FASB ASC Topic 230, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including
cash and equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term
debts, the carrying amounts approximate their fair values due to their short maturities. Receivables on sales-type leases are based
on interest rates implicit in the lease.
FASB ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the FV of financial instruments held by the Company. FASB ASC Topic 825, “Financial
Instruments,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that
enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a reasonable estimate of their FV because of the short period
of time between the origination of such instruments and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
|
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to FV measurement.
|
Effective on January 1, 2020, the Company adopted ASU 2018-13,
Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies
the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the FV hierarchy.
The Company analyzes all financial instruments with features
of both liabilities and equity under FASB ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815, “Derivatives and Hedging.”
As of March 31, 2020, and December 31, 2019, the Company did
not have any long-term debt obligations; and the Company did not identify any assets or liabilities that are required to be presented
on the balance sheet at FV.
Stock-Based Compensation
The Company accounts for share-based compensation awards to
employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based
payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized
as compensation expense over the requisite service period.
The Company accounts for share-based compensation awards to
non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”.
Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the fair value of the
equity instrument issued or committed to be issued, as this is more reliable than the fair value of the services received. The
fair value is measured at the date that the commitment for performance by the counterparty has been reached or the counterparty’s
performance is complete.
Effective on January 1, 2020, the Company adopted ASU 2018-07,
“Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which
expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An
entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing
model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which
a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.
The adoption of ASU 2018-07 did not have an impact on the Company’s financial statements.
Basic and Diluted Earnings per Share
The Company presents net income (loss) per share (“EPS”)
in accordance with FASB ASC Topic 260, “Earning Per Share.” Accordingly, basic income (loss) per share
is computed by dividing income (loss) available to common stockholders by the weighted average number of shares outstanding, without
consideration for common stock equivalents. Diluted EPS is computed by dividing the net income by the weighted-average number of
common shares outstanding as well as common share equivalents outstanding for the period determined using the treasury-stock method
for stock options and warrants and the if-converted method for convertible notes. The Company made an accounting policy election
to use the if-converted method for convertible securities that are eligible to receive common stock dividends, if declared. Diluted
EPS reflect the potential dilution that could occur based on the exercise of stock options or warrants or conversion of convertible
securities using the if-converted method.
For the three months ended March 31, 2020 and 2019, the basic
and diluted loss per share were the same due to outstanding options and warrants being anti-dilutive as a result of the Company’s
net loss. For the three months ended March 31, 2020 and 2019, 31,311 shares and 213,304 shares (post-reverse stock split), respectively,
purchasable under warrants and options were excluded from the EPS calculation, as their effects were anti-dilutive.
Foreign Currency Translation and Comprehensive Income (Loss)
The Company’s functional currency is the Renminbi (“RMB”).
For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the
reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and
expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising
from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated
other comprehensive income.” Gains and losses resulting from foreign currency transactions are included in income. There
was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company follows FASB ASC Topic 220, “Comprehensive
Income.” Comprehensive income is comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting,” requires
use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates
a company. FASB ASC Topic 280 has no effect on the Company’s CFS as substantially all of the Company’s operations are
conducted in one industry segment. All of the Company’s assets are located in the PRC.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred
loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application
will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. The Company is currently evaluating the impact that the standard will have on its CFS.
In December 2019, the FASB issued ASU 2019-12, Simplifying
the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740,
Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities.
The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years,
with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods
presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its
financial statements.
Other recent accounting pronouncements issued by the FASB, including
its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed
by management to have a material impact on the Company’s present or future CFS.
3. INVESTMENT IN SALES-TYPE LEASES, NET
Under sales-type leases, as of December 31, 2019, Xi’an
TCH leases BMPG systems to Pucheng (Phase I and II, 15 and 11 year terms, respectively); The components of the net investment in
sales-type leases as of March 31, 2020 and December 31, 2019 are as follows:
|
|
2020
|
|
2019
|
Total future minimum lease payments receivable
|
|
$
|
-
|
|
|
$
|
56,477,739
|
|
Less: executory cost
|
|
|
-
|
|
|
|
(3,623,100
|
)
|
Less: unearned interest
|
|
|
-
|
|
|
|
(14,905,393
|
)
|
Less: realized interest income but not yet received
|
|
|
-
|
|
|
|
(5,245,244
|
)
|
Less: allowance for net investment receivable
|
|
|
-
|
|
|
|
(24,416,442
|
)
|
Investment in sales-type leases, net
|
|
|
-
|
|
|
|
8,287,560
|
|
Current portion
|
|
|
-
|
|
|
|
-
|
|
Noncurrent portion
|
|
$
|
-
|
|
|
$
|
8,287,560
|
|
The ownership of Pucheng systems was transferred to Pucheng
in January 2020 as a result of receiving full payment from Pucheng by Xi’an TCH.
4. OTHER RECEIVABLES
As of March 31, 2020, other receivables mainly consisted of
(i) advances to third parties of $7,057, bearing no interest, payable upon demand, and (ii) other receivables of $33,107 including
social insurance of $10,218. As of December 31, 2019, other receivables mainly consisted of (i) advances to third parties of $7,167,
bearing no interest, payable upon demand, and (ii) tax and maintenance cost receivable of $1,001,527 for Xi’an TCH. Tax receivable
is VAT receivable from customers and payable to City government on collection.
5. PROPERTY AND EQUIPMENT AND CONSTRUCTION IN PROGRESS
Property and Equipment
As of March 31, 2020 and December 31, 2019, the Company had
net property and equipment (after impairment allowance) of $26.63 million and $27.04 million, respectively, which was for the Chengli
project.
The Chengli project finished construction, and was transferred
to the Company’s fixed assets at a cost of $35.24 million (without impairment loss) and ready to be put into operation as
of December 31, 2018. On January 22, 2019, Xi’an Zhonghong completed the transfer of Chengli CDQ WHPG project as the partial
repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF (see Note 9). However, because the loan was not deemed repaid
due to the buyback right (See Note 9 for detail), the Company kept the Chengli project in its books as fixed assets for accounting
purposes.
Construction in Progress
Construction in progress was for constructing power generation
systems for Xuzhou Tian’an project. The Company recorded additional RMB 6,047,602 ($876,660) asset impairment for Tian’an
Project in 2019, which is the difference between the Project’s selling price and the carrying value as of December 31, 2019.
As of March 31, 2020 and December 31, 2019, the Company’s construction in progress included:
|
|
2020
|
|
2019
|
Xuzhou Tian’an
|
|
$
|
-
|
|
|
$
|
37,759,277
|
|
Less: assets impairment allowance
|
|
|
-
|
|
|
|
(13,935,075
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
23,824,202
|
|
On January 10, 2020, Zhonghong, Tianyu and Huaxin signed a transfer
agreement to transfer all assets under construction and related rights and interests of Xuzhou Tian’an Project to Tianyu
for RMB 170 million including VAT ($24.37 million) three installment payments. The 1st installment payment of RMB 50 million ($7.17
million) to be paid within 20 working days after the contract is signed. The 2nd installment payment of RMB 50 million ($7.17 million)
is to be paid within 20 working days after completion of the project construction but no later than July 31, 2020. The final installment
payment of RMB 70 million ($10.03 million) is to be paid before December 31, 2020. On March 11, 2020, the Company received the
1st installment payment.
6. TAXES PAYABLE
Taxes payable consisted of the following as of March 31, 2020
and December 31, 2019:
|
|
2020
|
|
2019
|
Income tax – current
|
|
$
|
2,113,916
|
|
|
$
|
2,118,432
|
|
Value-added tax
|
|
|
2,147,944
|
|
|
|
1,708,298
|
|
Other taxes
|
|
|
327,802
|
|
|
|
260,912
|
|
Total – current
|
|
|
4,589,662
|
|
|
|
4,087,642
|
|
Income tax – noncurrent
|
|
$
|
5,782,625
|
|
|
$
|
5,782,625
|
|
Income tax payable included $7.61 million ($1.83 million included
in current above and $5.78 million noncurrent) from recording the estimated one-time transition tax on post-1986 foreign unremitted
earnings under the Tax Cut and Jobs Act signed on December 22, 2017. An election is available for the U.S. shareholders of a foreign
company to pay the tax liability in installments over a period of eight years with 8% of net tax liability in the first five years,
15% in the sixth year, 20% in the seventh year, and 25% in the eighth year. The Company made such an election.
7. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following
as of March 31, 2020 and December 31, 2019:
|
|
2020
|
|
2019
|
Employee training, labor union expenditure and social insurance payable
|
|
$
|
837,794
|
|
|
$
|
843,807
|
|
Consulting, auditing, and legal expenses
|
|
|
35,256
|
|
|
|
40,602
|
|
Accrued payroll and welfare
|
|
|
242,229
|
|
|
|
254,882
|
|
Other
|
|
|
40,455
|
|
|
|
45,460
|
|
Total
|
|
$
|
1,155,734
|
|
|
$
|
1,184,751
|
|
8. DEFERRED TAX, NET
Deferred tax assets resulted from asset impairment loss which
was temporarily non-tax deductible for tax purposes but expensed in accordance with US GAAP, interest income in sales-type leases
which was recognized as income for tax purposes but not for book purpose as it did not meet revenue recognition in accordance with
US GAAP, accrued employee social insurance that can be deducted for tax purposes in the future, and the difference between tax
and accounting basis of cost of fixed assets which was capitalized for tax purposes and expensed as part of cost of systems in
accordance with US GAAP. Deferred tax liability arose from the difference between tax and accounting basis of net investment in
sales-type leases.
As of March 31, 2020 and December 31, 2019, deferred tax liability
consisted of the following:
|
|
2020
|
|
2019
|
Non-current deferred tax assets
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
186,145
|
|
|
$
|
189,050
|
|
Interest income in sales-type leases on cash basis
|
|
|
-
|
|
|
|
853,265
|
|
Depreciation of fixed assets
|
|
|
-
|
|
|
|
2,938,605
|
|
Assets impairment loss
|
|
|
1,411,413
|
|
|
|
7,537,556
|
|
US NOL
|
|
|
266,817
|
|
|
|
3,246,655
|
|
PRC NOL
|
|
|
16,337,354
|
|
|
|
10,424,558
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
-
|
|
|
|
(6,685,021
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
18,201,729
|
|
|
|
18,504,668
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(18,201,729
|
)
|
|
|
(18,504,668
|
)
|
Non-current deferred tax liabilities, net
|
|
$
|
-
|
|
|
$
|
-
|
|
9. LOANS PAYABLE
Entrusted Loan Payable (HYREF Loan)
The HYREF Fund (Beijing Hongyuan Recycling Energy Investment
Center, LLP) was established in July 2013 with a total fund size of RMB 460 million ($77 million) invested in Xi’an Zhonghong
for Zhonghong’s three new CDQ WHPG projects. The HYREF Fund invested RMB 3 million ($0.5 million) as an equity investment
and RMB 457 million ($74.5 million) as a debt investment in Xi’an Zhonghong; in return for such investments, the HYREF Fund
will receive interest from Zhonghong for the HYREF Fund’s debt investment. The RMB 457 million ($74.5 million) original loan
balance was released to Zhonghong through an entrusted bank, which is also the supervising bank for the use of the loan. The loan
was deposited in a bank account at the Supervising Bank (the Industrial Bank Xi’an Branch) and is jointly supervised by Zhonghong
and the Fund Management Company. Project spending shall be verified by the Fund Management Company to confirm it is in accordance
with the project schedule before the funds are released. All the operating accounts of Zhonghong have been opened with the branches
of the Supervising Bank, and the Supervising Bank has the right to monitor all bank accounts opened by Zhonghong. The entrusted
bank will charge 0.1% of the loan amount as a service fee and will not take any lending risk. The loan was collateralized by the
accounts receivable and the fixed assets of Shenqiu Phase I and II power generation systems; the accounts receivable and fixed
assets of Zhonghong’s three CDQ WHPG systems; and a 27 million RMB ($4.39 million) capital contribution made by Xi’an
TCH in Zhonghong. Repayment of the loan (principal and interest) was also jointly and severally guaranteed by Xi’an TCH and
the Chairman and CEO of the Company. In the fourth quarter of 2015, three power stations of Erdos TCH were pledged to Industrial
Bank as an additional guarantee for the loan to Zhonghong’s three CDQ WHPG systems. In 2016, two additional power stations
of Erdos TCH and Pucheng Phase I and II systems were pledged to Industrial Bank as an additional guarantee along with Xi’an
TCH’s equity in Zhonghong.
The term of this loan was for 60 months from July 31, 2013 to
July 30, 2018. On August 6, 2016, Zhonghong was required to repay principal of RMB 280 million ($42.22 million), of which the Company
paid RMB 50 million ($7.54 million); on August 6, 2017, Zhonghong was initially supposed to repay principal of RMB 100 million
($16.27 million) and on July 30, 2018, Zhonghong was initially supposed to repay the remainder of RMB 77 million ($12.52 million).
The interest rate is 12.5%. During the term, Zhonghong shall maintain a minimal funding level and capital level in its designated
account with the Supervising Bank to make sure it has sufficient funds to make principal payments when they are due. Notwithstanding
the requirements, the HYREF Fund and Supervising Bank verbally notified Zhonghong from the beginning that it was unlikely that
they would enforce these requirements for the purpose of the efficient utilization of working capital. As of December 31, 2018,
the entrusted loan payable had an outstanding balance of $59.29 million, of which, $10.92 million was from the investment of Xi’an
TCH; accordingly, the Company netted the loan payable of $10.92 million with the long-term investment to the HYREF Fund made by
Xi’an TCH. The Company had paid RMB 50 million ($7.54 million) of the RMB 280 million ($42.22 million), and on August 5,
2016, the Company entered into a supplemental agreement with the lender to extend the due date of the remaining RMB 230 million
($34.68 million) of the original RMB 280 million ($45.54 million) to August 6, 2017. During the year ended December 31, 2017, the
Company negotiated with the lender again to further extend the remaining loan balance of RMB 230 million ($34.68 million), RMB
100 million ($16.27 million), and RMB 77 million ($12.52 million) (which included investment from Xi’an TCH of RMB 75 million
and was netted off with the entrusted loan payable of the HYREF Fund in the balance sheet). The lender had tentatively agreed to
extend the remaining loan balance until August 2019 with an adjusted annual interest rate of 9%, subject to the final approval
from its headquarters. The headquarters did not approve the extension proposal with an adjusted annual interest rate of 9%; however,
on December 29, 2018, the Company worked out with the lender an alternative repayment proposal as described below. As of March
31, 2020, the interest payable for this loan was $8.39 million and the outstanding balance for this loan was $20.45 million.
As of December 31, 2019, the interest payable for this loan was $8.20 million and the outstanding balance for this loan was $20.77
million.
Repayment of HYREF loan
1. Transfer of Chengli project as partial repayment
On December 29, 2018, Xi’an Zhonghong, Xi’an TCH,
HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi’an
Zhonghong transferred Chengli CDQ WHPG station as the repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF. Xi’an
Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai also agreed to buy back the Chengli CDQ WHPG Station when conditions under
the Buy Back Agreement are met. Due to the Buy Back agreement, the loan was not deemed repaid, the Company kept the Chengli project
in its books as fixed assets as of March 31, 2020 and December 31, 2019.
On January 22, 2019, Xi’an Zhonghong, completed the transfer
of Chengli CDQ WHPG station to HYREF as the repayment of a loan for RMB 188,639,400 ($27.54 million) owed to HYREF. Xi’an
TCH is a secondary limited partner of HYREF. The consideration of the CDQ WHPG station was determined by the parties based upon
the appraisal report issued by Zhonglian Assets Appraisal Group (Shaanxi) Co., Ltd. as of August 15, 2018.
2. Buy Back Agreement
On December 29, 2018, Xi’an TCH, Xi’an Zhonghong,
HYREF, Guohua Ku, Chonggong Bai and Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”)
entered into a Buy Back Agreement.
Pursuant to the Buy Back Agreement, Xi’an TCH, Xi’an
Zhonghong, Guohua Ku and Chonggong Bai (the “Buyers”) jointly and severally agreed to buy back all outstanding capital
equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai (see 5 below), and a CDQ WHPG station in Boxing County
which was transferred to HYREF by Xi’an Zhonghong. The buy-back price for the Xi’an Hanneng’s equity will be
the higher of (i) the market price of the equity shares at the time of buy-back; or (ii) the original transfer price of the equity
shares plus bank interest. HYREF may request that the Buyers buy back the equity shares of Xi’an Hanneng and/or the CDQ WHPG
station if one of the following conditions is met: (i) HYREF holds the equity shares of Xi’an Hanneng until December 31,
2021; (ii) Xi’an Huaxin New Energy Co., Ltd., is delisted from The National Equities Exchange And Quotations Co., Ltd., a
Chinese over-the-counter trading system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the Buyers or
its affiliates has a credit problem, including not being able to issue an auditor report or standard auditor report or any control
person or executive of the Buyers is involved in crimes and is under prosecution or has other material credit problems, to HYREF’s
reasonable belief; (iv) if Xi’an Zhonghong fails to timely make repayment on principal or interest of the loan agreement,
its supplemental agreement or extension agreement; (v) the Buyers or any party to the Debt Repayment Agreement materially breaches
the Debt Repayment Agreement or its related transaction documents, including but not limited to the Share Transfer Agreement, the
Pledged Assets Transfer Agreement, the Entrusted Loan Agreement and their guarantee agreements and supplemental agreements.
Due to halted trading of Huaxin stock by NEEQ for not filing
its 2018 annual report, on December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally
agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier.
The total buy back price was RMB 261,727,506 ($37.52 million) including accrued interest of RMB 14,661,506 ($2.10 million), and
was paid in full by Xi’an TCH.
3. Xi’an
TCH transferred 40% ownership in the Fund Management Company to Hongyuan Huifu for partial payment of financial advisory fee
On December 29, 2018, Xi’an TCH entered into a Share Transfer
Agreement with Hongyuan Huifu Venture Capital Co. Ltd (“Hongyuan Huifu”), pursuant to which Xi’an TCH transferred
its 40% ownership in Hongyuan Recycling Energy Investment Management Beijing Co., Ltd. (the “Fund Management Company”)
to Hongyuan Huifu for consideration of RMB 3,453,867 ($504,000) (the “Fund Management Company Transfer Price”). On
January 22, 2019, Xi’an TCH completed the 40% ownership transfer transaction. The Company had $46,461 loss from the sale
of a 40% equity interest in Fund Management Company during the year ended December 31, 2019.
On December 29, 2018, Xi’an TCH, Hongyuan Huifu and Fund
Management Company entered into a supplemental agreement to the Share Transfer Agreement. Xi’an TCH owes the Fund Management
Company RMB 18,306,667 ($2,672,000) in financial advisory fees, and the parties agreed that the Fund Management Company Transfer
Price could be used to off-set the outstanding financial advisory fees. Upon the completion of this transaction, the Fund Management
Company owed RMB 3,453,867 ($502,400) to Hongyuan Huifu, and Xi’an TCH owed RMB 14,852,800 ($2,168,000) to the Fund Management
Company.
4. HYREF Fund transferred 10% ownership in Xi’an Zhonghong to Shanghai TCH
On December 29, 2018, Shanghai TCH entered into a Share Transfer
Agreement with HYREF, pursuant to which HYREF agreed to transfer its 10% ownership in Xi’an Zhonghong to Shanghai TCH for
RMB 3 million ($430,034), and was recorded as long term payable in the Company’s balance sheet. On January 22, 2019, Hongyuan
Huifu completed the transfer of its 10% ownership in Xi’an Zhonghong to Shanghai TCH, Xi’an Zhonghong then became
a 100% subsidiary of the Company. The Company did not record any gain or loss for this purchase as the controlling interest did
not change.
5. Transfer of Xuzhou Huayu Project and Shenqiu Phase I & II project to Mr. Bai for partial repayment of HYREF loan
On January 4, 2019, Xi’an Zhonghong, Xi’an TCH,
and Mr. Chonggong Bai entered into a Projects Transfer Agreement, pursuant to which Xi’an Zhonghong transferred a CDQ WHPG
station (under construction) located in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr.
Bai for RMB 120,000,000 ($17.52 million) and Xi’an TCH will transfer two Biomass Power Generation Projects in Shenqiu (“Shenqiu
Phase I and II Projects”) to Mr. Bai for RMB 127,066,000 ($18.55 million). Mr. Bai agreed to transfer all the equity shares
of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the RMB 247,066,000 ($36.07 million) loan made by Xi’an
Zhonghong to HYREF as consideration for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
On February 15, 2019, Xi’an Zhonghong completed the transfer
of the Xuzhou Huayu Project and Xi’an TCH completed the transfer of Shenqiu Phase I and II Projects to Mr. Bai, and on January
10, 2019, Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment of
Xi’an Zhonghong’s loan to HYREF as consideration for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and
II Projects.
Xi’an Hanneng is a holding company and was supposed to
own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”), so that HYREF will indirectly receive
and own such shares of Xi’an Huaxin as the repayment for the loan of Zhonghong. Xi’an Hanneng already owned 29,948,000
shares of Huaxin; however, Xi’an Hanneng was not able to obtain the remaining 17,202,000 shares due to halted trading of
Huaxin stock by NEEQ for not filing its 2018 annual report.
On December 20, 2019, Mr. Bai, Xi’an TCH and Xi’an
Zhonghong agreed to have Mr. Bai repay the Company in cash for the transfer price of Xuzhou Huayu and Shenqiu in five installment
payments. The 1st payment of RMB 50 million ($7.17 million) is due on January 5, 2020, the 2nd payment
of RMB 50 million ($7.17 million) was due on February 5, 2020, the 3rd payment of RMB 50 million ($7.17 million)
was due on April 5, 2020, the 4th payment of RMB 50 million ($7.17 million) is due on June 30, 2020, and the final
payment of RMB 47,066,000 ($6.75 million) is due on September 30, 2020. As of this report date, the Company has already received
RMB 150 million ($21.51 million).
|
6.
|
The lender agreed to extend the repayment of RMB 77.00 million ($11.04 million) to July 8, 2023; of which, RMB 75.00 million ($10.81 million) was Xi’an TCH’s investment into the HYREF fund as a secondary limited partner, and the Company netted off the investment of RMB 75 million ($10.81 million) by Xi’an TCH with the entrusted loan payable of the HYREF Fund.
|
A reconciliation of repayment of HYREF loan (entrusted loan)
by three Projects at March 31, 2020 was as follows:
Transfer price for Chengli Project
|
|
$
|
26,624,805
|
|
|
Entrusted loan payable at March 31, 2020, net with Xi’an TCH investment in entrusted loan (current and noncurrent)
|
|
$
|
20,447,710
|
|
Transfer price for Xuzhou Huayu Project
|
|
|
16,936,952
|
|
|
Interest payable on entrusted loan at March 31, 2020
|
|
|
8,389,311
|
|
Transfer price for Shenqiu Phase I and II Projects
|
|
|
17,934,256
|
|
|
Add back: Xi’an TCH investment in entrusted loan
|
|
|
10,585,595
|
|
|
|
|
|
|
|
Less: interest accrued from September 20, 2018 to March 31, 2020 (cut-off date for interest calculation for repayment was September 20, 2018)
|
|
|
(1,929,934
|
)
|
|
|
|
|
|
|
Less: portion of loan with repayment due date extended to year 2023
|
|
|
(10,867,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: interest & penalty repaid by Xi’an TCH
|
|
|
8,460,017
|
|
|
|
|
|
|
|
Add back: loan principle repaid by Xi’an TCH
|
|
|
26,411,192
|
|
|
|
$
|
61,496,013
|
|
|
|
|
$
|
61,496,013
|
|
10. REFUNDABLE DEPOSITS FROM CUSTOMERS FOR SYSTEMS LEASING
As of March 31, 2020 and December 31, 2019, the balance of refundable
deposits from customers for systems leasing was $0 and $544,709 (for Pucheng systems), respectively.
11. RELATED PARTY TRANSACTIONS
On December 29, 2018, the Company’s Chairman of the Board
and CEO, Guohua Ku, entered into a Buy-Back Agreement with the following parties: Xi’an TCH, Xi’an Zhonghong, HYREF,
Chonggong Bai and Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”). Pursuant
to the terms of the Buy Back Agreement, Mr. Ku, together with Xi’an TCH, Xi’an Zhonghong, and Chonggong Bai, as Buyers,
jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by
Chonggong Bai, and a CDQ WHPG station in Boxing County which was transferred to HYREF by Xi’an Zhonghong. (See Note 9). Pursuant
to the terms of the Buy-Back agreement, HYREF may request that the Buyers buy back the equity shares of Xi’an Hanneng and/or
the CDQ WHPG station if one of the following conditions is met: (i) HYREF holds the equity shares of Xi’an Hanneng until
December 31, 2021; (ii) Xi’an Huaxin New Energy Co., Ltd., is delisted from The National Equities Exchange And Quotations
Co., Ltd., a Chinese over-the-counter trading system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the
Buyers or its affiliates has a credit problem, including not being able to issue an auditor report or standard auditor report or
any control person or executive of the Buyers is involved in crimes and is under prosecution or has other material credit problems,
to HYREF’s reasonable belief; (iv) if Xi’an Zhonghong fails to timely make repayment on principal or interest of the
loan agreement, its supplemental agreement or extension agreement; (v) the Buyers or any party to the Debt Repayment Agreement
materially breaches the Debt Repayment Agreement or its related transaction documents, including but not limited to the Share Transfer
Agreement, the Pledged Assets Transfer Agreement, the Entrusted Loan Agreement and their guarantee agreements and supplemental
agreements. Due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report, on December 19, 2019, Xi’an
TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding capital equity
of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back price was RMB 261,727,506 ($37.52
million) including accrued interest of RMB 14,661,506 ($2.10 million), and was paid in full by Xi’an TCH.
As of March 31, 2020, and December 31, 2019, the Company had
$28,723 and $41,174, respectively, in advances from the Company’s management, which bear no interest, are unsecured, and
are payable upon demand.
12. NOTE PAYABLES, NET
Convertible Notes / Promissory Notes in January and February
2019
On January 31, 2019, the Company entered into a Securities
Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (the “Purchaser”), pursuant to
which the Company sold and issued to the Purchaser a Convertible Promissory Note of $1,050,000. The Purchaser purchased the Note
with an original issue discount of $50,000. The Note bears interest at 8%. All outstanding principal and accrued interest on the
Note will become due and payable on January 30, 2021, subject to a potential one-year extension period during which interest would
not accrue. The Company’s obligations under the Note may be prepaid at any time, provided that in such circumstance the Company
would pay 125% of any amounts outstanding under the Note and being prepaid. Amounts outstanding under the Note may be converted
at any time, at the Lender’s option, into shares of the Company’s common stock at a conversion price of $3.00 per share,
subject to certain adjustments as discussed in the July 2018 Note above. The conversion feature did not require bifurcation and
derivative accounting as the conversion price was greater than the market price of the Company common shares, there was no beneficial
conversion feature to recognize.
On February 27, 2019, the Company entered into a Securities
Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (the “Purchaser”), pursuant to
which the Company sold and issued to the Purchaser a Convertible Promissory Note of $1,050,000. The Purchaser purchased the Note
with an original issue discount of $50,000. The Note bears interest at 8%. All outstanding principal and accrued interest on the
Note will become due and payable on February 26, 2021, subject to a potential one-year extension period during which interest would
not accrue. The Company’s obligations under the Note may be prepaid at any time, provided that in such circumstance the Company
would pay 125% of any amounts outstanding under the Note and being prepaid. Amounts outstanding under the Note may be converted
at any time, at the Lender’s option, into shares of the Company’s common stock at a conversion price of $3.00 per share,
subject to certain adjustments as discussed above in the July 2018 Note. The conversion feature did not require bifurcation and
derivative accounting and as the conversion price was greater than the market value of the Company common shares, there was no
beneficial conversion feature to recognize.
Pursuant to an Exchange Agreement dated April 14, 2019 (the
“Exchange Agreement”), the Company and Iliad Research and Trading, L.P. agreed to exchange the above two notes (the
“Original Notes”) with two new promissory notes (the “Exchange Notes”). Upon execution of the agreement,
the notes holder surrendered the Convertible Notes to the Company and the Company issued to the holder the Exchange Notes. Upon
surrender, the two Convertible Notes were cancelled and the remaining amount owed to Holder hereafter be evidenced solely by the
Exchange Notes ($1,173,480 and $ 1,165,379 for the January and February 2019 notes, respectively). All outstanding principal and
accrued interest on the Exchange Notes will become due and payable on January 31, 2021 and February 27, 2021, respectively. The
Exchange Notes bore interest at 8% and did not grant conversion options to the Purchaser. The Company’s obligations under
the Exchange Notes could be prepaid at any time, provided that in such circumstance the Company would have paid 125% of any amounts
outstanding under the Exchange Notes. Beginning on the date that is six months from the issue date of the respective Original Notes
(the “Issue Dates”) and at any time thereafter until the Exchange Notes are paid in full, Purchaser shall have the
right to redeem up to $750,000 of the outstanding balance during months six to eight following the respective Issue Date and any
amount thereafter. The exchange of the Convertible Notes with Promissory Notes did not cause substantially different terms, and
did not meet the conditions described in ASC 405-20-40-1, and therefore was accounted for as a modification and not an extinguishment;
accordingly, the Company did not recognize any gain or loss for the exchange of the notes under ASC 470-50-40-8.
During the three months ended March 31, 2020, the Company amortized
OID of $12,500 and recorded $35,127 interest expense.
As a result of default in the redemption request by the lender
made on August 1, 2019, the Company and the lender entered into a forbearance agreement in which the lender agreed not to enforce
its rights under the agreement and agreed not to make any Redemptions pursuant to the Section 4 of the Note before October 1, 2019.
Under the term of the forbearance agreement, in the event Lender delivers after October 1, 2019 a Redemption Notice to Borrower
and the Redemption Amount set forth therein is not paid in cash to Lender within three Trading Days, then the applicable Redemption
Amount shall be increased by 25% (the “First Adjustment,” and such increase to the Redemption Amount, the “First
Adjusted Redemption Amount”). In the event the First Adjusted Redemption Amount is not paid within three Trading Days after
the date of First Adjustment, then the First Adjusted Redemption Amount shall be increased in accordance with the following formula:
$0.50 divided by the lowest Closing Trade Price of the Common Stock during the 20 Trading Days prior to the date of the Second
Adjustment and the resulting quotient multiplied by the First Adjusted Redemption Amount (the “Second Adjustment,”
and such increase to the First Adjusted Redemption Amount, the “Second Adjusted Redemption Amount”), provided, however,
that such formula shall only be applied if the resulting quotient is greater than one and such formula shall in no event be used
to reduce the First Adjusted Redemption Amount.
On September 19, 2019, the Company entered into an Exchange
Agreement with Iliad Research and Trading, L.P (“Lender”). Pursuant to the Agreement, the Company and Lender agreed
to partition a new Promissory Note in the original principal amount of $202,000 (the “Partitioned Note”) from a Promissory
Note (the “Note”) issued by the Company on April 14, 2019, which was exchanged from a Convertible Note originally issued
by Company on January 31, 2019, whereupon the outstanding balance of the Note was reduced by an amount equal to the initial outstanding
balance of the Partitioned Note. The Company and Lender further agreed to settle the Partitioned Note by the issuance of 40,400
shares (post-reverse stock split) of the Company’s Common Stock. The Company recorded $24,240 gain on this partitioned note
settlement, which was the difference between the market price and the conversion price.
On October 16, 2019, the Company entered into two Exchange Agreements
with Iliad Research and Trading, L.P. Pursuant to the Agreements, the Company and Lender agreed to partition two new Promissory
Notes in the original principal amounts of $125,000 and $200,000 from a Promissory Note issued by the Company on April 14, 2019.
The Company and Lender agreed to settle the Partitioned Notes by the issuance of 25,000 shares and 40,000 shares (post-reverse
stock split) of the Company’s Common Stock. The Company recorded gain on conversion of $22,500 and $36,000, respectively.
On November 11, 2019, the Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender agreed to partition a new Promissory Note
in the original principal amount of $150,000 from a Promissory Note issued by the Company on April 14, 2019. The Company and Lender
agreed to settle the Partitioned Note by the issuance of 30,000 shares (post-reverse stock split) of the Company’s Common
Stock. The Company recorded $45,000 gain on conversion of this portion of note.
On December 16, 2019, the Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender agreed to partition a new Promissory Note
in the original principal amount of $120,000 from a Promissory Note issued by the Company on April 14, 2019. The Company and Lender
agreed to exchange the Partitioned Note for the delivery of 40,000 shares (post-reverse stock split) of the Company’s Common
Stock. The Company recorded $4,000 gain on conversion of this portion of note. On the same date, the Company and the lender amended
the September 11, 2019 forbearance agreement to increase the adjustment ratio described above from $0.50 to $0.30 (pre-reverse
stock split price).
The outstanding balance of the Note shall be reduced by an amount
equal to the total outstanding balance of the Partitioned Note. The investor made adjustments of $305,626 to increase the principle
of the notes during the year ended December 31, 2019 under the term of the September 11th forbearance agreement
and the amendment to forbearance agreement dated on December 16, 2019.
On January 3, 2020, Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender agreed to partition a new Promissory Note
in the original principal amount of $150,000 from a Promissory Note issued by the Company on April 14, 2019. The Company and Lender
exchanged the Partitioned Note for the delivery of 50,000 shares (post-reverse stock split) of the Company’s Common Stock.
The Company recorded $25,000 loss on conversion of this portion of note.
On January 13, 2020, the Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender agreed to partition a new Promissory Note
in the original principal amount of $135,000 from a Promissory Note issued by the Company on April 14, 2019. The Company and Lender
exchanged the Partitioned Note for the delivery of 45,000 shares (post-reverse stock split) of the Company’s Common Stock.
The Company recorded $54,000 loss on conversion of this portion of note.
On March 6, 2020, the Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and the Lender agreed to partition a new Promissory
Note in the original principal amount of $145,000 from a Promissory Note issued by the Company on April 14, 2019. The Company and
the Lender exchanged the Partitioned Note for 48,333 shares (post-reverse stock split) of common stock of the Company. The Company
recorded $24,167 loss on conversion of this portion of note.
13. SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Following is a summary of the activities
of warrants that were issued from equity financing (post-reverse stock split) for the three months ended March 31, 2020:
|
|
Number of
Warrants
|
|
Average
Exercise
Price
(post-reverse
stock split
price)
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
Outstanding at December 31, 2019
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
4.21
|
|
Exercisable at December 31, 2019
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
4.21
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.96
|
|
Exercisable at March 31, 2020
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.96
|
|
Shares Issued for Stock Compensation
On March 16, 2020, the Company’s Board of Director agreed
to issue 3,333 shares of the Company’s common stock (post-reverse stock split) to the Company’s law firm. The shares
are earned in full and non-refundable as of March 9, 2020. The FV of these shares are $10,999 on March 9, 2020.
14. INCOME TAX
The Company’s Chinese subsidiaries are governed by the
Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in
the statutory financial statements after appropriate tax adjustments. Under Chinese tax law, the tax treatment of finance and sales-type
leases is similar to US GAAP. However, the local tax bureau continues to treat CREG sales-type leases as operating leases. Accordingly,
the Company recorded deferred income taxes.
The Company’s subsidiaries generate all of their income
from their PRC operations. All of the Company’s Chinese subsidiaries’ effective income tax rate for 2019 and 2018 was
25%. Yinghua, Shanghai TCH, Xi’an TCH, Huahong, Zhonghong and Erdos TCH file separate income tax returns.
There is no income tax for companies domiciled in the Cayman
Islands. Accordingly, the Company’s CFS do not present any income tax provisions related to Cayman Islands tax jurisdiction,
where Sifang Holding is domiciled.
The US parent company, CREG is taxed in the US and, as of March
31, 2020, had net operating loss (“NOL”) carry forwards for income taxes of $1.27 million; for federal income tax purposes,
the NOL arising in tax years beginning after 2017 may only reduce 80% of a taxpayer’s taxable income, and may be carried
forward indefinitely. The management believes the realization of benefits from these losses may be uncertain due to the US parent
company’s continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
The recently issued Coronavirus Aid, Relief and Economic
Security Act (the CARES Act or the Act), provides four relief provisions for corporate taxpayers as follows:
1.
|
Five-year net operating loss (NOL) carryback provision: the Act allows for the carryback of losses arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year of the loss.
|
2.
|
Fiscal year NOL carryback fix from the Tax Cuts and Jobs Act (TCJA) of 2017: the Act corrects the language to provide fiscal year taxpayers who had NOLs arising in years that began prior to December 31, 2017 and ended after December 31, 2017 with the ability to carry back those NOLs.
|
3.
|
Deferral of 80% income limitation on post-2017 NOLs to 2021: the Act suspends this 80% limitation for taxable years beginning before January 1, 2021, and instead allows the full offset of taxable income. For tax years beginning after December 31, 2020, the Act reinstates the 80% limitation.
|
4.
|
Immediate Alternative Minimum Tax (“AMT”) tax credit refunds: the Act accelerates availability of AMT credits. The full remaining refundable AMT credit amount will be available for a corporation’s first taxable year beginning in 2019. Alternatively, a corporation may elect to use 100% of its AMT credits for its first taxable year beginning in 2018.
|
As of March 31, 2020, the Company’s PRC subsidiaries had
$65.35 million NOL that can be carried forward to offset future taxable income for five years from the year the loss is incurred.
The NOL was mostly from Zhonghong, Zhonghong has not yet generated any sales yet; accordingly, the Company recorded a 100% deferred
tax valuation allowance for PRC NOL.
The following table reconciles the U.S. statutory rates to the
Company’s effective tax rate for the three months ended March 31, 2020 and 2019, respectively:
|
|
2020
|
|
2019
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
(2.3
|
)%
|
|
|
(3.4
|
)%
|
Reversal of temporary difference due to disposal of Shenqiu
|
|
|
-
|
%
|
|
|
(52.9
|
)%
|
Permanent differences
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
Other
|
|
|
-
|
%
|
|
|
(0.7
|
)%
|
Utilization of NOL
|
|
|
|
|
|
|
(1.1
|
)%
|
Valuation allowance on PRC NOL
|
|
|
14.7
|
%
|
|
|
19.6
|
%
|
Valuation allowance on US NOL
|
|
|
4.6
|
%
|
|
|
-
|
%
|
Tax (benefit) per financial statements
|
|
|
-
|
%
|
|
|
(55.2
|
)%
|
The provision for income tax expense for the three months ended
March 31, 2020 and 2019 consisted of the following:
|
|
2020
|
|
2019
|
Income tax expense – current
|
|
$
|
-
|
|
|
$
|
139,743
|
|
Income tax benefit – deferred
|
|
|
-
|
|
|
|
(2,530,614
|
)
|
Total income tax benefit
|
|
$
|
-
|
|
|
$
|
(2,390,871
|
)
|
15. STOCK-BASED COMPENSATION PLAN
Options to Employees and Directors
On June 19, 2015, the stockholders of the Company approved the
China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”) at its annual meeting. The total shares of common
stock authorized for issuance during the term of the Plan is 124,626 (post-reverse stock split). The Plan was effective immediately
upon its adoption by the Board of Directors on April 24, 2015, subject to stockholder approval, and will terminate on the earliest
to occur of (i) the 10th anniversary of the Plan’s effective date, or (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully-vested shares. The stockholders approved the Plan at their annual meeting on June
19, 2015.
The following table summarizes option activity with respect
to employees and independent directors, and the number of options reflects the Reverse Stock Split effective April 13, 2020:
|
|
Number of
Shares
|
|
Average
Exercise Price
per Share (post-reverse stock split price)
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
4.41
|
|
Exercisable at December 31, 2019
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
4.41
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
4.16
|
|
Exercisable at March 31, 2020
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
4.16
|
|
16. STATUTORY RESERVES
Pursuant to the corporate law of the PRC effective January 1,
2006, the Company is only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration
or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus Reserve Fund
The Company’s Chinese subsidiaries are required to transfer
10% of their net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Company’s registered capital.
The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par
value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of
the registered capital.
The maximum statutory reserve amount has not been reached for
any subsidiary. The table below discloses the statutory reserve amount in the currency type registered for each Chinese subsidiary
as of March 31, 2020 and December 31, 2019:
Name of Chinese Subsidiaries
|
|
Registered
Capital
|
|
Maximum
Statutory
Reserve
Amount
|
|
Statutory reserve at
March 31, 2020 and
December 31, 2019
|
|
|
|
|
|
|
|
Shanghai TCH
|
|
$
|
29,800,000
|
|
|
$
|
14,900,000
|
|
|
|
¥6,564,303 ($1,003,859)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an TCH
|
|
¥
|
202,000,000
|
|
|
¥
|
101,000,000
|
|
|
|
¥69,359,820 ($10,606,984)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erdos TCH
|
|
¥
|
120,000,000
|
|
|
¥
|
60,000,000
|
|
|
|
¥19,035,814 ($2,914,869)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an Zhonghong
|
|
¥
|
30,000,000
|
|
|
¥
|
15,000,000
|
|
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Huahong
|
|
$
|
2,500,300
|
|
|
$
|
1,250,150
|
|
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhongxun
|
|
¥
|
35,000,000
|
|
|
¥
|
17,500,000
|
|
|
|
Did not accrue yet due to accumulated deficit
|
|
Common Welfare Fund
The common welfare fund is a voluntary fund to which the Company
can transfer 5% to 10% of its net income. This fund can only be utilized on capital items for the collective benefit of the Company’s
employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable
other than upon liquidation. The Company does not participate in this fund.
17. CONTINGENCIES
China maintains a “closed” capital account, meaning
companies, banks, and individuals cannot move money in or out of the country except in accordance with strict rules. The People’s
Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) regulate the flow of foreign exchange in and out of the
country. For inward or outward foreign currency transactions, the Company needs to make a timely declaration to the bank with sufficient
supporting documents to declare the nature of the business transaction. The Company’s sales, purchases and expense transactions
are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely
convertible into foreign currencies under the current law. Remittances in currencies other than RMB may require certain supporting
documentation in order to make the remittance.
The Company’s operations in the PRC are subject to specific
considerations and significant risks not typically associated with companies in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s
results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company sells electricity to its customers and receives
commercial notes (bank acceptance) from them in lieu of payments for accounts receivable. The Company discounts the commercial
notes with the bank or endorses the commercial notes to vendors for payment of their own obligations or to get cash from third
parties. Most of the commercial notes have a maturity of less than six months.
18. COMMITMENTS
Lease Commitment
On November 20, 2017, Xi’an TCH entered into a lease for
its office with a term from December 1, 2017 through November 30, 2020. The monthly rent is RMB 36,536 ($5,600) with quarterly
payment in advance.
On August 2, 2018, the Company entered into a lease for its
office use in Beijing with a term from August 4, 2018 through August 3, 2020. The monthly rent is RMB 22,000 ($3,205) with quarterly
payment in advance. This lease was terminated in 2019.
For the three months ended March 31, 2020 and 2019, the rental
expense of the Company was $16,374 and $26,582 (including Beijing office rent of $9,782), respectively.
The Company adopted ASC 842 on CFS on January 1, 2019. The components
of lease costs, lease term and discount rate with respect of the office lease with an initial term of more than 12 months are as
follows:
|
|
Three Months Ended
|
|
|
March 31,
2020
|
Operating lease cost
|
|
$
|
16,374
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
0.67 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
3
|
%
|
The following is a schedule, by years, of maturities of the
office lease liabilities as of March 31, 2020:
|
|
Operating Leases
|
2020
|
|
$
|
41,254
|
|
Total undiscounted cash flows
|
|
|
41,254
|
|
Less: imputed interest
|
|
|
(460
|
)
|
Present value of lease liabilities
|
|
$
|
40,794
|
|
Employment Agreement
On May 8, 2020, the Company entered an employment agreement
with the Company’s CFO for a term of 24 months. The monthly salary is RMB 16,000 ($2,300). The Company will grant the CFO
no less than 5,000 shares of the Company’s common stock annually.
19. SUBSEQUENT EVENTS
The Company follows the guidance in FASB ASC 855-10 for the
disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were
issued and determined the Company has the following material subsequent events:
On April 30, 2020, the Company entered into an Exchange Agreement
with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and the Lender agreed to partition a new Promissory
Note in the original principal amount of $150,000 from a Convertible Promissory Note dated January 31, 2019 which was exchanged
for a new Promissory Note in the original principal amount of $1,173,480 on April 14, 2019. The Company and the Lender agreed to
exchange the Partitioned Note for 50,000 shares of common stock of the Company, and then the amount of the outstanding balance
of the Promissory Note will be reduced by an amount equal to the Partitioned Note. The shares of common stock were issued without
any restrictions.
On May 8, 2020, the Company entered an employment agreement
with the Company’s CFO for a term of 24 months. The monthly salary is RMB 16,000 ($2,300). The Company will grant the CFO
no less than 5,000 shares of the Company’s common stock annually.
On May 15, 2020, the Company entered into
an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Exchange Agreement, the Company and the Lender agreed
to partition a new Promissory Note in the original principal amount of $319,586 from a Convertible Promissory Note dated January
31, 2019 which was exchanged for a new Promissory Note in the original principal amount of $1,173,480 on April 14, 2019. The Company
and the Lender agreed to exchange the Partitioned Note for 106,528 shares of common stock of the Company, and then the amount of
the outstanding balance of the Note will be reduced by an amount equal to the Partitioned Note. The shares of common stock were
issued without any restrictions.
On May 15, 2020, the Company entered into
a Forbearance Agreement with the Lender. The Lender had delivered a redemption notice to the Company on November 4, 2019 pursuant
to the terms of the Exchange Agreement dated April 14, 2019 and the Company failed to pay the amount provided therein. Accordingly,
the Lender has the right to accelerate the maturity date of the Note and cause the outstanding balance to be increased by 25%.
The Lender agreed with the Company to withdraw the November 4, 2019 redemption notice as if it was never made and agreed that as
of May 15, 2020 there is no default under the Note. The Company did not pay any consideration to the Lender for this forbearance.
The outstanding balance of the Note as of May 15, 2020 is $1,271,719.78 and if the Lender delivers a redemption notice and the
amount set forth in such notice is not paid in cash to Lender within three trading days, the applicable redemption amount shall
be increased to 25%.
On May 29, 2020, the Company entered into
an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Exchange Agreement, the Company and the Lender agreed
to partition a new Promissory Note in the original principal amount of $150,000 from a Convertible Promissory Note dated February
27, 2019 which was exchanged for a new Promissory Note in the original principal amount of $1,165,379.18 on April 14, 2019. The
Company and the Lender agreed to exchange the Partitioned Note for 65,674 shares of common stock of the Company, and then the amount
of the outstanding balance of the Note will be reduced by an amount equal to the Partitioned Note. The shares of common stock were
issued without any restrictions.