* Giving retroactive effect to the 2
for 1 split effected on June 20, 2018
* Giving retroactive effect to the 2
for 1 split effected on June 20, 2018
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of business and organization
TMSR
Holding Company Limited (the “Company” or “TMSR”), formerly known as JM Global Holding Company (“JM
Global”), was a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of
acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction
or other similar business transaction, one or more operating businesses or assets (“Business Combination”). On June
20, 2018, TMSR completed a reincorporation and as a result, the Company changed its state of incorporation from Delaware to Nevada.
The Articles of Incorporation and Bylaws of TMSR Nevada became the governing instruments of the Company, resulting in a 2-for-1
forward stock split of the Company’s common stock (the “Forward Split). The Reincorporation and Forward Split were
approved by shareholders holding the majority of the outstanding shares of common stock of TMSR Delaware on June 1, 2018 at the
Annual Meeting of Shareholders.
On
February 6, 2018, China Sunlong Environmental Technology Inc. (“China Sunlong”) consummated the business combination
(the “Business Combination”) with JM Global pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”)
dated as of August 28, 2017 by and among (i) JM Global; (ii) Zhong Hui Holding Limited; (iii) China Sunlong; (iv) each of the
shareholders of China Sunlong named on Annex I of the Share Exchange Agreement (the “Sellers”); and (v) Chuanliu Ni,
a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, in the capacity as the representative for
the Sellers. Pursuant to the Share Exchange Agreement, JM Global acquired from the Sellers all of the issued and outstanding equity
interests of China Sunlong in exchange for 17,990,856 newly-issued shares of common stock of JM Global to the Sellers. 1,799,088
of these newly-issued shares are held in escrow for 18 months from the closing date of the Business Combination as a security
for China Sunlong and the Sellers’ indemnification obligations under the Share Exchange Agreement. This transaction is accounted
for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders
of China Sunlong owns the majority of the outstanding shares of JM Global immediately following the completion of the transaction
and JM Global’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was
deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong.
The financial statements of China Sunlong prior to February 6, 2018 are prepared on the basis as if the reorganization became
effective as of the beginning of the first period presented in the accompanying consolidated financial statements of JM Global.
China
Sunlong is a holding company incorporated on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive
operations other than holding all of the outstanding share capital of Shengrong Environmental Protection Holding Company Limited
(“Shengrong BVI”). Shengrong BVI is a holding company incorporated on June 30, 2015, under the laws of the British
Virgin Islands. Shengrong BVI has no substantive operations other than holding all of the outstanding share capital of Hong Kong
Shengrong Environmental Technology Limited (“Shengrong HK”). Shengrong HK is also a holding company holding all of
the outstanding equity of Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).
The
Company focuses on the industrial solid waste recycling and comprehensive utilization. The Company’s main products are high
efficiency permanent magnetic separators and comprehensive utilization systems for industrial solid wastes. The Company’s
headquarter is located in Hubei Province, in the People’s Republic of China (the “PRC” or “China”).
All of the Company’s business activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong
Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.
On
April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries
(collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with
Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd.
(collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated
in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement,
the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for
the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total
Consideration”), of which $5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0
million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”).
The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing
price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject
to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary
for acquisitions of this type. The Acquisition closed on May 1, 2018. Starting on May 1, 2018, the Company’s business activities
added the research, development, production and sale of coating materials.
On
August 16, 2018, The Purchasers and the Sellers entered into a supplement agreement (“Supplement Agreement”), which
modified the terms of consideration set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018.
Pursuant to the Supplement Agreement, in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay
a total consideration of $11.2 million (“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid
in cash (“Cash Consideration”) and $4.7 million shall be paid in shares of common stock (“Common Stock”),
par value $0.0001, of TMSR (“Share Consideration”). In the Supplement Agreement, both Purchasers and Sellers also
agreed to delete the section 3.3 of the Share Purchase Agreement, a section that stipulates the Share Consideration shall be issued
in three equal installments.
On
March 31, 2017, China Sunlong completed its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex
BVI”). At the closing of such acquisition, the selling shareholders of TJComex BVI received 5,935 shares (“Payment
Shares”) of China Sunlong Common Stock valued at $926.71 per share for 100% of their equity in TJComex BVI. TJComex BVI
owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited (“TJComex HK”), a Hong
Kong limited liability company, which owns 100% equity interest of Tianjin Corro Technological Consulting Co., Ltd. (“TJComex
WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC. Pursuant to certain contractual arrangements,
TJComex WFOE controls Tianjin Commodity Exchange Co., Ltd. (“TJComex Tianjin”), a limited liability company incorporated
under the law of the PRC. TJComex Tianjin is engaged in general merchandise trading business and related consulting services,
and its headquarter is located in the city of Tianjin, PRC.
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose of TJComex BVI is
to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the director of China Sunlong.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the
consolidated financial statements for the period ending December 31, 2018. As TJComex operating revenue was less than 1% of the
Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s
operations and financial results, the results of operations for TJComex were not reported as discontinued operations under the
guidance of Accounting Standards Codification 205.
On
October 10, 2017, Hubei Shengrong established a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving
Science and Technology Ltd. (“Fujian Shengrong”), with registered capital of RMB 10,000,000 (approximately USD 1,518,120).
Fujian Shengrong has no operations prior to May 30, 2018. On May 30, 2018, Hubei Shengrong and two unrelated entities entered
into certain Capital Transfer and Contribution Agreement pursuant to which these two entities shall contribute cash of approximately
USD 5.0 million (RMB 32.0 million) into Fujian Shengrong and Hubei Shengrong shall contribute approximately USD 1.3 million (RMB
8.0 million) which is the consideration for certain technology consulting services to be provided by Hubei Shengrong to the two
entities. Upon completion of the contribution, the total registered capital of Fujian Shengrong increased to RMB 40.0 million
(approximately USD 6.3 million) and Hubai Shengrong owns 20% and the two entities collectively own 80% of the equity interest
of Fujian Shengrong. In August, 2018, Hubei Shengrong transferred 20% equity interest of Fujian Shengrong to Shengrong WFOE. The
Company will account for the investment in Fujian Shengrong using the cost method. Since Shengrong WFOE did not provide any cash
contribution to Fujian Shengrong or technology services, the investment balance under the cost method investment on March 31,
2019 is $0.
On
November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong
Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”),
a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the Purchase
Agreement, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange
for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements
(the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control,
manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”).
On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements
with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide Shengrong WFOE with the power, rights
and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including
absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license
to carry out coal trading business in China. The Acquisition closed on November 30, 2018. Starting on November 30, 2018, the Company’s
business activities added coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap,
of which business activities are carried out in Nantong, Jiang Su Province, PRC.
On
December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises
Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”).
Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s
agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the
“Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred
as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan
Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change,
Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately
7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the
foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling
systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development
and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder
of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team
and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong
WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling
systems business and the processed industrial waste materials trading business, this restructuring did not constitute a strategic
shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations
for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
The
accompanying consolidated financial statements reflect the activities of TMSR and each of the following entities:
Name
|
|
|
Background
|
|
Ownership
|
China Sunlong
|
|
●
|
A Cayman Islands company
|
|
100% owned by the Company
|
Shengrong BVI
|
|
●
●
|
A British Virgin Island company
Incorporated on June 30, 2015
|
|
100% owned by China Sunlong
|
Shengrong HK
|
|
●
●
|
A Hong Kong company
Incorporated on September 25, 2015
|
|
100% owned by Shengrong BVI
|
Shengrong WFOE
|
|
●
|
A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by Shengrong HK
|
|
|
●
●
●
●
|
Incorporated on March 1, 2016
Registered capital of USD 12,946 (HKD100,000), fully funded
Purchase and sales of high efficiency permanent magnetic separator
and comprehensive utilization system
Trading of processed industrial waste materials
|
|
|
Hubei Shengrong
2
|
|
●
●
|
A PRC limited liability company
Incorporated on January 14, 2009
|
|
100% owned by Shengrong WFOE
|
|
|
●
|
Registered capital of USD 4,417,800 (RMB 30,000,000),
fully funded
|
|
|
|
|
●
●
|
Production and sales of high efficiency permanent magnetic separator
and comprehensive utilization system.
Trading of processed industrial waste materials
|
|
|
Wuhan HOST
|
|
●
●
●
|
A PRC limited liability company
Incorporated on October 27, 2010
Registered capital of USD 750,075 (RMB 5,000,000),
fully funded
|
|
100% owned by Shengrong WFOE
|
|
|
●
|
Research, development, production and sale of coating materials.
|
|
|
Shanghai Host Coating Materials Co., Ltd. (“Shanghai HOST”)
|
|
●
●
●
|
A PRC limited liability company
Incorporated on December 11, 2014
Registered capital of USD 3,184,371 (RMB 20,000,000),
to be fully funded by November 2024
|
|
|
|
|
●
|
No operations and no capital contribution has been made as of December 31, 2018
|
|
80% owned by Wuhan HOST
|
|
|
|
|
|
|
Wuhan HOST Coating Materials Xiaogan Co., Ltd. (“Xiaogan HOST”)
|
|
●
●
●
●
|
A PRC limited liability company
Incorporated on December 25, 2018
Registered capital of USD 11,595,379 (RMB 80,000,000),
to be fully funded by December 2028
No operations and no capital contribution has been made as of
December 31, 2018
|
|
90% owned by Wuhan HOST
|
Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”)
|
|
●
●
●
●
|
A PRC limited liability company
Incorporated on May 20, 2009
Registered capital of USD 3,171,655 (RMB 20,180,000), fully
funded
Coal wholesales and sales of coke, steels, construction materials,
mechanical equipment and steel scrap
|
|
VIE of Shengrong WFOE
|
TJComex BVI
1
|
|
●
●
|
A British Virgin Island company
Incorporated on March 8, 2016
|
|
100% owned by China Sunlong
|
TJComex HK
1
|
|
●
●
|
A Hong Kong company
Incorporated on March 19, 2014
|
|
100% owned by TJComex BVI
|
TJComex WFOE
1
|
|
●
|
A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by TJComex HK
|
|
|
●
|
Incorporated on March 10, 2004
|
|
|
|
|
●
|
Registered capital of USD 200,000
|
|
|
TJComex Tianjin
1
|
|
●
●
|
A PRC limited liability company
Incorporated on November 19, 2007
|
|
100% owned by TJComex WFOE
|
|
|
●
|
Registered capital of USD 7,809,165 (RMB 55,000,000)
|
|
|
|
|
●
|
General merchandise trading business and related
consulting services
|
|
|
1
|
Disposed
on April 2, 2018
|
2
|
Disposed
on December 27, 2018
|
Contractual
Arrangements
Rong
Hai is controlled through contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries.
Such contractual arrangements consist of a series of five agreements, consulting services agreement, equity pledge agreement,
call option agreement, voting rights proxy agreement, and operating agreement (collectively the “Contractual Arrangements”,
which were signed on November 30, 2018).
Material
terms of each of the Rong Hai VIE Agreements are described below:
Consulting
Services Agreement
Pursuant
to the consulting services agreement between Rong Hai and Shengrong WFOE dated November 30, 2018, Shengrong WFOE has the exclusive
right to provide consulting services to Rong Hai relating to Rong Hai’s business, including but not limited to business
consulting services, human resources development, and business development. Shengrong WFOE exclusively owns any intellectual property
rights arising from the performance of this agreement. Shengrong WFOE has the right to determine the service fees based on Rong
Hai’s actual operation on a quarterly basis.
This
consulting services agreement shall take effect on the date of execution of this consulting services agreement and this consulting
services agreement shall be in full force and effective until Rong Hai’s valid operation term expires. Shengrong WFOE may,
at its discretion, decide to renew or terminate this consulting services agreement.
Equity
Pledge Agreement.
Under
the equity pledge agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, the shareholders
pledged all of their equity interests in Rong Hai to Shengrong WFOE to guarantee Rong Hai’s performance of relevant obligations
and indebtedness under the consulting services agreement. In addition, the shareholders of Rong Hai have completed the registration
of the equity pledge under the agreement with the competent local authority. If Rong Hai breaches its obligation under the consulting
services agreement, Shengrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity
interests.
This
equity pledge agreement shall take effect on the date of execution of this equity pledge agreement and this equity pledge agreement
shall be in full force and effective until Rong Hai and Shengrong WFOE’s satisfaction of all contractual obligations and
settlement of all secured indebtedness. Upon Shengrong WFOE’s request, Rong Hai shall extend its operation period to sustain
the effectiveness of this equity pledge agreement.
Call
Option Agreement
Under
the call option agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, each of the
shareholders of Rong Hai irrevocably granted to WFOE or its designee an option to purchase at any time, to the extent permitted
under PRC law, all or a portion of his equity interests in Rong Hai. Also, Shengrong WFOE or its designee has the right to acquire
any and all of its assets of Rong Hai. Without Shengrong WFOE’s prior written consent, Rong Hai’s shareholders cannot
transfer their equity interests in Rong Hai, and Rong Hai cannot transfer its assets. The acquisition price for the shares or
assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option.
This
call option agreement shall take effect on the date of execution of this call option agreement. Rong Hai and Shengrong WFOE shall
not terminate this call option agreement under any circumstances for any reason unless it is early terminated by Shengrong WFOE
or by the requirements under the applicable laws. This call option agreement shall be terminated provided that all equity interest
or assets under this option is transferred to Shengrong WFOE or its designee.
Voting
Rights Proxy Agreement
Under
the voting rights proxy agreement among Shengrong WFOE and the shareholders of Rong Hai dated November 30, 2018, each shareholder
of Rong Hai irrevocably appointed Shengrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and
all rights that such shareholder has in respect of his equity interests in Rong Hai, including but limited to the power to vote
on its behalf on all matters of Rong Hai requiring shareholder approval in accordance with the articles of association of Rong
Hai.
The
voting rights proxy agreement shall take effect on the date of execution of this voting rights proxy agreement and remain in effect
indefinitely for the maximum period of time permitted by law in consideration of Shengrong WFOE.
Operating
Agreement
Pursuant
to the operating agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, Rong Hai and
the shareholders of Rong Hai agreed not to enter into any transaction that could materially affect Rong Hai’s assets, obligations,
rights or operations without prior written consent from Shengrong WFOE, including but not limited to the amendment of the articles
of association of Rong Hai. Rong Hai and its shareholders agree to accept and follow our corporate policies provided by Shengrong
WFOE in connection with Rong Hai’s daily operations, financial management and the employment and dismissal of Rong Hai’s
employees. Rong Hai agreed that it should seek guarantee from Shengrong WFOE first if any guarantee is needed for Rong Hai’s
performance of any contract or loan in the course of its business operation.
This
operating agreement shall take effect on the date of execution of this operating agreement and this operating agreement shall
be in full force and effective until Rong Hai’s valid operation term expires. Either party of Shengrong WFOE and Rong Hai
shall complete approval or registration procedures for the extension of its business term three months prior to the expiration
of its business term, for the purpose of the maintenance of the effectiveness of this operating agreement.
All
the Rong Hai VIE Agreements became effective immediately upon their execution.
Note
2 – Summary of significant accounting policies
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations
of the Securities Exchange Commission (“SEC”). Interim results are not necessarily indicative of results to be expected
for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s
annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1,
2019.
Principles
of consolidation
The
unaudited condensed financial statements of the Company include the accounts of TMSR and its wholly owned subsidiaries and VIE.
All intercompany transactions and balances are eliminated upon consolidation.
Use
of estimates and assumptions
The
preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and
expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated
financial statements include the useful lives of intangible assets, deferred revenues and plant and equipment, impairment of long-lived
assets, collectability of receivables, inventory valuation allowance, present value of lease liabilities and realization of deferred
tax assets. Actual results could differ from these estimates.
Foreign
currency translation and transaction
The
reporting currency of the Company is the U.S. dollar. The Company in China conducts its businesses in the local currency, Renminbi
(RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s
Bank of China at the end of the period. The statement of income accounts are translated at the average translation rates and the
equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated
other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred.
Translation
adjustments included in accumulated other comprehensive loss amounted to $209,608 and $720,693 as of March 31, 2019 and December
31, 2018, respectively. The balance sheet amounts, with the exception of shareholders’ equity at March 31, 2019 and December
31, 2018 were translated at 6.71 RMB and 6.88 RMB to $1.00, respectively. The shareholders’ equity accounts were stated
at their historical rate. The average translation rates applied to statement of income accounts for the three months ended March
31, 2019 and 2018 were 6.75 RMB and 6.36 RMB, respectively. Cash flows are also translated at average translation rates for the
periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding
balances on the consolidated balance sheet.
The
PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations.
These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that
are subject to the restrictions.
Accounts
receivable, net
Accounts
receivable include trade accounts due from customers. An allowance for doubtful accounts may be established and recorded based
on management’s assessment of potential losses based on the credit history and relationships with the customers. Management
reviews its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when
necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined
that the likelihood of collection is not probable. As of March 31, 2019 and December 31, 2018, $633,759 and $732,846 were recorded
for allowance for doubtful accounts, respectively.
Inventories
Inventories
are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the first-in-first-out
method in Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. Management reviews inventories for obsolescence
and cost in excess of net realizable value at least annually and records a reserve against the inventory when the carrying value
exceeds net realizable value. As of March 31, 2019 and December 31, 2018, no obsolescence and cost in excess of net realizable
value were recorded for allowance.
Prepayments
Prepayments
are funds deposited or advanced to outside vendors for future inventory or services purchases. As a standard practice in China,
many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete
its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with
its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
Plant
and equipment, net
Plant
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives
and residual value are as follows:
|
|
Useful Life
|
|
Estimated Residual Value
|
|
Building
|
|
5 – 20 years
|
|
|
5
|
%
|
Office equipment and furnishing
|
|
5 years
|
|
|
5
|
%
|
Production equipment
|
|
3-10 years
|
|
|
5
|
%
|
Automobile
|
|
5 years
|
|
|
5
|
%
|
Leasehold improvements
|
|
Shorter of the remaining lease terms or estimated useful lives
|
|
|
0
|
%
|
The
cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts
and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance
and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful
life of assets, are capitalized. The Company also re-evaluates the periods of depreciation and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
Right-of-use
assets and lease liabilities
In February 2016, the FASB issued
ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease
obligations (lease liability) for leases previously classified as operating leases under generally accepted accounting principles
on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after
December 15, 2018, including interim periods within those fiscal years. The impact of the adoption on January 1, 2019 increased
the right-of-use assets and lease liabilities by approximately $317,000.
Intangible
assets, net
Intangible
assets represent land use rights and patents, and they are stated at cost, less accumulated amortization.
Research and development costs associated with internally developed patents are expensed when incurred. Amortization expense
is recognized on the straight-line basis over the estimated useful lives of the assets. All land in the PRC is owned by the
government; however, the government grants “land use rights.” The Company has obtained the rights to use various
parcels of land. The patents have finite useful lives and are amortized using a
straight-line method that reflects the estimated pattern in which the economic benefits of the intangible asset are to be
consumed. The Company amortizes the cost of the land use rights and patents, over their useful life using
the straight-line method. The Company also re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. The estimated useful lives are as follows:
|
|
Useful Life
|
Land
use rights
|
|
50
years
|
Patents
|
|
10
- 20 years
|
Goodwill
Goodwill
represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired
subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when
circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment
exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of income.
Impairment losses on goodwill are not reversed. As of March 31, 2019 and December 31, 2018, no impairment of goodwill was recognized.
Impairment
for long-lived assets
Long-lived
assets, including plant, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes
in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate
that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the
undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted
future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any,
are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of
the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable
market values. As of March 31, 2019 and December 31, 2018, no impairment of long-lived assets was recognized.
Fair
value measurement
The
accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments
and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount
of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities,
customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The
accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement
and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
Financial
instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or
cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected
realization and their current market rates of interest.
Customer
deposits
In
Shengrong WFOE, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 3%
to 10% advanced deposits from the customers upon the signing of the sales contracts. At various stages of the sales contract execution,
the Company generally collects certain amounts of advanced deposits from the customers based on the approximate amount of cash
flows needed at each stage. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
In
Wuhan HOST, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 95% to
100% advanced deposits from the customers upon signing of the sales contracts. A few customers with good credit history are not
required to make any deposit. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
Revenue
recognition
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers
(ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did
not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than
retainage revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance
obligations. However, the impact of the Company’s retainage revenue was not material as of the date of adoption, and as
a result, did not result in an adjustment.
The
core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of
goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such
exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be
recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s
revenue streams are primarily recognized at a point in time except for the retainage revenues where the retainage periods are
recognized over the retainage period, usually is a period of twelve months.
The
ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that
the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will
not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue
when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared
to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the
Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards
and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition
except its retainage revenues.
An
entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order
to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls
the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange.
Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer,
will result in the recognition of the net amount the entity is entitled to retain in the exchange.
Revenue
from equipment and systems, revenue from coating and fuel materials, and revenue from trading and others are recognized at the
date of goods delivered and title passed to customers, when a formal arrangement exists, the price is fixed or determinable, the
Company has no other significant obligations and collectability is reasonably assured. Such revenues are recognized at a point
in time after all performance obligations are satisfied under the new five-step model. In addition, training service revenues
are recognized when the services are rendered and the Company has no other obligations, and collectability is reasonably assured.
These revenues are recognized at a point in time.
Prior
to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as warranty retainage during the
retainage period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the
contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s
policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced
insignificant warranty retainage claims historically. Due to the infrequent and insignificant amount of warranty retainage claims,
the ability to collect retainage was reasonably assured and was recognized at the time of shipment. On January 1, 2018, upon the
adoption of ASU 2014-09 (ASC 606), revenues from product warranty retainage are recognized over the retainage period over 12 months.
For the three months ended March 31, 2019, less than 5% of our retainage revenues were recognized in our consolidated revenues
and included in the Company’s equipment and systems revenues in the accompanying statements of income and comprehensive
income.
Payments
received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
The
Company’s disaggregate revenue streams are summarized as follows:
|
|
For the Three Months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues – Equipment and systems
|
|
$
|
-
|
|
|
$
|
7,081,783
|
|
Revenues – Coating and fuel materials
|
|
|
7,100,513
|
|
|
|
-
|
|
Revenues – Trading and others
|
|
|
165,829
|
|
|
|
416,100
|
|
Total revenues
|
|
$
|
7,266,342
|
|
|
$
|
7,497,883
|
|
Gross
versus Net Revenue Reporting
Starting
from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly
purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications
and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’
site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred
to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers
and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should
be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the
transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance
for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed
industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting
the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory
loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal
in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
Research
and Development (“R&D”) Expenses
Research
and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product
development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D
expenses incurred by the Company are included in the selling, general and administrative expenses and totaled $$77,590 and $1,415
for the three months ended March 31, 2019 and 2018, respectively.
Income
taxes
The
Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results
for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet date.
Deferred
taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in
the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences.
Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible
temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it
is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws
of the relevant taxing authorities.
An
uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax
are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the three
months ended March 31, 2019 and 2018. As of March 31, 2019, the Company’s PRC tax returns filed for 2015, 2016 and 2017
remain subject to examination by any applicable tax authorities.
Earnings
per share
Basic
earnings per share are computed by dividing income available to common shareholders of the Company by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common shares were exercised and converted into common shares. 9,789,674 and 10,500,000
of outstanding warrants which is equivalent to convertible of 4,894,837 and 5,250,000 common shares were excluded from the diluted
earnings per share calculation due to its antidilutive effect for the three months ended March 31, 2019 and 2018, respectively.
824,000 of outstanding options were excluded from the diluted earnings per share calculation due to its antidilutive effect for
the three months ended March 31, 2019 and 2018.
Recently
issued accounting pronouncements
In
February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required
to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive
income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this
Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public
business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update
should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption
of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the Company’s unaudited condensed consolidated balance sheets, statements of income and comprehensive
income and statements of cash flows.
Note
3 – Business combination and restructuring
TJ
Comex BVI
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI, in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose TJComex BVI is to
(i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, for no consideration.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the
consolidated financial statements for the year ended December 31, 2018. As TJComex operating revenue was less than 1% of the Company’s
revenue and the disposal did not constitute a strategic shift that will have a major effect on the Company’s operations
and financial results, the results of operations for TJComex were not reported as discontinued operations under the guidance of
Accounting Standards Codification 205.
Wuhan
HOST
On
April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries
(collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with
Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd.
(collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated
in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement,
the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for
the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total
Consideration”), of which $ 5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0
million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”).
The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing
price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject
to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary
for acquisitions of this type. The Acquisition closed on May 1, 2018.
On
August 16, 2018, The Purchasers and the Sellers entered into a supplement agreement (“Supplement Agreement”), which
modified the terms of consideration set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018.
Pursuant to the Supplement Agreement, in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay
a total consideration of $11.2 million (“Total Consideration”), of which $6.5 million or RMB equivalent shall be paid
in cash (“Cash Consideration”) and $4.7 million shall be paid in shares of common stock (“Common Stock”),
par value $0.0001, of TMSR (“Share Consideration”). In the Supplement Agreement, both Purchasers and Sellers also
agreed to delete the section 3.3 of the Share Purchase Agreement, a section that stipulates the Share Consideration shall be issued
in three equal installments.
The
Company’s acquisition of Wuhan HOST was accounted for as a business combination in accordance with ASC 805. The Company
has allocated the purchase price of Wuhan HOST based upon the fair value of the identifiable assets acquired and liabilities assumed
on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company
is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets
identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related
costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The
following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date,
which represents the net purchase price allocation at the date of the acquisition of Wuhan HOST based on a valuation performed
by an independent valuation firm engaged by the Company:
Total consideration at fair value
|
|
$
|
11,200,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
276,626
|
|
Other current assets
|
|
|
6,763,767
|
|
Plant and equipment
|
|
|
6,499,268
|
|
Other noncurrent assets
|
|
|
2,139,987
|
|
Goodwill
|
|
|
7,544,008
|
|
Total asset
|
|
|
23,223,656
|
|
Total liabilities
|
|
|
(12,023,656
|
)
|
Net asset acquired
|
|
$
|
11,200,000
|
|
Approximately
$7.5 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of
the Company and Wuhan HOST. None of the goodwill is expected to be deductible for income tax purposes.
For the three months ended March 31, 2018,
the impact of the acquisition of Wuhan HOST to the unaudited condensed consolidated statements of income and comprehensive income
was not material.
Rong
Hai
On
November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong
Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”),
a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA,
TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong
Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the
“Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage
and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”).
On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements
with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide WFOE with the power, rights and obligations
equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights
to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out
coal trading business in China. The Acquisition closed on November 30, 2018.
The
Company’s acquisition of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has
allocated the purchase price of Rong Hai based upon the fair value of the identifiable assets acquired and liabilities assumed
on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company
is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets
identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related
costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The
following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date,
which represents the net purchase price allocation at the date of the acquisition of Rong Hai based on a valuation performed by
an independent valuation firm engaged by the Company:
Total consideration at fair value
|
|
$
|
9,260,000
|
|
|
|
Fair Value
|
|
Cash
|
|
$
|
717,056
|
|
Other current assets
|
|
|
5,980,230
|
|
Plant and equipment
|
|
|
28,875
|
|
Other noncurrent assets
|
|
|
116,655
|
|
Goodwill
|
|
|
7,307,470
|
|
Total asset
|
|
|
14,150,286
|
|
Total liabilities
|
|
|
(4,890,286
|
)
|
Net asset acquired
|
|
$
|
9,260,000
|
|
Approximately
$7.3 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of
the Company and Rong Hai. None of the goodwill is expected to be deductible for income tax purposes.
For
the three months ended March 31, 2018, the impact of the acquisition of Rong Hai to the unaudited condensed consolidated statements
of income and comprehensive income was not material.
Hubei
Shengrong
On
December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises
Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”).
Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s
agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the
“Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred
as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan
Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change,
Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately
7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the
foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling
systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development
and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder
of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team
and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong
WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling
systems business and the processed industrial waste materials trading business, the results of operations for Hubei Shengrong
were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.
Hopeway
is jointly owned by Ms. Jiazhen Li, the Company’s chief executive officer, and Mr. Xiaonian Zhang, the Company’s president
and director. As Hopeway is a related party under common control with the Company under Ms. Li and Mr. Zhang, no gain or loss
are recognized in this disposition and the net consideration of the transaction are recognized as addition to capital as opposed
to a gain. Total fair value of the consideration of the cancelled 8,523,320 shares of common stock was determined by using the
average closing stock price of the Company held by Hopeway during the period from February 6, 2018 to December 27, 2018 at $3.56
per share.
As
of December 27, 2018, the net assets of Hubei Shengrong and reconciliation of reduction of capital are as follows:
|
|
December 27, 2018
|
|
CURRENT ASSETS
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,994
|
|
Accounts receivable, net
|
|
|
9,410,436
|
|
Accounts receivable - related party, net
|
|
|
761,794
|
|
Other receivables
|
|
|
48,718
|
|
Other receivable - related party
|
|
|
2,158
|
|
Inventories
|
|
|
5,332,990
|
|
Prepayments
|
|
|
31,793,810
|
|
Total current assets
|
|
|
47,397,900
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, NET
|
|
|
203,992
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
Other assets
|
|
|
7,269
|
|
Deferred tax assets
|
|
|
780,550
|
|
Total other assets
|
|
|
787,819
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,389,711
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
Short term loans - bank
|
|
$
|
2,180,708
|
|
Accounts payable
|
|
|
95,854
|
|
Other payables and accrued liabilities
|
|
|
156,498
|
|
Other payables - related parties
|
|
|
507,183
|
|
Customer deposits
|
|
|
347,853
|
|
Taxes payable
|
|
|
16,602,841
|
|
Total current liabilities
|
|
|
19,890,937
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
|
|
|
Deferred rent liabilities
|
|
|
30,763
|
|
Total other liabilities
|
|
|
30,763
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
19,921,700
|
|
|
|
|
|
|
Total net assets
|
|
$
|
28,468,011
|
|
Total consideration
|
|
|
(30,362,135
|
)
|
Currency translation adjustment
|
|
|
900,281
|
|
Total addition to paid-in-capital
|
|
$
|
993,843
|
|
Note
4 – Variable interest entity
On
November 30, 2018, Shengrong WFOE entered into Contractual Arrangements with Rong Hai and its shareholders upon executing of the
“Purchase Agreement”. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature
of business and organization” above. As a result, the Company classifies Rong Hai as VIE.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities
without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial
interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb
the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is
deemed to be the primary beneficiary and must consolidate the VIE. Shengrong WFOE is deemed to have a controlling financial interest
and be the primary beneficiary of Rong Hai because it has both of the following characteristics:
(1)
The power to direct activities at Hong Hai that most significantly impact such entity’s economic performance, and
(2)
The obligation to absorb losses of, and the right to receive benefits from Hong Hai that could potentially be significant to such
entity.
Accordingly,
the accounts of Hong Hai are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition,
their financial positions and results of operations are included in the Company’s consolidated financial statements beginning
on November 30, 2018.
The
carrying amount of the VIE’s assets and liabilities are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,846,789
|
|
|
$
|
6,321,261
|
|
Property, plants and equipment
|
|
|
25,497
|
|
|
|
27,693
|
|
Other noncurrent assets
|
|
|
204,783
|
|
|
|
118,020
|
|
Goodwill
|
|
|
7,576,271
|
|
|
|
7,392,991
|
|
Total assets
|
|
|
14,653,340
|
|
|
|
13,859,965
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
4,513,756
|
|
|
|
4,188,340
|
|
Non-current liabilities
|
|
|
93,802
|
|
|
|
-
|
|
Total liabilities
|
|
|
4,607,558
|
|
|
|
4,188,340
|
|
Net assets
|
|
$
|
10,045,782
|
|
|
$
|
9,671,625
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
521,446
|
|
|
$
|
508,832
|
|
Accounts payable
|
|
|
1,842,195
|
|
|
|
821,289
|
|
Other payables and accrued liabilities
|
|
|
751,576
|
|
|
|
559,984
|
|
Other payables – related party
|
|
|
1,346,759
|
|
|
|
2,285,701
|
|
Tax payables
|
|
|
21,937
|
|
|
|
12,534
|
|
Lease liabilities
|
|
|
29,843
|
|
|
|
-
|
|
Total current liabilities
|
|
|
4,513,756
|
|
|
|
4,188,340
|
|
Lease liabilities - noncurrent
|
|
|
93,802
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
4,607,558
|
|
|
$
|
4,188,340
|
|
The
summarized operating results of the VIE’s are as follows:
|
|
For the three months ended March 31,
|
|
|
|
2019
|
|
|
|
|
|
Operating revenues
|
|
$
|
5,032,785
|
|
Gross profit
|
|
|
98,685
|
|
Income from operations
|
|
|
189,201
|
|
Net income
|
|
$
|
133,670
|
|
Note
5 – Accounts receivable, net
Accounts
receivable consist of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
5,916,496
|
|
|
$
|
4,924,092
|
|
Less: Allowance for doubtful accounts
|
|
|
(633,759
|
)
|
|
|
(732,846
|
)
|
Total accounts receivable, net
|
|
$
|
5,282,737
|
|
|
$
|
4,191,246
|
|
Movement
of allowance for doubtful accounts is as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
732,846
|
|
|
$
|
6,674,834
|
|
Beginning balance from Wuhan HOST
|
|
|
-
|
|
|
|
218,152
|
|
Beginning balance from Rong Hai
|
|
|
-
|
|
|
|
469,000
|
|
Depositing ending balance of Hubei Shengrong
|
|
|
-
|
|
|
|
(5,203,666
|
)
|
Addition
|
|
|
9,805
|
|
|
|
411,261
|
|
Recovery
|
|
|
(124,954
|
)
|
|
|
(1,020,125
|
)
|
Exchange rate effect
|
|
|
16,062
|
|
|
|
(816,610
|
)
|
Ending balance
|
|
$
|
633,759
|
|
|
$
|
732,846
|
|
Note
6 – Inventories
Inventories
consist of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
2,024,806
|
|
|
$
|
1,965,175
|
|
Work in progress
|
|
|
-
|
|
|
|
258
|
|
Total inventories
|
|
$
|
2,024,806
|
|
|
$
|
1,965,433
|
|
Note
7 – Plant and equipment, net
Plant
and equipment consist of the following:
|
|
March
31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Building
|
|
$
|
5,765,547
|
|
|
$
|
5,626,071
|
|
Production
equipment
|
|
|
995,483
|
|
|
|
954,845
|
|
Office
equipment and furniture
|
|
|
60,569
|
|
|
|
59,102
|
|
Automobile
|
|
|
214,240
|
|
|
|
209,057
|
|
Subtotal
|
|
|
7,035,839
|
|
|
|
6,849,075
|
|
Less:
accumulated depreciation and amortization
|
|
|
(1,214,900
|
)
|
|
|
(1,087,743
|
)
|
Total
|
|
$
|
5,820,939
|
|
|
$
|
5,761,332
|
|
Depreciation
expense for the three months ended March 31, 2019 and 2018 amounted to $70,092 and $51,133, respectively.
Note
8 – Intangible assets, net
Intangible
assets consist of the following:
|
|
March 31,
2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
1,517,850
|
|
|
$
|
1,481,130
|
|
Patents
|
|
|
3,706,649
|
|
|
|
3,616,981
|
|
Software
|
|
|
10,477
|
|
|
|
10,224
|
|
Less: accumulated amortization
|
|
|
(2,452,416
|
)
|
|
|
(2,318,240
|
)
|
Net intangible assets
|
|
$
|
2,782,560
|
|
|
$
|
2,790,095
|
|
Amortization
expense for the three months ended March 31, 2019 and 2018 amounted to $69,002 and $68,724, respectively.
The
Company has one patent that expires in 2019. In the event that the Company is unable to renew the patent, its’ future
results of operations may be materially adversely affected.
The
estimated amortization is as follows:
Twelve months ending March 31,
|
|
Estimated
amortization expense
|
|
|
|
|
|
2020
|
|
$
|
180,198
|
|
2021
|
|
|
177,255
|
|
2022
|
|
|
177,077
|
|
2023
|
|
|
177,077
|
|
2024
|
|
|
176,667
|
|
Thereafter
|
|
|
1,894,286
|
|
Total
|
|
$
|
2,782,560
|
|
Note
9 – Goodwill
The
changes in the carrying amount of goodwill by business units are as follows
:
|
|
Wuhan HOST
|
|
|
Rong Hai
|
|
|
Total
|
|
Balance as of December 31, 2018
|
|
$
|
6,946,059
|
|
|
$
|
7,392,991
|
|
|
$
|
14,339,050
|
|
Foreign currency translation adjustment
|
|
|
172,200
|
|
|
|
183,280
|
|
|
|
355,480
|
|
Balance as of March 31, 2019
|
|
$
|
7,118,259
|
|
|
$
|
7,576,271
|
|
|
$
|
14,694,530
|
|
Note
10 – Related party balances and transactions
Related
party balances
|
a.
|
Other
receivable – related party:
|
Name of related party
|
|
Relationship
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Xiaonian Zhang
|
|
Shareholder of the Company
|
|
$
|
26,817
|
|
|
$
|
40,707
|
|
The
Company advanced funds to the related party for daily operating purposes, and those funds or expenses receipts will be returned
to the Company by the end of 2019.
|
b.
|
Other
payables – related parties:
|
Name of related party
|
|
Relationship
|
|
March 31,
2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Jiazhen Li
|
|
CEO, Former Co-Chairman
|
|
$
|
12,632
|
|
|
$
|
11,232
|
|
Chuanliu Ni
|
|
Co-Chairman
|
|
|
325,907
|
|
|
|
325,907
|
|
Xiaoyan Shen
|
|
CFO
|
|
|
-
|
|
|
|
-
|
|
Zhong Hui Holding Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
140,500
|
|
Chunyong Zheng
|
|
Spouse of shareholder of the Company
|
|
|
2,606,710
|
|
|
|
2,543,651
|
|
Long Liao
|
|
Shareholder of the Company
|
|
|
74,492
|
|
|
|
72,690
|
|
Wuhan Modern
|
|
Under common control of shareholder of the Company
|
|
|
730,271
|
|
|
|
712,605
|
|
Qihai Wang
|
|
Shareholder of the Company
|
|
|
1,009,363
|
|
|
|
1,941,957
|
|
Jirong Huang
|
|
Spouse of shareholder of the Company
|
|
|
64,242
|
|
|
|
77,197
|
|
Yongzheng Wang
|
|
Son of shareholder of the Company
|
|
|
24,398
|
|
|
|
23,808
|
|
Nantong Ronghai Logistics Co., Ltd.
|
|
Under common control of shareholder of the Company
|
|
|
248,757
|
|
|
|
242,739
|
|
Total
|
|
|
|
$
|
5,237,272
|
|
|
$
|
6,092,286
|
|
The
above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.
Note
11 – Debt
Short
term loan
Short
term loan due to bank is as follows:
Short term loans
|
|
Maturities
|
|
Weighted average interest rate
|
|
|
Collateral/Guarantee
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Loan from Bank of Jiangsu
|
|
September 25, 2019
|
|
|
6.31
|
%
|
|
Guaranteed by Qihai Wang’s personal property
|
|
$
|
521,446
|
|
|
|
508,832
|
|
Third
party loan
In
January 2018, the Company obtained an unsecured loan from an unrelated third party in the amount of $144,841 (RMB 1,000,000) due
on August 21, 2020 with no interest. On March 11, 2019, the Board granted an aggregate of 72,785 shares of restricted common stock,
with a fair value of $144,841, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed
to this unrelated third party.
Interest
expense for the three months ended March 31, 2019 and 2018 amounted to $7,842 and $46,972, respectively.
Note
12 – Taxes
Income
tax
United
States
TMSR
was organized in the state of Delaware in April 2015 and re-incorporated in the state of Nevada in June 2018. TMSR’s U.S.
net operating loss for the three months ended March 31, 2019 amounted to approximately $539,000. As of March 31, 2019, TMSR’s
net operating loss carry forward for United States income taxes was approximately $588,000. The net operating loss carry forwards
are available to reduce future years’ taxable income through year 2038. Management believes that the realization of the
benefits from these losses appears uncertain due to the Company’s operating history and continued losses in the United States.
Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management
reviews this valuation allowance periodically and makes changes accordingly.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States.
Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible
low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for
tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial
offset for foreign tax credits. The Company determined that there are no impact of GILTI for the three months ended March 31,
2019 and 2018, which the Company believes that it will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits
are available to reduce its US corporate tax, which may result in no additional US federal income tax being due.
Cayman
Islands
China
Sunlong is incorporated in the Cayman Islands and are not subject to tax on income or capital gains under current Cayman Islands
law. In addition, upon payments of dividends by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British
Virgin Islands
Shengrong
BVI is incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under current British
Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands
withholding tax will be imposed.
Hong
Kong
Shengrong
HK is incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial
statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company
did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since
inception. Under Hong Kong tax law, Shengrong HK is exempted from income tax on its foreign-derived income and there are no withholding
taxes in Hong Kong on remittance of dividends.
PRC
Shengrong
WFOE, Wuhan HOST and Rong Hai are governed by the income tax laws of the PRC and the income tax provision in respect to operations
in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations
and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises
are subject to income tax at a rate of 25% after appropriate tax adjustments.
Significant
components of the provision for income taxes are as follows:
|
|
For the three months ended March 31, 2019
|
|
|
For the three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
20,828
|
|
|
$
|
95,463
|
|
Deferred
|
|
|
30,000
|
|
|
|
210,462
|
|
Total provision for income taxes
|
|
$
|
50,828
|
|
|
$
|
305,925
|
|
Under
the Income Tax Laws of the PRC, companies are subject to income tax at a rate of 25%. However, Wuhan Host obtained the “high-tech
enterprise” tax status in 2016, which reduced its statutory income tax rate to 15% from 2016 to 2019. Tax savings resulted
from the reduced statutory income tax rate amounted to $3,032 and $63,642 for the three months ended March 31, 2019 and 2018,
respectively. Tax savings resulted from the reduced statutory income tax rate that increased the Company’s earnings
per share by $0.00 and $0.01 for the three months ended March 31, 2019 and 2018, respectively.
Deferred
tax assets
Bad
debt allowances must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant
components of deferred tax assets were as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
123,550
|
|
|
$
|
10,396
|
|
Net operating losses carried forward – PRC
|
|
|
216,630
|
|
|
|
-
|
|
Bad debt allowance
|
|
|
180,807
|
|
|
|
205,863
|
|
Valuation allowance
|
|
|
(340,180
|
)
|
|
|
(10,396
|
)
|
Deferred tax assets, net
|
|
$
|
180,807
|
|
|
$
|
205,863
|
|
Value
added tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value
added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 6% to 17% of the gross sales
price and changed to 6% to 16% of gross sales starting in May 2018. The VAT standard rates changed to 6% to 13% of the gross sales
prices starting in April 2019. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials
used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products
and services.
Taxes
payable consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
19,283
|
|
|
$
|
24,436
|
|
Income taxes payable
|
|
|
20,940
|
|
|
|
13,114
|
|
Other taxes payable
|
|
|
54,219
|
|
|
|
18,199
|
|
Total
|
|
$
|
94,442
|
|
|
$
|
55,749
|
|
Note
13 – Leases
Effective January 1, 2019, the
Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require
us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired
or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient
that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption
on January 1, 2019 increased the right-of-uses and lease liabilities by approximately $317,000.
The
Company had an office lease agreement with a 5-year lease term starting in December 2016 until December 2021 and another office
lease agreement with a 5-year lease term starting in January 2018 until January 2023. Upon adoption of ASU 2016-02, the Company
recognized lease labilities of approximately $317,000, with corresponding Right-of-use (“ROU”) assets of the same
amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of
4.75%, which is determined using an incremental borrowing rate.
The weighted average remaining
lease term of its existing leases is 3.22 years.
The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For
the three months ended March 31, 2019 and 2018, rent expenses amounted to $27,971 and $46,818, respectively.
The five-year maturity of the
Company’s lease obligations is presented below:
Twelve months ended March 31,
|
|
Operating lease amount
|
|
2020
|
|
$
|
131,185
|
|
2021
|
|
|
104,948
|
|
2022
|
|
|
81,169
|
|
2023
|
|
|
25,208
|
|
Total lease payments
|
|
|
342,510
|
|
Less: interest
|
|
|
(21,601
|
)
|
Present value of lease liabilities
|
|
$
|
320,909
|
|
Note
14 – Concentration of risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. As of March 31, 2019 and December 31, 2018, no cash were deposited with various financial institutions located in
the U.S. As of March 31, 2019 and December 31, 2018, $548,468 and $680,709 and were deposited with various financial institutions
located in the PRC, respectively. As of March 31, 2019 and December 31, 2018, $7,795 and $7,823 were deposited with one financial
institution located in Hong Kong, respectively. While management believes that these financial institutions are of high credit
quality, it also continually monitors their credit worthiness.
Accounts
receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is
mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding
balances.
Customer
and vendor concentration risk
For
the three months ended March 31, 2019, three customers accounted for 28.0%, 18.4% and 14.1% of the Company’s revenues. For
the three months ended March 31, 2018, two customers accounted for 63.6% and 26.2% of the Company’s revenues.
As
of March 31, 2019, one customer accounted for 40.2% of the Company’s accounts receivable. As of December 31, 2018, two customers
accounted for 41.1% and 13.4% of the Company’s accounts receivable.
For
the three months ended March 31, 2019, three suppliers accounted for 28.6%, 21.4% and 16.4% of the Company’s total purchases.
For the three months ended March 31, 2018, three suppliers accounted for 54.5%, 21.8% and 14.5% of the Company’s total purchases.
As
of March 31, 2019, three suppliers accounted for 42.2%, 22.0% and 13.2% of the Company’s prepayments; and three suppliers
accounted for 41.7%, 20.7% and 10.5% of the Company’s total accounts payable. As of December 31, 2018, three suppliers accounted
for 44.2%, 15.5% and 13.9% of the Company’s total prepayments; and four suppliers accounted for 27.4%, 26.5%, 12.5% and
11.9% of the Company’s total accounts payable.
Note
15 – Equity
Restricted
net assets
The
Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries.
Relevant PRC statutory laws and regulations permit payments of dividends by Shengrong WFOE only out of its retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the
accompanying unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected
in the statutory financial statements of Shengrong WFOE.
Shengrong
WFOE, Wuhan HOST, Rong Hai are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain
statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, Shengrong WFOE may allocate
a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare
fund at its discretion. Wuhan HOST and Rong Hai may allocate a portion of its after-tax profits based on PRC accounting standards
to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable
as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks
designated by State Administration of Foreign Exchange.
As
of March 31, 2019 and December 31, 2018, Shengrong WFOE, Wuhan HOST, and Rong Hai, collectively attributed $0 of retained
earnings for their statutory reserves as they have accumulated losses.
As
a result of the foregoing restrictions, Shengrong WFOE, Wuhan Host and Rong Hai are restricted in their ability to transfer their
net assets to the Company. Foreign exchange and other regulation in the PRC may further restrict Shengrong WFOE, Wuhan Host and
Rong Hai from transferring funds to China Sunlong in the form of dividends, loans and advances. As of March 31, 2019 and December
31, 2018, amounts restricted are the net assets of Shengrong WFOE, Wuhan Host and Rong Hai which amounted to $2,559,373 and $2,347,967,
respectively.
Stock
split
On
June 1, 2018, the Company’s shareholder approved a 2 for 1 stock split of the Company’s common stock at the Annual
Meeting of Shareholders. The stock split was effected on June 20, 2018, pursuant to the completion of the reincorporation from
Delaware to Nevada. All shares and per share amounts used herein and in the accompanying consolidated financial statements have
been retroactively restated to reflect the stock split.
Common
stock
On
June 23, 2018, the Company issued an aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share,
to certain non-U.S. purchasers at a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to
certain securities purchase agreement dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption
from registration under Regulation S promulgated under the Securities Act of 1933, as amended.
On February 12, 2019, the
Company’s warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common
stock using cashless exercises method.
On February 20, 2019, the Company’s
warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using
cashless exercises method.
On
March 11, 2019, the Board granted an aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined
using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the
carrying value of the debt equaled to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized
upon this debt settlement.
On
March 15, 2019, the Board granted an aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined
using the closing price of $2.04 on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying
value of the debt equaled to the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon
this debt settlement.
Warrants
and options
On
July 29, 2015, the Company sold 10,000,000 units at a purchase price of $5.00 per unit (“Public Units”) in its initial
public offering. Each Public Unit consists of one share of the Company’s common stock, $0.0001 par value, and one warrant.
Each warrant will entitle the holder to purchase one-half of one share of common stock at an exercise price of $2.88 per half
share ($5.75 per whole share). Warrants may be exercised only for a whole number of shares of common stock. No fractional shares
will be issued upon exercise of the warrants. The warrants will become exercisable on 30 days after the consummation of its initial
Business Combination with China Sunlong on February 6, 2018. The warrants will expire February 5, 2023. The warrants will be redeemable
by the Company at a price of $0.01 per warrant upon 30 days prior written notice after the warrants become exercisable, only in
the event that the last sale price of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading
day period ending on the third business day prior to the date on which notice of redemption is given.
The
sponsor of the Company purchased, simultaneously with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00
per unit in a private placement for an aggregate price of $2,500,000. Each unit purchased is substantially identical to the units
sold in the Public Offering.
The
Company sold to the underwriter (and/or its designees), for $100, as additional compensation, an option to purchase up to a total
of 800,000 units exercisable at $5.00 per unit (or an aggregate exercise price of $4,000,000) upon the closing of the Public Offering.
Since the option is not exercisable until the earliest on the closing the initial Business Combination, the option will effectively
represent the right to purchase up to 800,000 shares of common stock and 800,000 warrants to purchase 400,000 shares at $5.75
per full share for an aggregate maximum amount of $6,300,000. The units issuable upon exercise of this option are identical to
those issued in the Public Offering.
In
July 2016, the board of directors of the Company appointed two new directors. In August 2016, the sponsor of the Company
granted an option to each of the two new directors to acquire 12,000 shares of common stock at a price of $4.90 per share vested
immediately and exercisable commencing six months after closing of the initial Business Combination and expiring five years from
the closing of the initial Business Combination.
The
aforementioned warrants and options are deemed to be effective on February 6, 2018, the date of the consummation of its initial
business combination with China Sunlong, as the Company was deemed to be the accounting acquiree in the transaction and the transaction
was treated as a recapitalization of China Sunlong.
The
summary of warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercisable
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2018
|
|
|
10,500,000
|
|
|
|
5,250,000
|
|
|
$
|
5.75
|
|
|
|
4.41
|
|
Granted/Acquired
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(710,326
|
)
|
|
|
(355,163
|
)
|
|
$
|
-
|
|
|
|
-
|
|
March 31, 2019
|
|
|
9,789,674
|
|
|
|
4,894,837
|
|
|
$
|
5.75
|
|
|
|
3.91
|
|
The
summary of option activity is as follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2018
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.41
|
|
Granted/Acquired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
March 31, 2019
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
3.91
|
|
Note
16 – Contingencies
The
Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although
the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will
have a material adverse impact on its financial position, results of operations or liquidity.
On
February 27, 2013, Wuhan HOST entered into a contract to purchase land use rights for a parcel of land in E Zhou City, Hubei,
China, for $1,212,478. The Company has paid to the local government $781,349, a balance of $431,129 has not been paid; however,
the government has already issued to the Company all the necessary certificates transferring title of the land use rights for
the parcel of land to the Company, and has not taken action to collect any remaining unpaid balance. If the government determines
that it wishes to collect an unpaid balance, the total cost to the Company would be $431,129.
Note
17 – Segment reporting
The
Company follows ASC 280, Segment Reporting, which requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their performance. The Company’s chief operating decision
maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income
from operations of the four operating entities: Shengrong China, Wuhan Host, Rong Hai, and TJComex Tianjin. TJComex Tianjin was
disposed in April 2018.
The
Company’s operations currently encompass three business segments. The Company also has a separate business segments prior
to April 2018. Such reportable segments are consistent with the way the Company manages its business, with each segment operating
under separate management and producing discrete financial information. The accounting principles applied at the operating division
level in determining income from operations is generally the same as those applied at the unaudited condensed consolidated financial
statement level.
The
operation and products of the three existing segments and one disposed segment are as follow:
|
1.
|
Hubei
Shengrong and Shengrong WFOE: sale of solid waste recycling and comprehensive utilization equipment and trading of processed
industrial waste materials; and
|
|
2.
|
Wuhan
HOST: research, development, production and sale of coating materials; and
|
|
3.
|
Rong
Hai: Coal wholesales and sale of coke, steels, construction materials, mechanical equipment and steel scrap.
|
|
|
|
|
4.
|
TJComex
Tianjin: General merchandise trading business and related consulting services (disposed in April 2018).
|
The
following represents results of divisional operations for the three months ended March 31, 2019 and 2018:
|
|
For the Three Months ended March 31, 2019
|
|
|
For the Three Months ended March 31, 2018
|
|
Revenues:
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
-
|
|
|
$
|
7,497,233
|
|
Wuhan HOST
|
|
|
2,233,557
|
|
|
|
-
|
|
Rong Hai
|
|
|
5,032,785
|
|
|
|
-
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
650
|
|
Consolidated revenues
|
|
$
|
7,266,342
|
|
|
$
|
7,497,883
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
-
|
|
|
$
|
756,798
|
|
Wuhan HOST
|
|
|
166,745
|
|
|
|
-
|
|
Rong Hai
|
|
|
98,685
|
|
|
|
-
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
650
|
|
Consolidated gross profit
|
|
$
|
265,430
|
|
|
$
|
757,448
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
(329,203
|
)
|
|
$
|
1,348,767
|
|
Wuhan HOST
|
|
|
(34,394
|
)
|
|
|
-
|
|
Rong Hai
|
|
|
189,201
|
|
|
|
-
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
(112,615
|
)
|
TMSR, China Sunlong, Shengrong BVI and Shengrong HK
|
|
|
(538,827
|
)
|
|
|
(5,341
|
)
|
Consolidated (loss) income from operations
|
|
$
|
(713,223
|
)
|
|
$
|
1,230,811
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
(305,603
|
)
|
|
$
|
1,041,712
|
|
Wuhan HOST
|
|
|
(20,690
|
)
|
|
|
-
|
|
Rong Hai
|
|
|
133,670
|
|
|
|
-
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
(112,726
|
)
|
TMSR, China Sunlong, Shengrong BVI and Shengrong HK
|
|
|
(538,823
|
)
|
|
|
(5,372
|
)
|
Consolidated net (loss) income
|
|
$
|
(731,446
|
)
|
|
$
|
923,614
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
64,754
|
|
|
$
|
90,783
|
|
Wuhan HOST
|
|
|
71,471
|
|
|
|
-
|
|
Rong Hai
|
|
|
2,869
|
|
|
|
-
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
29,074
|
|
Consolidated depreciation and amortization
|
|
$
|
139,094
|
|
|
$
|
119,857
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
-
|
|
|
$
|
46,972
|
|
Rong Hai
|
|
|
7,842
|
|
|
|
-
|
|
Consolidated interest expense
|
|
$
|
7,842
|
|
|
$
|
46,972
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Wuhan HOST
|
|
$
|
16,876
|
|
|
$
|
-
|
|
Consolidated capital expenditures
|
|
$
|
16,876
|
|
|
$
|
-
|
|
The
following represents assets by division as of:
Total assets as of
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Hubei Shengrong and Shengrong WFOE
|
|
$
|
2,681,938
|
|
|
$
|
2,301,663
|
|
Wuhan HOST
|
|
|
17,467,575
|
|
|
|
16,612,376
|
|
Rong Hai
|
|
|
14,653,340
|
|
|
|
13,859,965
|
|
TJComex Tianjin
|
|
|
-
|
|
|
|
-
|
|
TMSR, China Sunlong, Shengrong BVI and Shengrong HK
|
|
|
78,947
|
|
|
|
78,973
|
|
Total Assets
|
|
$
|
34,881,800
|
|
|
$
|
32,852,977
|
|
Note
18 – Subsequent events
On
April 4, 2019, the Company entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S.
Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities
Act”) pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at
a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.