EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
Additional
paid-in
capital
|
|
Accumulated
other
com-
prehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1,
2015
|
2,229,609
|
123
|
9,535
|
(766
)
|
776
|
315
|
5,760
|
1,787
|
17,530
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(616
)
|
(391
)
|
(1,007
)
|
Purchase 7,314 shares of treasury
stock
|
-
|
-
|
-
|
(20
)
|
-
|
-
|
-
|
-
|
(20
)
|
Other comprehensive income /
(loss): Foreign exchange translation adjustment
|
-
|
-
|
-
|
-
|
23
|
-
|
-
|
(86
)
|
(63
)
|
Stock-based compensation
expense
|
-
|
-
|
16
|
-
|
-
|
-
|
-
|
-
|
16
|
Balance as of December 31,
2015
|
2,229,609
|
123
|
9,551
|
(786
)
|
799
|
315
|
5,144
|
1,310
|
16,456
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
231
|
(73
)
|
158
|
Other comprehensive income /
(loss): Foreign exchange translation adjustment
|
-
|
-
|
-
|
-
|
58
|
-
|
-
|
(54
)
|
4
|
Appropriation of
reserves
|
-
|
-
|
-
|
-
|
-
|
37
|
(37
)
|
-
|
-
|
Balance as of December 31,
2016
|
2,229,609
|
123
|
9,551
|
(786
)
|
857
|
352
|
5,338
|
1,183
|
16,618
|
Net income /
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
473
|
(106
)
|
367
|
Other comprehensive income:
Foreign exchange translation adjustment
|
-
|
-
|
-
|
-
|
61
|
-
|
-
|
61
|
122
|
Balance as of December 31,
2017
|
2,229,609
|
123
|
9,551
|
(786
)
|
918
|
352
|
5,811
|
1,138
|
17,107
|
The
accompanying notes are an integral part of these consolidated
financial statements.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities
Euro
Tech Holdings Company Limited (the “Company”) was
incorporated in the British Virgin Islands on September 30,
1996.
Euro
Tech (Far East) Limited (“Far East”) is the principal
operating subsidiary of the Company. It is principally engaged in
the marketing and trading of water and waste water related process
control, analytical and testing instruments, disinfection
equipment, supplies and related automation systems in Hong Kong and
in the People’s Republic of China (the
“PRC”).
Details
of the Company’s significant subsidiaries and affiliates are
summarised as follows:
Name
|
Percentage of
equity ownership
|
Place of
incorporation
|
Principal
activities
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
|
Euro Tech (Far
East) Limited
|
100
%
|
100
%
|
Hong
Kong
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
Euro Tech (China)
Limited
|
100
%
|
100
%
|
Hong
Kong
|
Inactive
|
|
|
|
|
|
Euro Tech Trading
(Shanghai) Limited
|
100
%
|
100
%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
Shanghai Euro Tech
Limited
|
100
%
|
100
%
|
The
PRC
|
Manufacturing of
analytical and testing equipment
|
|
|
|
|
|
Shanghai Euro Tech
Environmental Engineering Company Limited
|
100
%
|
100
%
|
The
PRC
|
Undertaking water
and waste-water treatment engineering projects
|
|
|
|
|
|
Chongqing Euro Tech
Rizhi Technology Co., Ltd
|
100
%
|
100
%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
Rizhi Euro Tech
Instrument (Shaanxi) Co., Ltd
|
100
%
|
100
%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities (Continued)
Name
|
Percentage of
equity ownership
|
Place of
incorporation
|
Principal
activities
|
|
|
|
|
|
Guangzhou Euro Tech
Environmental Equipment Co., Ltd
|
100
%
|
100
%
|
The
PRC
|
Marketing and
trading of water and waste water related process control,
analytical and testing instruments, disinfection equipment,
supplies and related automation systems
|
|
|
|
|
|
Yixing Pact
Environmental Technology Co., Ltd
|
58
%
|
58
%
|
The
PRC
|
Design,
manufacturing and operation of water and waste water treatment
machinery and equipment
|
|
|
|
|
|
Pact Asia Pacific
Limited
|
58
%
|
58%
|
The British Virgin
Islands
|
Selling of
environmental protection equipment, undertaking environment
protection projects and providing relevant technology advice,
training and services
|
|
|
|
|
|
Affiliates:
|
|
|
|
|
|
|
|
|
|
Zhejiang Tianlan
Environmental Protection Technology Co. Ltd. (“Blue
Sky”)
|
19.4
%*
|
19.7%*
|
The
PRC
|
Design, general
contract, equipment manufacturing, installation, testing and
operation management of the treatment of waste gases
emitted
|
|
|
|
|
|
Zhejiang Jiahuan
Electronic Co. Ltd.
|
20
%
|
20
%
|
The
PRC
|
Design and
manufacturing of automatic control systems and electric voltage
control equipment for electrostatic precipitators (air purification
equipment)
|
* The
Group interest in Blue Sky has been counted for as an affiliate
using the equity method as the Group has representation on both the
Board and Executive Committee of Blue Sky, and the ability to
participate in the decision-making process.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(a)
Basis
of Consolidation
The
consolidated financial statements include the financial statements
of Euro Tech Holdings Company Limited and its subsidiaries (the
“Group”). The financial statements of variable interest
entitiy ("VIE”), as defined by the Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Subtopic 810-10, Consolidation,
are included in the consolidated financial statements, if
applicable. All material intercompany balances and transactions
have been eliminated on consolidation.
The
Group identified that a retail shop established in the PRC
qualified as a variable interest entity as defined in ASC 810-10.
This retail shop was principally engaged in the retailing business
of water and waste water related process control, analytical and
testing instruments, disinfection equipment, supplies and related
automation systems. The Company is the primary beneficiary of this
retail shop and, accordingly, consolidated their financial
statements. The Company has a controlling financial interest in
this retail shop and is subject to a majority of the risk of loss
from the retailing activities, and is entitled to receive a
majority of the retail shop’s residual returns. Total assets
and liabilities of this consolidated VIE total US$9,179 and
US$1,626, as of December 31, 2015, respectively. This VIE had
ceased operation since October 2016.
(b)
Subsidiaries
and affiliates
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders.
Investments
in companies in which the Group has significant influence
(ownership interest of between 20% and 50%) but less than
controlling interests, are accounted for by the equity
method. Income on intercompany sales, not yet realized
outside of the Group, was eliminated. The Group also reviews
these investments for impairment whenever events indicate the
carrying amount may not be recoverable.
In
accordance with ASC Topic 323-10-40-1, a change in the
Group’s proportionate share of an investee’s equity,
resulting from issuance of shares by the investee to third parties,
is accounted for as if the Group had sold a proportionate share of
its investment. Any gain or loss resulting from an investee’s
share issuance is recognized in earnings.
Management
evaluates investments in affiliated companies, for evidence of
other-than-temporary declines in value. Such evaluation is
dependent on the specific facts and circumstances and includes
analysis of relevant financial information (e.g. budgets, business
plans, financial statements, etc.). During the years ended December
31, 2017 and 2016, no impairment was identified.
The
Group’s main source of revenue is the sale of water and waste
water related process control, analytical and testing instruments,
disinfection equipment, supplies and related automation systems.
Revenues are recognized when delivery has occurred and, where
applicable, after installation has been completed, there is a
persuasive evidence of an arrangement, the fee is fixed or
determinable and collection of the related receivable is reasonably
assured and no further obligations exist. In case where delivery
has occurred but the required installation has not been performed,
the Group does not recognize the revenues until the installation is
completed.
The Group’s revenues are recognized as follows:
1.
Revenues from sales are
recognized when title and risk of loss of the product pass to the
customer (usually upon delivery)
.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(c)
Revenue
Recognition (Continued)
2.
Revenues and
profits in long term fixed price contracts or engineering revenue
are recognised using the percentage of completion method in
accordance with FASB ASC Subtopic 605-35, Revenue Recognition
– Construction-Type and Production-Type Contracts. This
approach primarily is based on contract costs incurred to date
compared with total estimated contract costs. Changes to total
estimated contract costs or losses, if any, are recognised in the
period they are determined. Essentially all of such amounts are
expected to be billed and collected within one year and are
classified as current assets. Billings in excess of costs and
estimated earnings on uncompleted contracts are classified as
current liabilities. When reasonably dependable estimates cannot be
made, engineering contract revenues are recognised using the
completed contract method.
(d)
Research
and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately US$163,000,
US$475,000 and US$852,000 for the years ended December 31, 2017,
2016 and 2015 respectively and were included in “Selling and
Administrative expenses" in the Group’s consolidated
statements of
operations and
comprehensive income / (loss)
.
(e)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately
US$13,000, US$13,000 and US$17,000 for the years ended December 31,
2017, 2016 and 2015 respectively and were included in
“Selling and Administrative expenses" in the Group’s consolidated
statements of
operations and
comprehensive income / (loss)
.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
The
Group accounts for income and deferred tax under the provisions of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognised for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognised for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be
realised.
In
accordance with ASC 740-10, the Group recognises tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits.The Group recognises interest and/or penalties, if any,
related to income tax matters in income tax expense (Nil for the
three years ended December 31, 2017, 2016 and 2015). The Group did
not have such uncertain tax positions in 2017, 2016 and 2015. The
Group is subject to examination of tax authorities in the United
States of America (open for audit for 2015 to 2017), Hong Kong
(open for audit for 2011 to 2017) and PRC (open for audit for 2015
to 2017).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognised in the consolidated statements of operations and
comprehensive income / (loss) for the period that includes the
enactment date.
(g)
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, and bank deposits
with original maturities of three months or less, all of which are
unrestricted as to withdrawal. There were no cash equivalents as of
December 31, 2017 and 2016.
Restricted cash
represents cash deposits retained with banks in the PRC for
issuance of performance guarantees to the customers. The
amount is expected to be released within one year after the balance
sheet date.
Receivables, net
are recorded at their nominal values. Doubtful debt allowances are
provided for identified individual risks for these line items. If
the loss of a certain part of the receivables is probable, doubtful
debt allowances are provided to cover the expected loss.
Receivables are written off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote.
Inventories are
stated at the lower of cost, on the first-in, first-out method, or
net realizable value. Costs include purchase and related costs
incurred in bringing each product to its present location and
condition. Net realizable value is calculated based on the
estimated normal selling price, less further costs expected to be
incurred for disposal. Allowance is made for obsolete, slow moving
or defective items, where appropriate.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(k)
Property,
Plant and Equipment
Property, plant and
equipment are stated at cost less accumulated depreciation. Gains
or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalised. All
ordinary repair and maintenance costs are expensed as incurred.
Depreciation of property, plant and equipment is computed using the
straight-line method over the assets’ estimated useful lives
as follows:
Office
premises
|
47 to
51 years
|
Leasehold
improvements
|
over
terms of the leases or the useful lives whichever is
less
|
Furniture,
fixtures and office equipment
|
3 to 5
years
|
Motor
vehicles
|
4
years
|
Testing
equipment
|
3
years
|
(l)
Impairment
for long lived assets
The
Group adheres to FASB ASC Subtopic 360-10, Property, Plant, and
Equipment, which requires impairment losses to be recorded for
property, plant and equipment to be held and used in operations
when indicators of impairment are present. Reviews are regularly
performed to determine whether the carrying value of assets is
impaired. The Group determines the existence of such impairment by
measuring the fair value and comparing such amount to the carrying
amount of the assets. An impairment loss, if one exists, is then
measured by the excess of carrying value over fair value. Assets to
be disposed of are reported at the lower of the carrying amount or
fair value of such assets less costs to sell. Asset impairment
charges are recorded to reduce the carrying amount of the
long-lived asset that will be sold or disposed of to its estimated
fair value. Charges for the asset impairment reduce the carrying
amount of the long-lived assets to its estimated salvage value in
connection with the decision to dispose of such assets. There were
no impairment losses recorded during each of the three years in the
period ended December 31, 2017.
In
accordance with ASC 840, Leases, leases for a lessee are clasified
at the inception date as either a capital lease or an operating
lease.
Operating lease
expenses are recogized on a straight-line basis over the applicable
lease term. The Group leases offices, factories and warehouse under
operating lease agreements.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
Goodwill represents the excess of the purchase price in a business
combination over the fair value of the net tangible and intangible
assets acquired. Under ASC 350, goodwill is not amortized, but
rather is subject to an annual impairment test. Goodwill is tested
for impairment at the reporting unit level by comparing the fair
value of the reporting unit with its carrying value. The Group
performs its annual impairment analysis of goodwill in the fourth
quarter of the year, or more often if there are indicators of
impairment present.
The provisions of ASC 350 require that a two-step impairment test
be performed on goodwill at the level of the reporting units. In
the first step, or Step 1, the
Group
compares the fair value of each reporting unit to its
carrying value. If the fair value exceeds the carrying value of the
net assets, goodwill is considered not impaired, and the Group is
not required to perform further testing. If the carrying value of
the net assets exceeds the fair value, then the
Group
must perform the second step, or Step 2, of the
impairment test in order to determine the implied fair value of
goodwill. To determine the fair value used in Step 1, the
Group
uses discounted cash flows. If and when the Group is
required to perform a Step 2 analysis, determining the fair value
of its net assets and its off-balance sheet intangibles would
require it to make judgments that involve the use of significant
estimates and assumptions.
(o)
Foreign
Currency Translation
The
Company maintains its books and records in United States dollars.
Its subsidiaries and affiliates maintain their books and records
either in Hong Kong dollars or Chinese Renminbi (“functional
currencies”). Foreign currency transactions during the year
are translated into the respective functional currencies at the
applicable rates of exchange at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are translated into the respective functional currencies using the
exchange rates prevailing at the balance sheet dates. Gains or
losses from foreign currency transactions are recognised in the
consolidated statements of
operations and
comprehensive income / (loss)
during the year in which they
occur. Translation adjustments on subsidiaries’ equity are
included as accumulated comprehensive income or loss.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(p)
Fair
Value Measurement
ASC
820 defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the
Group considers the principal or most advantageous market in which
it would transact and it considers assumptions that market
participants would use when pricing the asset or
liability.
ASC
820 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs
that may be used to measure fair value:
Level
1 – Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Group holds.
An active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
Level
2 – Valuation based on observable prices that are based on
inputs not quoted on active market, but corroborated by market
data.
Level
3 – Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The
Group adheres to ASC 820, Fair Value Measurements and Disclosures,
for all financial assets and liabilities and nonfinancial assets
and liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a recurring basis (at
least annually).
Financial
instruments include cash and cash equivalents, restricted cash,
accounts receivable, net, prepayments and other current assets,
accounts payable,
bank
borrowings,
other
payables and accrued expenses. The carrying amounts of cash and
cash equivalents, restricted cash, accounts receivable, net,
prepayments and other current assets,
accounts
payable,
bank borrowings
,
other
payables and accrued expenses approximate their fair value due to
the short term maturities of these instruments.
The
fair values of current financial assets and liabilities carried at
amortized cost approximate their carrying amounts.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(q)
Comprehensive
Income / (Loss)
The
Group adheres to FASB ASC Subtopic 220-10, Comprehensive Income,
which requires the Group to report all changes in equity during a
period, except for those resulting from investment by owners and
distribution to owners, in the financial statements for the period
in which they are recognised. The Group has presented comprehensive
income, which encompasses net income and foreign currency
translation adjustments, in the consolidated statement of changes
in shareholders’ equity.
On
November 22, 2011, the Company filed Amended and Restated
Memorandum and Articles of Association with the Registry of
Corporate Affairs of the BVI Financial Services Commission that on
November 29, 2011 became effective as of the filing date to amend
the Company’s ordinary shares of US$0.01 par value capital
stock to no par value capital stock. Treasury stock is accounted
for using the cost method. When treasury stock is reissued, the
value is computed and recorded using a weighted-average
basis.
(s)
Net
income per Ordinary Share
Net
income per ordinary share is computed in accordance with FASB ASC
Subtopic 260-10, Earnings Per Share, by dividing the net income by
the weighted average number of ordinary share outstanding during
the period. The Company reports both basic earnings per share,
which is based on the weighted average number of ordinary shares
outstanding, and diluted earnings per share, which is based on the
weighted average number of ordinary shares outstanding and all
dilutive potential ordinary shares outstanding.
Outstanding stock
options are the only dilutive potential shares of the
Company.
(t)
Stock-based
Compensation
The
Group accounts for stock-based compensation in accordance with ASC
718, "Compensation-Stock Compensation". ASC 718 requires companies
to estimate the fair value of equity-based payment awards on the
date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is
recognized as an expense over the requisite service periods in the
Group's consolidated statement of
operations and comprehensive income / (loss)
.
The Group recognizes compensation expenses for the value of its
awards, based on the straight-line method over the requisite
service period of each of the awards, net of estimated forfeitures.
ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions that affect the amounts that are reported in the
consolidated financial statements and accompanying disclosures.
Although these estimates are based on management’s best
knowledge of current events and actions that the Group may
undertake in the future, actual results may be different from the
estimates.
Related parties
are affiliates of the Group; entities for which
investments are accounted for by the equity method by the Group;
trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship
of management; principal owners of the Group; its management;
members of the immediate families of principal owners of the Group
and its management; and other parties with which the Group may deal
if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests. Another party also is a related party if it can
significantly influence the management or operating policies of the
transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be
prevented from fully pursuing its own separate
interests.
The
Group’s segment reporting is prepared in accordance with FASB
ASC Subtopic 280-10, Segment Reporting. The management approach
required by ASC 280-10 designates that the internal reporting
structure that is used by management for making operating decisions
and assessing performance should be used as the source for
presenting the Group’s reportable segments. The Group
categorises its operations into two business segments: Trading and
manufacturing, and Engineering.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the "FASB")
issued ASU 2014-09, "Revenue from Contracts with Customers", also
known as the "New Revenue Standard". This update is the result of a
collaborative effort by the FASB and the International Accounting
Standards Board to simplify revenue recognition guidance, remove
inconsistencies in the application of revenue recognition, and to
improve comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets. The core
principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to receive for those goods or services. The New
Revenue Standard is applied through the following five-step
process:
1.
Identify the contract(s) with a customer.
|
2.
Identify the performance obligation in the contract.
|
3.
Determine the transaction price.
|
4.
Allocate the transaction price to the performance obligations in
the contract.
|
5.
Recognize revenue when (or as) the entity satisfies a performance
obligation.
|
For
a public entity, this update is effective for annual and interim
reporting periods beginning after December 15, 2017 with early
adoption permitted. This standard can be applied on either a
retrospective or modified retrospective approach. Since May, 2014,
a number of ASU's have been issued which further refine the
original guidance issued under ASU 2014-09 and are effective in
conjunction with this original standard.
The
Group established an implementation approach to assess the impact
of the new revenue guidance on its operations, consolidated
financial statements and related disclosures. This assessment
included (1) performing contract analyses for each revenue stream
identified, (2) assessing the noted differences in recognition and
measurement that may result from adopting this new standard, (3)
performing detailed analyses of contracts with large customers, and
(4) performing transaction level testing for consistency with
contract provisions that affect revenue recognition. The Group
evaluated the potential impacts of the new standard on its existing
revenue recognition policies and procedures during the fiscal year
ended December 31, 2017, and determined that the Group’s
performance obligations are met at goods/service delivery point,
with no other material obligations. The Group further determined
that its warranty terms are consistent. The Group also determined
that there were no incremental disaggregated revenue disclosures
required in our consolidated financial statements. Based on the
results of the evaluation, adoption of the new standard will not
have a material impact on our consolidated financial statements.
The New Revenue Standard became effective for us on January 1, 2018
and was applied on a retrospective basis, with no cumulative effect
of adoption to any of the consolidated financial statement line
items.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recently
Issued Accounting Pronouncements (Continued)
In
January 2016, the FASB issued ASU 2016-01, "Financial
Instruments – Recognition and Measurement of Financial Assets
and Financial Liabilities (Topic 825)". ASU 2016-01 revises the
classification and measurement of investments in certain equity
investments and the presentation of certain fair value changes for
certain financial liabilities measured at fair value. ASU 2016-01
requires the change in fair value of many equity investments to be
recognized in net income. ASU 2016-01 is effective for interim and
annual periods beginning after December 15, 2017, with early
adoption permitted. Adopting ASU 2016-01 will result in a
cumulative effect adjustment to the Group's retained earnings as of
the beginning of the year of adoption. The Group does not expect
the adoption of ASU 2016-01 to have a material impact on its
consolidated financial statements because there are no material
investments in certain equity investments and financial liabilities
measured at fair value.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)".
The objective of this update is to increase transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including
interim periods within those annual periods and is to be applied
utilizing a modified retrospective approach. The Group does not
expect the adoption of ASU 2016-02 to have a material impact on its
consolidated financial statements because there are no material
operating leases.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments
—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments:, which is effective for fiscal years
beginning after December 15, 2019. Among other things, these
amendments require the measurement of all expected credit losses
for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now
use forward-looking information to better inform their credit loss
estimates. Many of the loss estimation techniques applied today
will still be permitted, although the inputs to those techniques
will change to reflect the full amount of expected credit losses.
In addition, the ASU amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets
with credit deterioration.
The Group
does not expect the adoption of ASU 2016-13 to have a material
impact on its consolidated financial statements because there are
no material
expected credit losses for financial assets, no
available-for-sale debt securities and no purchased financial
assets with credit deterioration
.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(x)
Recently
Issued Accounting Pronouncements (Continued)
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
– (Topic 230): Classification of Certain Cash Receipts and
Cash Payments". ASU 2016-15 addresses eight specific cash flow
issues with the objective of reducing the existing diversity in
practice. ASU 2016-15 is effective for fiscal years, and for
interim periods within those years, beginning after December 15,
2017. Early application is permitted. The Group does not expect the
adoption of ASU 2016-15 to have a material impact on its
consolidated financial statements because for distributions
received from equity method Investees, it is already using the
nature of the distribution approach.
In
November 2016,
the FASB
issued
ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted
Cash”, which is effective for fiscal years beginning after
December 15, 2017. These amendments s require that a statement of
cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. As a result,
amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The amendments do not provide
a definition of restricted cash or restricted cash equivalents.
The Group adopted ASU 2016-18
effective January 1, 2017. The adoption of this guidance did not
have a material impact on our consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the Definition of a
Business”, which is effective for fiscal years beginning
after December 15, 2017. These amendments clarify the definition of
a business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or
sold a business. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and
consolidation. The amendments are intended to help companies and
other organizations evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses.
The Group does not expect
the adoption of ASU 2017-01 to have a material impact on its
consolidated financial statements because no planned business
combination is to be made.
In
January 2017, the "FASB" issued ASU 2017-04, "Intangibles –
Goodwill and Other – (Topic 350): Simplifying the Test for
Goodwill Impairment". ASU 2017-04 simplifies the accounting for
goodwill impairment by removing the requirement to calculate the
implied fair value. Instead, it requires that an entity records an
impairment charge based on the excess of a reporting unit's
carrying amount over its fair value. An entity still has the option
to perform the qualitative assessment for a reporting unit to
determine if the quantitative impairment test is necessary. ASU
2016-15 is effective for fiscal years, and for interim periods
within those years, beginning after December 15, 2019. Early
adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Group
does not expect the adoption of ASU 2017-01 to have a material
impact on its consolidated financial statements because no planned
business combination is to be made and goodwill to be
derived.
In
March 2017, the FASB issued ASU 2017-07, “Compensation
— Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost”, which is effective for fiscal years beginning
after December 15, 2017. The amendments apply to all entities that
offer employees defined benefit pension plans, other postretirement
benefit plans, or other types of benefits accounted for under Topic
715, Compensation — Retirement Benefits. The amendments
require that an employer report the service cost component in the
same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The
other components of net benefit cost are required to be presented
in the income statement separately from the service cost component
and outside a subtotal of income from operations, if one is
presented. If a separate line item or items are used to present the
other components of net benefit cost, that line item or items must
be appropriately described. If a separate line item or items are
not used, the line item or items used in the income statement to
present the other components of net benefit cost must be disclosed.
The amendments also allow only the service cost component to be
eligible for capitalization when applicable (e.g., as a cost of
internally manufactured inventory or a self-constructed asset).
The Group does not expect the adoption
of ASU 2017-07 to have a material impact on its consolidated
financial statements because no material
employees defined
benefit pension plans.
No
other new accounting pronouncements issued or effective during the
fiscal year have had or are expected to have a material impact on
the consolidated financial statements.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies (Continued)
(y)
Concentration of credit risk
Financial
instruments that potentially subject the Group to significant
concentration of credit risk primarily consist of cash and cash
equivalents, restricted cash, accounts receivable and prepayments.
The maximum exposure of such assets to credit risk is their
carrying amounts as of the balance sheet dates.
As
of December 31, 2017 and 2016, all of the Group’s cash
and cash equivalents, and restricted cash were deposited in
financial institutions located in the PRC and Hong Kong, which
management believes are of high credit quality.
Accounts
receivable, net, are typically unsecured and are derived from
revenue earned from the customers. The risk with respect to
accounts receivable is mitigated by credit evaluations the Group
performs on its customers and its ongoing monitoring of outstanding
balances.
Prepayments
made to suppliers are typically unsecured and arise from deposits
paid in advance for future purchases. Due to the Group’s
concentration of prepayments made to a limited number of suppliers
and the significant prepayments that are made to them, any negative
events or deterioration in financial strength with respect to the
Group’s suppliers may cause material loss to the Group and
have a material adverse effect on the Group’s financial
condition and results of operations. The risk with respect to
prepayments made to suppliers is mitigated by credit evaluations
that the Group performs on its suppliers prior to making any
prepayments and the ongoing monitoring of its suppliers’
performance.
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
The
suppliers of the Group offer a standard one-year warranty to end
customer of the Group. The Group only provides labour service to
repair or replace parts. The Group does not maintain a general
warranty reserve because historically labour costs for such repair
or replacement have been de minimis.
(ab)
Shipping
and handling costs
Amounts
billed to customers related to shipping and handling are classified
as revenues, and the Group’s shipping and handling costs are
included in cost of revenues.
3
Other
(losses) / income, net
|
|
|
|
|
|
|
|
Exchange (loss),
net
|
(46
)
|
(75
)
|
(75
)
|
Rental
income
|
32
|
80
|
84
|
|
(14
)
|
5
|
9
|
No income tax
arose in the United States of America by the Group for the years
ended December 31, 2017, 2016 and 2015.
The
Company and Pact Asia Pacific Limited are exempt from taxation in
the British Virgin Islands (“BVI”).
Far
East and Euro Tech (China) Limited provided for Hong Kong profits
tax at a rate of 16.5% in year 2017 (2016 and 2015: 16.5%) on the
basis of their income for financial reporting purposes, adjusting
for income and expense items which are not assessable or deductible
for profits tax purposes.
Euro
Tech Trading (Shanghai) Limited (“ETTS”), a subsidiary
of Far East, provides for PRC Enterprise Income Tax at a rate of
25% (2016 and 2015: 25%), after offsetting losses brought forward,
if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax purposes. As
of December 31, 2017, ETTS had an assessable loss carried forward
of US$703,650 as agreed by the local tax authority to offset its
profit for the forth coming years (2016: US$746,808 and 2015:
US$588,103). Such loss will expire in 5 years.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Income
taxes (Continued)
Shanghai Euro Tech
Limited (“SET”), a subsidiary of
Far East
,
provides for PRC Enterprise Income Tax at a rate of 25% (2016 and
2015: 25%), after offsetting losses brought forward, if any, on the
basis of its income for financial reporting purposes, adjusting for
income and expense items which are not assessable or deductible for
PRC Enterprise Income Tax purposes. As of December 31, 2017, SET
had an assessable loss carried forward of US$254,265 as agreed by
the local tax authority to offset its profit for the forth coming
years (2016: US$256,664 and 2015: US$284,173). Such loss will
expire in 5 years.
Shanghai Euro Tech
Environmental Engineering Company Limited (“SETEE”), a
subsidiary of
Far East
,
provides for PRC Enterprise Income Tax at a rate of 25% (2016 and
2015: 25%), after offsetting losses brought forward, if any, on the
basis of its income for financial reporting purposes, adjusting for
income and expense items which are not assessable or deductible for
PRC Enterprise Income Tax purposes. As of December 31, 2017, SETEE
had an assessable loss carried forward of US$895,579 as agreed by
the local tax authority to offset its profit for the forth coming
years (2016: US$1,074,609 and 2015: US$1,363,392). Such loss will
expire in 5 years.
Yixing
Pact Environmental Technology Co. Ltd. (“Yixing), a
subsidiary of
Far East
,
provides for PRC Enterprise Income Tax at a rate of 25% (2016 and
2015: 25%), after offsetting losses brought forward, if any, on the
basis of its income for financial reporting purposes, adjusting for
income and expense items which are not assessable or deductible for
PRC Enterprise Income Tax purposes. As of December 31, 2017, Yixing
had an assessable loss carried forward of US$512,252 as agreed by
the local tax authority to offset its profit for the forth coming
years (2016: US$ Nil). Such loss will expire in 5
years.
Chongqing Euro Tech
Rizhi Technology Co., Ltd (“CQ”), Rizhi Euro Tech
Instrument (Shaanxi) Co., Ltd (“RZ”) and Guangzhou Euro
Tech Environmental Equipment Co., Ltd (“GZ”),
subsidiaries of Far East, provide for PRC Enterprise Income Tax at
a rate of 25% (2016 and 2015: 25%), after offsetting losses brought
forward, if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax purposes.
CQ, RZ and GZ had an assessable loss carried forward of US$121,674,
US$ Nil and US$298,448 respectively as agreed by the local tax
authority to offset its profit for the forth coming years (2016:
US$124,025, US$60,980 and US$320,545). Such loss will expire in 5
years.
VIE of
the Group provide for PRC Enterprise Income Tax at a rate of 25%
for years 2016 and 2015, after offsetting losses brought forward,
if any, on the basis of its income for financial reporting
purposes, adjusting for income and expense items which are not
assessable or deductible for PRC Enterprise Income Tax
purposes.
Under
the New Enterprise Income Tax Law and the implementation rules,
profits of the PRC subsidiaries earned on or after January 1, 2008
and distributed by the PRC subsidiaries to foreign holding company
are subject to a withholding tax at a rate of 10% unless reduced by
tax treaty. Aggregate undistributed earnings of Far East’s
subsidiaries located in the PRC that are available for distribution
to Far East of approximately US$0.5 million at December 31, 2017
(2016: US$1.2 million and 2015: US$1.1 million) are intended to be
reinvested, and accordingly, no deferred taxation has been made for
the PRC dividend withholding taxes that would be payable upon the
distribution of those amounts to Far East. Distributions made out
of pre January 1, 2008 retained earnings will not be subject to the
withholding tax.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Income
taxes (Continued)
Loss
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
The PRC and Hong
Kong
|
(564
)
|
(640
)
|
(1,904
)
|
The
provision / (credit) for income taxes consist of:
|
|
|
|
|
|
|
|
Current tax
expenses:
|
|
|
|
The PRC and Hong
Kong
|
-
|
212
|
(72
)
|
Total current
provision / (credit)
|
-
|
212
|
(72
)
|
|
|
|
|
Deferred tax
expenses:
|
|
|
|
The PRC and Hong
Kong
|
28
|
16
|
25
|
Total deferred
provision
|
28
|
16
|
25
|
Total provision /
(credit)
|
28
|
228
|
(47
)
|
The
principal reconciling items from income tax computed at the
statutory tax rates and at the effective income tax rates are as
follows:
|
|
|
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
(94
)
|
(136
)
|
(177
)
|
Change in valuation
allowances
|
120
|
350
|
455
|
Under-provision for
income tax in prior years
|
-
|
-
|
(69
)
|
Non-deductible
expenses
|
2
|
14
|
(256
)
|
Total provision /
(credit) for income tax at effective tax rate
|
28
|
228
|
(47
)
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Income
taxes (Continued)
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
Tax
losses
|
958
|
838
|
Temporary
differences
|
(6
)
|
(2
)
|
Less: Valuation
allowances
|
(794
)
|
(650
)
|
Net deferred tax
assets
|
158
|
186
|
5
Net
income per ordinary share
The
calculation of the basic and diluted net income per ordinary share
is based on the following data:
|
|
|
|
|
|
Weighted average
number of ordinary shares for the purposes of basic and diluted net
income per share
|
2,061,909
|
2,061,909
|
2,063,738
|
6
Accounts
receivable, net
|
|
|
|
|
|
Accounts
receivable
|
3,917
|
4,431
|
Less: Allowance for
doubtful debts
|
(109
)
|
(38
)
|
|
3,808
|
4,393
|
The
following is an aging analysis of past due account receivables as
of December 31, 2017 and 2016:
|
|
|
|
|
|
Current
|
1,816
|
1,789
|
30-59
days
|
1,076
|
1,072
|
60-89
days
|
288
|
852
|
Greater than or
equal to 90 days
|
628
|
680
|
|
3,808
|
4,393
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
7
Prepayments
and other current assets
Prepayment and
other current assets mainly represent deposits for purchases and
services, rental and utilities deposits, and prepaid
expenses.
|
|
|
|
|
|
Cost and estimated
earnings in excess of billings
|
194
|
343
|
Deposits
paid
|
85
|
70
|
Prepayments
|
475
|
221
|
Other
receivables
|
104
|
156
|
Other tax
recoverable
|
2
|
25
|
|
860
|
815
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
132
|
115
|
Work
in progress
|
48
|
29
|
Finished
goods
|
748
|
554
|
|
928
|
698
|
Provision
for obsolete and slow moving inventories
|
(432
)
|
(354
)
|
|
|
|
|
496
|
344
|
Movements in the
provision for obsolete and slow moving inventories are as
follows:
|
|
|
|
|
|
|
|
|
At
January 1
|
354
|
318
|
Provision
during the year
|
68
|
43
|
Exchange
differences
|
10
|
(7
)
|
At
December 31
|
432
|
354
|
Management
continuously reviews obsolete and slow moving inventories and
assesses the inventory valuation to determine if the provision is
deemed appropriate. For the years ended December 31, 2017, and 2016
provision for obsolete and slow moving inventories amounted to
US$68,000 and US$43,000, respectively, which were charged to cost
of revenue in consolidated statements of operations and
comprehensive income / (loss).
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
Property,
plant and equipment, net
|
|
|
|
|
|
Office
premises*
|
1,866
|
1,866
|
Leasehold
improvements
|
157
|
155
|
Furniture, fixtures
and office equipment
|
612
|
581
|
Motor
vehicles
|
191
|
188
|
Testing
equipment
|
37
|
30
|
|
2,863
|
2,820
|
|
|
|
Less: Accumulated
depreciation
|
(2,129
)
|
(2,049
)
|
|
734
|
771
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
61
|
55
|
56
|
*
Far
East earns rental income from a property in Beijing, PRC for which
it does not hold the title. Far East is investigating various ways
in which to obtain the title but has not formulated a specific plan
as of the date of issuance of this consolidated financial
statements. The net book value of the property at December 31, 2017
is approximately US$104,000 (2016: US$108,000).
10
Interests
in affiliates
Investments in
affiliates are accounted for using the equity method of
accounting.
Far
East is holding 19.4% (2016: 19.7%) equity interests in Blue Sky, a
company incorporated in the PRC, with total cost of investment
US$5,540,000. Blue Sky provides a comprehensive service for design,
general contract, equipment manufacturing, installation, testing
and operation management of the treatment of waste gases emitted
from various boilers and industrial furnaces of power plants, steel
works and chemical plants since 2000.
Blue
Sky has listed its shares on the New Third Board in the PRC since
November 17, 2015 and suspended trading from August 15, 2017 and
resumed trading on February 2, 2018.
The
Group interest in Blue Sky has been counted for as an affiliate
using the equity method as the Group has representation on both the
Board and Executive Committee of Blue Sky, and the ability to
participate in the decision-making process.
During
the year, the Group’s equity in Blue Sky was diluted
subsequent to the issuance of new ordinary shares by Blue Sky to
other shareholders. A net profit on deemed disposal of an affiliate
of US$128,000 (2016: US$24,000) had been recognized in the
consolidated statement of operations and comprehensive income /
(loss) for that year.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
Interests
in affiliates (Continued)
A
summary of the financial information of the affiliate,
Blue Sky
, is
set forth below:
|
|
|
Balance
Sheet:
|
|
|
|
|
|
Current
assets
|
56,911
|
46,297
|
|
|
|
Non-current
assets
|
26,544
|
25,847
|
Total
assets
|
83,455
|
72,144
|
|
|
|
Total
liabilities
|
(36,948
)
|
(45,372
)
|
|
|
|
Total
shareholders’ equity
|
46,507
|
26,772
|
|
|
|
Operating
results:
|
|
|
|
|
|
Net
sales
|
62,234
|
43,226
|
|
|
|
Operating
income
|
4,439
|
3,841
|
|
|
|
Net
income
|
3,863
|
3,473
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
Interests
in affiliates (Continued)
Far
East
is holding 20%
equity interests in Zhejiang Jia Huan Electronic Co. Ltd.
(“Jia Huan”), a company incorporated in the PRC, with
total cost of investment US$2,486,000. Jia Huan provides a
comprehensive service for environmental protection business since
1969 and is based in Jin Hua, Zhejiang.
A
summary of the financial information of the affiliate, Jia Huan, is
set forth below:
|
|
|
Balance
Sheet:
|
|
|
|
|
|
Current
assets
|
21,374
|
22,021
|
|
|
|
Non-current
assets
|
4,570
|
4,079
|
Total
assets
|
25,944
|
26,100
|
|
|
|
Total
liabilities
|
(10,215
)
|
(11,694
)
|
|
|
|
Total
shareholders’ equity
|
15,729
|
14,406
|
|
|
|
Operating
results:
|
|
|
|
|
|
Net
sales
|
16,301
|
16,684
|
|
|
|
Operating
income
|
32
|
1,586
|
|
|
|
Net
income
|
597
|
1,564
|
11
Other
payables and accrued expenses
Other
payables and accrued expenses mainly represent deposits received
from customers and accruals for operating expenses.
|
|
|
|
|
|
Dividend
payables
|
84
|
79
|
Deposits received
from customers
|
1,877
|
1,113
|
Rental deposit
received
|
7
|
14
|
Amount due to
related parties
|
20
|
-
|
Other
payables
|
723
|
994
|
Other tax
payables
|
10
|
58
|
|
2,721
|
2,258
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
During
the years ended December 31, 2017 and 2016, there was no movement
with the Company’s issued ordinary shares and outstanding
shares.
Number of outstanding shares at years end
of:
|
|
|
Shares issued
|
2,229,609
|
2,229,609
|
Less: shares under treasury
stock
|
(167,700
)
|
(167,700
)
|
|
2,061,909
|
2,061,909
|
The
Group accounts for acquisitions of subsidiaries in accordance with
FASB ASC Subtopic 805-10, Business Combinations. Goodwill
represents the excess of acquisition cost over the estimated fair
value of net assets acquired in relation to the acquisition of
Yixing Pact Environmental Technology Co., Ltd and Pact Asia Pacific
Limited in 2005.
As of
December 31, 2017, the Group completed the annual impairment test
(i.e. comparing the carrying amount of the net assets, including
goodwill, with the fair value of
Yixing Pact
Environmental Technology Co., Ltd and Pact Asia Pacific
Limited
as of December 31, 2017). Based on
management’s assessment, the Group determined that there was
no impairment of goodwill as of December 31, 2017 and
2016.
The
Company authorised a stock buyback program in January 2015 pursuant
to which up to 60,000 shares, but not to exceed US$150,000 in
value, of the Company’s ordinary share could be purchased in
the open market from time to time as market and business conditions
warrant. The Company repurchased a total of 7,314 shares of
ordinary share during 2015 for total consideration of approximately
US$20,000.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
15
PRC
statutory reserves
Under
the relevant PRC laws and regulations, the PRC subsidiaries are
required to appropriate a certain percentage of it's respective net
income to two statutory funds i.e. the statutory reserve fund and
the statutory staff welfare fund. The PRC subsidiaries can also
appropriate certain amount of its net income to the enterprise
expansion fund.
(i)
Statutory reserve
fund
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate at least 10% of its net income to the
statutory reserve fund until such fund reaches 50% of its
registered capital. The statutory reserve fund can be utilised upon
the approval by the relevant authorities, to offset accumulated
losses or to increase its registered capital, provided that such
fund be maintained at a minimum of 25% of its registered
capital.
Under
the PRC laws and regulations, the PRC subsidiaries are restricted
in their ability to transfer certain of its net assets in the form
of dividend payments, loans or advances. The amounts restricted
include paid-in capital and statutory reserves, as determined
pursuant to PRC generally accepted accounting principles, totaling
US$3,520,000 as at December 31, 2017 (2016: US$3,520,000 and
2015:US$3,457,000).
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the PRC subsidiaries are
required to allocate certain amount of its net income to the
statutory staff welfare fund determined by it. The statutory staff
welfare fund can only be used to provide staff welfare facilities
and other collective benefits to its employees. This fund is
non-distributable other than upon liquidation of the PRC
subsidiaries.
(iii)
Enterprise
expansion fund
The
enterprise
expansion fund shall only be used to make up losses, expand the PRC
subsidiaries’ production operations, or increase the capital
of the subsidiaries. The
enterprise
expansion fund can be utilised upon approval by relevant
authorities, to convert into registered capital and issue bonus
capital to existing investors, provided that such fund be
maintained at a minimum of 25% of its registered
capital.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
2014
Officers’ Stock Option and Incentive Plan
Effective on
November 22, 2014, the Company entered into a stock option contract
with a Business Development Manager of Yixing Pact Environmental
Technology Co., Ltd, granting the optionee the right to purchase
20,692 Ordinary Shares, 1% of the Company’s issued and
outstanding shares, at an exercise price of $3.44 per share. The
exercise price was determined by the average closing price of the
Company’s ordinary shares as reported by NASDAQ for a ten day
period prior to the end of the Business Development Manager’s
probationary period on November 22, 2014, the effective date of the
stock option contract. The stock options granted are exercisable
three years after the effective date and terminate five years after
the effective date. In the event of the optionee’s
termination, except for his resignation, the options may be
exercisable within three months of the termination. In the event of
optionee’s death, retirement or disability, he or his legal
representative shall have up to one year to exercise the
option.
The
Company estimate the fair value of the options granted under the
Binomial pricing model.
Changes
in outstanding stock option under plan mentioned above were as
follows:
|
|
|
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
-
|
-
|
20,692
|
3.44
|
20,692
|
3.44
|
Cancelled
|
-
|
-
|
(20,692
)
|
(3.44
)
|
-
|
-
|
Outstanding, end of
year
|
-
|
-
|
-
|
-
|
20,692
|
3.44
|
|
|
|
|
|
|
|
Exercisable, end of
year
|
-
|
-
|
-
|
-
|
-
|
-
|
As of
December 31, 2017, 2016 and 2015, there was no unrecognised
stock-based compensation expense related to unvested stock
options.
The
Group adheres to the provisions of ASC 718-10, which requires to
recognise expense related to the fair value of stock-based
compensation awards, including employee stock options.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
16
Stock
options (Continued)
The
Binomial option-pricing model is used to estimate the fair value of
the options granted. This requires the input of subjective
assumptions, including the expected volatility of stock price,
expected option term, expected risk-free rate over the expected
option term and expected dividend yield rate over the expected
option term. Because changes in subjective input assumptions can
materially affect the fair value estimate, in directors’
opinion, the existing model may not necessarily provide a
realisable measure of the fair value of the stock options. Expected
volatility is based on historical volatility in the 180 days prior
to the issue of the options. Expected option term and dividend
yield rate are based on historical trends. Expected risk-free rate
is based on US Treasury securities with similar maturities as the
expected terms of the options at the date of grant.
Prior
to December 1, 2000, Far East had only one defined contribution
pension plan for all its Hong Kong employees. Under this plan, all
employees were entitled to pension benefits equal to their own
contributions plus 50% to 100% of individual fund account balances
contributed by Far East, depending on their years of service with
Far East. Far East was required to make specific contributions at
approximately 10% of the basic salaries of the employees to an
independent fund management company.
With
the introduction of the Mandatory Provident Fund Scheme ("MPF
scheme"), a defined contribution scheme managed by an independent
trustee on December 1, 2000, Far East and its employees who joined
Far East subsequently make monthly contributions to the scheme at
5% of the employee’s cash income as defined under the
Mandatory Provident Fund Schemes Ordinance. Under the MPF scheme,
the employer and its employees are each required to make
contributions to the plan at 5% of the employees' relevant income,
subject to a cap of monthly relevant income of HK$30,000.
Contributions to the plan vest immediately.
As
stipulated by the rules and regulations in the PRC, the PRC's
subsidiaries contributes to state-sponsored retirement plans for
its employees in Mainland China. PRC subsidiaries' contribution
range from 14% to 20% of the basic salaries of its employees, and
has no further obligations for the actual payment of pension or
post-retirement benefits beyond the annual contributions. The
state-sponsored retirement plans are responsible for the entire
pension obligations payable to retired employees.
During
the years ended December 31, 2017, 2016 and 2015, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately US$281,000,
US$314,000 and US$458,000 respectively.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial risk
factors
The
Group’s activities expose it to a variety of financial risks:
credit risk and foreign exchange rate risk.
The
Group has no significant concentration of credit risk, cash in
banks in Hong Kong is insured under the Hong Deposit Protection
Board with limit of approximately US$64,000 per bank per each
depositor. Far East hold uninsured balance of approximately
US$187,000 (2016: approximately US$335,000) in banks in Hong Kong.
The Group has policies in place to ensure that sales of products
are made to customers with an appropriate credit history. The Group
has policies that limit the amount of credit exposure to any
customers. Cash transactions are limited to hight credit quality
banks.
There is no
policy for requiring collateral for the credit risk of financial
instruments by the Group (2016: Nil).
(ii)
Foreign exchange
rate risk
The
Group operates in Hong Kong, the PRC and trades with both local and
overseas customers and suppliers, and is exposed to foreign
exchange risk arising from various currency exposures, primarily
with respect to purchases in Hong Kong dollar, Renminbi and Euro.
Foreign exchange risk arises from committed and unmatched future
commercial transactions, such as confirmed import purchase orders
and sales orders, recognised assets and liabilities, and net
investment in the PRC operations.
19
Related
party transactions
Other
than compensation to directors and stock options available to the
directors, there were no transactions with other related parties in
the years 2017, 2016 and 2015.
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
20
Commitments
and contingencies
The
Group has various operating lease agreements for office and
industrial premises. Rental expenses for the years ended December
31, 2017, 2016 and 2015 were approximately US$324,000, US$297,000
and US$297,000, respectively. Future minimum rental payments as of
December 31, 2017, under agreements classified as operating leases
with non-cancellable terms amounted to US$193,000 of which
US$157,000 are payable in the year 2018 and US$36,000 are payable
within years 2019 to 2023.
As at
December 31, 2017 and 2016, the Group had various banking
facilities available for overdraft and import and export credits
from which the Group can draw up to approximately US$897,000 and
US$897,000 respectively, of which approximately
US$230,000, US$863,000 was utilised for issuance
of bank guarantees as security for the performance of various
contracts with customers and import loans. The various banking
facilities are secured by a property located in Hong Kong and
various blanket counter indemnities and counter indemnities. The
weighted average interest rate for import loans as at December 31,
2017 was 4% per annum (December 31, 2016: 4% per annum). For the
years ended December 31, 2017 and 2016, the average dollar amount
of the bank borrowings was approximately US$302,000 and US$441,000
respectively and average interest rates were approximately 4% per
annum for the years ended December 31, 2017 and
2016.
(iii)
Non-controlling
interest put option
The
Group granted the non-controlling interest of Yixing Pact
Environmental Technology Co., Ltd and Pact Asia Pacific Limited a
put option, which is effective from 2009, requiring the Group to
acquire part or all remaining shares of these two companies at a
purchase price per share calculated by 5.2 times of their average
net income for the three prior fiscal years divided by total number
of shares outstanding at the time of exercise of such
option.
Shanghai
Euro Tech Environmental Engineering Company Limited
is
a plaintiff in a civil action claiming from the defendant for
outstanding debts of approximately of US$416,000. The litigation
has not been concluded, but having taken legal advice, the
directors are of the opinion that sufficient provision was made in
the consolidated financial statements
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(i)
The Group reports
under two segments: Trading and manufacturing, and
Engineering.
Operating income
represents total revenues less operating expenses, excluding other
expense, interest and income taxes. The identifiable assets by
segment are those used in each segment’s operations.
Intersegment transactions are not significant and have been
eliminated to arrive at consolidated totals.
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Trading and
manufacturing
|
11,001
|
13,721
|
12,256
|
Engineering
|
6,349
|
8,757
|
6,046
|
|
17,350
|
22,478
|
18,302
|
Operating
loss
|
|
|
|
Trading and
manufacturing
|
(153
)
|
(346
)
|
(187
)
|
Engineering
|
(306
)
|
(209
)
|
(1,624
)
|
Unallocated
corporate expenses
|
(115
)
|
(115
)
|
(147
)
|
|
(574
)
|
(670
)
|
(1,958
)
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
Trading and
manufacturing
|
41
|
43
|
46
|
Engineering
|
20
|
12
|
10
|
|
61
|
55
|
56
|
Capital
Expenditures, Gross
|
|
|
|
Trading and
manufacturing
|
13
|
12
|
11
|
Engineering
|
5
|
48
|
10
|
|
18
|
60
|
21
|
|
|
|
|
|
|
Assets
|
|
|
Trading and
manufacturing
|
5,049
|
5,463
|
Engineering
|
18,688
|
17,641
|
|
23,737
|
23,104
|
Liabilities
|
|
|
Trading and
manufacturing
|
2,806
|
3,208
|
Engineering
|
3,824
|
3,278
|
|
6,630
|
6,486
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
21
Segment
information (Continued)
(ii)
Geographical
analysis of revenue by customer location is as
follows:
|
|
|
|
|
|
|
|
Revenue
-
|
|
|
|
The
PRC
|
7,740
|
10,604
|
9,327
|
Hong
Kong
|
9,270
|
11,687
|
8,726
|
Others
|
340
|
187
|
249
|
|
17,350
|
22,478
|
18,302
|
(iii)
Long-lived assets
(1)
Geographical
analysis of long-lived assets is as follows:
|
|
|
|
|
|
Hong
Kong
|
460
|
480
|
The
PRC
|
274
|
291
|
|
734
|
771
|
(1)
Long-lived assets
represent property, plant and equipment, net.
Details
of individual suppliers accounting for more than 5% of the
Group’s purchases are as follows:
|
|
|
|
Supplier
A
|
45
%
|
63
%
|
39
%
|
Supplier
B
|
10
%
|
7
%
|
11
%
|
Supplier
C
|
9
%
|
5
%
|
6
%
|
Supplier
D
|
4
%
|
5
%
|
5
%
|
EURO
TECH HOLDINGS COMPANY LIMITED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
21
Segment
information (Continued)
Details
of individual customers accounting for more than 5% of the
Group’s revenue are as follows:
|
|
|
|
Customer
A
|
10
%
|
13
%
|
11
%
|
Customer
B
|
7
%
|
-
|
-
|
Customer
C
|
5
%
|
-
|
-
|
Customer
D
|
5
%
|
-
|
-
|
Customer
E
|
-
|
6
%
|
-
|
Customer
F
|
-
|
6
%
|
-
|
Customer
G
|
-
|
-
|
11
%
|
Customer
H
|
-
|
-
|
6
%
|
Customer
I
|
-
|
-
|
5
%
|
On March 5, 2018, Far East entered into an Equity
Transfer Agreement to sell its 20% equity stake of Jia Huan
to
Ms. Jin
Lijuan
. The completion of the
transaction is subject to completion of all closing formalities,
including the need to obtain approval and registration with the
relevant governmental authorities.
ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION
TECHNOLOGY COMPANY LIMITED
Consolidated Financial Statements as of December 31,
2017
|
|
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-40 to
F-41
|
Consolidated
Balance Sheets As Of December 31, 2017 and 2016
|
F-42
|
Consolidated
Statements of Operations for the Years Ended December 31, 2017,
2016 and 2015
|
F-43
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017,
2016 and 2015
|
F-44
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years
Ended December 31, 2017, 2016 and 2015
|
F-45
|
Notes
to the Consolidated Financial Statements
|
F-46 to
F-63
|
Report of Independent Registered Public Accounting
Firm
To the shareholders and the Board of Directors of
Zhejiang Tianlan Environmental Protection Technology Company
Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet
of
Zhejiang
Tianlan Environmental Protection Technology Company Limited
(the “Company”) and its
subsidiaries (hereinafter collectively referred to as the
“Group”) as of December 31, 2017 and the related
consolidated statements of operations, changes in
shareholders’ equity and cash flows for the year ended
December 31, 2017, and the related notes (collectively referred to
as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Group as of
December 31, 2017, the results of its operations and its cash flows
for the year ended December 31, 2017, in conformity with the
accounting principles generally accepted in the United States of
America.
Basis for opinion
This consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Group's consolidated financial statements based on
our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Group in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Group is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our
audit, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in this
consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of this consolidated financial statements. We believe that our
audit provides a reasonable basis for our opinion.
/s/ Union Power HK CPA Limited
Union Power HK CPA Limited (as
successor to
Centurion ZD CPA
Ltd.
)
Certified Public Accountants
We have served as the Company’s auditor since
2018.
Hong Kong, the People’s Republic of China
May 14, 2018
Report of Independent Registered Public Accounting
Firm
To the Directors and Stockholders of
Zhejiang Tianlan Environmental Protection Technology Company
Limited
We have audited the accompanying consolidated balance sheet of
Zhejiang Tianlan Environmental Protection Technology Company
Limited (the “Company”) and its subsidiaries
(hereinafter collectively referred to as the “Group”)
as of December 31, 2016, the related consolidated statements of
operations, changes in shareholders’ equity and cash flows
for each of the years in the two-years period ended December 31,
2016. These financial statements are the responsibility
of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of the Company’s internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
balance sheet of the Company and its subsidiaries as of December
31, 2016 and the consolidated results of their operations and cash
flows for each of the years in the two-years period ended December
31, 2016, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Centurion ZD CPA Ltd.
Centurion ZD CPA Ltd. (fka
DCAW (CPA) Ltd. as successor to
Dominic K.F. Chan & Co.)
Certified Public Accountants
Hong Kong, April 26, 2017
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
|
25,785
|
33,545
|
Accounts
receivable, net
|
7
|
180,518
|
165,100
|
Prepayments and
other current assets
|
8
|
149,637
|
111,057
|
Other tax
receivables
|
5
|
-
|
215
|
Inventories
|
9
|
15,117
|
13,105
|
|
|
|
|
Total current
assets
|
|
371,057
|
323,022
|
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
10
|
140,479
|
149,840
|
Intangible asset,
net
|
11
|
1,223
|
1,375
|
Land use right,
net
|
12
|
5,598
|
5,747
|
Deferred tax
assets
|
4
|
6,269
|
5,864
|
Other non-current
asset
|
6
|
17,512
|
17,512
|
Long term
investment
|
16
|
1,991
|
-
|
|
|
173,072
|
180,338
|
Total
assets
|
|
544,129
|
503,360
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Bank
borrowings
|
13
|
33,000
|
25,000
|
Accounts
payable
|
|
127,429
|
117,939
|
Other payables and
accrued expenses
|
14
|
72,450
|
51,183
|
Other taxes
payable
|
5
|
11,086
|
7,490
|
Borrowings -
current portion
|
15
|
29,438
|
25,076
|
Income tax
payable
|
|
4,782
|
3,262
|
|
|
|
|
Total current
liabilities
|
|
278,185
|
229,950
|
|
|
|
|
Non-Current
liabilities:
|
|
|
|
Borrowings -
non-current portion
|
15
|
54,630
|
86,615
|
|
|
|
|
Commitments and
contingencies
|
22
|
|
|
|
|
|
|
Total
liabilities
|
|
332,815
|
316,565
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
Share
capital
|
|
|
|
82,572,000
(2016: 81,372,000) shares authorised, issued and
outstanding
|
|
82,572
|
81,372
|
Capital
reserve
|
18
|
32,480
|
26,480
|
PRC statutory
reserves
|
17
|
14,122
|
11,636
|
Retained
earnings
|
|
79,646
|
65,394
|
|
|
|
|
Equity attributable
to shareholders of Zhejiang Tianlan Environmental Protection
Technology Company Limited
|
|
208,820
|
184,882
|
Non-controlling
interest
|
|
2,494
|
1,913
|
|
|
|
|
Total
shareholders’ equity
|
|
211,314
|
186,795
|
|
|
|
|
Total liabilities
and shareholders’ equity
|
|
544,129
|
503,360
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
422,323
|
289,086
|
419,275
|
|
|
|
|
Cost of
revenue
|
|
(339,488
)
|
(202,869
)
|
(331,875
)
|
Gross
profit
|
|
82,835
|
86,217
|
87,400
|
|
|
|
|
Selling and
administrative expenses
|
|
(52,713
)
|
(60,528
)
|
(60,702
)
|
Operating
income
|
|
30,122
|
25,689
|
26,698
|
|
|
|
|
Loss on disposal of
a subsidiary
|
|
-
|
(35
)
|
-
|
Interest
income
|
|
75
|
70
|
166
|
Interest
expenses
|
|
(2,037
)
|
(1,577
)
|
(4,710
)
|
Other income,
net
|
3
|
1,887
|
3,456
|
2,773
|
Income before
income taxes
|
|
30,047
|
27,603
|
24,927
|
|
|
|
|
|
Income
taxes
|
4
|
(3,832
)
|
(4,961
)
|
(3,174
)
|
Net
income
|
|
26,215
|
22,642
|
21,753
|
Net income
attributable to non-controlling interest
|
|
19
|
586
|
(82
)
|
Net income
attributable to shareholders of Zhejiang Tianlan Environmental
Protection Technology Company Limited
|
|
26,234
|
23,228
|
21,671
|
|
|
|
|
|
Net income per
ordinary share
|
|
RMB 0.32
|
RMB 0.29
|
RMB 0.27
|
|
|
|
|
|
Weighted average
number of ordinary shares outstanding
|
|
82,539,123
|
80,744,055
|
80,172,000
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
26,215
|
22,642
|
21,753
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Depreciation of
property, plant and equipment
|
12,647
|
14,144
|
8,473
|
Amortisation of
intangible asset
|
152
|
575
|
193
|
Amortisation of
land use right
|
149
|
149
|
149
|
Written off of
motor vehicles
|
-
|
-
|
5
|
Loss on disposal of
property, plant and equipment
|
-
|
15
|
-
|
Deferred tax
assets
|
(405
)
|
(1,337
)
|
(177
)
|
Other non-current
asset
|
-
|
(17,512
)
|
-
|
(Increase) /
decrease in current assets:
|
|
|
|
Accounts
receivable, net
|
(15,418
)
|
42,807
|
(51,299
)
|
Prepayments and
other current assets
|
(38,580
)
|
8,506
|
57,251
|
Other tax
receivables
|
215
|
(215
)
|
1,045
|
Inventories
|
(2,012
)
|
(994
)
|
3,943
|
Increase /
(decrease) in current liabilities:
|
|
|
|
Accounts
payable
|
9,490
|
(59,042
)
|
(57
)
|
Other payables and
accrued expenses
|
21,267
|
10,408
|
(72,663
)
|
Other taxes
payable
|
3,596
|
(933
)
|
(479
)
|
Income tax
payable
|
1,520
|
2,268
|
934
|
|
|
|
|
Net cash provided
by / (used in) operating activities
|
18,836
|
21,481
|
(30,929
)
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of
intangible asset
|
-
|
(402
)
|
-
|
Purchase of
property, plant and equipment
|
(3,535
)
|
(3,368
)
|
(8,285
)
|
Payment for long
term investments
|
(1,991
)
|
-
|
-
|
Sales proceeds from
a subsidiary
|
-
|
1,000
|
-
|
Sales proceeds from
property, plant and equipment
|
249
|
1,100
|
-
|
|
|
|
|
Net cash used in
investing activities
|
(5,277
)
|
(1,670
)
|
(8,285
)
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds from
issuance of shares
|
7,800
|
3,360
|
-
|
Repayment of bank
borrowings
|
(48,000
)
|
(70,000
)
|
(174,900
)
|
Proceeds from bank
borrowings
|
56,000
|
50,000
|
122,000
|
Dividend paid to
shareholders
|
(9,496
)
|
(9,220
)
|
(9,180
)
|
(Repayment of) /
proceeds from borrowings
|
(27,623
)
|
3,959
|
107,732
|
|
|
|
|
Net cash (used in)
/ provided by financing activities
|
(21,319
)
|
(21,901
)
|
45,652
|
|
|
|
|
|
|
|
|
Net (decrease) /
increase in cash and cash equivalents
|
(7,760
)
|
(2,090
)
|
6,438
|
Cash and cash
equivalents, beginning of year
|
33,545
|
35,635
|
29,197
|
|
|
|
|
Cash and cash
equivalents, end of year
|
25,785
|
33,545
|
35,635
|
Supplementary
information
|
|
|
|
|
|
|
|
Interest
paid
|
1,966
|
1,577
|
6,429
|
Income tax
paid
|
4,961
|
4,245
|
3,310
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of
January 1,
2015
|
61,200
|
43,189
|
6,821
|
43,710
|
1,520
|
156,440
|
Net
income
|
-
|
-
|
-
|
21,671
|
82
|
21,753
|
Dividend
paid
|
-
|
-
|
-
|
(9,180
)
|
-
|
(9,180
)
|
Appropriation of
reserves
|
-
|
-
|
2,273
|
(2,273
)
|
-
|
-
|
Issue share capital
by transfer from statutory reserves
|
18,972
|
(18,972
)
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Balance as
of
December 31,
2015
|
80,172
|
24,217
|
9,094
|
53,928
|
1,602
|
169,013
|
Net income /
(loss)
|
-
|
-
|
-
|
23,228
|
(586
)
|
22,642
|
Dividend
paid
|
-
|
-
|
-
|
(9,220
)
|
-
|
(9,220
)
|
Appropriation of
reserves
|
|
|
2,542
|
(2,542
)
|
-
|
-
|
Deemed disposal of
subsidiary
|
-
|
103
|
-
|
-
|
897
|
1,000
|
Issue share
capital
|
1,200
|
2,160
|
-
|
-
|
-
|
3,360
|
Balance as
of
December 31,
2016
|
81,372
|
26,480
|
11,636
|
65,394
|
1,913
|
186,795
|
Net income /
(loss)
|
-
|
-
|
-
|
26,234
|
(19
)
|
26,215
|
Dividend
paid
|
-
|
-
|
-
|
(9,496
)
|
-
|
(9,496
)
|
Appropriation of
reserves
|
|
|
2,486
|
(2,486
)
|
-
|
-
|
Issue share
capital
|
1,200
|
6,000
|
-
|
-
|
600
|
7,800
|
Balance as
of
December 31,
2017
|
82,572
|
32,480
|
14,122
|
79,646
|
2,494
|
211,314
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities
Zhejiang Tianlan Environmental Protection
Technology Company Limited
(the “Company”) was
incorporated in
Hangzhou City,
Zhejiang Province, the People's Republic of China
(“PRC”) on May 18, 2000. The Company is a limited
company by shares with an operating period up to August 5,
2037.
The
Company provides a comprehensive service for design, general
contract, equipment manufacturing, installation, testing and
operation management of the treatment of waste gases emitted from
various boilers and industrial furnaces of power plants, steel
works and chemical plants since 2000.
The
Company has listed its shares on the New Third Board in the
People’s Republic of China (“PRC”) since November
17, 2015 and suspended trading from August 15, 2017 and resumed
trading on February 2, 2018.
Details
of the Company’s subsidiaries are summarised as
follows:
Name
|
|
Percentage of equity ownership
|
|
Place of incorporation
|
|
Principal activities
|
|
|
2017
|
2016
|
|
|
|
|
Zhejiang
Tianlan Environmental Engineering and Design Company
Limited
|
|
100%
|
100%
|
|
PRC
|
|
Provision
of maintenance services of environmental protection
equipment
|
|
|
|
|
|
|
|
|
Hangzhou
Tianlan Environmental Protection Equipments Company
Limited
|
|
51%
|
51%
|
|
PRC
|
|
Manufacturing
and installation services of environmental protection
equipment
|
Shihezi
Tianlan Environmental Protection Technology Company
Limited
|
|
100%
|
100%
|
|
PRC
|
|
Provision
of maintenance services of environmental protection
equipment
|
Hangzhou Tianlian Environmental
Testing Technology Company Limited
*
|
|
80%
|
80%
|
|
PRC
|
|
Provision
of testing services of environmental protection
equipment
|
* The
company was incorporated on October 28, 2015. On April 17, 2016,
the board of directors approved the sales of 1,000,000 ordinary
shares to third parties, for aggregate proceeds of RMB
1,000,000.
Z
HEJIANG
TIANLAN
ENVIRONMENTAL PROTECTION TECHNOLOGY
COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(a)
Basis
of Consolidation
The
consolidated financial statements include the financial statements
of
Zhejiang Tianlan Environmental
Protection Technology Company Limited
and its subsidiaries
(the “Group”). In preparing the consolidated financial
statements presented herewith, all significant intercompany
balances and transactions have been eliminated on
consolidation.
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders.
The
Group’s main source of revenue is the construction and
installation services of environmental protection equipment for
flue gas desulphurization, dust removal and flue gas denitration.
Revenues are recorded under the percentage of completion method in
accordance with FASB ASC Subtopic 605-35, Revenue Recognition
— Construction-Type and Production-Type Contracts. This
approach primarily is based on contract costs incurred to date
compared with total estimated contract costs. Changes to total
estimated contract costs or losses, if any, are recognised in the
period they are determined. Revenues recognised in excess of
amounts billed are classified as costs and estimated earnings in
excess of billings on uncompleted contracts. Essentially all of
such amounts are expected to be billed and collected within one
year and are classified as current assets. Billings in excess of
costs and estimated earnings on uncompleted contracts are
classified as current liabilities. When reasonably dependable
estimates cannot be made, construction and installation services
revenues are recognised using the completed contract
method.
(d)
Research
and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately
RMB12,873,000, RMB13,808,000 and RMB18,895,000 for the years ended
December 31, 2017, 2016 and 2015 respectively and were included in
“Selling and Administrative expenses" in the Group’s
consolidated statements of of operations.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(e)
Advertising
and promotional expenses
Advertising and
promotional expenses (“A&P” expenses) are expensed
as incurred. The A&P expenses amounted to approximately
RMB4,000, RMB58,000 and RMB24,000 for the years December 31, 2017,
2016 and 2015 respectively and were included in “Selling and
Administrative expenses" in the Group’s consolidated
statements of operations.
The
Group accounts for income and deferred tax under the provisions of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognised for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognised for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be
realised.
In
accordance with ASC 740-10, the Group recognises tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits. The Group recognises interest and/or penalties, if any,
related to income tax matters in income tax expense. The Group did
not have such uncertain tax positions in 2017, 2016 and 2015. The
Group is subject to examination of tax authorities in PRC (open for
audit for 2015 to 2017).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognised in the consolidated statements of operations for the
period that includes the enactment date.
(g)
Cash
and Cash Equivalents
Cash
and cash equivalents consist of bank deposits with original
maturities of three months or less, all of which are unrestricted
as to withdrawal and uninsured. There were no cash equivalents as
of December 31, 2017 and 2016.
Receivables, net
are recorded at their nominal values. Doubtful debt allowances are
provided for identified individual risks for these line items. If
the loss of a certain part of the receivables is probable, doubtful
debt allowances are provided to cover the expected loss.
Receivables are written off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote.
According to
construction and installation contracts signed with the customers,
an amount ranging from 5%-20% of contract sum will only be
receivable one year after the final inspection report is issued by
relevant department of Ministry of Environmental Protection. As of
December 31, 2017, accounts receivable in exceed of one year
amounted to RMB52,105,000 (2016: RMB46,624,000).
Inventories are
stated at the lower of cost or net realizable value determined
using the weighted average method which approximates cost and
estimated net realizable value. Cost of work in progress and
finished goods comprise direct material, direct production costs
and an allocated portion of production overhead costs based on
normal operating capacity.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(j)
Property,
Plant and Equipment and Land Use Right, net
Property, plant and
equipment are stated at cost less accumulated depreciation. Gains
or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalised. All
ordinary repair and maintenance costs are expensed as incurred.
Land in the PRC is owned by the PRC government. The government in
the PRC, according to PRC Law, may sell the right to use the land
for a specific period for time. Thus, all of the Company’s
land purchases in the PRC are considered to be leasehold land and
are classified as land use right.
Depreciation of
property, plant and equipment and amortization of land use right
are computed using the straight-line method over the assets’
estimated useful lives as follows:
Land
use right
|
Over
terms of the leases
|
Office
premises
|
47-50
years, with 5% residual value
|
Leasehold
improvements
|
over
terms of the leases or the useful lives whichever is less, with 5%
residual value
|
Plant
and machineries
|
5 to 10
years, with 5% residual value
|
Furniture,
fixtures and office equipment
|
3 to 5
years, with 5% residual value
|
Motor
vehicles
|
1 to 8
years, with 5% residual value
|
(k)
Intangible
Assets, net
The
Group amortizes its intangible assets with definite lives over
their estimated useful lives and reviews these assets for
impairment. The Group is currently amortizing its acquired
intangible assets with definite lives over periods generally
ranging between five to twenty years.
(l)
Impairment
for long lived assets
The
Group adheres to FASB ASC Subtopic 360-10, Property, Plant, and
Equipment, which requires impairment losses to be recorded for
property, plant and equipment to be held and used in operations
when indicators of impairment are present. Reviews are regularly
performed to determine whether the carrying value of assets is
impaired. The Group determines the existence of such impairment by
measuring the fair value and comparing such amount to the carrying
amount of the assets. An impairment loss, if one exists, is then
measured at the amount by which the carrying amount of the asset
exceeds the fair value. Assets to be disposed of are reported at
the lower of the carrying amount or fair value of such assets less
costs to sell. Asset impairment charges are recorded to reduce the
carrying amount of the long-lived asset that will be sold or
disposed of to its estimated fair values. Charges for the asset
impairment reduce the carrying amount of the long-lived assets to
its estimated salvage value in connection with the decision to
dispose of such assets. There were no impairment losses recorded
during each of the three years in the period ended December 31,
2017.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(m)
Government
grant income
Government grant
income consisted of receipt of funds to subsidize the investment
cost of information technology system development and market
development in China. No present or future obligation arises from
the receipt of such amount.
Government grants
are recognized in the consolidated balance sheet initially when
there is reasonable assurance that they will be received and that
the Group will comply with the conditions attaching to them. Grants
that compensate the Group for expenses incurred are recognized as
income in the consolidated statement of operations on a systematic
basis in the same periods in which the expenses are incurred.
Grants that compensate the Group for the cost of an asset are
deducted from the carrying amount of the asset and consequently are
effectively recognized in the consolidated statement of operations
over the useful life of the asset by way of reduced depreciation
expenses.
In
accordance with ASC 840, Leases, leases for a lessee are classified
at the inception date as either a capital lease or an operating
lease.
Operating lease
expenses are recognized on a straight-line basis over the
applicable lease term. The Group leases offices, factories and
arehouse underg leae agreements.
Paid
in capital refers to the registered capital paid up by the
shareholders of the Company.
On
December 17, 2015, the Company increased the number of registered
shares by 18,972,000 shares. The paid up capital was increased by
RMB 18,972,000 transferred from the capital reserves, which is
agreed by the shareholders and the board of directors.
At
the year end of December 31, 2015, there were 80,172,000 shares
issued.
On
June 2, 2016, the Company increased the number of paid up shares by
1,200,000 in the aggregative amount to gross proceeds of RMB
3,360,000 to the existing shareholders.
On
January 10, 2017, the Company increased the number of paid up
shares by 1,200,000 in the aggregative amount to gross proceeds of
RMB 7,200,000 to the existing shareholders.
At
the year end of December 31, 2017, there were 82,572,000 shares
(2016: 81,372,000 shares) issued.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions that affect the amounts that are reported in the
consolidated financial statements and accompanying disclosures.
Although these estimates are based on management’s best
knowledge of current events and actions that the Group may
undertake in the future, actual results may be different from the
estimates.
Entities are
considered to be related to the Group if the parties, directly or
indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Group. Related
parties also include principal owners of the Group, its management,
members of the immediate families of principal owners of the Group
and its management and other parties with which the Group may deal
if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests. A party which can significantly influence the
management or operating policies of the transacting parties or if
it has an ownership interest in one of the transacting parties and
can significantly influence the other to an extent that one or more
of the transacting parties might be prevented from fully pursuing
its own separate interests is also a related party.
(r)
Fair
Value Measurement
ASC
820 defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the
Group considers the principal or most advantageous market in which
it would transact and it considers assumptions that market
participants would use when pricing the asset or
liability.
ASC
820 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs
that may be used to measure fair value:
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(r)
Fair
Value Measurement - Continued
Level
1 – Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Group holds.
An active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
Level
2 – Valuation based on observable prices that are based on
inputs not quoted on active market, but corroborated by market
data.
Level
3 – Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The
Group adheres to ASC 820, Fair Value Measurements and Disclosures,
for all financial assets and liabilities and nonfinancial assets
and liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a recurring basis (at
least annually).
Financial
instruments include cash and cash equivalents, accounts receivable,
net, prepayments and other current assets,
accounts payable
, bank borrowings, other payables
and accrued expenses
. The carrying amounts of cash and cash
equivalents, accounts receivable, net, prepayments and other
current assets
,
accounts payable
, bank borrowings, other payables and
accrued expenses approximate their fair value due to the short term
maturities of these instruments.
The
fair values of current financial assets and liabilities carried at
amortized cost approximate their carrying amounts.
(s)
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the "FASB")
issued ASU 2014-09, "Revenue from Contracts with Customers", also
known as the "New Revenue Standard". This update is the result of a
collaborative effort by the FASB and the International Accounting
Standards Board to simplify revenue recognition guidance, remove
inconsistencies in the application of revenue recognition, and to
improve comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets. The core
principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to receive for those goods or services. The New
Revenue Standard is applied through the following five-step
process:
1.
Identify the contract(s) with a customer.
|
2.
Identify the performance obligation in the contract
|
3.
Determine the transaction price
|
4.
Allocate the transaction price to the performance obligations in
the contract.
|
5.
Recognize revenue when (or as) the entity satisfies a performance
obligation.
|
For
a public entity, this update is effective for annual and interim
reporting periods beginning after December 15, 2017 with early
adoption permitted. This standard can be applied on either a
retrospective or modified retrospective approach. Since May, 2014,
a number of ASU's have been issued which further refine the
original guidance issued under ASU 2014-09 and are effective in
conjunction with this original standard.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(s)
Recently Issued Accounting Pronouncements
-
Continued
The
Group established an implementation approach to assess the impact
of the new revenue guidance on its operations, consolidated
financial statements and related disclosures. This assessment
included (1) performing contract analyses for each revenue stream
identified, (2) assessing the noted differences in recognition and
measurement that may result from adopting this new standard, (3)
performing detailed analyses of contracts with large customers, and
(4) performing transaction level testing for consistency with
contract provisions that affect revenue recognition. The Group
evaluated the potential impacts of the new standard on its existing
revenue recognition policies and procedures during the fiscal year
ended December 31, 2017, and determined that the Group’s
performance obligations are met at goods/service delivery point,
with no other material obligations. The Group further determined
that its warranty terms are consistent. The Group also determined
that there were no incremental disaggregated revenue disclosures
required in our consolidated financial statements. Based on the
results of the evaluation, adoption of the new standard will not
have a material impact on our consolidated financial statements.
The New Revenue Standard became effective for us on January 1, 2018
and was applied on a retrospective basis, with no cumulative effect
of adoption to any of the consolidated financial statement line
items.
In
January 2016, the FASB issued ASU 2016-01, "Financial
Instruments – Recognition and Measurement of Financial Assets
and Financial Liabilities (Topic 825)". ASU 2016-01 revises the
classification and measurement of investments in certain equity
investments and the presentation of certain fair value changes for
certain financial liabilities measured at fair value. ASU 2016-01
requires the change in fair value of many equity investments to be
recognized in net income. ASU 2016-01 is effective for interim and
annual periods beginning after December 15, 2017, with early
adoption permitted. Adopting ASU 2016-01 will result in a
cumulative effect adjustment to the Group's retained earnings as of
the beginning of the year of adoption. The Group does not expect
the adoption of ASU 2016-01 to have a material impact on its
consolidated financial statements because there are no material
investments in certain equity investments and financial liabilities
measured at fair value.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)".
The objective of this update is to increase transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including
interim periods within those annual periods and is to be applied
utilizing a modified retrospective approach. The Group does not
expect the adoption of ASU 2016-02 to have a material impact on its
consolidated financial statements because there are no material
operating leases.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments
—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments:, which is effective for fiscal years
beginning after December 15, 2019. Among other things, these
amendments require the measurement of all expected credit losses
for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now
use forward-looking information to better inform their credit loss
estimates. Many of the loss estimation techniques applied today
will still be permitted, although the inputs to those techniques
will change to reflect the full amount of expected credit losses.
In addition, the ASU amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets
with credit deterioration.
The Group
does not expect the adoption of ASU 2016-13 to have a material
impact on its consolidated financial statements because there are
no material
expected credit losses for financial assets, no
available-for-sale debt securities and no purchased financial
assets with credit deterioration
.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
– (Topic 230): Classification of Certain Cash Receipts and
Cash Payments". ASU 2016-15 addresses eight specific cash flow
issues with the objective of reducing the existing diversity in
practice. ASU 2016-15 is effective for fiscal years, and for
interim periods within those years, beginning after December 15,
2017. Early application is permitted. The Group does not expect the
adoption of ASU 2016-15 to have a material impact on its
consolidated financial statements because for distributions
received from equity method Investees, it is already using the
nature of the distribution approach.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(s)
Recently Issued Accounting Pronouncements
-
Continued
In
January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the Definition of a
Business”, which is effective for fiscal years beginning
after December 15, 2017. These amendments clarify the definition of
a business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or
sold a business. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and
consolidation. The amendments are intended to help companies and
other organizations evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses.
The Group does not expect
the adoption of ASU 2017-01 to have a material impact on its
consolidated financial statements because no planned business
combination is to be made.
In
March 2017, the FASB issued ASU 2017-07, “Compensation
— Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost”, which is effective for fiscal years beginning
after December 15, 2017. The amendments apply to all entities that
offer employees defined benefit pension plans, other postretirement
benefit plans, or other types of benefits accounted for under Topic
715, Compensation — Retirement Benefits. The amendments
require that an employer report the service cost component in the
same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The
other components of net benefit cost are required to be presented
in the income statement separately from the service cost component
and outside a subtotal of income from operations, if one is
presented. If a separate line item or items are used to present the
other components of net benefit cost, that line item or items must
be appropriately described. If a separate line item or items are
not used, the line item or items used in the income statement to
present the other components of net benefit cost must be disclosed.
The amendments also allow only the service cost component to be
eligible for capitalization when applicable (e.g., as a cost of
internally manufactured inventory or a self-constructed asset).
The Group does not expect the adoption
of ASU 2017-07 to have a material impact on its consolidated
financial statements because no material
employees defined
benefit pension plans.
No
other new accounting pronouncements issued or effective during the
fiscal year have had or are expected to have a material impact on
the consolidated financial statements.
(t)
Net
income per Ordinary Share
Net
income per ordinary share is computed in accordance with FASB ASC
Subtopic 260-10, Earnings Per Share, by dividing the net income by
the weighted average number of ordinary shares outstanding during
the period.
The
suppliers of the Group offer a standard one-year warranty to the
end customer of the Group. The Group only provides labour service
to repair or replace parts. The Group does not maintain a general
warranty reserve because historically labour costs for such repair
or replacement have been de minimis.
(v)
Shipping
and handling costs
Amounts
billed to customers related to shipping and handling are classified
as revenues, and the Group’s shipping and handling costs are
included in cost of revenues.
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
(x)
Concentration of credit risk
Financial
instruments that potentially subject the Group to significant
concentration of credit risk primarily consist of cash and cash
equivalents, accounts receivable, net, and prepayments. The maximum
exposure of such assets to credit risk is their carrying amounts as
of the balance sheet dates.
As
of December 31, 2017 and 2016, all of the Group’s cash
and cash equivalents were deposited in financial institutions
located in the PRC, which management believes are of high credit
quality.
Accounts
receivable are typically unsecured and are derived from revenue
earned from the customers. The risk with respect to accounts
receivable is mitigated by credit evaluations the Group performs on
its customers and its ongoing monitoring of outstanding
balances.
Prepayments
made to suppliers are typically unsecured and arise from deposits
paid in advance for future purchases. Due to the Group’s
concentration of prepayments made to a limited number of suppliers
and the significant prepayments that are made to them, any negative
events or deterioration in financial strength with respect to the
Group’s suppliers may cause material loss to the Group and
have a material adverse effect on the Group’s financial
condition and results of operations. The risk with respect to
prepayments made to suppliers is mitigated by credit evaluations
that the Group performs on its suppliers prior to making any
prepayments and the ongoing monitoring of its suppliers’
performance.
|
|
|
|
|
|
|
|
(Loss) on disposal
of property, plant and equipment
|
-
|
(15
)
|
-
|
Subsidy
income
|
2,262
|
3,360
|
2,617
|
Sales of scrapped
materials
|
37
|
3
|
6
|
Investment
income
|
(405
)
|
412
|
|
Others
|
(7
)
|
(304
)
|
150
|
|
1,887
|
3,456
|
2,773
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
According to
relevant PRC tax laws and regulations, entities incorporated in the
PRC are subject to Enterprise Income Tax (“EIT”) at a
statutory rate of 25% or reduced national EIT rates of 15% for
certain High and New Technology Enterprises (“HNTE”) on
PRC taxable income.
Zhejiang Tianlan
Environmental Protection Technology Company Limited
and
Hangzhou Tianlan Environmental Protection Equipment Company Limited
are classified as HNTE which enjoys a preferential tax rate of
15%.
During
the years ended December 31, 2017 and 2016, the PRC tax laws and
regulations have launched a tax reduction scheme for small
enterprises, Hangzhou Tianlan Environmental Engineering and Design
Company Limited, Shihezi Tianlan Environmental Protection
Technology Company Limited, Da Tong Tianlan Environmental
Protection Technology Service Company Limited and Hangzhou Tianlan
Environmental Testing Technology Company Limited are entitled to
enjoy this tax benefit. As such, they are subjects to Enterprise
Income Tax rate of
10%
only.
The
provision for income taxes consists of:
|
|
|
|
|
|
|
|
Current PRC
EIT:
|
|
|
|
Domestic
|
4,237
|
6,298
|
3,351
|
|
|
|
|
Income
taxes
|
4,237
|
6,298
|
3,351
|
|
|
|
|
|
|
|
|
Deferred tax
benefit:
|
(405
)
|
(1,337
)
|
(177
)
|
|
|
|
|
Total deferred
taxes
|
(405
)
|
(1,337
)
|
(177
)
|
|
|
|
|
Total
|
3,832
|
4,961
|
3,174
|
The
principal reconciling items from income tax computed at the
statutory rates and at the effective income tax rates are as
follows:
|
|
|
|
|
|
|
|
Income before
income taxes
|
30,047
|
27,603
|
24,927
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
4,548
|
4,078
|
3,767
|
(Over)-provision
for income tax in prior years
|
(29
)
|
57
|
-
|
Permanent
difference
|
(459
)
|
(82
)
|
-
|
Temporary
differences
|
(405
)
|
(1,337
)
|
(177
)
|
Tax effect of
revenue not subject to tax
|
(1,438
)
|
(901
)
|
(1,068
)
|
Tax effect of
expenses not deductible for tax purposes
|
1,435
|
2,732
|
596
|
Tax effect of
unused tax losses not recognized
|
180
|
414
|
56
|
Total provision for
income tax at effective tax rate
|
3,832
|
4,961
|
3,174
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Income
taxes - Continued
The
components of deferred tax assets are as follows:
|
|
|
|
|
|
Allowance for
doubtful debts
|
6,269
|
5,864
|
Net deferred tax
assets
|
6,269
|
5,864
|
5
Other taxes receivable / payable
Other
taxes receivable / payable comprises mainly Valued-Added Tax
(“VAT”) and Business Tax (“BT”). The Group
is subject to output VAT levied at the rate of 17% or 11% of the
revenue from sales of equipment. The input VAT paid on purchases of
materials and other direct inputs can be used to offset the output
VAT levied on operating revenue to determine the net VAT payable or
recoverable. BT is charged at a rate of 5% and 3% on the revenue
from technique services and installation services
respectively.
6
Other
non-current assets
Other
non-current assets represent deposits for sales and leaseback
agreement amounted to approximately to RMB17,512,000 (2016:
RMB17,512,000).
7
Accounts
receivable, net
|
|
|
|
|
|
Accounts
receivable
|
222,279
|
204,166
|
Less: Allowance for
doubtful debts
|
(41,761
)
|
(39,066
)
|
|
180,518
|
165,100
|
The
following is an aging analysis of past due account receivables as
of December 31, 2017 and 2016:
|
|
|
|
|
|
Within 1
year
|
128,413
|
118,476
|
1 year – 2
years
|
37,934
|
31,340
|
2 years – 3
years
|
9,158
|
9,387
|
3 years – 4
years
|
4,120
|
4,593
|
4 years – 5
years
|
893
|
240
|
Greater than 5
years
|
-
|
1,064
|
|
180,518
|
165,100
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7
Accounts
receivable, net (Continued)
At
December 31, 2017, the trade receivables pledged as security for
the Company’s bank loans and third party’s loans
amounted to approximately RMB24,363,000 (2016:
RMB25,474,000).
8
Prepayments
and other current assets
Prepayment and
other current assets mainly represent deposits for bidding
projects, deposits for purchases and services and prepaid
expenses.
|
|
|
|
|
|
Cost and estimated
earnings in excess of billing
|
119,256
|
70,786
|
Prepayments
|
19,606
|
24,100
|
Other
receivables
|
10,775
|
14,851
|
Other current
assets
|
-
|
1,320
|
|
149,637
|
111,057
|
The
other current assets also include cost and estimated earnings in
excess of billing.
Cost
and estimated earnings in excess of billings
|
|
|
|
|
|
Contracts costs
incurred plus estimated earnings
|
330,322
|
389,534
|
Less: Progress
billings
|
(211,066
)
|
(318,748
)
|
Cost and estimated
earnings in excess of billings
|
119,256
|
70,786
|
|
|
|
|
|
|
Raw
materials
|
4,741
|
5,606
|
Work in
progress
|
6,452
|
7,269
|
Finished
goods
|
3,924
|
230
|
|
15,117
|
13,105
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10
Property,
plant and equipment
|
|
|
|
|
|
Building and
leasehold improvements
|
56,665
|
56,665
|
Furniture, fixtures
and office equipment
|
10,911
|
9,660
|
Motor
vehicles
|
4,410
|
4,451
|
Plant and
machineries
|
115,349
|
115,349
|
Construction in
progress
|
-
|
211
|
|
|
|
|
187,335
|
186,336
|
|
|
|
Less: Accumulated
depreciation
|
(46,856
)
|
(36,496
)
|
|
|
|
|
140,479
|
149,840
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
12,647
|
14,144
|
8,473
|
At
December 31, 2017, the net book value of property, plant and
equipment pledged as security for the Company’s bank loans
and third party’s loans amounted to approximately
RMB99,406,000 (2016: RMB109,041,000).
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11
Intangible
assets, net
|
|
|
|
|
|
Patents
|
2,400
|
2,400
|
Others
|
567
|
567
|
|
|
|
|
2,967
|
2,967
|
|
|
|
Less: Accumulated
amortisation
|
(1,744
)
|
(1,592
)
|
|
|
|
|
1,223
|
1,375
|
|
|
|
|
|
|
|
|
Amortisation
expense
|
152
|
575
|
193
|
The
useful lives of intangible assets, net of the Group are normally
10-20 years. The following table represents the total estimated
amortization of intangible assets, net for the five succeeding
fiscal years to December 31, 2017:
For the Twelve Months Ending December 31,
|
Estimated Amortization Expenses
|
|
|
2018
|
152
|
2019
|
152
|
2020
|
152
|
2021
|
152
|
2022
|
152
|
Thereafter
|
463
|
|
1,223
|
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Land use
right
|
7,361
|
7,361
|
Less: Accumulated
amortisation
|
(1,763
)
|
(1,614
)
|
|
5,598
|
5,747
|
|
|
|
|
|
|
|
|
Amortisation
expense
|
149
|
149
|
149
|
At
December 31, 2017, the land use right pledged as security for the
Company’s bank loans and third party’s loans amounted
to approximately RMB1,645,000 (2016: RMB1,691,000).
The
following table represents the total estimated amortization of land
use right, net for the five succeeding fiscal years to December 31,
2017:
For the Twelve Months Ending December
31,
|
Estimated Amortization
Expenses RMB'000
|
|
|
2018
|
149
|
2019
|
149
|
2020
|
149
|
2021
|
149
|
2022
|
149
|
Therafter
|
4,853
|
|
5,598
|
|
|
|
|
|
|
Bank loan borrowed
by the Company (note i)
|
28,000
|
20,000
|
Bank loan borrowed
by a subsidiary of the Company
(note
ii)
|
5,000
|
5,000
|
|
33,000
|
25,000
|
(i)
The bank loan is
denominated in Renminbi and is repayable within 1 year. The bank
loan borrowed by the Company as of December 31, 2017 bears interest
at fixed rates 4.87% and 5.22% (2016: 4.57%) per annum. Interest
paid during the year ended December 31, 2017 was approximately
RMB1,720,000 (2016: RMB1,221,000 and 2015:
RMB3,768,000).
(ii)
The bank loan is
denominated in Renminbi and is repayable within 1 year. The bank
loan borrowed by a subsidiary of the Company as of December 31,
2017 bears interest at fixed rates 5.39% (2016: 5.22%) per annum
and is secured by the subsidiary’s office premises and
leasehold improvements and land use right. Interest paid during the
year ended December 31, 2017 was
approximately RMB272,000 (2016:
RMB154,000 and 2015: RMB369,000).
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14
Other
payables and accrued expenses
|
|
|
|
|
|
Deposits received
from customers
|
52,777
|
35,225
|
Accrued
expenses
|
10,751
|
10,116
|
Other
payables
|
1,076
|
1,227
|
Deferred
income
|
7,846
|
4,610
|
Amount due to a
related company
|
-
|
5
|
|
72,450
|
51,183
|
|
|
|
|
|
|
Current
portion
|
29,438
|
25,076
|
Non-current
portion
|
54,630
|
86,615
|
Total borrowings by
the Company
|
84,068
|
111,691
|
(i)
On May 15, 2015,
the Company signed a sales and leaseback agreement with lessor A
with total principal of RMB 66,700,000 and is repayable within 5
years. The third party loan is denominated in Renminbi. The third
party loan borrowed by the Company as of December 31, 2017 bears
interest at fixed rates 5.27% (2016: 5.27%) per annum
and is secured by the Company’s
machinery A. Interest paid during the year ended December 31, 2017
was approximately RMB2,027,000 (2016: RMB2,011,000 and 2015:
RMB1,719,000) and was included in “Cost of revenue” in
the Group’s consolidated statements of
operations.
(ii)
On December 9,
2015, the Company signed a sales and leaseback agreement with
lessor B with total principal of RMB 87,560,000 and is repayable
within 5 years. The third party loan is denominated in Renminbi.
The third party loan borrowed by the Company as of December 31,
2017 bears interest at fixed rates 4.83% (2016: 4.83%) per
annum
and are secured by
the Company’s machinery B and the franchise, income and
account receivables generated from Machinery B. A. Interest paid
during the year ended December 31, 2017 was approximately
RMB3,273,000 (2016: RMB3,192,000 and 2015: Nil) and was included in
“Cost of revenue” in the Group’s consolidated
statements of
operations
.
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
Group's long-term investments consist of minority ownership
interests in two limited liability companies, generally from
private equity arrangements. These investments are carried under
the equity method of accounting, with changes in the carrying value
reported as realized gains or losses in the consolidated financial
statements. During the year ended December 31, 2017, the Company
and its subsidiary, invested RMB2,373,000 and RMB276,000 (totally
RMB2,649,000) into two limited liability companies respectively.
The carrying values of these investments approximately RMB1,861,000
and RMB130,000 (totally RMB1,991,000) as at December 31, 2017
(December 31, 2016: Nil).
17
PRC
statutory reserves
Under
the relevant PRC laws and regulations, the Group is required to
appropriate a certain percentage of its respective net income to
two statutory funds, namely the statutory reserve fund and the
statutory staff welfare fund.
(i)
Statutory reserve
fund
Pursuant to
applicable PRC laws and regulations, the Group is required to
allocate at least 10% its net income to the statutory reserve fund
until such fund reaches 50% of its registered capital. The
statutory reserve fund can be utilised upon the approval by the
relevant authorities, to offset accumulated losses or to increase
registered capital, provided that such fund be maintained at a
minimum of 25% of its registered capital.
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the Group is required to
allocate certain amount of its net income to the statutory staff
welfare fund determined by them. The statutory staff welfare fund
can only be used to provide staff welfare facilities and other
collective benefits to its employees. This fund is
non-distributable other than upon liquidation of the
Group.
Capital
reserve represents capital contributions from shareholders in
excess of the paid-in capital amount.
As
stipulated by the rules and regulations in the PRC, the Group
contributes to state-sponsored retirement plans for its employees
in Mainland China. The Group contributes approximately 12% to
14%
of the basic salaries
of its employees, and has no further obligations for the actual
payment of pension or post-retirement benefits beyond the annual
contributions. The state-sponsored retirement plans are responsible
for the entire pension obligations payable to retired
employees.
During
the years ended December 31, 2017, 2016 and 2015, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately RMB4,298,000,
RMB3,905,000 and RMB3,850,000 respectively.
The
Group’s activities expose it mainly to credit
risk.
The
Group has no significant concentration of credit risk. The Group
has policies in place to ensure that sales of products are made to
customers with an appropriate credit history. The Group has
policies that limit the amount of credit exposure to any customers.
Cash in banks is not insured in PRC.
There is no
policy for requiring collateral for the credit risk of financial
instruments by the Group (2016: Nil).
ZHEJIANG TIANLAN
ENVIRONMENTAL
PROTECTION TECHNOLOGY
COMPANY
LIMITED
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS
There
were insignificant transactions with related parties in the years
2017 and 2016 other than those disclosed elsewhere in the
consolidated financial statements.
22
Commitments
and contingencies
The
Group has no rental expense during the year ended December 31, 2017
(2016 and 2015: RMB Nil). As of December 31, 2017, the Group has no
future minimum lease payments under non-cancellable operating
leases.
The
Group is not currently a party to any legal proceeding,
investigation or claim which, in the opinion of the management, is
likely to have a material adverse effect on the business, financial
conditions or results of operations.
On
January 25, 2018, the shareholders approved the transfer of
Hangzhou Tianlian Environmental
Testing Technology Company
Limited’s shares of RMB6,400,000, with shareholding of 80%
from the Company to Wu Zhongbiao, Jin Ruiben and Li Jun amounting
to RMB5,040,000, RMB600,000 and RMB760,000, respectively. Upon the
completion of the transfer, the Company will no longer hold any
shares of Hangzhou Tianlian Environmental
Testing Technology Company Limited.
Meanwhile, Wu Zhongbiao will be appointed as the chairperson and is
considered as a related party.
On
January 25, 2018, the shareholders approved the transfer
of
Zhejiang Tianlan
Environmental Engineering and Design Company Limited’s shares
of RMB5,100,000, with shareholding of 100% from the Company to Wu
Zhongbiao and
Wang Yuejun amounting
to RMB4,590,000 and RMB510,000, respectively. Upon the completion
of the transfer, the Company will no longer hold any shares or
obligations on capital injection of Zhejiang Tianlan Environmental
Engineering and Design Company Limited.
The
Company has evaluated all events or transactions that occurred
through the date the consolidated financial statements were issued,
and has determined that there were no material events or
transactions which would require recognition or disclosure in the
consolidated financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
Consolidated Financial Statements as of December 31,
2017
Table of Contents
|
|
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
F-65 to
F-66
|
Consolidated
Balance Sheets as at December 31, 2017 and 2016
|
F-67
|
Consolidated
Statements of Operations for the Years Ended December 31, 2017,
2016 and 2015
|
F-68
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017,
2016 and 2015
|
F-69
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years
Ended December 31, 2017, 2016 and 2015
|
F-70
|
Notes
to the Consolidated Financial Statements
|
F-71 to
F-86
|
Report of Independent Registered Public Accounting
Firm
To the shareholders and the Board of Directors of
Zhejiang Jiahuan Electronic Company Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet
of
Zhejiang
Jiahuan Electronic Company Limited
(the “Company”) and its subsidiary
(hereinafter collectively referred to as the “Group”)
as of December 31, 2017, and the related consolidated statements of
operations and changes in shareholders’ equity and cash flows
for the year ended December 31, 2017, and the related notes
(collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Group as of December 31, 2017, the results of its
operations and its cash flows for the year ended December 31, 2017,
in conformity with the accounting principles generally accepted in
the United States of America.
Basis for opinion
This consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Group's consolidated financial statements based on
our audit. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Group in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Group is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our
audit, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in this
consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of this consolidated financial statements. We believe that our
audit provides a reasonable basis for our opinion.
/s/ Union Power HK CPA Limited
Union Power HK CPA Limited (as
successor to
Centurion ZD CPA
Ltd.
)
Certified Public Accountants
We have served as the Company’s auditor since
2018.
Hong Kong, the People’s Republic of China
May 14, 2018
Report of Independent Registered Public Accounting
Firm
To the Directors and Stockholders of
Zhejiang Jiahuan Electronic Company Limited
We have audited the accompanying consolidated balance sheet of
Zhejiang Jiahuan Electronic Company Limited (the
“Company”) and its subsidiaries (hereinafter
collectively referred to as the “Group”) as of December
31, 2016, and the related consolidated statements of operations,
changes in shareholders’ equity and cash flows for each of
the years in the two-years periods ended December 31,
2016. These financial statements are the responsibility
of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of the Company’s internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
balance sheet of the Company and its subsidiaries as of December
31, 2016 and the consolidated results of their operations and cash
flows for each of the years in the two-years ended December 31,
2016, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Centurion ZD CPA Ltd.
Centurion ZD CPA Ltd. (fka
DCAW (CPA) Ltd. as successor to
Dominic K.F. Chan & Co.)
Certified Public Accountants
Hong Kong, April 26, 2017
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
|
7,135
|
6,595
|
Restricted
cash
|
|
1,495
|
1,498
|
Accounts
receivable, net
|
5
|
91,853
|
91,037
|
Notes
receivables
|
|
9,476
|
11,064
|
Prepayments and
other current assets
|
6
|
14,290
|
15,442
|
Inventories
|
8
|
15,057
|
28,005
|
Tax
recoverable
|
|
54
|
-
|
|
|
|
|
Total current
assets
|
|
139,360
|
153,641
|
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
|
9
|
19,962
|
21,861
|
Land use right,
net
|
10
|
6,125
|
6,288
|
Intangible asset,
net
|
11
|
3,645
|
242
|
Long term
investment
|
7
|
69
|
69
|
Total non-current
assets
|
|
29,801
|
28,460
|
Total
assets
|
|
169,161
|
182,101
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Short term bank
loans
|
13
|
27,500
|
28,200
|
Note
payable
|
|
-
|
4,750
|
Accounts
payable
|
|
22,997
|
27,595
|
Other payables and
accrued expenses
|
12
|
7,916
|
13,911
|
Taxes
payable
|
|
2,694
|
1,466
|
|
|
|
|
Total current
liabilities
|
|
61,107
|
75,922
|
|
|
|
|
Other long term
liabilities
|
15
|
5,495
|
5,671
|
Commitments and
contingencies
|
18
|
|
|
Shareholders’
equity:
|
|
|
|
Share
capital
|
|
|
|
RMB80,000,000
(2016: RMB80,000,000) authorized and fully paid
|
|
80,000
|
80,000
|
Capital
reserves
|
|
(1,399
)
|
(1,399
)
|
PRC statutory
reserves
|
16
|
3,095
|
3,095
|
Retained
earnings
|
|
20,863
|
18,812
|
|
|
|
|
Total
shareholders’ equity
|
|
102,559
|
100,508
|
|
|
|
|
Total liabilities
and shareholders’ equity
|
|
169,161
|
182,101
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
110,621
|
111,585
|
115,515
|
|
|
|
|
Cost of
revenue
|
|
(76,788
)
|
(65,304
)
|
(76,473
)
|
Gross
profit
|
|
33,833
|
46,281
|
39,042
|
|
|
|
|
Selling and
administrative expenses
|
|
(33,612
)
|
(35,671
)
|
(30,792
)
|
Operating
income
|
|
221
|
10,610
|
8,250
|
Non-operating
income
|
|
-
|
922
|
-
|
Non-operating
expense
|
|
(441
)
|
(1,518
)
|
-
|
Interest
expenses
|
|
(1,310
)
|
(2,752
)
|
(3,861
)
|
Other income,
net
|
3
|
5,846
|
4,592
|
1,408
|
Other expenses,
net
|
|
(2
)
|
(5
)
|
-
|
Income before
income taxes
|
|
4,314
|
11,849
|
5,797
|
|
|
|
|
|
Income
taxes
|
4
|
(263
)
|
(1,387
)
|
(861
)
|
Net
income
|
|
4,051
|
10,462
|
4,936
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
4,051
|
10,462
|
4,936
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Depreciation of
property, plant and equipment
|
2,093
|
2,211
|
2,296
|
Loss on sale
property, plant and equipment
|
-
|
147
|
-
|
Write off of
property, plant and equipment
|
176
|
-
|
32
|
Amortisation of
intangible asset
|
591
|
266
|
83
|
Amortisation of
land use right
|
163
|
163
|
163
|
Other
gains
|
-
|
-
|
(282
)
|
(Increase) /
decrease in current assets:
|
|
|
|
Accounts
receivable, net
|
(816
)
|
8,795
|
(25,939
)
|
Note
receivables
|
1,588
|
(10,364
)
|
5,004
|
Prepayments and other current
assets
|
1,152
|
2,030
|
(3,072
)
|
Inventories
|
12,948
|
(6,542
)
|
10,786
|
Increase /
(decrease) in current liabilities:
|
|
|
|
Accounts
payable
|
(4,598
)
|
465
|
2,269
|
Note
payable
|
(4,750
)
|
1,155
|
3,595
|
Other payables and
accrued expenses
|
(5,995
)
|
3,688
|
(3,145
)
|
Taxes
payable
|
1,174
|
(1,426
)
|
1,121
|
Other long-term
liability
|
(176
)
|
(119
)
|
(133
)
|
|
|
|
|
Net cash provided
by / (used in) operating activities
|
7,601
|
10,931
|
(2,286
)
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchase of
intangible asset
|
(3,994
)
|
-
|
(591
)
|
Purchase of
property, plant and equipment
|
(370
)
|
(613
)
|
(258
)
|
Proceeds from the
sale of property, plant and equipment
|
-
|
182
|
-
|
|
|
|
|
Net cash used in
investing activities
|
(4,364
)
|
(431
)
|
(849
)
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Repayment of short
term bank loan
|
(28,200
)
|
(39,400
)
|
(50,400
)
|
Proceeds from short
term bank loan
|
27,500
|
28,200
|
63,200
|
Decrease in amounts
due to shareholders
|
-
|
-
|
(5,470
)
|
Dividend paid to
shareholders
|
(2,000
)
|
-
|
-
|
|
|
|
|
Net cash (used in)
/ provided by financing activities
|
(2,700
)
|
(11,200
)
|
7,330
|
|
|
|
|
Net increase /
(decrease) in cash, cash equivalents and restricted
cash
|
537
|
(700
)
|
4,195
|
Cash, cash
equivalents and restricted cash, beginning of year
|
8,093
|
8,793
|
4,598
|
|
|
|
|
Cash, cash
equivalents and restricted cash,
end of year
|
8,630
|
8,093
|
8,793
|
|
|
|
|
Cash
breakdown
|
7,135
|
6,595
|
7,303
|
Cash and cash
equivalents
|
1,495
|
1,498
|
1,490
|
Restricted
cash
|
8,630
|
8,093
|
8,793
|
Supplementary
information
|
|
|
|
Interest
paid
|
(1,311
)
|
(2,752
)
|
(3,861
)
|
Income tax
paid
|
(114
)
|
(2,813
)
|
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of
January 1,
2015
|
11,250
|
8,542
|
20,931
|
44,387
|
283
|
85,393
|
Net
income
|
-
|
-
|
-
|
4,936
|
-
|
4,936
|
Disposal of
Non-controlling interest
|
-
|
-
|
-
|
-
|
(283
)
|
(283
)
|
Balance as
of
December 31,
2015
|
11,250
|
8,542
|
20,931
|
49,323
|
-
|
90,046
|
Capitalization of
reserves
|
27,777
|
(9,941
)
|
(17,836
)
|
-
|
-
|
-
|
Net
income
|
-
|
-
|
-
|
10,462
|
-
|
10,462
|
Dividend
paid
|
40,973
|
-
|
-
|
(40,973
)
|
-
|
-
|
Balance as
of
December 31,
2016
|
80,000
|
(1,399
)
|
3,095
|
18,812
|
-
|
100,508
|
Net
income
|
-
|
-
|
-
|
4,051
|
|
4,051
|
Dividend
paid
|
-
|
-
|
-
|
(2,000
)
|
-
|
(2,000
)
|
Balance as
of
December 31,
2017
|
80,000
|
(1,399
)
|
3,095
|
20,863
|
-
|
102,559
|
The
accompanying notes are an integral part of these consolidated
financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Organisation
and principal activities
Zhejiang Jiahuan Electronic Company Limited
(the “Company”) was established in the People’s
Republic of China (“PRC”) as a limited liability
company. The principal activities of the Company are design,
manufacturing and sales of automatic control systems and electric
voltage control equipment for electrostatic precipitators (air
purification equipment).
Details
of the Company’s subsidiary are summarised as
follows:
Name
|
|
Percentage of equity ownership
|
|
Place of incorporation
|
|
Principal activities
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
|
|
|
|
Zhejiang Jiahuan
Engineering Technology Co., Ltd (Formerly known as Zhejiang Jiahuan
Xinyu Environmental Production Co., Ltd)
|
|
100%
|
100%
|
|
PRC
|
|
Manufacturing
and installation services of environmental production
equipment
|
2
Summary
of significant accounting policies
(a)
Basis
of Consolidation
The
consolidated financial statements include the financial statements
of
Zhejiang Jiahuan Electronic Company
Limited
and its subsidiary (the “Group”). In
preparing the consolidated financial statements presented herewith,
all significant intercompany balances and transactions have been
eliminated on consolidation.
A
subsidiary is a company in which the Company, directly or
indirectly, controls more than one half of the voting power; has
the power to appoint or remove the majority of the members of the
board of directors; to cast a majority of votes at the meeting of
the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the
shareholders or equity holders
Revenue
from the sales of automatic control systems, electric voltage
control equipment, environmental equipment, and solar and wind
power equipment is recognized when the product is delivered and the
title is transferred. For certain products where installation is
necessary, revenue is recognized upon completion of
installation.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies
(d)
Research
and Development Costs
Research and
development costs (“R&D” costs) are expensed as
incurred. The R&D costs amounted to approximately
RMB11,874,000, RMB8,814,000 and RMB6,982,000 for the years ended
December 31, 2017, 2016 and 2015 respectively and were included in
“Selling and Administrative” expenses in the
Group’s consolidated statements of operations.
The
Group accounts for income and deferred tax under the provisions of
FASB ASC Subtopic 740-10, Income Taxes, in accordance with which
deferred taxes are recognised for all temporary differences between
the applicable tax balance sheets and the consolidated balance
sheet. Deferred tax assets and liabilities are recognised for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. ASC 740-10 also
requires the recognition of the future tax benefits of net
operating loss carry forwards. A valuation allowance is established
when the deferred tax assets are not expected to be
realised.
In
accordance with ASC 740-10, the Group recognises tax benefits that
satisfy a greater than 50% probability threshold and provides for
the estimated impact of interest and penalties for such tax
benefits. The Group recognizes interest and/or penalties, if any,
related to income tax matters in income tax expense. The Company
did not have such uncertain tax positions in 2017, 2016 and 2015.
The Group is subject to examination of tax authorities in PRC (open
for audit for 2015 to 2017).
Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to be applicable for taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognised in the consolidated statements of operations for the
period that includes the enactment date.
(f)
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand and demand deposits with
banks with original maturities of three months or less. There were
no cash equivalents as of December 31, 2017 and 2016.
Investments
comprise marketable securities which are classified as
available-for-sale securities and are carried at fair value with
unrealized gains and losses, net of taxes, reported as a separate
component of shareholders’ equity. The Company determines any
realized gains or losses on the sale of marketable securities on a
specific identification method, and records such gains and losses
as a component of other income (expense), net in the consolidated
statement of operations.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies – Continued
Receivables, net
are recorded at their nominal values. Doubtful debt allowances are
provided for identified individual risks for these line items. If
the loss of a certain part of the receivables is probable, doubtful
debt allowances are provided to cover the expected loss.
Receivables are written off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote.
Inventories are
stated at the lower of cost or net realizable value determined
using the first-in, first-out method. Costs include purchase and
related costs incurred in bringing each product to its present
location and condition. Net realizable value is calculated based on
the estimated normal selling price, less further costs expected to
be incurred for disposal. Provision is made for obsolete, slow
moving or defective items, where appropriate.
(j)
Property,
Plant and Equipment and Land Use Right, net
Property, plant and
equipment are stated at cost less accumulated depreciation. Gains
or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalised. All
ordinary repair and maintenance costs are expensed as
incurred.
Land in
the PRC is owned by the PRC government. The government in the PRC,
according to PRC Law, may sell the right to use the land for a
specific period for time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are
classified as land use right.
Depreciation of
property, plant and equipment and amortization of land use right
are computed using the straight-line method over the assets’
estimated useful lives as follows:
Land
use right
|
50
years
|
Buildings
|
20
years
|
Plant and
machinery
|
5 to
20 years
|
Office
equipment
|
3 to
10 years
|
Motor
vehicles
|
5 to
10 years
|
(k)
Intangible
Assets, net
The
Company amortizes its intangible assets with definite lives over
their estimated useful lives and reviews these assets for
impairment. The Company is currently amortizing its acquired
intangible assets with definite lives over periods generally
ranging between five to twenty years.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies – Continued
(l)
Impairment
for long lived assets
The
Group adheres to FASB ASC Subtopic 360-10, Property, Plant, and
Equipment, which requires impairment losses to be recorded for
property, plant and equipment to be held and used in operations
when indicators of impairment are present. Reviews are regularly
performed to determine whether the carrying value of assets is
impaired. The Group determines the existence of such impairment by
measuring the fair value and comparing such amount to the carrying
amount of the assets. An impairment loss, if one exists, is then
measured at the amount by which the carrying amount of the asset
exceeds the fair value. Assets to be disposed of are reported at
the lower of the carrying amount or fair value of such assets less
costs to sell. Asset impairment charges are recorded to reduce the
carrying amount of the long-lived asset that will be sold or
disposed of to its estimated fair value. Charges for the asset
impairment reduce the carrying amount of the long-lived assets to
its estimated salvage value in connection with the decision to
dispose of such assets. There were no impairment losses recorded
during each of the three years in the period ended December
31, 2017, 2016 and 2015.
The
suppliers of the Group offer a standard one-year warranty to end
customer of the Group. The Group only provides labour service to
repair or replace parts. The Group does not maintain a general
warranty reserve because historically labour costs for such repair
or replacement have been de minimis.
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions that affect the amounts that are reported in the
consolidated financial statements and accompanying disclosures.
Although these estimates are based on management’s best
knowledge of current events and actions that the Group may
undertake in the future, actual results may be different from the
estimates.
Entities are
considered to be related to the Group if the parties, directly or
indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Group. Related
parties also include principal owners of the Group, its management,
members of the immediate families of principal owners of the Group
and its management and other parties with which the Group may deal
if one party controls or can significantly influence the management
or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests. A party which can significantly influence the
management or operating policies of the transacting parties or if
it has an ownership interest in one of the transacting parties and
can significantly influence the other to an extent that one or more
of the transacting parties might be prevented from fully pursuing
its own separate interests is also a related party.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies – Continued
(p)
Recently Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the "FASB")
issued ASU 2014-09, "Revenue from Contracts with Customers", also
known as the "New Revenue Standard". This update is the result of a
collaborative effort by the FASB and the International Accounting
Standards Board to simplify revenue recognition guidance, remove
inconsistencies in the application of revenue recognition, and to
improve comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets. The core
principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to receive for those goods or services. The New
Revenue Standard is applied through the following five-step
process:
1.
Identify the contract(s) with a customer.
|
2.
Identify the performance obligation in the contract.
|
3.
Determine the transaction price.
|
4.
Allocate the transaction price to the performance obligations in
the contract.
|
5.
Recognize revenue when (or as) the entity satisfies a performance
obligation.
|
For
a public entity, this update is effective for annual and interim
reporting periods beginning after December 15, 2017 with early
adoption permitted. This standard can be applied on either a
retrospective or modified retrospective approach. Since May, 2014,
a number of ASU's have been issued which further refine the
original guidance issued under ASU 2014-09 and are effective in
conjunction with this original standard.
The
Group established an implementation approach to assess the impact
of the new revenue guidance on its operations, consolidated
financial statements and related disclosures. This assessment
included (1) performing contract analyses for each revenue stream
identified, (2) assessing the noted differences in recognition and
measurement that may result from adopting this new standard, (3)
performing detailed analyses of contracts with large customers, and
(4) performing transaction level testing for consistency with
contract provisions that affect revenue recognition. The Group
evaluated the potential impacts of the new standard on its existing
revenue recognition policies and procedures during the fiscal year
ended December 31, 2017, and determined that the Group’s
performance obligations are met at goods/service delivery point,
with no other material obligations. The Group further determined
that its warranty terms are consistent. The Group also determined
that there were no incremental disaggregated revenue disclosures
required in our consolidated financial statements. Based on the
results of the evaluation, adoption of the new standard will not
have a material impact on our consolidated financial statements.
The New Revenue Standard became effective for us on January 1, 2018
and was applied on a retrospective basis, with no cumulative effect
of adoption to any of the consolidated financial statement line
items.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(p)
Recently
Issued Accounting Pronouncements - continued
In
January 2016, the FASB issued ASU 2016-01, "Financial
Instruments – Recognition and Measurement of Financial Assets
and Financial Liabilities (Topic 825)". ASU 2016-01 revises the
classification and measurement of investments in certain equity
investments and the presentation of certain fair value changes for
certain financial liabilities measured at fair value. ASU 2016-01
requires the change in fair value of many equity investments to be
recognized in net income. ASU 2016-01 is effective for interim and
annual periods beginning after December 15, 2017, with early
adoption permitted. Adopting ASU 2016-01 will result in a
cumulative effect adjustment to the Group's retained earnings as of
the beginning of the year of adoption. The Group does not expect
the adoption of ASU 2016-01 to have a material impact on its
consolidated financial statements because there are no material
investments in certain equity investments and financial liabilities
measured at fair value.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments
—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments:, which is effective for fiscal years
beginning after December 15, 2019. Among other things, these
amendments require the measurement of all expected credit losses
for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now
use forward-looking information to better inform their credit loss
estimates. Many of the loss estimation techniques applied today
will still be permitted, although the inputs to those techniques
will change to reflect the full amount of expected credit losses.
In addition, the ASU amends the accounting for credit losses on
available-for-sale debt securities and purchased financial assets
with credit deterioration.
The Group
does not expect the adoption of ASU 2016-13 to have a material
impact on its consolidated financial statements because there are
no material
expected credit losses for financial assets, no
available-for-sale debt securities and no purchased financial
assets with credit deterioration
.
In
August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows
– (Topic 230): Classification of Certain Cash Receipts and
Cash Payments". ASU 2016-15 addresses eight specific cash flow
issues with the objective of reducing the existing diversity in
practice. ASU 2016-15 is effective for fiscal years, and for
interim periods within those years, beginning after December 15,
2017. Early application is permitted. The Group does not expect the
adoption of ASU 2016-15 to have a material impact on its
consolidated financial statements because for distributions
received from equity method Investees, it is already using the
nature of the distribution approach.
In
November 2016,
the FASB
issued
ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted
Cash”, which is effective for fiscal years beginning after
December 15, 2017. These amendments s require that a statement of
cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. As a result,
amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The amendments do not provide
a definition of restricted cash or restricted cash equivalents.
The Group adopted ASU 2016-18
effective January 1, 2017. The adoption of this guidance did not
have a material impact on our consolidated financial
statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(p)
Recently
Issued Accounting Pronouncements - continued
In
January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the Definition of a
Business”, which is effective for fiscal years beginning
after December 15, 2017. These amendments clarify the definition of
a business. The amendments affect all companies and other reporting
organizations that must determine whether they have acquired or
sold a business. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and
consolidation. The amendments are intended to help companies and
other organizations evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses.
The Group does not expect
the adoption of ASU 2017-01 to have a material impact on its
consolidated financial statements because no planned business
combination is to be made.
In
March 2017, the FASB issued ASU 2017-07, “Compensation
— Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost”, which is effective for fiscal years beginning
after December 15, 2017. The amendments apply to all entities that
offer employees defined benefit pension plans, other postretirement
benefit plans, or other types of benefits accounted for under Topic
715, Compensation — Retirement Benefits. The amendments
require that an employer report the service cost component in the
same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The
other components of net benefit cost are required to be presented
in the income statement separately from the service cost component
and outside a subtotal of income from operations, if one is
presented. If a separate line item or items are used to present the
other components of net benefit cost, that line item or items must
be appropriately described. If a separate line item or items are
not used, the line item or items used in the income statement to
present the other components of net benefit cost must be disclosed.
The amendments also allow only the service cost component to be
eligible for capitalization when applicable (e.g., as a cost of
internally manufactured inventory or a self-constructed asset).
The Group does not expect the adoption
of ASU 2017-07 to have a material impact on its consolidated
financial statements because no material
employees defined
benefit pension plans.
No
other new accounting pronouncements issued or effective during the
fiscal year have had or are expected to have a material impact on
the consolidated financial statements.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(q)
Fair
Value Measurement
ASC
820 defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the
Group considers the principal or most advantageous market in which
it would transact and it considers assumptions that market
participants would use when pricing the asset or
liability.
ASC
820 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs
that may be used to measure fair value:
Level
1 – Valuations based on unadjusted quoted prices in active
market for identical assets or liabilities that the Group holds. An
active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
Level
2 – Valuation based on observable prices that are based on
inputs not quoted on active market, but corroborated by market
data.
Level
3 – Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The
Group adheres to ASC 820, Fair Value Measurements and Disclosures,
for all financial assets and liabilities and nonfinancial assets
and liabilities that are recognized or disclosed at fair value in
the consolidated financial statements on a recurring basis (at
least annually).
Financial
instruments include cash and cash equivalents, restricted cash,
accounts receivable, net, notes receivables, prepayments and other
current assets, short-term bank loans, note payable, accounts
payable,
other
payables
and
accrued expenses. The carrying amounts of
cash and cash equivalents, restricted cash, accounts receivable,
net, notes receivables, prepayments and other current assets, short
term bank loans, note payble, accounts payable, other payables and
accrued expenses
approximate their fair value due to the
short term maturities of these instruments.
The
fair values of current financial assets and liabilities carried at
amortized cost approximate their carrying amounts.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2
Summary
of significant accounting policies - Continued
(r)
Shipping
and handling costs
Amounts
billed to customers related to shipping and handling are classified
as revenues, and the Group’s shipping and handling costs are
included in cost of revenues.
Restricted cash
represents cash deposits retained with banks in the PRC for staff
welfare. The amount is expected to be released within one year
after the balance sheet date.
Interest
relating to loans repaid is expensed in the period the repayment
occurs.
(u)
Concentration of credit risk
Financial
instruments that potentially subject the Group to significant
concentration of credit risk primarily consist of cash and cash
equivalents, restricted cash, accounts receivable, net, and
prepayments. The maximum exposure of such assets to credit risk is
their carrying amounts as of the balance sheet dates.
As
of December 31, 2017 and 2016, all of the Group’s cash
and cash equivalents were deposited in financial institutions
located in the PRC, which management believes are of high credit
quality.
Accounts
receivable are typically unsecured and are derived from revenue
earned from the customers. The risk with respect to accounts
receivable is mitigated by credit evaluations the Group performs on
its customers and its ongoing monitoring of outstanding
balances.
Prepayments
made to suppliers are typically unsecured and arise from deposits
paid in advance for future purchases. Due to the Group’s
concentration of prepayments made to a limited number of suppliers
and the significant prepayments that are made to them, any negative
events or deterioration in financial strength with respect to the
Group’s suppliers may cause material loss to the Group and
have a material adverse effect on the Group’s financial
condition and results of operations. The risk with respect to
prepayments made to suppliers is mitigated by credit evaluations
that the Group performs on its suppliers prior to making any
prepayments and the ongoing monitoring of its suppliers’
performance.
(v)
Government grant income
Government grant
income consisted of receipt of funds to subsidize the investment
cost of information technolofy system development and market
development in China. No present of future obligation arises from
the receipt of such amount.
Government
grants are recognized in the consolidated balance sheet initially
when there is reasonable assurance that they will be received and
that the Group will comply with the condistions attaching to them.
Grants that compensate the Group for expenses incurred are
recognized as income in the consolidated statement of operations on
a systematic basis in the same periods in which the expenses are
incurred. Grants that compensate the Group for the cost of an asset
are deducted from the carrying amount of the asset and sonsequently
are effectively recognized in the consolidated statement of
operations over the useful life of the asset by way of reduced
depreciation expenses.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Government
grant
|
4,350
|
3,115
|
200
|
Rental income
(i)
|
1,316
|
1,271
|
901
|
Interest
income
|
4
|
54
|
44
|
Sundry
income
|
176
|
152
|
263
|
|
5,846
|
4,592
|
1,408
|
(i)
Rental income under
operating leases is recognized on a straight-line basis over the
term of the relevant lease.
According to
relevant PRC tax laws and regulations, entities incorporated in the
PRC are subject to Enterprise Income Tax (“EIT”) at a
statutory rate of 25% or reduced national EIT rates for certain
High and New Technology Enterprises (“HNTE”) on PRC
taxable income.
The Company is
classified as HNTE which enjoys a preferential tax rate of
15%.
The
provision for income taxes consists of:
|
|
|
|
|
|
|
|
Income
taxes
|
263
|
1,387
|
861
|
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
Income
taxes (continued)
The
principal reconciling items from income tax computed at the
statutory tax rates and at the effective income tax rates are as
follows:
|
|
|
|
|
|
|
|
Income before
income taxes
|
4,314
|
11,849
|
5,797
|
|
|
|
|
Computed tax using
respective companies’ statutory tax rates
|
988
|
2,326
|
1,119
|
Tax effect on
revenue not subject to tax
|
(752
)
|
(930
)
|
(447
)
|
Under / (over)
provision for income tax in prior years
|
27
|
(9
)
|
189
|
Total provision for
income tax at effective tax rate
|
263
|
1,387
|
861
|
No
deferred tax assets or liabilities have been recognized in the
consolidated financial statements as the Group did not have
material temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts as at December
31, 2017, and 2016.
5
Accounts
receivable, net
|
|
|
|
|
|
Accounts
receivable, gross
|
91,885
|
91,069
|
Less: Allowance for
doubtful debts
|
(32
)
|
(32
)
|
Accounts
receivable, net
|
|
|
|
91,853
|
91,037
|
|
|
|
|
|
|
Balance at
beginning and end of the year
|
|
|
|
(32
)
|
(32
)
|
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
Prepayments
and other current assets
Prepayment and
other current assets mainly represent deposits for bidding
projects, deposits for purchases and services and prepaid
expenses.
|
|
|
|
|
|
Prepayments and
other receivables
|
8,026
|
11,994
|
Deposits
|
6,264
|
3,448
|
|
14,290
|
15,442
|
|
2017
|
|
|
Gross
unrealized
|
|
|
|
|
|
|
|
|
|
|
|
Long term
investment:
|
|
|
|
|
Unlisted
investment
|
69
|
-
|
-
|
69
|
|
|
|
|
Gross
unrealized
|
|
|
|
|
|
Fair
Value
|
|
|
|
|
|
Long term
investment:
|
|
|
|
|
Unlisted
investment
|
69
|
-
|
-
|
69
|
Long
term investment valued at amortized cost.
The
fair value of the unlisted investment approximates its book
value.
|
|
|
|
|
|
Raw
materials
|
1,764
|
6,529
|
Work in
progress
|
11,316
|
11,264
|
Finished
goods
|
1,977
|
10,212
|
|
15,057
|
28,005
|
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9
Property,
plant and equipment, net
|
|
|
|
|
|
Buildings
|
34,724
|
34,724
|
Plant and
machinery
|
5,813
|
7,014
|
Office
equipment
|
1,252
|
1,206
|
Motor
vehicles
|
467
|
467
|
|
42,256
|
43,411
|
Less: Accumulated
depreciation
|
(22,294
)
|
(21,550
)
|
|
19,962
|
21,861
|
|
|
|
|
|
|
|
|
Depreciation
charge
|
2,093
|
2,211
|
2,296
|
Buildings with a
carrying amount of approximately RMB34,724,000 and RMB34,724,000 as
of December 31, 2017 and 2016 respectively were pledged, along with
the land use right as discussed below, to secure the
Company’s short-term bank loans.
|
|
|
|
|
|
Land use
right
|
7,987
|
7,987
|
Less: Accumulated
amortisation
|
(1,862
)
|
(1,699
)
|
|
6,125
|
6,288
|
|
|
|
|
|
|
|
|
Amortisation
expense
|
163
|
163
|
163
|
Land
use right, net with a carrying amount of approximately RMB6,125,000
and RMB6,288,000 as of December 31, 2017 and 2016 was pledged,
along with the buildings discussed above, to secure the
Company’s short-term bank loans.
The
following table represents the total estimated amorization of land
use right, net for the five succeeding fiscal years to December 31,
2017:
For the Twelve Months Ending December 31,
|
Estimated Amortization Expenses
|
|
|
2018
|
163
|
2019
|
163
|
2020
|
163
|
2021
|
163
|
2022
|
163
|
Thereafter
|
5,310
|
|
6,125
|
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Software
|
4,688
|
591
|
|
4,688
|
591
|
Less: Accumulated
amortization
|
(1,043
)
|
(349
)
|
|
3,645
|
242
|
|
|
|
|
|
|
|
|
Amortization
expenses
|
591
|
266
|
83
|
The
useful lives of intangible assets, net of the Group are normally
5-20 years. The following table represents the total estimated
amortization of intangible assets, net for the five succeeding
fiscal years to December 31, 2017:
For
the Twelve Months Ending December 31,
|
Estimated
Amortization Expenses
|
|
|
|
|
2018
|
591
|
2019
|
591
|
2020
|
591
|
2021
|
591
|
2022
|
591
|
Thereafter
|
690
|
|
3,645
|
12
Other
payables and accrued expenses
|
|
|
|
|
|
Deposits received
from customers
|
4,938
|
10,979
|
Accrued
expenses
|
2,909
|
2,795
|
Other
payables
|
69
|
137
|
|
7,916
|
13,911
|
The
short term loans as of December 31, 2017 bear interest at fixed
rates ranging from 4.9% to 5.655% per annum (December 31, 2016:
4.568% to 6.630%) with maturity dates from March 2, 2018 to
December 17, 2018 and are secured by the Company’s buildings
and land use right. Interest paid during the years ended December
31, 2017 and 2016 was approximately RMB1,310,000 and RMB2,752,000
respectively.
14
Dividends
to shareholders
In the
fiscal year ended December 31, 2017 the Company declared and paid a
dividend of RMB2,000,000 to the shareholders (2016: declared
RMB40,973,000).
15
Other
long term liabilities
Other
long term liabilities represent accrued staff benefits and
subsidies received from the government in relation to an agreement
to meet certain profit and turnover targets until the balance can
be recognised as reserves of the Group. As the targets are yet to
be met, the balance remained in other long term
liabilities.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16
PRC
statutory reserves
Under
the relevant PRC laws and regulations, the Group is required to
appropriate a certain percentage of its respective net income to
two statutory funds, namely the statutory reserve fund and the
statutory staff welfare fund.
(i)
Statutory reserve
fund
Pursuant to
applicable PRC laws and regulations, the Group is required to
allocate at least 10% of its net income to the statutory reserve
fund until such fund reaches 50% of its registered capital. The
statutory reserve fund can be utilised upon the approval by the
relevant authorities, to offset accumulated losses or to increase
its registered capital, provided that such fund be maintained at a
minimum of 25% of its registered capital.
(ii)
Statutory staff
welfare fund
Pursuant to
applicable PRC laws and regulations, the Group is required to
allocate certain amount of its net income to the statutory staff
welfare fund determined by it. The staff welfare fund can only be
used to provide staff welfare facilities and other collective
benefits to its employees. This fund is non-distributable other
than upon liquidation of the Group.
As
stipulated by the rules and regulations in the PRC, the Group
contributes to the state-sponsored retirement plans for its
employees in Mainland China. The Group contributes approximately
26% of the basic salaries of its employees, and has no further
obligations for the actual payment of pension or post-retirement
benefits beyond the annual contributions. The state-sponsored
retirement plans are responsible for the entire pension obligations
payable to retired employees.
During
the year ended December 31, 2017 and 2016, the aggregate
contributions of the Group to the aforementioned pension plans and
retirement benefit schemes were approximately RMB1,317,000 and
RMB1,799,000 respectively.
18
Commitments
and contingencies
The
Group has no rental expense during the year ended December 31, 2017
(2016 and 2015: RMB Nil). As of December 31, 2017, the Group has no
future minimum lease payments under non-cancellable operating
leases.
The
Group is not currently a party to any legal proceeding,
investigation or claim which, in the opinion of the management, is
likely to have a material adverse effect on the business, financial
condition or results of operations.
ZHEJIANG JIAHUAN ELECTRONIC COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
19
Future
Minimum rental receivable
The
Company entered into two separate tenancy agreements with two third
parties with lease term from August 15, 2016 to August 14, 2019
with monthly rental income of RMB48,972 for the period from August
15, 2016 to August 14, 2018 and RMB 51,420 for the period from
August 15, 2018 to August 14, 2019 and with lease term from May 15,
2017 to May 14, 2019 with monthly rental income of RMB20,880 for
the period from May 15, 2017 to May 14, 2018 and RMB21,924 for the
period from May 15, 2018 to May 14, 2019,
respectively.
At the
end of the reporting period, the Company’s total future
minimum rental receivable under non-cancellable operating leases is
as follows:-
|
|
|
|
|
|
Within 1
year
|
859
|
791
|
After 1 year but
within 5 years
|
447
|
-
|
|
1,306
|
791
|
The
Group’s activities expose it mainly to credit
risk.
The
Group has no significant concentration of credit risk. The Group
has policies in place to ensure that sales of products are made to
customers with an appropriate credit history. The Group has
policies that limit the amount of credit exposure to any customers.
Cash in banks is not insured in PRC.
There is no
policy requiring collateral for the credit risk of financial
instruments by the Group (2016: Nil).
Euro Tech (NASDAQ:CLWT)
Historical Stock Chart
From Sep 2024 to Oct 2024
Euro Tech (NASDAQ:CLWT)
Historical Stock Chart
From Oct 2023 to Oct 2024