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
SEPTEMBER 30, 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 September 30,
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 initially expected the resumption of operations in July 2020, but the resumption of operations will be
delayed due to the global pandemic of Covid-19, the Company is not able to provide a resumption date as it will depend on the overall
progress of the global epidemic control. 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, par value $0.001
per share (the “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 ($7.34 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 ($10.28 million) is to be paid before December 31, 2020. On March
11, 2020, the Company received the 1st installment payment. The repayment date for 2nd installment
payment is delayed to fourth quarter of 2020.
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 September 30, 2020, the Company had gross receivable from Zhongtai for $4.40 million
(with bad debt allowance of $4.40 million). In January 2020, Zhongtai paid RMB 10 million ($1.41 million); in March 2020, Zhongtai
paid RMB 20 million ($2.82 million); in June 2020, Zhongtai paid RMB 10 million ($1.41 million). Zhongtai is committed to pay in
full the remaining balance of RMB 30 million ($4.40 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.
Reverse Stock Split
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, 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 and related disclosure as of December 31, 2019, and for the nine and three months ended September 30, 2019
were retroactively restated to reflect this reverse stock split.
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.
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, most cities in China were reopened, the outbreak in China is under the control. The Company disposed all of its systems
and currently holds only five power generating systems through Erdos TCH, the Company initially expected to resume production of
these five power generating systems in July 2020 from the renovation and furnace safety upgrade, but the resumption of operations
will be delayed due to the global pandemic of Covid-19; Erdos exports ferrosilicon to 27 countries, the Company decided not to
resume the production in the third quarter of 2020 as a result of decreased sales order and overstocked inventory. The Company
expects the resumption date to be December 2020, and is currently doing the final testing of the equipment. There are some new
Covid-19 cases discovered in a few provinces of China, however, the number of new cases are not significant due to PRC government’s
strict control.
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 September 30, 2020 and for the nine and three-month periods ended September 30, 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 September 30, 2020, its consolidated results of operations and cash flows for the nine and
three months ended September 30, 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 September 30,
2020. All significant inter-company accounts and transactions were eliminated in consolidation.
Uses and Sources of Liquidity
For the nine and three months ended September
30, 2020, the Company had a net loss of $0.28 million and 0.68 million. For the year ended December 31, 2019, the Company had net
loss of $8.78 million. The Company has an accumulated deficit of $46.87 million as of September 30, 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 $73.79
million cash on hand at September 30, 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.
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 nine and three months ended September 30, 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 September 30, 2020, the ROU was $5,891.
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 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 September 30, 2020, the Company had
gross accounts receivable of $29.27 million; of which, $6.91 million was for transferring the ownership of Huayu and Shenqiu Phase
I and II systems to Mr. Bai; $4.41million was from the sales of CDQ and a CDQ WHPG system to Zhongtai, $17.62 million was from
transferring the ownership of Tian’an project to Tianyu, and $0.33 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 September 30, 2020, the Company had
bad debt allowance of $4,405,222 for Zhongtai and $32,861 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. The Company made a reversal of bad debts allowance of $1,659,101, of which $1,430,260 was for Zhongtai and $228,842
was for Erdos TCH during the nine months ended September 30, 2020 as a result of payment collection from Zhongtai and Erdos TCH.
In October 2020, the Company collected RMB 47 million ($6.91 million) from Mr. Bai. As of this report date, the Company has received
the full payment of RMB 247 million ($36.28 million) from Mr. Bai.
|
|
2020
|
|
|
2019
|
|
Xuzhou Zhongtai project
|
|
$
|
4,405,222
|
|
|
$
|
10,034,116
|
|
Bai Chonggong (for Shenqiu and Huayu projects)
|
|
|
6,911,205
|
|
|
|
35,415,556
|
|
Xuzhou Tian’an project
|
|
|
17,620,887
|
|
|
|
-
|
|
Receivable of electricity sales of Erdos
|
|
|
328,611
|
|
|
|
2,614,299
|
|
Total accounts receivable
|
|
|
29,265,925
|
|
|
|
48,063,971
|
|
Bad debt allowance
|
|
|
(4,438,083
|
)
|
|
|
(5,995,210
|
)
|
Accounts receivable, net
|
|
|
24,827,842
|
|
|
$
|
42,068,761
|
|
Interest Receivable on Sales Type Leases
As of September 30, 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 September 30, 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 September 30, 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, respectively. Xi’an TCH received RMB 97.6 million ($14
million) in full which included interest of $5.3 million for Pucheng system on January 14, 2020 and the ownership of the system
was transferred. The bad debt allowance of Pucheng was recorded in 2019.
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 nine and three months
ended September 30, 2020 and 2019.
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 September 30, 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 nine and three months ended September
30, 2020 and 2019, the basic and diluted loss per share were the same due to the Company’s net loss. For the nine months
ended September 30, 2020 and 2019, 31,311 shares and 406,764 shares (post-reverse stock split), respectively; purchasable under
warrants and options were excluded from the EPS calculation as these were not 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 September 30, 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 to Xi’an TCH.
4. OTHER RECEIVABLES
As of September 30, 2020, other receivables
mainly consisted of (i) advances to third parties of $7,342, bearing no interest, payable upon demand, ii) advance to employees
of $9,329, and (iii) other receivables of $28,970 including social insurance receivable of $5,459. As of December 31, 2019, other
receivables mainly consisted of (i) advances to third parties of $7,167, bearing no interest, payable upon demand, (ii) tax and
maintenance cost receivable of $1,001,527 for Xi’an TCH, and iii) others of $22,449. 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 September 30, 2020 and December 31,
2019, the Company had net property and equipment (after impairment allowance) of $27.70 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 and accrued interest 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 loan and 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 September 30, 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 $0.6 million VAT (total of $24.37 million) in three installment payments. The Company
recorded impairment loss of $13.9 million as of December 31, 2019. 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. The repayment date for 2nd installment payment is delayed to fourth quarter
of 2020.
6. TAXES PAYABLE
Taxes payable consisted of the following as of September 30,
2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Income tax – current
|
|
$
|
2,125,599
|
|
|
$
|
2,118,432
|
|
Value-added tax
|
|
|
311,194
|
|
|
|
1,708,298
|
|
Other taxes
|
|
|
72,999
|
|
|
|
260,912
|
|
Total – current
|
|
|
2,509,792
|
|
|
|
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 September 30, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Employee training, labor union expenditure and social insurance payable
|
|
$
|
864,388
|
|
|
$
|
843,807
|
|
Consulting, auditing, and legal expenses
|
|
|
31,090
|
|
|
|
40,602
|
|
Accrued payroll and welfare
|
|
|
245,310
|
|
|
|
254,882
|
|
Other
|
|
|
41,854
|
|
|
|
45,460
|
|
Total
|
|
$
|
1,182,642
|
|
|
$
|
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 September 30, 2020 and December 31, 2019, net deferred
tax assets consisted of the following:
|
|
2020
|
|
|
2019
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
193,661
|
|
|
$
|
189,050
|
|
Interest income in sales-type leases on cash basis
|
|
|
-
|
|
|
|
853,265
|
|
Depreciation of fixed assets
|
|
|
-
|
|
|
|
2,938,605
|
|
Assets impairment loss
|
|
|
1,101,305
|
|
|
|
7,537,556
|
|
US NOL
|
|
|
323,412
|
|
|
|
3,246,655
|
|
PRC NOL
|
|
|
17,302,394
|
|
|
|
10,424,558
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
-
|
|
|
|
(6,685,021
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
18,920,772
|
|
|
|
18,504,668
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(18,920,772
|
)
|
|
|
(18,504,668
|
)
|
Non-current deferred tax assets, 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 September 30, 2020, the interest payable for this loan was $9.39 million and the outstanding balance for this loan was $21.27
million including a non-current portion of $0.30 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 including a non-current portion of $0.29 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.
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.
However, 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 September 30, 2020 and December 31, 2019.
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 offset 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 (Long-Term Payable)
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 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. 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 received the full payment of RMB 247 million ($36.28 million) from Mr. Bai.
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 September 30, 2020 was as follows:
Transfer price for Chengli Project
|
|
$
|
27,699,945
|
|
|
Entrusted loan payable at September 30, 2020, net with Xi’an TCH investment in entrusted loan (current and noncurrent)
|
|
$
|
21,273,412
|
|
Transfer price for Xuzhou Huayu Project
|
|
|
17,620,887
|
|
|
Interest payable on entrusted loan at September 30, 2020
|
|
|
9,387,757
|
|
Transfer price for Shenqiu Phase I and II Projects
|
|
|
18,658,463
|
|
|
Add back: Xi’an TCH investment in entrusted loan
|
|
|
11,013,054
|
|
|
|
|
|
|
|
Less: interest accrued from September 20, 2018 to September 30, 2020 (cut-off date for interest calculation for repayment was September 20, 2018)
|
|
|
(2,667,543
|
)
|
|
|
|
|
|
|
Less: portion of loan with repayment due date extended to year 2023
|
|
|
(11,306,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: interest & penalty repaid by Xi’an TCH
|
|
|
8,801,643
|
|
|
|
|
|
|
|
Add back: loan principle repaid by Xi’an TCH
|
|
|
27,477,708
|
|
|
|
$
|
63,979,295
|
|
|
|
|
$
|
63,979,295
|
|
10. REFUNDABLE DEPOSITS FROM CUSTOMERS FOR SYSTEMS LEASING
As of September 30, 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
As of September 30, 2020, and December
31, 2019, the Company had $28,590 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 nine
months ended September 30, 2020, the Company amortized OID of $45,833 and recorded $84,901 interest expense. During the three months
ended September 30, 2020, the Company amortized OID of $6,250 and recorded $23,292 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.
In 2019, the Company entered into a series
of Exchange Agreements with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender partitioned five
Promissory Notes in the original total principal amount of $797,000 from a Promissory Note issued by the Company on April 14, 2019.
The Company and Lender exchanged the Partitioned Note for the delivery of total 175,400 shares (post-reverse stock split) of the
Company’s Common Stock. The Company recorded $131,740 gain on conversion of these portion of the note. However, on December
16, 2019, 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.
During the first quarter of 2020, Company
entered into three Exchange Agreements with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender
partitioned three new Promissory Notes in the original total principal amount of $430,000 from a Promissory Note issued by the
Company on April 14, 2019. The Company and Lender exchanged the Partitioned Note for the delivery of total 143,333 shares (post-reverse
stock split) of the Company’s Common Stock. The Company recorded $103,167 loss on conversion of these portion of the note.
During the second quarter of 2020, Company
entered into four Exchange Agreements with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender partitioned
four new Promissory Notes in the original total principal amount of $819,586 from a Promissory Note issued by the Company on April
14, 2019. The Company and Lender exchanged the Partitioned Note for the delivery of total 304,710 shares (post-reverse stock split)
of the Company’s Common Stock. The Company recorded $49,837 gain on conversion of these portion of the note. In addition,
the investor also made adjustments of $145,000 to increase the principle of the notes during the second quarter of 2020 under the
term of the September 11th forbearance agreement and the amendment to forbearance agreement dated on December 16,
2019. These transactions were recorded as credit to additional paid in capital of $769,749, which was the difference between Note
conversion of $819,586 and gain on conversion of $49,837. The $49,837 gain on conversion and $145,000 principle adjustment discussed
above resulted in a net loss on note redemption/ conversion of $95,163 in the statement of operations.
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 $1,271,720, and under the new Forbearance Agreement, 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%.
During the third quarter of 2020, Company
entered into three Exchange Agreements with Iliad Research and Trading, L.P. Pursuant to the Agreements, the Company and Lender
partitioned three new Promissory Notes in the original total principal amount of $600,000 from a Promissory Note issued by the
Company on April 14, 2019. The Company and Lender exchanged the Partitioned Note for the delivery of total 242,699 shares (post-reverse
stock split) of the Company’s Common Stock. The Company recorded $36,023 loss on conversion of these portion of the note.
In addition, under the term of the forbearance agreement, as the investor delivered redemption notices totaling $1,050,000
which were not paid within 5 days, per the forbearance agreement, adjustments of $262,500 were made to increase the principle
of the notes during the third quarter of 2020. These transactions were recorded as credit to additional paid in capital of $636,023,
which was the fair value of the shares issued based on the stock price on the date of the exchange. The $36,023 loss on conversion
and $262,500 principle adjustment discussed above resulted in a loss on note redemption/ conversion of $298,523 in the statement
of operations for the three months ended September 30,2020.
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 nine months
ended September 30, 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 September 30, 2020
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.46
|
|
Exercisable at September 30, 2020
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
3.46
|
|
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.
Shares
Issued for Equity Financing
On
August 24, 2020 and September 28, 2020, the Company entered into Securities Purchase Agreements with the purchaser and offered
and sold to such purchaser 265,250 shares of Common Stock at negotiated purchase prices (132,000 shares at $2.15 per share
and 133,250 shares at $2.34 per share) without reference to the market price and received the net proceeds was $497,187 after
deducting the placement agent commission and certain expenses. These 265,250 shares were offered and sold in a registered
public offering pursuant to the prospectus supplement dated August 24, 2020, and the original prospectus contained in an effective
shelf registration statement on Form S-3 (the “Registration Statement”), which was originally filed with the Securities
and Exchange Commission on December 1, 2017, and was declared effective on December 8, 2017 (File No. 333-221868).
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 2020 and 2019 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 September 30, 2020, had net operating loss (“NOL”) carry forwards
for income taxes of $1.54 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. However, the coronavirus Aid, Relief
and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate
taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and
2020. 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.
As
of September 30, 2020, the Company’s PRC subsidiaries had $69.21 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 Xi’an TCH, Erdos TCH and Zhonghong.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. After consideration of all the information available, management believes that significant uncertainty
exists with respect to future realization of the deferred tax assets due to the continuous loss of these entities, 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 nine months ended September
30, 2020 and 2019, respectively:
|
|
2020
|
|
|
2019
|
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
9.8
|
%
|
|
|
(3.6
|
)%
|
Reversal of temporary difference due to disposal of Shenqiu
|
|
|
-
|
%
|
|
|
(15.5
|
)%
|
Permanent differences
|
|
|
41.3
|
%
|
|
|
1.3
|
%
|
Change in valuation allowance
|
|
|
(30.1
|
)%
|
|
|
17.6
|
%
|
Tax (benefit) per financial statements
|
|
|
-
|
%
|
|
|
(21.2
|
)%
|
The
provision for income tax expense for the nine months ended September 30, 2020 and 2019 consisted of the following:
|
|
2020
|
|
|
2019
|
|
Income tax expense – current
|
|
$
|
-
|
|
|
$
|
2,487
|
|
Income tax benefit – deferred
|
|
|
-
|
|
|
|
(3,044,371
|
)
|
Total income tax benefit
|
|
$
|
-
|
|
|
$
|
(3,041,884
|
)
|
The
following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September
30, 2020 and 2019, respectively:
|
|
2020
|
|
|
2019
|
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
(1.9
|
)%
|
|
|
(3.7
|
)%
|
Reversal of temporary difference due to disposal of Shenqiu
|
|
|
-
|
%
|
|
|
(2.1
|
)%
|
Permanent differences
|
|
|
9.5
|
%
|
|
|
(0.1
|
)%
|
Change in valuation allowance
|
|
|
13.4
|
%
|
|
|
11.3
|
%
|
Tax expense per financial statements
|
|
|
-
|
%
|
|
|
(15.6
|
)%
|
The
provision for income tax expense for the three months ended September 30, 2020 and 2019 consisted of the following:
|
|
2020
|
|
2019
|
Income tax benefit –
current
|
|
$
|
-
|
|
|
$
|
(755,840)
|
|
Income tax expense – deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax expense
|
|
$
|
-
|
|
|
$
|
(755,840)
|
|
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 September 30, 2020
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
3.66
|
|
Exercisable at September 30, 2020
|
|
|
900
|
|
|
$
|
54.3
|
|
|
|
3.66
|
|
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.
During
the nine and three months ended September 30, 2020, the Company transferred $141,692 and $1,198, which is 10% of Xi’an TCH’s
net income to the statutory reverse. 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 September 30, 2020 and
December 31, 2019:
Name of Chinese Subsidiaries
|
|
Registered
Capital
|
|
|
Maximum
Statutory
Reserve
Amount
|
|
|
Statutory
reserve at
September 30,
2020
|
|
Statutory
reserve at
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai TCH
|
|
$
|
29,800,000
|
|
|
$
|
14,900,000
|
|
|
¥6,564,303 ($1,003,859)
|
|
¥6,564,303 ($1,003,859)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an TCH
|
|
¥
|
202,000,000
|
|
|
¥
|
101,000,000
|
|
|
¥70,350,493 ($10,748,676)
|
|
¥69,359,820 ($10,606,984)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erdos TCH
|
|
¥
|
120,000,000
|
|
|
¥
|
60,000,000
|
|
|
¥19,035,814 ($2,914,869)
|
|
¥19,035,814 ($2,914,869)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an Zhonghong
|
|
¥
|
30,000,000
|
|
|
¥
|
15,000,000
|
|
|
Did not accrue yet due to accumulated deficit
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Huahong
|
|
$
|
2,500,300
|
|
|
$
|
1,250,150
|
|
|
Did not accrue yet due to accumulated deficit
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhongxun
|
|
¥
|
35,000,000
|
|
|
¥
|
17,500,000
|
|
|
Did not accrue yet due to accumulated deficit
|
|
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.
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.
For
the nine months ended September 30, 2020 and 2019, the rental expense of the Company was $49,034 and $79,288 (including Beijing
office rent of $28,888), respectively.
For
the three months ended September 30, 2020 and 2019, the rental expense of the Company was $16,532 and $26,221 (including Beijing
office rent of $9,687), 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:
|
|
Nine Months Ended
|
|
|
|
September 30,
2020
|
|
Operating lease cost – amortization of ROU
|
|
$
|
48,220
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
814
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
0.17 years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
3
|
%
|
|
|
Three Months
Ended
|
|
|
|
September 30,
2020
|
|
Operating lease cost – amortization of ROU
|
|
$
|
16,372
|
|
Operating lease cost – interest expense on lease liability
|
|
$
|
160
|
|
Employment
Agreement
On
May 8, 2020, the Company entered an employment agreement with Yongjiang Shi, 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.
Investment
Banking Engagement Agreement
On
October 10, 2019, the Company entered an investment banking engagement agreement with an investment banker firm to engage them
as the exclusive lead underwriter for a registered securities offering. The Company shall pay to the investment banker an equity
retainer fee of 15,000 shares (post-reverse stock split) of the restricted Common Stock of the Company (10,000 shares was issued
within 10 business days of signing the agreement, and remaining 5,000 shares will be paid upon completion of the offering). The
proposed offering amount is $5 million, at closing of the offering, the Company will pay a 7% of the gross offering proceeds and
warrants to purchase that number of shares of Common Stock or units of securities as shall equal 7% of the securities issued and
sold by the Company at each closing of the offering. This agreement was renewed on July 22, 2020 for another six months, or the
final closing of a transaction, whichever comes first.
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
October 13, 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 $200,000 from a Convertible
Promissory Note dated January 31, 2019 which was exchanged for a new Promissory Note on April 14, 2019. The Company and the Lender
agreed to exchange the Partitioned Note for 56,980 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
November 4, 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 $200,000 from a Convertible
Promissory Note dated January 31, 2019 which was exchanged for a new Promissory Note on April 14, 2019. The Company and the Lender
agreed to exchange the Partitioned Note for 67,340 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.