SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(29,463,062
|
)
|
|
$
|
(4,918,233
|
)
|
Adjustments to reconcile net loss from operations to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,080,857
|
|
|
|
2,937,696
|
|
Amortization of intangible assets
|
|
|
299,373
|
|
|
|
241,464
|
|
Bad debt allowance
|
|
|
1,285,990
|
|
|
|
1,892,821
|
|
Bad debt recovery - discontinued operations
|
|
|
(16,899
|
)
|
|
|
-
|
|
Impairment loss of intangible asset
|
|
|
1,922,674
|
|
|
|
-
|
|
Loss on equity method investment
|
|
|
9,038,303
|
|
|
|
81,871
|
|
Stock-based employment compensation
|
|
|
879,258
|
|
|
|
482,243
|
|
Stock-based professional fees
|
|
|
9,132,385
|
|
|
|
-
|
|
Stock-based donation
|
|
|
241,860
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
115,836
|
|
|
|
-
|
|
Amortization of license fee
|
|
|
210,213
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
382,776
|
|
|
|
(111,669
|
)
|
Accounts receivable
|
|
|
2,449,872
|
|
|
|
(415,467
|
)
|
Inventories
|
|
|
(1,011,749
|
)
|
|
|
(1,499,147
|
)
|
Prepaid and other current assets
|
|
|
(1,021,180
|
)
|
|
|
929,997
|
|
Advances to suppliers
|
|
|
720,730
|
|
|
|
(1,363,517
|
)
|
Assets of discontinued operations
|
|
|
200,197
|
|
|
|
116,061
|
|
Accounts payable
|
|
|
(434,324
|
)
|
|
|
1,506,286
|
|
Accrued expenses
|
|
|
142,124
|
|
|
|
(166,965
|
)
|
VAT and service taxes payable
|
|
|
-
|
|
|
|
(41,153
|
)
|
Income taxes payable
|
|
|
-
|
|
|
|
(20,390
|
)
|
Advances from customers
|
|
|
(1,226,059
|
)
|
|
|
552,352
|
|
Liabilities of discontinued operations
|
|
|
(132,916
|
)
|
|
|
(221,741
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,203,741
|
)
|
|
|
(17,491
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceed received from acquisition
|
|
|
2,341
|
|
|
|
-
|
|
Proceed received from sale of subsidiary, in cash
|
|
|
-
|
|
|
|
2,115,842
|
|
Purchase of property and equipment
|
|
|
(74,466
|
)
|
|
|
(86,402
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(72,125
|
)
|
|
|
2,029,440
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceed from convertible note
|
|
|
900,000
|
|
|
|
-
|
|
Offering costs paid
|
|
|
(195,018
|
)
|
|
|
-
|
|
Proceeds from bank loan
|
|
|
1,856,198
|
|
|
|
1,248,932
|
|
Repayments of bank loan
|
|
|
(1,303,941
|
)
|
|
|
(1,469,332
|
)
|
Decrease in bank acceptance notes payable
|
|
|
(268,458
|
)
|
|
|
(191,014
|
)
|
Advance from related party
|
|
|
1,810,815
|
|
|
|
351,430
|
|
Proceeds from sale of common stock, net
|
|
|
256,410
|
|
|
|
860,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,056,006
|
|
|
|
800,016
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
(274,378
|
)
|
|
|
159,686
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
|
(494,238
|
)
|
|
|
2,971,651
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - beginning of period
|
|
|
1,292,428
|
|
|
|
2,032,545
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - end of period
|
|
$
|
798,190
|
|
|
$
|
5,004,196
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
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Cash paid in continuing operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
88,372
|
|
|
$
|
107,991
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
12,808
|
|
|
|
|
|
|
|
|
|
|
Cash paid in discontinued operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Stock issued for future services to consultants and vendors
|
|
$
|
6,335,098
|
|
|
$
|
1,083,967
|
|
Stock issued for accrued liabilities
|
|
$
|
-
|
|
|
$
|
28,400
|
|
Stock issued for future services to employees and directors
|
|
$
|
496,654
|
|
|
$
|
-
|
|
Stock issued for repayment of convertible note
|
|
$
|
670,335
|
|
|
$
|
-
|
|
Stock issued for acquisition of subsidiaries
|
|
$
|
976,984
|
|
|
$
|
-
|
|
Stock issued for prepayment of license fee - related party
|
|
$
|
829,787
|
|
|
$
|
-
|
|
Stock issued for prepayment of rental & management fee
|
|
$
|
1,048,659
|
|
|
$
|
-
|
|
Increase in prepaid expenses and other from sale of equipment
|
|
$
|
-
|
|
|
$
|
1,306,677
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF CASH,CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
1,019,437
|
|
|
$
|
1,481,498
|
|
Restricted cash at beginning of period
|
|
|
272,991
|
|
|
|
551,047
|
|
Restricted cash included in discontinued operations at beginning of period
|
|
|
-
|
|
|
|
-
|
|
Total cash, cash equivalents and restricted cash at beginning of period
|
|
$
|
1,292,428
|
|
|
$
|
2,032,545
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
707,101
|
|
|
$
|
4,774,697
|
|
Restricted cash at end of period
|
|
|
91,089
|
|
|
|
229,499
|
|
Restricted cash included in discontinued operations at end of period
|
|
|
-
|
|
|
|
-
|
|
Total cash, cash equivalents and restricted cash at ended of period
|
|
$
|
798,190
|
|
|
$
|
5,004,196
|
|
See notes to unaudited condensed consolidated financial statements.
NOTE
1 –
DESCRIPTION OF BUSINESS AND ORGANIZATION
Sharing
Economy International Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex,
Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc. and on June 13, 2011, the
Company changed its corporate name to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into
a Nevada corporation. On January 8, 2018, the Company changed its corporate name to Sharing Economy International Inc.
Through
its affiliated companies, the Company manufactures and sells textile dyeing and finishing machines. The Company is the sole owner
of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland
owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and, until
December 30, 2016, Fulland owned 100% of Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind”). Green Power
is and Fulland Wind was a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s
Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements,
as fully described below, dated October 12, 2007 with Wuxi Huayang Heavy Industries, Co., Ltd. (“Heavy Industries”),
formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd., and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”),
both of which are limited liability companies organized under the laws of, and based in, the PRC. Heavy Industries and Dyeing
are sometimes collectively referred to as the “Huayang Companies.”
Fulland
was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital in accordance
with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official
notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain
SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition
matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and his wife, Ms. Lihua Tang, submitted their
application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens
to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Dyeing,
which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for
the textile industry. The Company refers to this segment as the dyeing and finishing equipment segment. On December 26, 2016,
Dyeing and an unrelated individual formed Wuxi Shengxin New Energy Engineering Co., Ltd. (“Shengxin”), a limited liability
company organized under the laws of the PRC in which Dyeing has a 30% equity interest and the unrelated third party holds a 70%
interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain photovoltaic power
generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. In April 2018, Shengxin
secured and invested in a large solar PV project in GuiZhou province. Shengxin paid RMB40.0 million for the project rights and
also engaged a local contractor to proceed with building the project. However, on June 1, 2018, the Chinese government halted
installation of new solar farms for the remainder of the year and reduced subsidies for projects already under construction. In
September 2018, due to significance doubt about the status of this project and recoverability of the Company’s investment,
the Company fully impaired the value of its investment in Shengxin (See Note 6).
Fulland
Wind was formed on August 27, 2008. In 2009, the Company began to produce and sell forged products through Fulland Wind. Through
Fulland Wind, the Company manufactured and sold forged products, including wind products such as shafts, rolled rings, gear rims,
gearboxes, bearings and other components and finished products and assemblies for the wind power and other industries, including
large-scale equipment used in the manufacturing process for the various industries. The Company referred to this segment of its
business as the forged rolled rings and related components segment. On December 30, 2016, Fulland sold the stock of Fulland Wind
and accordingly, the forged rolled rings and related components business is reflected as a discontinued operation for all periods
presented (See Note 3).
Beginning
in February 2015, Heavy Industries began to produce equipment for the petroleum and chemical industries. The Company referred
to this segment of its business as the petroleum and chemical equipment segment. Because of a significant decline in revenues
from this segment, the Company determined it would not continue to operate in this segment and accordingly, the petroleum and
chemical equipment segment is reflected as discontinued operations for all periods presented (See Note 3). As a result of the
discontinuation of the forged rolled rings and the petroleum and chemical equipment business, the Company’s business primarily
consists of the dyeing and finishing equipment business as its primary continuing operations since December 31, 2016.
The
Company’s latest business initiatives are focused on targeting the technology and global sharing economy markets, by developing
online platforms and rental business partnerships that will drive the global development of sharing through economical rental
business models. In connection with the new business initiatives, the Company formed or acquired the following subsidiaries:
|
●
|
Vantage
Ultimate Limited (“Vantage”), a company incorporated under the laws of British Virgin Islands on February 1, 2017
and is wholly-owned by the Company.
|
|
|
|
|
●
|
Sharing
Economy Investment Limited (“Sharing Economy”), a company incorporated under the laws of British Virgin Islands
on May 18, 2017 and is wholly-owned by Vantage.
|
|
|
|
|
●
|
EC
Advertising Limited (“EC Advertising”), a company incorporated under the laws of Hong Kong on March 17, 2017 and
is a wholly-owned by Sharing Economy.
|
|
|
|
|
●
|
EC
Rental Limited (“EC Rental”), a company incorporated under the laws of British Virgin Islands on May 22, 2017
and is wholly-owned by Vantage.
|
|
|
|
|
●
|
EC
Assets Management Limited (“EC Assets”), a company incorporated under the laws of British Virgin Islands on May
22, 2017 and is wholly-owned by Vantage.
|
|
●
|
EC
(Fly Car) Limited, a company incorporated under the laws of British Virgin Islands on May 22, 2017 and is a wholly-owned by
Sharing Economy.
|
|
|
|
|
●
|
Global
Bike Share (Mobile App) Limited, a company incorporated under the laws of British Virgin Islands on May 23, 2017 and is a
wholly-owned by Sharing Economy.
|
|
|
|
|
●
|
EC
Power (Global) Technology Limited (“EC Power”), a company incorporated under the laws of British Virgin Islands
on May 26, 2017 and is wholly-owned by EC Rental.
|
|
|
|
|
●
|
ECPower
(HK) Company Limited, a company incorporated under the laws of Hong Kong on June 23, 2017 and is wholly-owned by EC Power.
|
|
|
|
|
●
|
EC
Manpower Limited, a company incorporated under the laws of Hong Kong on July 3, 2017 and is wholly-owned by Vantage.
|
|
|
|
|
●
|
EC
Technology & Innovations Limited (“EC Technology”), a company incorporated under the laws of British Virgin
Islands on September 1, 2017 and is wholly-owned by Vantage.
|
|
|
|
|
●
|
Inspirit
Studio Limited (“Inspirit Studios”), a company incorporated under the laws of Hong Kong on August 24, 2015, and
51% of its shareholding was acquired by EC Technology on December 8, 2017.
|
|
|
|
|
●
|
EC
Creative Limited (“EC Creative”), a company incorporated under the laws of British Virgin Islands on January 9,
2018 and is wholly-owned by Vantage.
|
|
|
|
|
●
|
3D
Discovery Co. Limited (“3D Discovery”), a company incorporated under the laws of Hong Kong on February 24, 2015,
and 60% of its shareholdings was acquired by EC Technology on January 19, 2018.
|
|
|
|
|
●
|
Sharing
Film International Limited, a company incorporated under the laws of Hong Kong on January 22, 2018 and is a wholly-owned by
EC Creative.
|
|
|
|
|
●
|
AnyWorkspace
Limited (“AnyWorkspace”), a company incorporated under the laws of Hong Kong
on November 12, 2015, and 80% of its shareholding was acquired by Sharing Economy on
January 30, 2018.
|
|
●
|
Xiamen
Great Media Company Limited (“Xiamen Great Media”), a company incorporated under the laws of the PRC on September
5, 2018 and is a wholly-owned by EC Advertising.
|
Reverse
split; change in authorized common stock
On
February 24, 2017, the Company filed a certificate of change which effected a one-for-four reverse split, which became effective
in the marketplace on March 20, 2017, and a reduction in the Company’s authorized common stock from 50,000,000 shares to
12,500,000 shares. These consolidated financial statements have been retroactively restated to reflect this reverse split.
Going
concern
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
consolidated financial statements, the Company had a net loss of approximately $18,574,000 and $29,463,000 for the three and
nine months ended September 30, 2018. The net cash used in operations was approximately $3,204,000 for the nine months ended
September 30, 2018. During the three and nine months ended September 30, 2018, revenues, substantially all of which are
derived from the manufacture and sales of textile dyeing and finishing equipment, decreased by 4.3% and 30.4% as compared to
the three and nine months ended September 30, 2017, respectively. Additionally, the Company recorded an impairment loss of
approximately $1,923,000 related to the write off of its patent use rights and in September 2018. Due to significance doubt
about the status and recoverability of the Company’s equity method investment in Shengxin, the Company fully impaired
the value of its investment in Shengxin (See Note 6). Management believes that these matters raise substantial doubt about
the Company’s ability to continue as a going concern. Management cannot provide assurance that the Company will
ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital.
Management believes that its capital resources are not currently adequate to continue operating and maintaining its business
strategy for twelve months from the date of this report.
The
Company may seek to raise capital through additional debt and/or equity financings to fund its operations in the future. Although
the Company has historically raised capital from sales of equity, from convertible debt and from bank loans, there is no assurance
that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in
the near future, management expects that the Company will need to curtail or cease operations. The accompanying consolidated financial
statements do not include any adjustments related to the recoverability and or classification of recorded asset amounts and or
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Nasdaq
Listing
On
October 8, 2018, the Company received a staff deficiency notice from The Nasdaq Stock Market (“Nasdaq”) informing
the Company that it has failed to comply with Nasdaq’s shareholder approval requirements set forth in Listing Rule 5635(c)
(the “Rule”). During the period from May 11, 2017 to date, the Company entered into approximately one hundred arrangements
resulting in the issuance or potential issuance of more than three million shares to officers, directors, employees, and consultants
(“Equity Compensation Grants”). The Company did not receive shareholder approval for the Equity Compensation Grants,
and the shares were not issued from a shareholder approval equity compensation plan. The Company submitted its plan to regain
compliance (“Plan of Compliance”) on October 26, 2018. If the Plan of Compliance is accepted, Nasdaq can grant an
extension of up to one hundred eighty calendar days from October 8, 2018 to evidence compliance. The Company believes that it
has otherwise been compliant with its filing obligations pursuant to the Securities Exchange Act of 1934, as amended, including
making all appropriate disclosures to the marketplace. The Company is currently doing everything possible to cure its deficiencies
regarding the Rule.
Basis
of presentation
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2018. The unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017
and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 11, 2018. The consolidated
balance sheet as of December 31, 2017 contained herein has been derived from the audited consolidated financial statements as
of December 31, 2017, but does not include all disclosures required by the generally accepted accounting principles in the U.S.
(“U.S. GAAP”).
Principles
of Consolidation
The
Company’s unaudited condensed consolidated financial statements include the financial statements of its wholly-owned and
majority owned subsidiaries, as well as the financial statements of the Huayang Companies, including Dyeing, which conducts the
Company’s continuing operations, and Heavy Industries, which operated discontinued operations. All significant intercompany
accounts and transactions have been eliminated in consolidation.
On
December 30, 2016, the Company sold and transferred its 100% interest in Fulland Wind to an unrelated party and discontinued
the Company’s forged rolled rings and related components business. Additionally, the Company’s management decided
to discontinue its petroleum and chemical equipment segment due to significant declines in revenues and the loss of its major
customer. As such, forged rolled rings and related components segment’s and petroleum and chemical segment’s assets
and liabilities have been classified on the consolidated balance sheets as assets and liabilities of discontinued operations as
of September 30, 2018 and December 31, 2017. The operating results of the forged rolled rings and related components and petroleum
and chemical segments have been classified as discontinued operations in our consolidated statements of operations for all years
presented. Unless otherwise indicated, all disclosures and amounts in the notes to the consolidated financial statements are related
to the Company’s continuing operations.
Pursuant
to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities
(“VIE”), and the Company is the primary beneficiary. The Company’s relationships with the Huayang Companies
and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned
enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC
laws, each of Green Power, Dyeing and Heavy Industries is an independent legal entity and none of them is exposed to liabilities
incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements.
Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance
with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing
and Heavy Industries:
Consulting
Services Agreement.
Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies,
Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice
and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing
machines, electrical equipment and related components (the “Services”). Under this agreement, Green Power owns the
intellectual property rights developed or discovered through research and development, in the course of providing the Services,
or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi
(“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter. To date, no such
payments have been made and all profits were reinvested in the Company’s operations.
Operating
Agreement.
Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang
Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management
and employment issues. The Huayang Companies’ shareholders must designate the candidates recommended by Green Power as their
representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives
of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements
or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in
return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies
agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its
assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor
of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement,
as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation
prior to the expiration of the agreement, with the extended term to be mutually agreed upon by the parties.
Equity
Pledge Agreement.
Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power,
the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee
the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang
Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee,
will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders
also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney
to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the
equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish
the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity
interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years
after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.
Option
Agreement.
Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang
Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the
extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions
to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated
person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended
on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the
parties.
Pursuant
to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang
Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies’ sales are included
in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s
net income includes all of the Huayang Companies net income. The Company does not record non-controlling interest on these VIE’s
and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company.
Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation
of the Company’s and the Huayang Companies’ financial statements.
There
are substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including
but not limited to the laws and regulations governing the Company’s business or the enforcement and performance of its contractual
arrangements. These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct
ownership. Due to its VIE structure, the Company has to rely on contractual rights to effect control and management of the VIEs,
which exposes it to the risk of potential breach of contract by the shareholders of the VIEs for a number of reasons. For example,
their interests as shareholders of the VIEs and the interests of the Company may have conflict and the Company may fail to resolve
such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the
shareholders may otherwise act in bad faith. If any of the foregoing were to happen, the Company may have to rely on legal or
arbitral proceedings to enforce its contractual rights, including specific performance or injunctive relief, and claiming damages.
Such arbitral and legal proceedings may cost substantial financial and other resources, and result in a disruption of its business,
and the Company cannot assure that the outcome will be in its favor. In addition, as all of these contractual arrangements are
governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would
be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these
contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC
laws and regulations or are otherwise not enforceable for public policy reasons. In the events that the Company is unable to enforce
any of these agreements, the Company would not be able to exert effective control over the affected VIEs and consequently, the
results of operations, assets and liabilities of the affected VIEs and their subsidiaries would not be included in the Company’s
consolidated financial statements. If such were the case, the Company’s cash flows, financial position and operating performance
would be materially adversely affected.
The
Company’s agreements with respect to its consolidated VIEs are approved and in place. The Company’s management believes
that such agreements are enforceable and considers it a remote possibility that PRC regulatory authorities with jurisdiction over
the Company’s operations and contractual relationships would find the agreements to be unenforceable under existing laws.
The
carrying amount of the VIE’s assets and liabilities are included in the accompanying consolidated financial statements of
the Company and are summarized as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
477,767
|
|
|
$
|
806,672
|
|
Accounts receivable, net
|
|
|
4,778,324
|
|
|
|
9,059,015
|
|
Inventory, net
|
|
|
5,264,334
|
|
|
|
4,553,559
|
|
Other current assets
|
|
|
4,799,613
|
|
|
|
5,901,119
|
|
Total current assets
|
|
|
15,320,038
|
|
|
|
20,320,365
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
-
|
|
|
|
9,053,859
|
|
Property and equipment, net
|
|
|
28,479,902
|
|
|
|
33,115,975
|
|
Intangible assets, net
|
|
|
2,953,687
|
|
|
|
5,302,047
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
46,753,627
|
|
|
|
67,792,246
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
5,788,136
|
|
|
|
7,629,783
|
|
Intercompany payables *
|
|
|
13,327,345
|
|
|
|
13,855,768
|
|
Other liabilities, non-current
|
|
|
282,605
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,398,086
|
|
|
|
21,485,551
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
27,355,541
|
|
|
$
|
46,306,695
|
|
*
|
Intercompany
payables are eliminated in consolidation.
|
Use
of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results
could materially differ from these estimates. Significant estimates in the three and nine months ended September 30, 2018 and
2017 include the allowance for doubtful accounts on accounts and other receivables, the allowance for obsolete inventory, the
useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and
valuation of deferred tax assets, the fair value of equity method investment, the fair value of assets held for sale, accruals
for taxes due, and the value of stock-based compensation.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity
of three months or less and money market accounts to be cash equivalents. The Company maintains with various financial institutions
mainly in the PRC, Hong Kong and the U.S. At September 30, 2018 and December 31, 2017, cash balances held in PRC and Hong Kong
banks of $695,214 and $952,663, respectively, are uninsured.
Fair
value of financial instruments
The
Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level
2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level
3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information. The Company did not measure these assets
at fair value at September 30, 2018 and December 31, 2017.
The
carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable,
accounts receivable, inventories, advances to suppliers, deferred tax assets, receivable from sale of subsidiary, prepaid expenses
and other, short-term bank loans, bank acceptance notes payable, note payable, accounts payable, accrued liabilities, advances
from customers, amount due to a related party, VAT and service taxes payable and income taxes payable approximate their fair market
value based on the short-term maturity of these instruments.
ASC
Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
Concentrations
of credit risk
The
Company’s operations are carried out in the PRC and Hong Kong. Accordingly, the Company’s business, financial condition
and results of operations may be influenced by the political, economic and legal environment in the PRC and Hong Kong, and by
the general state of the economies in the PRC and Hong Kong. The Company’s operations in the PRC are subject to specific
considerations and significant risks not typically associated with companies in North America. The Company’s results may
be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC and Hong Kong, and
none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is
not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which
are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations
of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
At
September 30, 2018 and December 31, 2017, the Company’s cash balances by geographic area were as follows:
Country:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
United States
|
|
$
|
11,887
|
|
|
|
1.68
|
%
|
|
$
|
66,774
|
|
|
|
6.55
|
%
|
Hong Kong
|
|
|
214,565
|
|
|
|
30.34
|
%
|
|
|
142,944
|
|
|
|
14.02
|
%
|
China
|
|
|
480,649
|
|
|
|
67.98
|
%
|
|
|
809,719
|
|
|
|
79.43
|
%
|
Total cash and cash equivalents
|
|
$
|
707,101
|
|
|
|
100.00
|
%
|
|
$
|
1,019,437
|
|
|
|
100.00
|
%
|
Restricted
cash
Restricted
cash mainly consists of cash deposits held by various banks in the PRC to secure bank acceptance notes payable. The Company’s
restricted cash totaled $91,089 and $272,991 at September 30, 2018 and December 31, 2017, respectively.
Notes
receivable
Notes
receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment
of the receivable. This amount is non-interest bearing and is normally paid within three and nine months. Historically, the Company
has experienced no losses on notes receivable. The Company’s notes receivable totaled $73,624 and $461,292 at September
30, 2018 and December 31, 2017, respectively.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30,
2018 and December 31, 2017, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amounts of $8,892,723 and $8,115,876, respectively.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower
of cost or market utilizing the weighted average method. A reserve is established when management determines that certain inventories
may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand,
the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on
estimates. The Company recorded an inventory reserve of $303,424 and $313,930 at September 30, 2018 and December 31, 2017,
respectively.
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended
to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $1,231,022 and $2,023,779 at
September 30, 2018 and December 31, 2017, respectively.
Property
and equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets
are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in the statements of operations in the year of disposition. The Company examines the possibility of decreases in
the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Equity
method investment
Investments
in which the Company has the ability to exercise significant influence, but do not control, are accounted for under the equity
method of accounting and are included in the long-term assets on the consolidated balance sheets. Under this method of accounting,
the Company’s share of the net earnings or losses of the investee is presented below the income tax line on the consolidated
statements of operations. The Company evaluates its equity method investment whenever events or changes in circumstance indicate
that the carrying amounts of such investment may be impaired. If a decline in the value of an equity method investment is determined
to be other than temporary, a loss is recorded in the current period. In September 2018, the Company impaired the value of its
equity method investment (See Note 6).
Impairment
of long-lived assets and intangible asset
In
accordance with ASC Topic 360, the Company reviews long-lived assets and intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. During
the nine months ended September 30, 2018 and 2017, the Company did not record any impairment charges on long-lived assets. During
the nine months ended September 30, 2018 and 2017, the Company recorded impairment loss on intangible asset of $1,922,674 and
$0, respectively.
Advances
from customers
Advances
from customers at September 30, 2018 and December 31, 2017 amounted to $1,159,530 and $2,454,375, respectively, and consist of
prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue when
customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s
revenue recognition policy.
Revenue
recognition
In
May 2014, FASB issued an update Accounting Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting
Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU
2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard,
which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity
to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
The Company adopted this standard in 2018 using the modified retrospective approach, which requires applying the new standard
to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on the
Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact on the process for,
timing of, and presentation and disclosure of revenue recognition from customers.
The
Company recognizes revenues from the sale of equipment upon shipment and transfer of title. The other elements may include installation
and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete
installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is
generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person
hours to complete a service and generally is recognized over the contract period.
All
other product sales with customer specific acceptance provisions are recognized upon customer acceptance and the delivery of the
parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
The
Company recognizes revenue from the rental of batteries when earned.
Income
taxes
The
Company is governed by the Income Tax Law of the PRC, Inland Revenue Ordinance of Hong Kong and the U.S. Internal Revenue Code
of 1986, as amended. The Company accounts for income taxes using the asset/liability method prescribed by ASC 740, “Accounting
for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes
the enactment date.
On
December 22, 2017, The United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which,
among other items, reduces the current federal income tax rate in the United States to 21% from 34%. The rate reduction is effective
January 1, 2018, and is permanent.
The
Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin
No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the
Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its
deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate
impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance
that may be issued as a result of the Act.
The
Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in the Company’s financial statements.
Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of
the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income
taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given period. As of September 30, 2018 and 2017, the Company had no uncertain
tax positions, and will continue to evaluate for uncertain positions in the future.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718, which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the vesting period or immediately if fully vested and non-forfeitable. The Financial Accounting Standards Board (“FASB”)
also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date
fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the vesting period of the award or on issuance if fully-vested
and non-forfeitable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company
records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties
are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting
date.
Shipping
costs
Shipping
costs are included in selling expenses, general and administrative and totaled $21,619 and $29,259 for the three months ended
September 30, 2018 and 2017, respectively. Shipping costs totaled $44,188 and $88,491 for the nine months ended September 30,
2018 and 2017, respectively.
Employee
benefits
The
Company’s operations and employees are all located in the PRC and Hong Kong. The Company makes mandatory contributions to
the PRC and Hong Kong governments’ health, retirement benefit and unemployment funds in accordance with the relevant Chinese
social security laws and law of Mandatory Provident Fund in Hong Kong. The costs of these payments are charged to the same accounts
as the related salary costs in the same period as the related salary costs incurred. Employee benefit costs totaled $71,249 and
$31,412 for the three months ended September 30, 2018 and 2017, respectively. Employee benefit costs totaled $196,299 and $106,118
for the nine months ended September 30, 2018 and 2017, respectively.
Research
and development
Research
and development costs are expensed as incurred. The costs primarily consist of raw materials and salaries incurred for the development
and improvement of the Company’s dyeing and finishing machine product line. Research and development costs totaled
$165,183 and $107,568 for the three months ended September 30, 2018 and 2017, respectively. Research and development costs
totaled $403,611 and $324,698 for the nine months ended September 30, 2018 and 2017, respectively.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the
functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”) or Hong Kong dollars
(“HKD”). For the subsidiaries and affiliates, whose functional currencies are the RMB or HKD, results of operations
and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified
exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to
assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding
balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss. The cumulative translation adjustment and effect
of exchange rate changes on cash for the nine months ended September 30, 2018 and 2017 was $(274,378) and $159,686, respectively.
Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on
the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing at the balance sheet date with any 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.
All
of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates.
The Company did not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are
not expected to have, a material effect on the results of operations of the Company.
For
operating subsidiaries and VIE’s located in the People’s Republic of China (“PRC”), asset and liability
accounts at September 30, 2018 and December 31, 2017 were translated at 6.8817 RMB to $1.00 and at 6.5075 to $1.00, respectively,
which were the exchange rates on the balance sheet dates. For operating subsidiaries in Hong Kong, asset and liability accounts
at September 30, 2018 and December 31, 2017 were translated at 7.8259 HKD and 7.8128 HKD to $1.00, respectively, which were the
exchange rates on the balance sheet date. For operating subsidiaries and VIE’s located in the PRC, the average translation
rates applied to the statements of operations for the nine months ended September 30, 2018 and 2017 were 6.5187 RMB and 6.8058
RMB to $1.00, respectively. For operating subsidiaries located in Hong Kong, the average translation rates applied to the statements
of operations for the nine months ended September 30, 2018 and 2017 was 7.8 HKD to $1.00. Cash flows from the Company’s
operations are calculated based upon the local currencies using the average translation rate.
Loss
per share of common stock
ASC
Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”)
with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
Basic
net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The Company did not have any common stock equivalents or potentially dilutive common stock outstanding during the three and nine
months ended September 30, 2018 and 2017. In a period in which the Company has a net loss, all potentially dilutive securities
are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.
The
following table presents a reconciliation of basic and diluted net loss per share:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net (loss) income for basic and diluted attributable to common shareholders
|
|
$
|
(18,196,461
|
)
|
|
$
|
(4,250,327
|
)
|
|
$
|
(28,779,651
|
)
|
|
$
|
(4,918,233
|
)
|
From continuing operations
|
|
|
(18,196,076
|
)
|
|
|
(4,178,988
|
)
|
|
|
(28,796,137
|
)
|
|
|
(4,846,894
|
)
|
From discontinued operations
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic and diluted
|
|
|
7,100,416
|
|
|
|
1,988,794
|
|
|
|
3,598,265
|
|
|
|
1,635,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations – basic and diluted
|
|
$
|
(2.56
|
)
|
|
$
|
(2.10
|
)
|
|
$
|
(8.00
|
)
|
|
$
|
(2.96
|
)
|
From discontinued operations – basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.04
|
)
|
|
|
0.01
|
|
|
|
(0.04
|
)
|
Net loss per common share – basic and diluted
|
|
$
|
(2.56
|
)
|
|
$
|
(2.14
|
)
|
|
$
|
(7.99
|
)
|
|
$
|
(3.00
|
)
|
Noncontrolling
interest
The
Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling
interests as a separate component of total shareholders’ equity on the consolidated balance sheets and the consolidated
net income/(loss) attributable to the its noncontrolling interest be clearly identified and presented on the face of the consolidated
statements of operations and comprehensive (loss).
Comprehensive
(loss) income
Comprehensive
loss (income) is comprised of net loss and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive (loss) income for
the three and nine months ended September 30, 2018 and 2017 included net loss and unrealized (loss) gain from foreign currency
translation adjustments.
Reclassification
Certain
reclassifications have been made in prior year’s consolidated financial statements to conform to the current year’s
financial presentation. The reclassifications have no effect on previously reported net income (loss) and related to the reclassification
of discontinued operations.
Reverse
stock split
The
Company effected a one-for-four reverse stock split of its common stock on March 20, 2017. All share and per share information
has been retroactively adjusted to reflect this reverse stock split.
Recent
accounting pronouncements
In
July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features
, or ASU 2017-11,
which updates the guidance related to the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. Under ASU 2017-11, a down round feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument
(or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence
of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present
earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered.
That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is
effective for public entities for all annual and interim periods beginning after December 15, 2019. Early adoption is permitted.
We are currently evaluating the impact that the adoption of ASU 2017-11 will have on our consolidated financial statements.
On
December 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting
for the tax effects of the Tax Cuts and Jobs Act (the TCJA). SAB 118 provides a measurement period that should not
extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with
SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740
is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but
for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional
treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the
Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements,
it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the
enactment of the TCJA. The Company has applied this guidance to its financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements
that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations,
cash flows or disclosures.
NOTE
2 –
ACQUISITIONS
On
January 19, 2018 (the “Closing Date”), the Company completed the acquisition of 60% of the issued and outstanding
capital stock of 3D Discovery Co. Limited (“3D Discovery”), a company incorporation in Hong Kong, from its shareholders
pursuant to the terms and conditions of a Sale and Purchase Agreement entered into among the Company and the 3D Discovery Stockholders
on the Closing Date (the “Acquisition Agreement”). 3D Discovery is a digital marketing services provider which provides
various solution such as 3D scanning and modeling, website and mobile app development, video production, and graphic design to
its clients. Apart from its existing business, 3D Discovery plans to develop a mobile app which allows users to create an interactive
virtual tour of a physical space by using a mobile phone camera. In connection with the acquisition, the Company issued 68,610
unregistered shares of its common stock valued at $442,535, based on the acquisition-date fair value of our common stock of $6.45
per share based on the quoted market price of the Company’s common stock on the Closing date.
On
January 30, 2018 (the “Closing Date”), the Company completed the acquisition of 80% of the issued and outstanding
capital stock of AnyWorkspace Limited (“AnyWorkspace”), a company incorporation in Hong Kong, from its shareholders
pursuant to the terms and conditions of a Sale and Purchase Agreement entered into among the Company and the AnyWorkspace Stockholders
on the Closing Date (the “Acquisition Agreement”). AnyWorkspace develops an online, real-time marketplace that connects
workspace providers with clients who need temporary office and meeting spaces. In connection with the acquisition, the Company
issued 106,464 unregistered shares of its common stock valued at $534,449, based on the acquisition-date fair value of our common
stock of $5.02 per share based on the quoted market price of the Company’s common stock on the Closing date.
The
fair value of the assets acquired and liabilities assumed were based on management estimates of the fair values on closing date
of each respective acquisition. Based upon the purchase price allocations, the following table summarizes the estimated fair value
of the assets acquired and liabilities assumed at the date of each acquisition:
Cash
|
|
$
|
2,374
|
|
Account receivable and prepayment
|
|
|
21,663
|
|
Property and equipment
|
|
|
9,222
|
|
Goodwill
|
|
|
53,201
|
|
Other intangible assets
|
|
|
1,300,805
|
|
Total assets acquired at fair value
|
|
|
1,387,265
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(6,294
|
)
|
Non-controlling interest assumed
|
|
|
(403,987
|
)
|
Total liabilities and non-controlling interest assumed
|
|
|
(410,281
|
)
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
976,984
|
|
The
assets acquired and liabilities assumed are recorded at their estimated fair value on the acquisition date with subsequent changes
recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates
based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as
of the business combination date. As a result, during the purchase price measurement period, which may be up to one year from
the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding
offset to goodwill. After the purchase price measurement period, the Company will record adjustments to assets acquired or liabilities
assumed in operating expenses in the period in which the adjustments were determined.
The
purchase price exceeded the fair value of the net assets acquired by approximately $53,201, which was initially recorded as goodwill.
Goodwill assigned represents the amount of consideration transferred in excess of the fair value assigned to identifiable assets
acquired and liabilities assumed. ASC 350-30-35-4 requires that goodwill be tested for impairment on an annual basis and between
annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities
to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate
the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions.
NOTE
3 –
DISCONTINUED OPERATIONS
Pursuant
to an agreement dated December 23, 2016, the Company, through its wholly-owned subsidiary Fulland, sold the stock of Fulland Wind
to a third party for a sales price of RMB 48 million (approximately $6.9 million). The Company’s forging and related
components business was conducted through Fulland Wind. The purchase price is payable in three installments. The Company received
the first installment of RMB 14,400,000 (approximately $2.1 million) on December 28, 2016, and received the second installment
of RMB14,400,000 (approximately $2.1 million) on April 10, 2017. The Company delivered Fulland Wind’s business license,
seals, books and records, business contracts and personnel roster to the third party buyer on December 30, 2016, effectively the
sale date. If the equity transfer registration formalities are completed within one year without any third party claims on the
equity transfer, a final payment of RMB 19,200,000 (approximately $2.7 million) was due 25 working days after the expiration of
such period.
Pursuant
to extension agreement dated December 31, 2017, the Company agreed the above third party buyer could paid off the final payment
of RMB 19,200,000 (approximately $2.7 million) by December 31, 2018. As a result of the sale, the forged rolled rings and related
components business is treated as a discontinued operation.
Additionally,
in December 2016, the Company’s management decided to discontinue its petroleum and chemical equipment segment due to significant
decline in revenues and the loss of its major customers. Accordingly, the petroleum and chemical equipment segment business is
treated as a discontinued operation.
Pursuant
to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the business of the forging and related components
segment and petroleum and chemical equipment segment are considered discontinued operations because: (a) the operations and cash
flows of the forging and related components segment and petroleum and chemical equipment segment were eliminated from the Company’s
operations; and (b) the Company has no interest in the divested operations.
The
results of operations from Fulland Wind and petroleum and chemical equipment segment for the three and nine months ended September
30, 2018 and 2017 have been classified to the loss from discontinued operations line on the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss presented herein.
Contemporaneously
with the sale of the Fulland Wind stock, pursuant to an agreement dated December 23, 2016, Heavy Industry entered into a lease
with Wang Jiahong for a factory building owned by Heavy Industry at an annual rental of RMB680,566 (approximately $98,000). The
lease had a ten-year term, commencing January 1, 2017. During 2017, the Company received RMB324,078 (approximately $49,800) in
lease payments from the tenant. During the fourth quarter of 2017, Wang Jiahong orally terminated the above lease agreement and
the Company is no longer received rental income.
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as
of September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017 is set forth
below.
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Assets:
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
12,785
|
|
|
$
|
33,646
|
|
Advances to suppliers
|
|
|
-
|
|
|
|
144,583
|
|
Prepaid expenses and other
|
|
|
198,937
|
|
|
|
229,281
|
|
Total current assets
|
|
|
211,722
|
|
|
|
407,510
|
|
Total assets
|
|
$
|
211,722
|
|
|
$
|
407,510
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
242,542
|
|
|
$
|
387,887
|
|
Accrued expenses and other liabilities
|
|
|
-
|
|
|
|
1,746
|
|
Total current liabilities
|
|
|
242,542
|
|
|
|
389,633
|
|
Total liabilities
|
|
$
|
242,542
|
|
|
$
|
389,633
|
|
The
summarized operating result of discontinued operations included in the Company’s unaudited condensed consolidated statements
of operations is as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
|
|
|
|
31,652
|
|
|
|
|
|
|
|
31,652
|
|
Gross loss
|
|
|
|
|
|
|
(31,652
|
)
|
|
|
|
|
|
|
(31,652
|
)
|
Operating (expenses) income
|
|
|
(385
|
)
|
|
|
(39,687
|
)
|
|
|
16,486
|
|
|
|
(39,687
|
)
|
(Loss) income from operations
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) gain from discontinued operations, net of income taxes
|
|
$
|
(385
|
)
|
|
$
|
(71,339
|
)
|
|
$
|
16,486
|
|
|
$
|
(71,339
|
)
|
NOTE
4 –
ACCOUNTS RECEIVABLE
At
September 30, 2018 and December 31, 2017, accounts receivable consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable
|
|
$
|
13,721,536
|
|
|
$
|
17,208,585
|
|
Less: allowance for doubtful accounts
|
|
|
(8,892,723
|
)
|
|
|
(8,115,876
|
)
|
|
|
$
|
4,828,813
|
|
|
$
|
9,092,709
|
|
The
Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to
the collectability of individual balances.
NOTE
5 –
INVENTORIES
At
September 30, 2018 and December 31, 2017, inventories consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
1,563,017
|
|
|
$
|
998,751
|
|
Work-in-process
|
|
|
1,898,527
|
|
|
|
2,629,570
|
|
Finished goods
|
|
|
2,106,214
|
|
|
|
1,239,168
|
|
|
|
|
5,567,758
|
|
|
|
4,867,489
|
|
Less: reserve for obsolete inventories
|
|
|
(303,424
|
)
|
|
|
(313,930
|
)
|
|
|
$
|
5,264,334
|
|
|
$
|
4,553,559
|
|
The
Company establishes a reserve to mark down its inventories for estimated unmarketable inventories equal to the difference between
the cost of inventories and the estimated net realizable value based on assumptions about the usability of the inventories, future
demand and market conditions. For the nine months ended September 30, 2018 and 2017, the Company did not increase its reserve
for obsolete inventory.
NOTE
6 –
EQUITY METHOD INVESTMENT
On
December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin pursuant to an agreement dated December 23, 2016.
The agreement sets forth general terms relating to the proposed business, but does not set forth specific funding obligations
for either party. Dyeing has agreed to invest RMB 60,000,000 (approximately $9,543,000) and had invested RMB 59.8 million (approximately
$9,511,000 at September 30, 2018), for which it received a 30% interest, and Mr. Xue has a commitment to invest RMB 140,000,000
(approximately $22.3 million), of which Mr. Xue has contributed RMB 60,000,000 (approximately $9.5 million), for which Mr. Xue
received a 70% interest in Shengxin. Shengxin’s registered capital is RMB 200 million (approximately $31.8 million). Mr.
Xue had advised Dyeing that he anticipated that he will fund the remaining RMB 80,000,000 (approximately $12.7 million) of his
commitment during 2018. Since Mr. Xue did not make this payment by the end of 2017, Dyeing has the right to amend the contract,
and both parties may adjust each side’s equity interest to reflect the amount of capital each side has actually invested.
As of September 30, 2018, no changes have been made to such contract.
Shengxin
intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the
provinces of GuiZhou and YunNan. The solar farm industry is China is subject to significant government regulation. In order to
construct and operate solar farms in China, it is necessary to obtain a permit for a specific location, to obtain leasehold rights
to a significant amount of contiguous land parcels in provinces where there is significant sunlight for most of the year to support
a solar farm and to have an agreement to connect with the local grid. The development of solar farms requires significant funding,
which, if financing is not available, would have to be provided by Dyeing and Mr. Xue. There are no agreements relating to the
funding obligations of either Dyeing or Mr. Xue with respect to any specific project. Shengxin anticipates that to the extent
that it obtains permits for solar farms, it will form a new subsidiary for the sole purpose of obtaining the permit for a specific
location and constructing the solar farm at that location. The nature of the parties’ respective investments and the respective
equity interest in any solar farm project will be determined on a case-by-case basis.
To
the extent that Mr. Xue develops the project, he may receive an equity interest in the project greater than the percentage of
his equity investment, with the specific amount being subject to mutual agreement of the parties.
The
Company’s investment in Shengxin is subject to a high degree of risk. The Company cannot give any assurance that Shengxin
will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably
or that Dyeing will have the resources to provide any funds that may be required in order to fund any solar farm projects for
which Shengxin may obtain permits. There may be a significant delay between the time funds are advanced for any project and the
realization of revenue or cash flow from any project.
In
April 2018, Shengxin secured and invested in a large solar PV project in GuiZhou province. Shengxin paid RMB40.0 million for the
project rights and also engaged a local contractor to proceed with building the project. However, on June 1, 2018, the Chinese
government halted installation of new solar farms for the remainder of the year and reduced subsidies for projects already under
construction. Accordingly, there is no guarantee that the Chinese government will invest in new solar farm or provide the subsidies
needed to fund projects. At September 30, 2018, Shengxin’s assets consisted of cash, advances to supplier and fixed assets
of approximately $48,000, $16.3 million and $14,000, respectively, and had no liabilities. At December 31, 2017, Shengxin’s
assets consisted of cash, advances to supplier and fixed assets of approximately $17.3 million and $615,000 and $5,000, respectively,
and had no liabilities.
In September 2018, due to significance
doubt about the status of this project and recoverability of the Company’s investment, the Company fully impaired the value
of its investment in Shengxin in the amount of $8,835,834 which is included in the Company’s share of Shengxin losses on
the accompanying consolidated statements of operations. For the three months ended September 30, 2018 and 2017, the Company’s
share of Shengxin’s net loss were $56,624 and $39,060, respectively. For the nine months ended September 30, 2018 and 2017,
the Company’s share of Shengxin’s net loss were $202,469 and $81,871, respectively. For the three and nine months ended
September 30, 2018, the total loss on equity method investment in Shengxin were $8,892,458 and $9,038,303, respectively.
NOTE
7 –
PROPERTY AND EQUIPMENT
At
September 30, 2018 and December 31, 2017, property and equipment consisted of the following:
|
|
Useful life
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Office equipment and furniture
|
|
5 years
|
|
|
$
|
85,252
|
|
|
$
|
71,120
|
|
Manufacturing equipment
|
|
5 - 10 years
|
|
|
|
32,617,253
|
|
|
|
34,419,653
|
|
Vehicles
|
|
5 years
|
|
|
|
243,712
|
|
|
|
253,564
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
|
21,329,517
|
|
|
|
22,556,026
|
|
Manufacturing equipment in progress
|
|
-
|
|
|
|
3,458,448
|
|
|
|
3,657,936
|
|
Construction in progress
|
|
-
|
|
|
|
1,563,567
|
|
|
|
1,652,859
|
|
|
|
|
|
|
|
59,297,749
|
|
|
|
62,611,158
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(30,756,627
|
)
|
|
|
(29,430,039
|
)
|
|
|
|
|
|
$
|
28,541,122
|
|
|
$
|
33,181,119
|
|
For
the three months ended September 30, 2018 and 2017, depreciation expense amounted to $979,203 and $998,394, respectively, of which
$705,648 and $721,042, respectively, was included in cost of revenues, and the remainder was included in operating expenses. For
the nine months ended September 30, 2018 and 2017, depreciation expense amounted to $3,080,857 and $2,937,696, respectively, of
which $2,218,554 and $2,123,042, respectively, was included in cost of revenues, and the remainder was included in operating expenses.
NOTE
8 –
INTANGIBLE ASSETS
At
September 30, 2018 and December 31, 2017, intangible assets consisted of the following:
|
|
Useful life
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Land use rights
|
|
45 - 50 years
|
|
|
$
|
3,923,565
|
|
|
$
|
4,149,181
|
|
Patent use rights
|
|
10 years
|
|
|
|
-
|
|
|
|
2,458,701
|
|
Other intangible assets
|
|
3 - 5 years
|
|
|
|
1,529,867
|
|
|
|
92,249
|
|
Goodwill
|
|
-
|
|
|
|
53,143
|
|
|
|
-
|
|
|
|
|
|
|
|
5,506,575
|
|
|
|
6,700,131
|
|
Less: accumulated amortization
|
|
|
|
|
|
(1,066,192
|
)
|
|
|
(1,305,835
|
)
|
|
|
|
|
|
$
|
4,440,383
|
|
|
$
|
5,394,296
|
|
Amortization
of intangible assets attributable to future periods is as follows:
Year ending September 30:
|
|
Amount
|
|
2019
|
|
$
|
565,996
|
|
2020
|
|
|
565,996
|
|
2021
|
|
|
529,522
|
|
2022
|
|
|
103,743
|
|
2023
|
|
|
97,795
|
|
Thereafter
|
|
|
2,524,187
|
|
|
|
$
|
4,387,240
|
|
There
is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified
terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The
Company amortizes the land use rights over the term of the respective land use right.
In
August 2016, the Company purchased a patent technology use right, value at RMB16,000,000, for a ten-year term from a third
party. This patent covers ozone-ultrasonic textile dyeing equipment. The Company amortizes the exclusive patent use right over
a term of ten years. Given the current poor market conditions for dying machine industry, customers are either getting shut down
for environmental reasons or moving to south east Asia, raw material prices are increasing rapidly, labor cost and related benefit
expenses increasing a lot as well, which credit market is extremely tight. The Company believes that the ultra-ozone patent will
probably not yield the expecting value. On September 30, 2018, the Company decided to impair the net book value of this patent
and recorded an impairment loss of $1,922,674.
In
January 2018, in connection the acquisition of 3D Discovery and AnyWorkspace, the Company acquired their technologies valued at
$754,495 and $682,411 respectively. The technology of 3D Discovery covers a 3D virtual tour solution for the property industry.
The technology of AnyWorkspace covers management software for an online, real-time marketplace that connects workspace providers
with clients who need temporary office and meeting spaces. Additionally. during the nine months ended September 30, 2018,
Inspirit Studio developed its sharing economy mobile platform, namely BuddiGo, and capitalized costs amounting to $88,983. The
BuddiGo application was launched in June 2018. The Company amortizes these technologies over a term of five years.
For
the three months ended September 30, 2018 and 2017, amortization of intangible assets amounted to $99,177 and $82,104, respectively.
For the nine months ended September 30, 2018 and 2017, amortization of intangible assets amounted to $299,373 and $241,464, respectively.
NOTE
9 –
SHORT-TERM BANK LOANS
Short-term
bank loans represent amounts due to various banks that are due within one year. These loans can be renewed with these banks upon
maturities. At September 30, 2018 and December 31, 2017, short-term bank loans consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Loan from Bank of China, due on December 4, 2018 with annual interest rate of 6.09%, secured by certain assets of the Company
|
|
$
|
363,282
|
|
|
$
|
384,172
|
|
Loan from Bank of China, due on December 6, 2018 with annual interest rate of 6.09%, secured by certain assets of the Company
|
|
|
363,282
|
|
|
|
384,172
|
|
Loan from Bank of Wuxi Nongshuang, due on April 25, 2018 with annual interest rate of 5.87%, secured by certain assets of the Company
|
|
|
-
|
|
|
|
691,510
|
|
Loan from Bank of Wuxi Nongshuang, due on February 22, 2019 with annual interest rate of 5.87%, secured by certain assets of the Company
|
|
|
653,909
|
|
|
|
-
|
|
Loan from Bank of Communication, due on September 20, 2019 with annual interest rate of 5.85%, secured by certain assets of the Company
|
|
|
-
|
|
|
|
614,675
|
|
Loan from Bank of Communication, due on September 25, 2018 with annual interest rate of 5.85%, secured by certain assets of the Company
|
|
|
581,252
|
|
|
|
|
|
Loan from Zhongli International Finance Corporation, credit line of RMB4,500,000 (approximately $653,908), with a security deposit of RMB900,000 (approximately $130,782) which will be returned in 36 months, monthly installment of RMB210,000 (approximately $30,516) in the 1
st
– 12
th
month; RMB138,000 (approximately $20,053) in the 13
th
- 24
th
month; RMB98,000 (approximately $14,241) in the 25
st
– 36
th
month; secured by certain assets of the Company *
|
|
|
240,521
|
|
|
|
-
|
|
Total short-term bank loans
|
|
$
|
2,202,246
|
|
|
$
|
2,074,529
|
|
*
Long-term bank loans represent amounts due to various banks that are due more than one year. Long-term portion of loan from Zhongli
International Finance Corporation is $282,605 as of September 30, 2018.
Minimum
36-month installments under the loan agreement are as follows:
12-month periods ending September 30,
|
|
Amount
|
|
2019
|
|
$
|
366,189
|
|
2020
|
|
|
240,638
|
|
2021
|
|
|
170,888
|
|
Total minimum loan payments
|
|
|
777,715
|
|
Less: amount representing interest
|
|
|
(123,807
|
)
|
Less: security deposit due
|
|
|
(130,782
|
)
|
Present value of net minimum loan payment
|
|
|
523,127
|
|
Less: current portion
|
|
|
240,521
|
|
Long-term portion
|
|
$
|
282,605
|
|
Interest
related to the short-term bank loans, which was $26,892 and $33,125 for the three months ended September 30, 2018 and 2017, and
$88,372 and $107,991 for the nine months ended September 30, 2018 and 2017, respectively, is included in interest expense on the
accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
NOTE
10 –
BANK ACCEPTANCE NOTES PAYABLE
Bank
acceptance notes payable represent amounts due to banks which are collateralized. All bank acceptance notes payable are secured
by the Company’s restricted cash which are deposits with various lenders. At September 30, 2018 and December 31, 2017, the
Company’s bank acceptance notes payables consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Bank of China, non-interest bearing, due on June 25, 2018, collateralized by 100% of restricted cash deposited
|
|
$
|
-
|
|
|
$
|
115,252
|
|
Bank of Communication, non-interest bearing, due on March 24, 2018, collateralized by 100% of restricted cash deposited
|
|
|
-
|
|
|
|
307,337
|
|
Bank of Communication, non-interest bearing, due on December 26, 2018, collateralized by 100% of restricted cash deposited
|
|
|
145,313
|
|
|
|
-
|
|
Total
|
|
$
|
145,313
|
|
|
$
|
422,589
|
|
NOTE
11 –
CONVERTIBLE NOTE PAYABLE
Note
Purchase Agreement
On
October 9, 2017, the Company entered into a Note Purchase Agreement (the “NPA”) with Chong Ou Holdings Group Company
Limited, a BVI company (the “Investor”) pursuant to which the Investor purchased a note for $670,000, bearing two
percent (2%) interest per annum (the “Note”). The Note automatically converts into shares of common stock of the Company
at a conversion price equal to $3.35 per share on January 8, 2018. The Company shall have the option, in its sole and absolute
discretion, to repay the Outstanding Amount in full on or before the Conversion Date. On January 8, 2018, the Note was converted
into 200,100 shares of common stock.
Securities
purchase agreement and related convertible note and warrants
On May 2, 2018, pursuant to a securities
purchase agreement, the Company closed a private placement of securities with Iliad Research and Trading, L.P. (the “Investor”)
pursuant to which the Investor purchased a Convertible Promissory Note (the “Iliad Note”) in the original principal
amount of $900,000, convertible into shares of common stock of the Company (the “Common Stock”), upon the terms and
subject to the limitations and conditions set forth in the Iliad Note, and a two year Warrant to purchase 134,328 shares of Common
Stock at an exercise price of $7.18 per share (the “Warrant”). In connection with the Iliad Note, the Company paid
an original issue discount of $150,000 and paid issuance costs of $45,018 which will be reflected as a debt discount and amortized
over the Iliad Note term. The Iliad Note bears interest at 10% per annum, is unsecured, and is due on the date that is fifteen
months from May 2, 2018. The warrants shall expire on the last calendar day of the month in which the second anniversary of the
Issue Date occurs.
If the Company exercises its right to prepay this Iliad Note, the Company shall make payment to Investor
of an amount in cash equal to 125% multiplied by the then Outstanding Balance of this Iliad Note.
The
Investor has the right at any time after May 2, 2018 until the Outstanding Balance has been paid in full to convert (each instance
of conversion is referred to herein as a (“Lender Conversion”) all or any part of the Outstanding Balance into shares
(“Lender Conversion Shares”) of fully paid and non-assessable common stock, $0.001 par value per share (“Common
Stock”), of the Company as per the following conversion formula:
|
●
|
the
number of Lender Conversion Shares equals the amount being converted (the “Conversion Amount”) divided by the
Lender Conversion Price (as defined below). All Investor Conversions shall be cashless and not require further payment from
the Investor. Subject to adjustment as set forth in this Iliad Note, the price at which Investor has the right to convert all
or any portion of the Outstanding Balance into Common Stock is $6.70 per share of Common Stock (the “Lender
Conversion Price”).
|
Beginning
on the date that is six months after May 2, 2018, (the “Redemption Start Date”), Investor shall have the right, exercisable
at any time in its sole and absolute discretion, to redeem all or any portion of the Iliad Note (such amount, the “Redemption
Amount”) by providing the Company with a redemption notice, and each date on which Lender delivers a redemption notice.
Payments of each Redemption Amount may be made (a) in cash, or (b) by converting such Redemption Amount into shares of Common
Stock (“Redemption Conversion Shares”, and together with the Lender Conversion Shares, the “Conversion Shares”)
(each, a “Redemption Conversion”) per the following formula: the number of Redemption Conversion Shares equals the
portion of the applicable Redemption Amount being converted divided by the Redemption Conversion Price (as defined below), or
(c) by any combination of the foregoing. Notwithstanding the foregoing, Borrower will not be entitled to elect a Redemption Conversion
with respect to any portion of any applicable Redemption Amount and shall be required to pay the entire amount of such Redemption
Amount in cash within thirty days, if (a) on the applicable Redemption Date there is an Equity Conditions Failure as defined in
the Iliad Note, and such failure is not waived in writing by the Investor; or (b) the Redemption Conversion Price is below the
Conversion Price Floor and the Company does not agree to waive the Conversion Price Floor. The Investor agrees to redeem at least
the Minimum Redemption Amount in each thirty-day period following the Redemption Start Date. The Investor also agrees not to redeem
more than the Minimum Redemption Amount in any thirty-day period following the Redemption Start Date in which the Redemption Conversion
Price is less than the Conversion Floor Price.
Subject
to the adjustments set forth herein, the conversion price for each Redemption Conversion (the “Redemption Conversion Price”)
shall be the lesser of (a) the Lender Conversion Price, and (b) the Market Price;
provided, however
, in no event shall
the Redemption Conversion Price be less than $2.00 per share (“Conversion Price Floor”).
This
debt instrument includes embedded components including a put option. The Company evaluated these embedded components to determine
whether they are embedded derivatives within the scope of ASC 815 that should be separately carried at fair value. ASC 815-15-25-1
provides guidance on when an embedded component should be separated from its host instrument and accounted for separately as a
derivative. Based on this analysis, the Company believes that the put option is clearly and closely related to the debt instrument
and does not meet the definition of a derivative. Accordingly, in connection with this Iliad Note, the Company recorded a debt
discount for (a) the original issue discount of $150,000 (b) the relative fair value of the warrants issued of $152,490 and (c)
legal fees and other fees paid in connection with the Iliad Note aggregating $45,018. There is no beneficial conversion feature
on this Iliad Note. The debt discount shall be accreted on a straight line basis over the term of this Iliad Note. At September
30, 2018 and December 31, 2017, convertible debt consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Principal
|
|
$
|
900,000
|
|
|
$
|
670,000
|
|
Unamortized discount
|
|
|
(231,672
|
)
|
|
|
-
|
|
Convertible debt, net
|
|
$
|
668,328
|
|
|
$
|
670,000
|
|
For the three months ended September 30, 2018, amortization of debt discount and accrued interest amounted
to $69,502 and $22,500, respectively. For the nine months ended September 30, 2018, amortization of debt discount and accrued interest
amounted to $115,836 and $37,500, respectively.
NOTE
12 –
RELATED PARTY TRANSACTIONS
License
Agreement with ECrent Capital Holdings Limited
On
June 11, 2017, the Company entered into an Exclusivity Agreement (the “Exclusivity Agreement”) with ECrent Capital
Holdings Limited (“ECrent”) the terms of which became effective on the same day. Pursuant to the Exclusivity Agreement,
the Company and ECrent agreed to engage in exclusive discussions regarding a potential acquisition by the Company of ECrent and/or
any of its subsidiaries or otherwise all or part of ECrent’s business and potential business cooperation between the two
companies (collectively, the “Potential Transactions”) for a period of three months commencing from the date of the
Exclusivity Agreement (the “Exclusive Period”). Ms. Deborah Yuen, an affiliate of YSK 1860 Co., Limited, which is
a major shareholder of the Company, controls ECrent. ECrent agreed that, during the Exclusive Period, neither ECrent nor its agents,
representatives or advisors will contact, solicit, discuss or negotiate with any third party with respect to any transaction relating
to a transfer or pledge of securities of ECrent and/or its subsidiaries, a sale of ECrent’s business, a business cooperation
or any other matters that may adversely affect the Potential Transactions or the parties’ discussion related thereto. The
exclusivity period has been further extended to a period of 18 months commencing from June 20, 2018 pursuant to three amendment
agreements dated September 11, 2017, January 23, 2018 and June 20, 2018.
On
May 8, 2018, amended on May 24, 2018 and amended on August 30, 2018, Sharing Economy entered into a License Agreement (the “Agreement”)
with ECrent. In accordance with the terms of the Amendment, ECrent shall grant the Company an exclusive license to utilize certain
software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in Taiwan,
Thailand, India, Indonesia, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Japan, and Korea until December 31, 2019. In
consideration for the license, the Company granted ECrent 250,000 shares of common stock (the “Consideration Shares”),
at an issue price of $1,040,000, or $4.16 per share, (based on the quoted market price of the Company’s common stock on
the amended Agreement date of May 24, 2018). Pursuant to the terms of the Agreement, ECrent shall provide a guarantee on revenue
and profit of $13,000,000 and $2,522,000, respectively. The Consideration Shares shall be reduced on a pro rata basis if there
is a shortfall in the guaranteed revenue and/or profit. In connection with this agreement, during the three and nine months ended
September 30, 2018, the Company recorded license fee expense of $145,213 and $210,213, respectively, which is included in cost
of sales, and at September 30, 2018, recorded a prepaid license fee – related party of $829,787 which will be amortized
over the remaining license period.
Due
to related parties
Provisional
Agreement with EC Assets Management Limited
On
June 21, 2018, EC Assets and Golden Value Finance Limited, entered into a Provisional Agreement for purchase and sale of the entire
issued share capital of Future Ocean Limited, the owner of House No. 74 Cedar Drive (also known as House B31) the Redhill Peninsula
Site D No. 18 Pak Pat Shan Road Hong Kong (the “Property”). Pursuant to the agreement, EC Assets has agreed to purchase
Future Ocean Limited for HKD96 million. The parties intend to negotiate in good faith to enter into a formal agreement for the
purchase and sale of the Property and close on or before December 31, 2018.There is no guarantee that the transaction will be
consummated. In connection with this procurement, Ms. Deborah Yuen lent the Company HKD9.6 million (approximately $1,230,769)
with non-interest bearing and due on demand as of September 30, 2018.
YSK
1860 Co., Limited
From
time to time, during 2017 and 2018, the Company receive advances from YSK 1860 Co., Limited, who is the major shareholder of the
Company for working capital purposes. These advances are non-interest bearing and are payable on demand. At September 30, 2018
and December 31, 2017, amounts due to YSK 1860 Co., Limited amounted to $927,635 and $347,589, respectively.
NOTE
13 –
STOCKHOLDERS’ EQUITY
Preferred
stock designated
On
September 7, 2018, the Company filed with the State of Nevada a Certificate of Designation establishing the designations, preferences,
limitations and relative rights of the Series A Preferred Stock (the “Designation”). The Designation authorized 10,000,000
shares of Series A Preferred Stock. Each share of Series A Preferred Stock shall be convertible into one (1) share of the Company’s
common stock, at the option of the holder, on or after the date and subject to the conditions set forth in the Designation.
Common
stock issued for services
During
the nine months ended September 30, 2018, the Company has issued 426,870 shares as bonus to certain directors, employees and consultants
for performance targets to be achieved for the year in 2018, and the Company has also issued 5,610 shares as salary and staff
benefits. These shares were valued at the fair market value on the entitlement or grant date using the reported closing share
price on the date of entitlement or grant. During the nine months ended September 30, 2018, the Company recorded stock-based compensation
expense of $879,258 and prepaid expenses of $496,654 which will be amortized over the remaining service period.
During
the nine months ended September 30, 2018, pursuant to consulting and service agreements, the Company issued an aggregate of
3,422,120 shares of common stock to 94 consultants and vendors for the services rendered and to be rendered. These shares were
valued at the fair market value on the grant date using the reported closing share price on the date of grant. As of September
30, 2018, in connection with the issuance of the shares to consultants and vendors, the Company recorded prepaid expenses of $7,159,087
which is being amortized over the respective service period.
Additionally,
the Company issued/will issue an additional 1,595,025 share of common stock to 36 consultants and vendors as follows: 1,255,588
shares between October 2018 and December 2018; 339,437 shares during year 2019, provided that these agreements are not terminated
prior to the issuance of such shares and subject to the approval and execution of the Plan of Compliance currently under review
by the Nasdaq. The initial fair value of these shares was valued at the fair market value on the grant or contract date using
the reported closing share price on the date of contract or grant. The Company will recognize stock-based professional fees over
the period during which the services are rendered by such consultant or vendor. At the end of each financial reporting period
prior to issuance of these shares, the fair value of these shares is remeasured using the then-current fair value of the Company’s
common stock. As of September 30, 2018, there was $2,633,897 of unvested stock-based consulting and service fees to be recognized
over the remaining service periods.
In
October 2018, the Company mutually agreed or terminated the consulting and service agreements of 6 consultants and vendors. Both
parties forgo their respective rights as stated in the agreements, the Company has no obligation to issue in aggregate of 614,929
shares in effect.
For
the nine months ended September 30, 2018, in connection with the above share issuances and the amortization of prepaid stock-based
consulting and service fees from shares issued in 2017, the Company recorded stock-based consulting and service fees of $9,132,385
For
part of the consultancy agreements, if, on the first date when the restrictive legend on the certificate of each lot of the shares
issued to the consultant/vendor pursuant these agreements are removed and such lot of shares becomes freely tradeable in the NASDAQ
Capital Market without restriction, the closing price of the shares drops below the issue price, the Company will compensate the
consultants and vendors for the drop in value of such lot of shares, which will be calculated by multiplying the number of Shares
by the difference between the closing price and the issue price (“Shortfall”). The total maximum number of shares
issued for the Shortfall of these consultancy agreements shall not exceed 291,169 Shares.
Additionally,
pursuant to a two-year consulting agreement between the Company’s wholly-owned subsidiary, EC Advertising and an individual,
the Company shall, within one month from the date of this Agreement (October 9, 2017), issue such number of ordinary shares of
EC Advertising to the Consultant (or his nominee) so that he (or his nominee) will hold 15% of EC Advertising issued share capital
as enlarged by the share issue pursuant to this agreement. Additionally, within one month after the Consultant achieves all the
performance targets as outlined in the agreement, EC Advertising shall issue, or shall cause its major shareholder to transfer,
such number of EC Advertising’s ordinary shares to the Consultant (or its nominee) so that he (and his nominee) will, together
with the 15% issued share capital discussed above, hold a total of 49% of EC Advertising’s issued share capital as enlarged
by the share issue or after the transfer (as the case may be). Performance targets include the achievement by the Company of total
revenue of $10,000,000 and profit after tax of $4,000,000 during the term of the agreement.
Common stock sold for cash
In
March 2018, pursuant to a stock purchase agreement, the Company sold 69,676 shares of common stock to an investor at a purchase
price of $3.68 per share for net cash proceeds a total of $256,410. The Company did not engage a placement agent with respect
to these sales.
Common
stock issued debt conversion
In
January 2018, the Company issued 200,100 shares of its common stock upon conversion of debt (see Note 11).
Common
stock issued in connection with acquisitions
On
January 19, 2018 (the “Closing Date”), the Company completed the acquisition of 60% of the issued and outstanding
capital stock of 3D Discovery from its shareholders pursuant to the terms and conditions of a Sale and Purchase Agreement entered
into among the Company and the 3D Discovery Stockholders on the Closing Date. In connection with the acquisition, the Company
issued 68,610 unregistered shares of its common stock valued at $442,535, based on the acquisition-date fair value of our common
stock of $6.45 per share based on the quoted market price of the Company’s common stock on the Closing date (See Note 2).
On
January 30, 2018 (the “Closing Date”), the Company completed the acquisition of 80% of the issued and outstanding
capital stock of AnyWorkspace from its shareholders pursuant to the terms and conditions of a Sale and Purchase Agreement entered
into among the Company and the AnyWorkspace Stockholders on the Closing Date. In connection with the acquisition, the Company
issued 106,464 unregistered shares of its common stock valued at $534,449, based on the acquisition-date fair value of our common
stock of $5.02 per share based on the quoted market price of the Company’s common stock on the Closing date (See Note 2).
On
June 26, 2018, pursuant to the sub-licensing agreement entered between the Company and a related party, Ecrent Capital Holdings
Limited, the Company issued 250,000 unregistered shares of its common stock valued at $1,040,000, or $4.16 per share, based on
the quoted market price of the Company’s common stock on the amended Agreement date of May 24, 2018. In connection
with this agreement, during the three and nine months ended September 30, 2018, the Company recorded license fee expense of $145,213
and $210,213, respectively, which is included in cost of sales, and at September 30, 2018, recorded a prepaid license fee –
related party of $829,787 which will be amortized over the remaining license period (see Note 12).
Shares
issued for donation
On
July 10, 2018, the Company issued 58,000 shares as donation to Ng Hong Man Educational Foundation Limited. The Foundation would
use the funds raised from the donation to support and promote the delivery of education and the operation of the Foundation, to
set up a co-working facility and community for training the low skill people, and to coordinate with schools and education institutes
to support and promote the education of sharing economy to the teenage groups. These shares were valued at $241,860, or $4.17
per share, based on the quoted market price of the Company’s common stock on the donation date. In connection with this
donation, during the three and nine months ended September 30, 2018, the Company recorded donation expense of $241,860 and $241,860,
respectively, which is included in operating expenses.
Shares
issued in connection with Tenancy Agreement for office complex of Shaw Movie City
Sharing
Film International Limited (“Sharing Film”), a wholly owned subsidiary of the Company, entered into a tenancy agreement
with Shaw Movie City Hong Kong Limited (“Landlord”). The Landlord let and Sharing Film took one level of office complex
of Shaw Movie City for one year commencing from 1 November 2018 renewable on a yearly basis. On July 24, 2018, the Company issued
311,357 shares as the payment for the annual rental and part of the management fee for the one year tenure and 54,777 shares as
the payment of part of the tenancy deposit. During the nine months ended September 30, 2018, the Company recorded stock-based
rental and management fee of $26,773 and prepaid expenses of $1,048,659 which will be amortized over the remaining service period. The
fair value of the tenancy deposit was valued at $189,185.
NOTE
14 –
STATUTORY RESERVE
The
Company is required to make appropriations to statutory reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’
registered capital or members’ equity. The profit arrived at must be set off against any accumulated losses sustained by
the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be
made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of
the registered capital. This statutory reserve is not distributable in the form of cash dividends. As of September 30, 2018 and
December 31, 2017, the Company appropriated the required 50% of its registered capital to statutory reserve for Dyeing and Heavy
Industries. Accordingly, no additional statutory reserve for Dyeing and Heavy Industries are required for the period ended September
30, 2018. Green Power had loss since its establishment. No appropriation to statutory reserves for it was required as it incurred
recurring net loss.
NOTE
15 –
SEGMENT INFORMATION
During
the three and nine months ended September 30, 2017, the Company operated in one reportable business segments, the manufacture
of textile dyeing and finishing equipment segment. During the three and nine months ended September 30, 2018, the Company operated
in two reportable business segments - (1) the manufacture of textile dyeing and finishing equipment segment, and (2) the Sharing
Economy Segment which targets the technology and global sharing economy markets, by developing online platforms and rental business
partnerships that will drive the global development of sharing through economical rental business models. The Company’s
reportable segments were strategic business units that offered different products. They were managed separately based on the fundamental
differences in their operations and locations. During the 2017 period, all of the Company’s operations were conducted in
the PRC. The Sharing Economy Segment is based in Hong Kong.
Information
with respect to these reportable business segments for the three and nine months ended September 30, 2018 and 2017 was as follows:
|
|
For the Three Months ended
September 30,
|
|
|
For the Nine Months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
2,444,437
|
|
|
$
|
2,629,217
|
|
|
$
|
7,499,362
|
|
|
$
|
10,998,438
|
|
Sharing economy
|
|
|
72,764
|
|
|
|
-
|
|
|
|
155,959
|
|
|
|
-
|
|
|
|
|
2,517,201
|
|
|
|
2,629,217
|
|
|
|
7,655,321
|
|
|
|
10,998,438
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
974,745
|
|
|
|
955,944
|
|
|
|
3,067,647
|
|
|
|
2,895,246
|
|
Sharing economy
|
|
|
4,458
|
|
|
|
-
|
|
|
|
13,210
|
|
|
|
-
|
|
|
|
|
979,203
|
|
|
|
955,944
|
|
|
|
3,080,857
|
|
|
|
2,895,246
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
26,892
|
|
|
|
33,125
|
|
|
|
88,372
|
|
|
|
107,991
|
|
Sharing economy
|
|
|
92,002
|
|
|
|
-
|
|
|
|
153,336
|
|
|
|
-
|
|
|
|
|
118,894
|
|
|
|
33,125
|
|
|
|
241,708
|
|
|
|
107,991
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
(13,293,023
|
)
|
|
|
(4,158,877
|
)
|
|
|
(17,364,755
|
)
|
|
|
(4,826,783
|
)
|
Sharing economy
|
|
|
(4,319,404
|
)
|
|
|
(20,111
|
)
|
|
|
(8,049,373
|
)
|
|
|
(20,111
|
)
|
Discontinued segments
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
Other (a)
|
|
|
(960,907
|
)
|
|
|
-
|
|
|
|
(4,065,420
|
)
|
|
|
-
|
|
|
|
$
|
(18,573,719
|
)
|
|
$
|
(4,250,327
|
)
|
|
$
|
(29,463,062
|
)
|
|
$
|
(4,918,233
|
)
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Identifiable long-lived tangible assets at September 30, 2018 and December 31, 2017 by segment
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
23,457,887
|
|
|
$
|
27,805,180
|
|
Sharing economy
|
|
|
61,220
|
|
|
|
65,144
|
|
Other (b)
|
|
|
5,022,015
|
|
|
|
5,310,795
|
|
|
|
$
|
28,541,122
|
|
|
$
|
33,181,119
|
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Identifiable long-lived tangible assets at September 30, 2018 and December 31, 2017 by geographical location
|
|
|
|
|
|
|
China
|
|
$
|
28,479,902
|
|
|
$
|
33,115,975
|
|
Hong Kong
|
|
|
61,220
|
|
|
|
65,144
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
28,541,122
|
|
|
$
|
33,181,119
|
|
(a)
|
The
Company does not allocate any general and administrative expense of its U.S. activities to its reportable segments, because
these activities are managed at a corporate level.
|
(b)
|
Represents
amount of net tangible assets not in use and to be used by for new segment being developed.
|
NOTE
16 –
CONCENTRATIONS
Customers
Three
customers accounted for approximately 45% (18%, 16% and 11%) of the Company’s revenues for the nine months ended September
30, 2018 and one customer accounted for approximately 10% of the Company’s revenues for the nine months ended September
30, 2017.
No
customer accounted for 10% of the Company’s total outstanding accounts receivable at September 30, 2018 and December 31,
2017.
Suppliers
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s inventories purchases
for the nine months ended September 30, 2018 and 2017.
|
|
Nine Months Ended
September 30,
|
|
Supplier
|
|
2018
|
|
|
2017
|
|
A
|
|
|
-
|
|
|
|
22
|
%
|
B
|
|
|
14
|
%
|
|
|
12
|
%
|
C
|
|
|
29
|
%
|
|
|
*
|
|
D
|
|
|
18
|
%
|
|
|
*
|
|
E
|
|
|
15
|
%
|
|
|
*
|
|
No
supplier accounted for approximately 10% of the Company’s total outstanding accounts payable at September 30, 2018. One
supplier accounted for approximately 13% of the Company’s total outstanding accounts payable at December 31, 2017.
NOTE
17 – COMMITMENT AND CONTINGENCIES
Equity
investment commitment
On
December 26, 2016, Dyeing made an equity investment with one unrelated company in Shengxin, a newly-formed entity which plans
to develop, construct and maintain photovoltaic power generation projects in China. Shengxin’s total registered capital
is RMB 200 million (approximately $31.8 million). Dyeing has agreed to invest RMB 60,000,000 (approximately $9,543,000) for a
30% equity interest and had invested RMB 59,800,000 (approximately $9,511,000) as of September 30, 2018. Mr. Xue has a commitment
to invest RMB 140,000,000 (approximately $22.3 million) for a 70% interest. Mr. Xue contributed RMB 60,000,000 (approximately
$9.5 million), and he advised Dyeing that he anticipates that he will fund the balance of his commitment during 2018. Since Mr.
Xue did not make this payment by the end of 2017, Dyeing has the right to amend the contract, and both parties may adjust each
sides’ equity interest to reflect the amount of capital each side has actually invested. As of the date of this report,
the contract had not been amended. In April 2018, Shengxin secured and invested in a large solar PV project in GuiZhou province.
Shengxin paid RMB40.0 million for the project rights and also engaged a local contractor to proceed with building the project.
However, on June 1, 2018, the Chinese government halted installation of new solar farms for the remainder of the year and reduced
subsidies for projects already under construction. Accordingly, there is no guarantee that the Chinese government will invest
in new solar farm or provide the subsidies needed to fund projects. In September 2018, due to significance doubt about the status
of this project and recoverability of the Company’s investment, the Company fully impaired the value of its investment in
Shengxin in the amount of $8,835,834. Additionally, for the three months ended September 30, 2018 and 2017, the Company’s
share of Shengxin’s net loss were $56,624 and $39,060, respectively. For the nine months ended September 30, 2018 and 2017,
the Company’s share of Shengxin’s net loss were $202,469 and $81,871, respectively.
Litigation
On
or about November 14, 2017, a complaint was filed in the United States District Court for the Eastern District of New York, captioned “
Morris
Ackerman v. Cleantech Solutions International, Inc.”
The complaint alleged that the Company’s proxy
statement, which included a proposal to amend the Company’s long-term incentive plan to provide for the grant of incentive
and non-qualified options and stock grants to employees and others, did not comply with the disclosure requirements for proxy
statements. The parties reached a confidential settlement on or about December 20, 2017, and the plaintiff voluntarily dismissed
the action with prejudice on or about January 2, 2018. In connection with this settlement, the Company paid $50,000.
On
February 2, 2018, the law firm of Ellenoff Grossman & Schole LLP (“EGS”) filed a complaint against the Company
along with a number of companies and individuals in an effort to recover their legal fees in connection with services provided
to the other defendants. The lawsuit contends that the Company is the alter ego or successor in interest of those other defendants.
Pursuant to the stipulation of discontinuance dated April 30, 2018, the EGS claim is discontinued without prejudices and without
costs as to the Company only.
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Transfer
agreement
On
August 4, 2017, the Company’s wholly-owned subsidiary, EC Power (Global) Technology Limited (“EC Power”), entered
into a Transfer Agreement (the “Transfer Agreement”) with ECoin Global Limited (“ECoin”), to purchase
ECoin Redemption Codes (the “Codes”) produced by ECoin for total future consideration of $20,000,000 (the “Transfer
Consideration”). In accordance with the Agreement, EC Power will market the Codes, which contain a value that enables subscribers
to upload certain number of items onto ECrent’s website for rental. The Codes have a validity period of four years, and
will not expire until August 3, 2021 (the “Expiry Date”). The Transfer Consideration will be paid by EC Power to ECoin
in installments, with each installment payable not later than thirty days after the end of December 31 in each calendar year.
Each
installment will represent an amount equal to 50% of the net sale proceeds of the Codes sold during each calendar year. The aggregate
of installments shall not exceed the Transfer Consideration. Any balance outstanding of the Transfer Consideration at the Expiry
Date will be paid and discharged by the issuance and delivery to ECoin of common stock of the Company in accordance with the terms
of the Agreement. The number of shares to be issued or delivered shall be an amount equal to (i) the balance due; divided by (ii)
the VWAP of the shares for the period of twenty trading days immediately preceding the Expiry Date, provided always that in no
circumstances shall shares be issued or delivered hereunder to the ECoin in excess of 19% of the issued and outstanding ordinary
Shares of the Company. As of the date of this report, EC Power has not taken possession of any redemption codes and as of September
30, 2018, EC Power has not sold any redemption codes.
Lease
agreement
On
June 29, 2018, the Company’s wholly-owned subsidiary, Sharing Film International Limited, entered into a tenancy agreement
for approximately 24,000 square feet in Shaw Studios, which is owned by Shaw Movie City Hong Kong Limited (“Shaw Movie City”).
The initial lease term will be for one year, commencing November 1, 2018. The Company plans to utilize these spaces
to explore and develop its film and media production and post-production business and to develop a sharing environment for the
film and media production industry.
The
rent of the Premises is HK$591,664 (approximately $76,000) per month, that is HK$7,099,970 per annum (approximately $910,000)
for the Term. The entire sum of HK$7,099,970 (approximately $910,000) shall be payable in advance on the Handover Date without
any deduction or set-off by such means and in such manner. Additionally, the Company shall pay a management fee as follows:
(i)
|
HK$47,207
(approximately $6,000) per month by cash in Hong Kong currency, payable in advance of each calendar month (commencing from
the month of August 2018) for the Management Fee of office A;
|
(ii)
|
HK$2,994
(approximately $384) per month by cash in Hong Kong currency, payable in advance of each calendar month (commencing from the
month of August 2018) for the Management Fee of flat roof;
|
(iii)
|
HK$571,061
(approximately $73,000) being 6 months’ Management Fee for office B (and balcony B) and office C (and balcony C) payable
in advance by way of Allotted Shares for Payment, as defined below, in the manner pursuant to the agreement
;
and
|
(iv)
|
HK$95,177
(approximately $12,000) per month by cash in Hong Kong currency, payable in advance of each calendar month (commencing from
the month of February 2019) for the Management Fee of office B (and balcony B) and office C (and balcony C).
|
Additionally,
the Company is required to pay a security deposit in the amount of HK$3,137,502 (approximately $402,000) payable as follows: 1)
HK$1,637,502 (approximately $210,000) by check and 2) HK$1,500,000 (approximately $192,000) by means of delivering to the Landlord
the Company’s the SEII new common shares issued and allotted to and in the name of the Landlord’s nominee, at the
Issue Price Per Allotted Share for Deposit, as defined below, provided that in no event shall the number of the Company’s
common shares to be issued to the Landlord’s Nominee pursuant to this Agreement will exceed 19.9% of the issued and outstanding
shares of the Company’s common stock based on the total issued and outstanding shares of the Company’s common stock
on the date of this Agreement.
The
issue price per Allotted Share for Payment is to be set and determined based on a 5-days closing average of the Company before
the Shares Issued Date less 10% thereof (“Issue Price Per Allotted Share for Payment”). The issue price per Allotted
Share for Deposit is to be set and determined based on a 5-days closing average of the Company before the Shares Issued Date (hereinafter
called “Issue Price Per Allotted Share for Deposit”).
The Company issued new shares to pay the up-front amounts due for rent, management fee and deposit on
the spaces (see note 13) during the period.
NOTE
18 –
RESTRICTED NET ASSETS
Regulations
in the PRC permit payments of dividends by the Company’s PRC subsidiary and VIEs only out of their retained earnings, if
any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory
reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIEs and subsidiary.
Heavy Industries and Dyeing had reached the cumulative limit as of December 31, 2017. The statutory reserve funds are not distributable
as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIEs and its PRC subsidiary are restricted
in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may
further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or
advances.
As of September 30, 2018 and December 31,
2017 and 2016, substantially all of the Company’s net assets are attributable to the PRC VIEs and its subsidiary located
in the PRC. Accordingly, the Company’s restricted net assets at September 30, 2018 and December 31, 2017 were approximately
$30,843,000 and $50,873,000, respectively.
NOTE
19 –
SUBSEQUENT EVENTS
Acquisition
of 60% interest in Gagfare Limited
On
August 17, 2018, SEIL has entered into a Sale and Purchase Agreement (the “Agreement”) with the shareholder of Gagfare
Limited (“Gagfare”), to acquire 60% ownership of Gagfare. SEIL will acquire 60% of Gagfare for US$3.6 million, which
shall be satisfied by the allotment and issuance of 1,176,087 preferred shares of the Company at a price of $3.061 per share.
Gagfare is an online platform enabling travelers to search flights directly with over 500 airlines globally, allowing them to
get the best-value airfare for their desired flight and secure a confirmed, impartial best airfare on their desired flight instantly.
The
acquisition has not yet been completed subject to certain conditions as stipulated in the Agreement, and the expiration date has
been extended from October 18, 2018 to January 18, 2019 by mutual agreement of both parties.
Redemption
of common shares of the Iliad Note
On
November 8, 2018, the Company converted an aggregate of $27,811 and $47,189 outstanding principal and interest of the Iliad
Note, respectively, into 36,621 shares of its common stock (see Note 11).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Historically, our primary operations involved
the design, manufacture and distribution of a line of proprietary high and low temperature dyeing and finishing machinery to the
textile industry. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are
used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie,
and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and
existing end markets.
We design and produce airflow dyeing machines,
which use air instead of water. Water is used in the traditional dyeing process. We believe that our air-flow technology, which
is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less
damage to the textile, and reduced emissions. Historically, the Chinese government’s mandate to phase out older machinery
in China’s textile industry that does not meet the new environmental standards has benefitted us. However, in recent years,
challenging economic conditions, increases in raw materials prices and the Chinese government’s more aggressive stance toward
shutting down factories, including textile manufacturers, that are not compliant with emission standards, have adversely impacted
our dyeing and finishing businesses. Due to rising production costs, many other textile manufacturers are closing or relocating
to other countries outside of China in Southeast Asia.
In an effort to improve our product offering
and appeal to textile manufacturers outside of our current customer base in China, we have developed prototypes of next generation
dyeing and finishing equipment utilizing a patent we purchased in August 2016 that covers ozone-ultrasonic textile dyeing equipment.
Up to this point, we have yet to generate any revenues from this new prototype. Due to the challenging conditions facing our customers,
increasing raw materials prices and labor costs, we believe that the patent is unlikely to yield significant value to the Company.
As a result, we have taken a $1.9 million impairment loss on this asset during the third quarter of 2018. We are also diversifying
our manufacturing operations to target other industries outside of the textile industry and plan to complete construction a mobile
phone cover production line later this year and begin production in the first quarter of 2019. We are actively exploring other
new ventures and opportunities that could contribute to our business in the future. We expect our revenue from dyeing and finishing
equipment segment will remain at or about its current quarterly level in the near future, although declines are possible.
On December 26, 2016, Dyeing and Xue Miao,
an unrelated individual, formed Shengxin pursuant to an agreement dated December 23, 2016. The agreement sets forth general terms
relating to the proposed business, but does not set forth specific funding obligations for either party. Dyeing has agreed to invest
RMB 60,000,000 (approximately $9,543,000) and had invested RMB 59.8 million (approximately $9,511,000 at September 30, 2018), for
which it received a 30% interest, and Mr. Xue had a commitment to invest RMB 140,000,000 (approximately $22.3 million), of which
Mr. Xue has contributed RMB 60,000,000 (approximately $9.5 million), for which Mr. Xue received a 70% interest in Shengxin. Shengxin’s
registered capital is RMB 200 million (approximately $31.8 million). Mr. Xue had advised Dyeing that he anticipated that he will
fund the remaining RMB 80,000,000 (approximately $12.7 million) of his commitment during 2018. Since Mr. Xue did not make this
payment by the end of 2017, Dyeing has the right to amend the contract, and both parties may adjust each side’s equity interest
to reflect the amount of capital each side has actually invested. As of September 30, 2018, no changes have been made to such contract.
Shengxin intends to develop, construct
and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan.
The solar farm industry is China is subject to significant government regulation. In order to construct and operate solar farms
in China, it is necessary to obtain a permit for a specific location, to obtain leasehold rights to a significant amount of contiguous
land parcels in provinces where there is significant sunlight for most of the year to support a solar farm and to have an agreement
to connect with the local grid. The development of solar farms requires significant funding, which, if financing is not available,
would have to be provided by Dyeing and Mr. Xue. There are no agreements relating to the funding obligations of either Dyeing or
Mr. Xue with respect to any specific project. Shengxin anticipates that to the extent that it obtains permits for solar farms,
it will form a new subsidiary for the sole purpose of obtaining the permit for a specific location and constructing the solar farm
at that location. The nature of the parties’ respective investments and the respective equity interest in any solar farm
project will be determined on a case-by-case basis.
To the extent that Mr. Xue develops the
project, he may receive an equity interest in the project greater than the percentage of his equity investment, with the specific
amount being subject to mutual agreement of the parties.
The Company’s investment in Shengxin
is subject to a high degree of risk. The Company cannot give any assurance that Shengxin will be able to obtain any permits, raise
any required funding, develop and operate or sell any solar farms or operate profitably or that Dyeing will have the resources
to provide any funds that may be required in order to fund any solar farm projects for which Shengxin may obtain permits. There
may be a significant delay between the time funds are advanced for any project and the realization of revenue or cash flow from
any project.
In April 2018, Shengxin secured and invested
in a large solar PV project in GuiZhou province. Shengxin paid RMB40.0 million for the project rights and also engaged a local
contractor to proceed with building the project. However, on June 1, 2018, the Chinese government halted installation of new solar
farms for the remainder of the year and reduced subsidies for projects already under construction. Accordingly, there is no guarantee
that the Chinese government will invest in new solar farm or provide the subsidies needed to fund projects. At September 30, 2018,
Shengxin’s assets consisted of cash, advances to supplier and fixed assets of approximately $48,000, $16.3 million and $14,000,
respectively, and had no liabilities. At December 31, 2017, Shengxin’s assets consisted of cash, advances to supplier and
fixed assets of approximately $17.3 million and $615,000 and $5,000, respectively, and had no liabilities. In September 2018, due
to significance doubt about the status of this project and recoverability of the Company’s investment, we fully impaired
the value of its investment in Shengxin in the amount of $8,835,834. Additionally, for the three months ended September 30, 2018
and 2017, the Company’s share of Shengxin’s net loss were $56,624 and $39,060, respectively. For the nine months ended
September 30, 2018 and 2017, the Company’s share of Shengxin’s net loss were $202,469 and $81,871, respectively.
Through December 30, 2016, we operated
in the forged rolled rings and related components segment, in which we manufactured and sold precision forged rolled rings, shafts,
flanges, and other forged components for the energy industry including wind power and other industries, On December 30, 2016, we
sold the stock in Fulland Wind, the subsidiary that operated our forged rolled rings and related components business, to a non-affiliated
third party, as a result of which the forged rolled rings and related components business is reflected as a discontinued operations
for all periods presented.
Additionally, during 2016, we operated
a petroleum and chemical equipment segment, in which we manufactured and sold petroleum and chemical equipment. Because of a significant
decline in revenues from this segment, we determined that we would not continue to operate in this segment and accordingly, the
petroleum and chemical equipment segment is reflected as discontinued operations for all periods presented.
Recently, difficult economic conditions,
limited availability of credit in China and trade tensions with the US presented numerous challenges for our business. As a result,
we experienced softer demand for our low-emission airflow dyeing machines as many of our potential customers already upgraded to
newer models and we believe that much of our remaining potential customer base does not have the ability to make significant capital
expenditures at this time. As a result, if we are to sell our products to the smaller textile manufacturers, it may be necessary
for us to design and market a cheaper machine that meets the Chinese government requirements or reduce prices which would impact
both revenues and gross margin.
Our ability to expand our operations and
increase our revenue is largely affected by the PRC government’s policy on such matters as the availability of credit, which
affects all of our operations, and its policies relating to the textile industry, environment issues and alternative energy as
well as the competitiveness of Chinese textile manufacturers at a time when consumers are looking for lower prices and manufacturers
are looking to produce in a country that has lower labor costs than China, all of which affects the market for our dyeing and finishing
equipment. Our business is also affected by general economic conditions and we cannot assure you that we will be able to increase
our revenues in the near future, if at all. For example, potential tariffs levied on Chinese textile manufacturers by the US would
have a negative impact on our customers and limit their ability to purchase equipment from us. Because of the nature of our products,
our customers’ projections of future economic conditions are an integral part of their decisions as to whether to purchase
capital equipment at this time or defer such purchases until a future date.
Recent developments
Inspirit Studio Limited
During the period, BuddiGo, the sharing
economy mobile platform developed by Inspirit Studio Limited (“Inspirit Studio”), continuously promoted its service
to the local market in Hong Kong. BuddiGo offers a wide range of errand services. Currently, about 80 percent of the orders received
are for on-demand urgent delivery of items such as documents, flowers and cakes. Food delivery services are also available. During
the period, BuddiGo conducted promotional programs via multiple online channels including broadcast branding videos with local
“key opinion leaders” (“KOLs”) who will help promote our services to target audiences. During the third
quarter of 2018, over 1,000 individuals have officially registered as sell-side buddies, who completed 20-30 delivery orders on
daily basis. In addition, BuddiGo has signed up with a number of local business partners to provide ongoing delivery services for
these clients.
In the third quarter of 2018, BuddiGo enhanced
its team with the addition of two new sales and marketing professionals as well as a new designer. The enlarged workforce helped
support BuddiGo’s heightened marketing activities which started from late August and are expected to result in significant
business growth in the latter half of 2018. BuddiGo is currently working with multiple agencies on the upcoming marketing campaign
which mainly focuses on promoting BuddiGo via online channels to increase reach and drive registration and conversion for both
buy-side and sell-side users. Our goal is to connect with the community and deliver localized content featuring BuddiGo’s
core features and advantages. BuddiGo is actively seeking strategic investors or collaborative parties who are enthusiastic about
its business model and can help achieve its business targets and expand into different countries.
AnyWorkspace Limited
During the period, AnyWorkspace Limited
(“AnyWorkspace”) focused on actively enlarging its exposure to the general public. Website traffic from new users rose
44% in the third quarter of 2018 compared to the second quarter of 2018. In addition, AnyWorkspace started showing positive traction
in India as space providers from New Delhi and Gurgaon have signed partnership agreements with us. We are currently revamping AnyWorkspace’s
corporate website, www.anyworkspace.com. We expected the website upgrade to be completed in the fourth quarter of 2018 and anticipate
significant growth in website traffic. AnyWorkspace will also focus on digital marketing activities for its market expansion plans
when there is available cash flow or funds from investors.
3D Discovery Co. Limited
3D Discovery Co. Limited (“3D Discovery”)
successfully completed a number of projects during the period. First, its “3D Virtual Tours in Hong Kong” generated
about 211,200 impressions during the period and the year-to-date accumulated number of impressions produced roughly amounted to
1,100,000. In addition, 3D Discovery partnered with Midland Realty, one of the largest real estate agencies in Hong Kong, to establish
the “Creation 200 3D Virtual Tours.” The 3D virtual tour creation mobile application, Autocap, is under development.
Autocap is a mobile application which allows users to create a virtual tour of a physical space on their own without the help of
a specialized 360 camera. Instead, upon registration and download of the Autocap app, users will be sent a motorized mount that
attaches to their smartphone and enables them to capture locations and produce 360-degree panoramic images with their smartphone.
Users will be charged processing and/or hosting fees once a tour is published. Due to unstable and uncertain market situations
in the economy and property markets caused by the trade tensions between the US and China, 3D Discovery has delayed the product
development and launch of the new platform. 3D Discovery plans on launching the iOS version by the end of the first half of 2019.
Autocap will be rolled out in stages, with the first phase focusing on Australia, Indonesia and Japan, respectively. Additionally,
the “big data” generated from the shots and images will be valuable to the analysis of users’ behavior and preferences.
Regarding the website and mobile app development business, the total accumulated contract value of around USD278,000 has been recorded
during the period. All these projects are expected to be completed within the fourth quarter of 2018.
EC Advertising Limited
Following the acquisition of BuddiGo, AnyWorkspace
and 3D Discovery by the Company during the period between late 2017 and the first half year of 2018, EC Advertising Limited (“EC
Advertising”) has been developing opportunities for these three platforms to attract advertisers.
During the period, we established a wholly-owned
subsidiary in Xiamen, Fujian Province of Mainland China, which is intended to cover our advertising business in this region. We
started meeting with a number of potential clients there and anticipate that this advertising company will confirm with them several
marketing campaigns which will be launched during the period between Christmas in 2018 and Chinese New Year in 2019. In order to
maximize our exposure to the potential clients in Mainland China, we are developing a strategic media plan which will cover major
cities in Mainland China such as Beijing, Shanghai, Guangzhou and Shenzhen. Major banks, real estate developers and consumer products
manufacturers and retailers are our target clients. More importantly, our presence in Mainland China can facilitate the rollout
of franchise programs of our business units, which is one of the revenue drivers for the Company.
ECrent Platform Business
In August 2018, Sharing Economy Investment
Limited (“SEIL”), a wholly-owned subsidiary of SEII, has entered into a License Agreement with Ecrent Capital Holdings
Limited (“ECRENT”), regarding the grant of an exclusive and sublicensable license from ECRENT to SEII to utilize certain
software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in United
Kingdom, Germany, France, Poland, Switzerland, Netherlands, Denmark, Russia, Italy, Spain, Portugal and Greece. In return, SEII
shall issue to ECRENT 360,000 shares of restricted common stock. Closing of this transaction was conditioned on various conditions,
including receipt of all necessary regulatory approvals. On October 9, 2018, the agreement was terminated by the parties, who have
agreed to forego their respective rights under the agreement.
In September 2018, SEIL has amended the
terms of the License Agreement, which was originally entered into on May 8, 2018 and amended on May 24, 2018, with Ecrent Capital
Holdings Limited (“ECRENT”), regarding the grant of an exclusive and sublicensable license from ECRENT to SEII to utilize
certain software and trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in
Taiwan, Thailand, India, Indonesia, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Japan, and Korea. According to the latest
amendment, ECRENT will guarantee that the operation of its related websites, mobile applications and business services will contribute
revenue of US$13,000,000 (increased from US$10,000,000 according to the previously amended agreement) and gross profit of US$2,522,000
(up from US$1,940,000 as stated on the previously amended agreement) from the closing date of the License Agreement through December
31, 2019 (extended from June 30, 2019 per the previously amended agreement).
In August, SEIL has entered into a License
Agreement with PTI Corporation (“PTI”), that sublicenses SEIL’s exclusive license with Ecrent Capital Holdings
Limited (“ECRENT”) to utilize certain software and trademarks in order to develop, launch, operate, commercialize,
and maintain an online website platform in South Korea. In return, PTI shall pay to SEIL $230,000 (“Consideration”).
The License Agreement will be effective on September 1, 2018 through December 31, 2019. In addition, if the aggregate revenue during
the period exceeds the Consideration, SEIL shall receive 30% of the difference between the aggregate revenue and the Consideration.
During the third quarter of 2018, PTI commenced prelaunch activities to develop the platform.
Gagfare Limited
On August 17, 2018, SEIL entered into a
Sale and Purchase Agreement (the “Agreement”) with the shareholder of Gagfare Limited (“Gagfare”), to acquire
60% ownership of Gagfare. SEIL will acquire 60% of Gagfare for US$3.6 million, which shall be satisfied by the allotment and issuance
of 1,176,087 preferred shares of the Company at a price of $3.061 per share. Gagfare is an online platform enabling travelers to
search flights directly with over 500 airlines globally, allowing them to get the best-value airfare for their desired flight and
secure a confirmed, impartial best airfare on their desired flight instantly, with a booking fee of only US$10. With the Gagfare
“book now, pay later” solution, travellers don’t have to pay the rest of the fare until closer to their travel
date.
The acquisition has not yet been completed
and is subject to certain conditions as stipulated in the Agreement, and the expiration date has been extended from October 18,
2018 to January 18, 2019 by mutual agreement of both parties.
Nasdaq Listing
On October 8, 2018, Sharing Economy International
Inc. (the “Company”) received a staff deficiency notice from The Nasdaq Stock Market (“Nasdaq”) informing
the Company that it has failed to comply with Nasdaq’s shareholder approval requirements set forth in Listing Rule 5635(c)
(the “Rule”). During the period from May 11, 2017 to date, the Company entered into approximately one hundred arrangements
resulting in the issuance or potential issuance of more than three million shares to officers, directors, employees, and consultants
(“Equity Compensation Grants”). The Company did not receive shareholder approval for the Equity Compensation Grants,
and the shares were not issued from a shareholder approval equity compensation plan. The Company submitted its plan to regain compliance
on October 26, 2018. If the plan is accepted, Nasdaq can grant an extension of up to one hundred eighty calendar days from October
8, 2018 to evidence compliance. The Company believes that it has otherwise been compliant with its filing obligations pursuant
to the Securities Exchange Act of 1934, as amended, including making all appropriate disclosures to the marketplace. The Company
is currently doing everything possible to cure its deficiencies regarding the Rule.
Inventory and
Raw Materials
A major element of our cost of revenues
is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these
fluctuations have been significant. In times of increasing prices, we need to try to establish the price at which we purchase raw
materials in order to avoid increases in costs which we cannot recoup through increases in sales prices. Similarly, in times of
decreasing prices, we may have purchased metals at prices which are high in terms of the price at which we can sell our products,
which also can impair our margins. Four major suppliers provided approximately 77% of our purchases of inventories for the nine
months ended September 30, 2018. Three major suppliers provided 34% of our purchases of inventories for the nine months ended September
30, 2017.
Critical Accounting Policies and Estimates
Our discussion
and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those
related to bad debts, inventories, recovery of long-lived assets, income taxes, the fair value of equity method investment, the
fair value of assets held for sale and the valuation of equity transactions.
We base our estimates
on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts
of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation
of the consolidated financial statements.
Variable Interest Entities
Pursuant to ASC
Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated
financial statements the financial statements of variable interest entities (“VIEs”). The accounting standards require
a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to
receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements,
bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary
of the entity.
Dyeing is considered
a VIE, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with the Dyeing pursuant to which we
shall receive 100% of Dyeing’s net income. In accordance with these agreements, Dyeing shall pay consulting fees equal to
100% of its net income to our wholly-owned subsidiary, Green Power, and Green Power shall supply the technology and administrative
services needed to service Dyeing.
The accounts of
the Dyeing are consolidated in the accompanying financial statements. As a VIE, Dyeing’s sales are included in our total
sales, its income from operations is consolidated with ours, and our net income includes all of the Huayang Companies’ net
income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling
interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the
contractual arrangements, we have pecuniary interest in Dyeing that require consolidation of the Dyeing’s financial statements
with our financial statements.
Accounts Receivable
We have a policy
of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts
receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed
to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery
is considered remote.
As a basis for
estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable
accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We
review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions
are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business
relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.
Inventories
Inventories, consisting
of raw materials, work-in-process and finished goods, are stated at the lower of cost or net realizable value utilizing the weighted
average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory
costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves
for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities
on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results
of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether
or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we
sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes
in demands for such products, or the estimated forecast of product demand and production requirements.
Advances to Suppliers
Advances to suppliers
represent the advance payments for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential
pricing and delivery.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets.
The estimated useful lives of the assets are as follows:
|
|
Useful Life
|
Building and building improvements
|
|
5 – 20 Years
|
Manufacturing equipment
|
|
5 – 10 Years
|
Office equipment and furniture
|
|
5 Years
|
Vehicles
|
|
5 Years
|
The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the
statements of income and comprehensive income in the year of disposition.
We examine the
possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded
value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than
the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair
value and its book value.
Land Use Rights
There is no private
ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual or company. The
government grants a land use right that permits the holder of the land use right to use the land for a specified period. Our land
use rights were granted with a term of 45 or 50 years. Any transfer of the land use right requires government approval. We have
recorded as an intangible asset the costs paid to acquire a land use right. The land use rights are amortized on the straight-line
method over the land use right terms.
Intangible
Assets
In January 2018,
in connection the acquisition of 3D Discovery and AnyWorkspace, the Company acquired their technologies. The technology of 3D Discovery
covers a 3D virtual tour solution for the property industry and the technology of AnyWorkspace covers management software for an
online, real-time marketplace that connects workspace providers with clients who need temporary office and meeting spaces.
During the period,
the sharing economy mobile platform, namely BuddiGo, developed by Inspirit Studio was capitalized. The BuddiGo application has
been launched since June 2018.
The Company amortizes
these technologies over a term of five years.
Revenue Recognition
In May 2014, FASB issued an update Accounting
Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”)
Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on
the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting
periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services and also requires certain additional disclosures. We adopted this standard in 2018 using the modified
retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective
date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based
on an evaluation of the impact ASU 2014-09 will have on our sources of revenue, we concluded that ASU 2014-09 did not have a material
impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers.
We recognize revenues from the sale of
equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty.
Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when
the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the
delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally
is recognized over the contract period.
All other product sales with customer specific
acceptance provisions are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare
part sales are recognized upon shipment or delivery based on the trade terms.
We recognize revenue from the rental of
batteries when earned.
Income Taxes
We are governed
by the Income Tax Law of the PRC, Inland Revenue Ordinance of Hong Kong and the U.S. Internal Revenue Code of 1986, as amended.
We account for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.”
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and
tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected
to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence,
it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes
of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
Deferred tax is
accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the
carrying amount of assets and liabilities in the 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, and deferred
tax assets are recognized to the extent that it is probably 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 charged to equity. Deferred tax assets and liabilities are offset when they related to income
taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.
On December 22, 2017, the United States
signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current
federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.
The Act has caused the Company’s
deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of
December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably
estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred
tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates
due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
Stock-based Compensation
Stock-based compensation is accounted for
based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of
the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately
if the award is non-forfeitable. The Accounting Standards Codification also requires measurement of the cost of employee and director
services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based
payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of
the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation
is recalculated based on the then current fair value, at each subsequent reporting date.
Currency Exchange Rates
Our functional
currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB and Hong Kong Dollar.
Substantially all of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect
our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting
purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due
to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar
and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our exposure to
foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales
contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies
into RMB, the functional currency of our operating subsidiary. Our results of operations and cash flow are translated at average
exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period.
Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign
currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may
incur net foreign currency losses in the future.
Our financial
statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our
operating subsidiaries and affiliates is RMB and the Hong Kong dollar. To the extent we hold assets denominated in U.S. dollars,
any appreciation of the RMB or HKD against the U.S. dollar could result in a charge in our statement of operations and a reduction
in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB or HKD against the U.S. dollar
could reduce the U.S. dollar equivalent amounts of our financial results.
Recent Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features
, or ASU 2017-11, which updates the guidance related
to the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
Under ASU 2017-11, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed
to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS)
in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as
a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for public entities
for all annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating
the impact that the adoption of ASU 2017-11 will have on our consolidated financial statements.
On December 22, 2017 the SEC staff issued
Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and
Jobs Act (the TCJA). SAB 118 provides a measurement period that should not extend beyond one year from the enactment
date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income
tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable
estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated
additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company
cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis
of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. We have applied this guidance
to our financial statements.
Other accounting standards that have been
issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are
unrelated to our consolidated financial condition, results of operations, cash flows or disclosures.
RESULTS OF OPERATIONS
The following table sets forth the results
of our operations for the three and nine months ended September 30, 2018 and 2017 indicated as a percentage of revenues (dollars
in thousands):
|
|
Three Months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Dollars
|
|
|
|
Percentage
|
|
|
|
Dollars
|
|
|
|
Percentage
|
|
Revenues
|
|
$
|
2,517
|
|
|
|
100.0
|
%
|
|
$
|
2,629
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
4,245
|
|
|
|
168.6
|
%
|
|
|
3,075
|
|
|
|
117.0
|
%
|
Gross (loss) profit
|
|
|
(1,728
|
)
|
|
|
(68.6
|
)%
|
|
|
(446
|
)
|
|
|
(17.0
|
)%
|
Operating expenses
|
|
|
7,773
|
|
|
|
308.8
|
%
|
|
|
3,664
|
|
|
|
139.4
|
%
|
Loss from operations
|
|
|
(9,501
|
)
|
|
|
(377.4
|
)%
|
|
|
(4,110
|
)
|
|
|
(156.3
|
)%
|
Other expense, net
|
|
|
(9,072
|
)
|
|
|
(360.4
|
)%
|
|
|
(69
|
)
|
|
|
(2.6
|
)%
|
Loss from continuing operations before provision for income taxes
|
|
|
(18,573
|
)
|
|
|
(737.9
|
)%
|
|
|
(4,179
|
)
|
|
|
(158.9
|
)%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from continuing operations
|
|
|
(18,573
|
)
|
|
|
(737.9
|
)%
|
|
|
(4,179
|
)
|
|
|
(158.9
|
)%
|
Loss from discontinued operations, net of income taxes
|
|
|
(1
|
)
|
|
|
0.0
|
%
|
|
|
(71
|
)
|
|
|
-
|
|
Net loss
|
|
|
(18,574
|
)
|
|
|
(737.9
|
)%
|
|
|
(4,250
|
)
|
|
|
(158.9
|
)%
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(1,472
|
)
|
|
|
(58.5
|
)%
|
|
|
1,224
|
|
|
|
46.6
|
%
|
Comprehensive (loss) income
|
|
$
|
(20,046
|
)
|
|
|
(796.3
|
)%
|
|
$
|
(3,026
|
)
|
|
|
(115.1
|
)%
|
|
|
Nine Months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Dollars
|
|
|
|
Percentage
|
|
|
|
Dollars
|
|
|
|
Percentage
|
|
Revenues
|
|
$
|
7,655
|
|
|
|
100.0
|
%
|
|
$
|
10,998
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
10,462
|
|
|
|
136.7
|
%
|
|
|
10,416
|
|
|
|
94.7
|
%
|
Gross (loss) profit
|
|
|
(2,807
|
)
|
|
|
(36.7
|
)%
|
|
|
583
|
|
|
|
5.3
|
%
|
Operating expenses
|
|
|
17,338
|
|
|
|
226.5
|
%
|
|
|
5,287
|
|
|
|
48.1
|
%
|
Loss from operations
|
|
|
(20,145
|
)
|
|
|
(263.2
|
)%
|
|
|
(4,704
|
)
|
|
|
(42.8
|
)%
|
Other expense, net
|
|
|
(9,335
|
)
|
|
|
(121.9
|
)%
|
|
|
(131
|
)
|
|
|
(1.2
|
)%
|
Loss from continuing operations before provision for income taxes
|
|
|
(29,480
|
)
|
|
|
(385.1
|
)%
|
|
|
(4,836
|
)
|
|
|
(44.0
|
)%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
0.1
|
%
|
Loss from continuing operations
|
|
|
(29,480
|
)
|
|
|
(385.1
|
)%
|
|
|
(4,847
|
)
|
|
|
(44.1
|
)%
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
16
|
|
|
|
0.2
|
%
|
|
|
(71
|
)
|
|
|
(0.6
|
)%
|
Net loss
|
|
|
(29,463
|
)
|
|
|
(384.9
|
)%
|
|
|
(4,918
|
)
|
|
|
(44.7
|
)%
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(2,374
|
)
|
|
|
(31.0
|
)%
|
|
|
2,808
|
|
|
|
25.5
|
%
|
Comprehensive (loss) income
|
|
$
|
(31,837
|
)
|
|
|
(415.9
|
)%
|
|
$
|
(2,110
|
)
|
|
|
(19.2
|
)%
|
Revenues.
For the three months
ended September 30, 2018, revenues from the sale of dyeing and finishing equipment decreased by $185,000, or 7.0%, as compared
to the three months ended September 30, 2017. For the nine months ended September 30, 2018, revenues from the sale of dyeing and
finishing equipment decreased by $3,499,000, or 31.8%, as compared to the nine months ended September 30, 2017. We experienced
an anticipated slowdown in sales of our low-emission airflow dyeing machines as many customers had replaced older dyeing equipment
with our low-emission airflow dyeing machine, and we believe that orders for new low-emission airflow dyeing machines have slowed
down in 2018 and 2017 because the remaining potential customer base included many companies that did not have the ability to make
the significant capital expenditures necessary to upgrade their equipment. Additionally, the textile industry in China has been
facing significant headwinds recently. Difficult economic conditions, a continuing decline in oil prices and limited availability
of credit in China, presented numerous challenges for our dyeing machine business. Additionally, apparel factories and other factories
have been shut down throughout the last year by China’s environmental bureau, which has been cutting electricity and gas
supply to determine compliance with China’s environmental laws. Accordingly, our revenues decreased in the 2018 period as
compared to the 2017 period. We expect that our revenues from dyeing and finishing equipment segment will remain at or about its’
current level in the near future, although declines are possible.
During the three and nine months ended
September 30, 2018, we recognized revenues from our sharing economy business of approximately $73,000 and $156,000 compared to
$24,000 for the three and nine months ended September 30, 2017, respectively.
Cost of revenues.
Cost of
revenues includes the cost of raw materials, labor, depreciation and other fixed and variable overhead costs. For the three months
ended September 30, 2018, cost of revenues was $4,245,000 as compared to $3,075,000 for the three months ended September 30, 2017,
an increase of $1,170,000, or 38.0%. For the nine months ended September 30, 2018, cost of revenues was $10,462,000 as compared
to $10,416,000 for the nine months ended September 30, 2017, an increase of $46,000, or 0.4%.
Gross profit (loss) and gross margin.
Our gross loss was approximately $(1,728,000) for the three months ended September 30, 2018 as compared to gross profit of ($446,000)
for the three months ended September 30, 2017, representing gross margins of (68.6)% and (17.0)%, respectively, a decrease period
over period. Our gross loss was approximately $(2,807,000) for the nine months ended September 30, 2018 as compared to gross profit
of $583,000 for the nine months ended September 30, 2017, representing gross margins of (36.7)% and 5.3%, respectively, a decrease
period over period. The decrease in our gross margin for the three and nine months ended September 30, 2018 was primarily attributed
to the reduced scale of operations resulting from lower revenues, which is reflected in the allocation of fixed costs, mainly consisting
of depreciation, to cost of revenues, and an increase in labor and raw material costs. We expect that our gross margin from dyeing
and finishing equipment segment will remain at its current levels although a decrease is possible as we try to market our equipment
to the smaller textile manufactures.
Operating expenses.
For the
three months ended September 30, 2018, operating expenses were $7,773,000 as compared to $3,664,000 for the three months ended
September 30, 2017, an increase of $4,109,000, or 112.1%. For the nine months ended September 30, 2018, operating expenses were
$17,338,000 as compared to $5,287,000 for the nine months ended September 30, 2017, an increase of $12,051,000, or 227.9%. Changes
in operating expenses consisted of the following:
Depreciation
.
Depreciation
was $979,000 and $998,000 for the three months ended September 30, 2018 and 2017, respectively. Depreciation was $3,081,000 and
$2,938,000 for the nine months ended September 30, 2018 and 2017, respectively. Depreciation for the three and nine months ended
September 30, 2018 and 2017 was included in the following categories (dollars in thousands):
|
|
Three Months ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
705
|
|
|
$
|
721
|
|
|
$
|
2,219
|
|
|
$
|
2,123
|
|
Operating expenses
|
|
|
274
|
|
|
|
277
|
|
|
|
862
|
|
|
|
815
|
|
Total
|
|
$
|
979
|
|
|
$
|
998
|
|
|
$
|
3,081
|
|
|
$
|
2,938
|
|
Selling, general and administrative
expenses.
Selling, general and administrative expenses totaled $5,442,000 and $12,864,000 for the three and nine months
ended September 30, 2018, as compared to $884,000 and $1,752,000 for the three and nine months ended September 30, 2017, an increase
of $4,558,000, or 515.7% and $11,112,000, or 634.4%, respectively. Selling, general and administrative expenses for the three and
nine months ended September 30, 2018 and 2017 consisted of the following (dollars in thousands):
|
|
Three Months ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
Professional fees
|
|
$
|
4,612
|
|
|
$
|
492
|
|
|
$
|
10,042
|
|
|
$
|
787
|
|
Payroll and related benefits
|
|
|
182
|
|
|
|
169
|
|
|
|
1,591
|
|
|
|
403
|
|
Travel and entertainment
|
|
|
48
|
|
|
|
44
|
|
|
|
156
|
|
|
|
122
|
|
Shipping
|
|
|
22
|
|
|
|
29
|
|
|
|
44
|
|
|
|
88
|
|
Intangible amortization
|
|
|
99
|
|
|
|
82
|
|
|
|
299
|
|
|
|
241
|
|
Director fees
|
|
|
34
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
Donation expense
|
|
|
242
|
|
|
|
-
|
|
|
|
259
|
|
|
|
|
|
Other
|
|
|
203
|
|
|
|
68
|
|
|
|
370
|
|
|
|
111
|
|
Total
|
|
$
|
5,442
|
|
|
$
|
884
|
|
|
$
|
12,864
|
|
|
$
|
1,752
|
|
|
●
|
Professional fees for the three and nine months ended September 30, 2018 increased by $4,121,000 and $9,255,000, or 838.6% and 1,176.5%, as compared to the three and nine months ended September 30, 2017, respectively. The increase was primarily attributable to an increase in stock-based consulting fees of approximately $4,421,000 and $9,132,000 incurred and paid to individuals and companies which performed consulting, legal and investor relations services relating to preparing and implementing a new business plan for us with the objective of improving our long-term growth, and an increase in legal service fees of approximately $74,000 and $521,000 in three and nine months ended September 30, 2018, respectively.
|
|
|
|
|
●
|
Payroll and related benefits for the three and nine months ended September 30, 2018 increased by $13,000 and $1,188,000, or 7.7% and 294.3%, as compared to the three and nine months ended September 30, 2017, respectively. The increase was mainly attributable to an increase in employee salaries and related benefits due to the increase in new executive management in Hong Kong during the three and nine months ended September 30, 2018 as compared to the comparable period in 2017, respectively. We expect that payroll and related benefits to increase in future periods.
|
|
|
|
|
●
|
Travel and entertainment expense for the three months ended September 30, 2018 decreased by $4,000, or 9.1%, as compared to the three months ended September 30, 2017, respectively. The decrease in the three months ended September 30, 2018 was primarily attributable to the cost control in travel and entertainment expense. Travel and entertainment expense for the nine months ended September 30, 2018 increased by $34,000, or 27.9%, as compared to the nine months ended September 30, 2017. The increase in the nine months ended September 30, 2018 was primarily attributable to the increase in travel and entertainment activities related to our new business initiatives.
|
|
|
|
|
●
|
Shipping expense for the three and nine months ended September 30, 2018 decreased by $8,000 and $44,000, or 26.1% and 50.1%, as compared to the three and nine months ended September 30, 2017, respectively. The decrease for the three and nine months ended September 30, 2018 was mainly attributable to the decrease in our revenues resulting in a decrease in shipping, as compared to the three and nine months ended September 30, 2017.
|
|
|
|
|
●
|
Other selling, general and administrative expenses for the three and nine months ended September 30, 2018 increased by $428,000 and $679,000, or 285.3% and 192.9%, as compared to the three months ended September 30, 2017, respectively. The increase in the three and nine months ended September 30, 2018 was attributable to an increase by $34,000 and $103,000 in director fee, respectively. The increase in the three and nine months ended September 30, 2018 was also attributable to an increase by $242,000 and $259,000 in donation fee, respectively, to an educational foundation that would use the funds raised from the donation to support and promote the delivery of education and the operation.
|
Research and development expenses
.
Research and development expenses were $165,000 and $404,000 for the three and nine months ended September 30, 2018, as compared
to $108,000 and $325,000 for the three and nine months ended September 30, 2017, an increase of $58,000 and $79,000, or 53.6% and
24.3%, respectively.
Bad debt expense
.
Bad debt
expense was $(30,000) and $1,286,000 for the three and nine months ended September 30, 2018, as compared to $2,396,000 for the
three and nine months ended September 30, 2017, a decrease of $2,426,000 and a decrease of $1,110,000, respectively. Based on our
periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s
evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’
collection history, the write off of uncollectible receivables against the existing reserve, and recent economic events.
Impairment loss
.
Impairment
loss was $1,923,000 and $1,923,000 for the three and nine months ended September 30, 2018, as compared to $0 and $0 for the three
and nine months ended September 30, 2017, respectively, In August 2016, the Company purchased a patent technology use right,
value at RMB16,000,000, for a ten-year term from a third party. Since the current poor market conditions for dying machine industry,
customers are either getting shut down for environmental reasons or moving to south east Asia, raw material prices are increasing
rapidly, labor cost and related benefit expenses increasing a lot as well. The Company believes that the ultra-ozone patent will
probably not yield the expecting value. On September 30, 2018, the Company decided to impair the net book value of this patent
and recorded an impairment loss of approximately $1,923,000.
Loss from operations.
As
a result of the factors described above, for the three and nine months ended September 30, 2018, loss from operations amounted
to $9,501,000 and $20,145,000, as compared to $4,110,000 and $4,704,000 for the three and nine months ended September 30, 2017,
respectively.
Other income (expense)
.
Other
income (expense) includes interest income, interest expense, foreign currency transaction gain (loss), loss on equity method investment,
and other income. For the three and nine months ended September 30, 2018, total other expense, net, amounted to $9,072,000 and
$9,335,000, as compared to $69,000 and $131,000 for the three and nine months ended September 30, 2017, an increase of $9,004,000
and $9,203,000, or 13,143.9% and 7,008.3%, respectively. The increase in other expense, net, was primarily attributable to losses
incurred in the three and nine months ended September 30, 2018 related to our equity method investment of $8,892,000 and $9,038,000,
respectively, including a write off of our equity method investment in September 2018. The increase in other expense, net, was
also attributable to losses incurred in the three and nine months ended September 30, 2018 related to interest expense of $86,000
and $134,000, respectively.
Income tax
provision
.
Income tax expense was $0 for the three and nine months ended September 30, 2018, as compared to $113
and $11,000 for the three and nine months ended September 30, 2017, a decrease of $113 and $11,000, respectively.
Loss from continuing operations.
As a result of the foregoing, our loss from continuing operations was $18,573,000, or $(2.56) per share (basic and diluted), for
the three months ended September 30, 2018, as compared with loss from continuing operations of $4,179,000, or $(2.10) per share
(basic and diluted), for the three months ended September 30, 2017, a change of $14,394,000, or 344.5%. Our loss from continuing
operations was $29,480,000, or $(8.00) per share (basic and diluted), for the nine months ended September 30, 2018, as compared
with loss from continuing operations of $4,847,000, or $(2.96) per share (basic and diluted), for the nine months ended September
30, 2017, a change of $24,633,000, or 508.2%.
Gain (loss) from discontinued operations,
net of income taxes.
Our loss from discontinued operations was $385, or $(0.00) per share (basic and diluted), for the
three months ended September 30, 2018, as compared with a loss from discontinued operations of $71,000, or $(0.04) per share (basic
and diluted), for the three months ended September 30, 2017, a change of $71,000, or 99.5%. Our gain from discontinued operations
was $17,000, or $0.01 per share (basic and diluted), for the nine months ended September 30, 2018, as compared with a loss from
discontinued operations of $71,000, or $(0.04) per share (basic and diluted), for the nine months ended September 30, 2017, a change
of $88,000, or 123.1%.
The summarized operating result of discontinued
operations included our consolidated statements of operations is as follows:
|
|
Three Months ended
September 30,
|
|
|
Nine Months ended
September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(Loss) gain from operations – bad debt recovery
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
Other expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) gain from discontinued operations before income taxes
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) gain from discontinued operations, net of income taxes
|
|
|
(385
|
)
|
|
|
(71,339
|
)
|
|
|
16,486
|
|
|
|
(71,339
|
)
|
(Loss) gain on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) gain from discontinued operations, net of income taxes
|
|
$
|
(385
|
)
|
|
|
(71,339
|
)
|
|
$
|
16,486
|
|
|
$
|
(71,339
|
)
|
Net loss.
As a result of
the foregoing, our net loss was $18,574,000, or $(2.56) per share (basic and diluted), for the three months ended September 30,
2018, as compared to a net loss $4,250,000, or $(2.14) per share (basic and diluted), for the three months ended September 30,
2017, a change of $14,323,000, or 337.0%. Our net loss was $29,463,000, or $(7.99) per share (basic and diluted), for the nine
months ended September 30, 2018, as compared to a net loss $4,918,000, or $(3.00) per share (basic and diluted), for the nine months
ended September 30, 2017, a change of $24,545,000, or 499.1%.
Foreign currency translation loss.
The functional currency of our subsidiaries and variable interest entities operating in the PRC is the Chinese Yuan or Renminbi
(“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange
for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign
currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $1,472,000 and $2,374,000
for the three and nine months ended September 30, 2018, as compared to a foreign currency translation gain of $1,224,000 and $2,808,000
for the three and nine months ended September 30, 2017, respectively. This non-cash loss had the effect of increasing our reported
comprehensive loss.
Comprehensive loss.
As a
result of our foreign currency translation loss, we had comprehensive loss for the three months ended September 30, 2018 of $20,046,000,
compared to comprehensive loss of $3,026,000 for the three months ended September 30, 2017. We had comprehensive loss for the nine
months ended September 30, 2018 of $31,837,000, compared to comprehensive loss of $2,110,000 for the nine months ended September
30, 2017.
Liquidity and Capital Resources
Liquidity is the ability of a company to
generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.
At September 30, 2018 and December 31, 2017, we had cash balances of $707,000 and $1,019,000, respectively. These funds are located
in financial institutions located as follows (dollars in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12
|
|
|
|
1.7
|
%
|
|
$
|
67
|
|
|
|
6.6
|
%
|
Hong Kong
|
|
|
215
|
|
|
|
30.3
|
%
|
|
|
143
|
|
|
|
14.0
|
%
|
China (PRC)
|
|
|
480
|
|
|
|
68.0
|
%
|
|
|
809
|
|
|
|
79.4
|
%
|
Total cash and cash equivalents
|
|
$
|
707
|
|
|
|
100.0
|
%
|
|
$
|
1,019
|
|
|
|
100.0
|
%
|
The following table sets forth a summary of changes in our working
capital from December 31, 2017 to September 30, 2018 (dollars in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
Change in
Working
Capital
|
|
|
Percentage
Change
|
|
Working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
26,826
|
|
|
$
|
22,926
|
|
|
$
|
3,900
|
|
|
|
17.0
|
%
|
Total current liabilities
|
|
|
9,186
|
|
|
|
9,387
|
|
|
|
(201
|
)
|
|
|
(2.1
|
)%
|
Working capital
|
|
$
|
17,640
|
|
|
$
|
13,539
|
|
|
$
|
4,101
|
|
|
|
30.3
|
%
|
Our working capital increased by $4,101,000
to $17,640,000 at September 30, 2018 from $13,539,000 at December 31, 2017. This increase in working capital is primarily attributable
to:
|
●
|
An increase in inventories, net of reserve for obsolete inventories, of $711,000;
|
|
|
|
|
●
|
An increase in license fee of $830,000;
|
|
|
|
|
●
|
An increase in prepaid expenses and other current assets of $8,654,000;
|
|
|
|
|
●
|
A decrease in accounts payable of $554,000;
|
|
|
|
|
●
|
A decrease in bank acceptance notes payable of $277,000;
|
|
|
|
|
●
|
A decrease in advances from customers of $1,295,000;
|
|
|
|
|
●
|
A decrease in income taxes payable of $3,000;
|
|
|
|
|
●
|
A decrease in convertible note payable of $2,000; and
|
|
|
|
|
●
|
A decrease in liabilities of discontinued operations related to the sale of our subsidiary of $147,000.
|
|
|
|
Offset by:
|
●
|
An increase in short-term loan of $128,000;
|
|
|
|
|
●
|
An increase in due to related party of $1,811,000;
|
|
●
|
An increase in accrued expenses of $140,000;
|
|
|
|
|
●
●
|
A decrease in cash and cash equivalent of $312,000;
A decrease in restricted cash of $182,000
|
|
|
|
|
●
|
A decrease in notes receivable of $388,000;
|
|
|
|
|
●
|
A decrease in accounts receivable, net of allowance for doubtful accounts, of $4,264,000;
|
|
|
|
|
●
|
A decrease in advances to suppliers of $793,000;
|
|
|
|
|
●
|
A decrease in receivable from sale of subsidiary of $160,000; and
|
|
|
|
|
●
|
A decrease in assets of discontinued operations related to the sale of our subsidiary of $196,000.
|
Because the exchange
rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in
assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable
changes reflected on the consolidated balance sheets.
Net cash flow
used in operating activities was $3,204,000 for the nine months ended September 30, 2018 as compared to net cash flow used in operating
activities of $17,000 for the nine months ended September 30, 2017, a change of $3,186,000.
|
●
|
Net cash flow used in operating activities for the nine months ended September 30, 2018 primarily reflected our net loss of $29,463,000, and add-back of non-cash items primarily consisting of depreciation of $3,081,000, amortization of intangible assets of $299,000, stock-based compensation and fees for consultants of $9,132,000, stock-based employment compensation of $879,000, stock-based donation of $242,000, a non-cash bad debt allowance of $1,286,000, a non-cash bad debt recovery of ($17,000), an impairment loss on intangible asset of $1,923,000, loss on equity method investment of $9,038,000, amortization of debt discount of $116,000, and amortization of license fee $210,000, and changes in operating assets and liabilities primarily consisting of an increase in inventories of $1,012,000, an increase in prepaid and other current assets of $1,021,000, a decrease of accounts payable of $434,000, a decrease of advances from customers of $1,226,000 and a decrease in liabilities of discontinued operations of $133,000, offset by a decrease in notes receivable of $383,000, a decrease in accounts receivable of $2,450,000, a decrease in advances to suppliers of $721,000, a decrease in assets of discontinued operations of $200,000, and an increase in accrued expenses of $142,000.
|
|
●
|
Net cash flow used in operating activities for the nine months ended September 30, 2017 primarily reflected a net loss of $4,918,000 adjusted for the add-back of non-cash items primarily consisting of depreciation of $2,938,000, amortization of intangible assets of $241,000, a loss on equity method investment of $82,000, and stock based compensation of $482,000, bad debt expense of $1,893,000, and changes in operating assets and liabilities mainly consisting of a decrease in prepaid and other current assets of $930,000 and an increase in accounts payable of $1,506,000, offset by an increase in accounts receivable of $415,000, an increase in inventories of $1,499,000, and an increase in advances to suppliers of $1,364,000.
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|
Net cash flow
used in investing activities was $72,000 for the nine months ended September 30, 2018 as compared to net cash flow provided by
investing activities of $2,029,000 for the nine months ended September 30, 2017. For the nine months ended September 30, 2018,
net cash flow used in purchase of property and equipment of $74,000, offset by cash received from the purchase subsidiary operations
of approximately $2,000. F
or the nine months ended September 30, 2017, net cash flow provided
by investing activities of $2,029,000, which reflects the purchase of property and equipment of $86,000 and proceeds received from
sale of subsidiary in cash of $2,116,000.
Net cash flow
provided by financing activities was $3,056,000 for the nine months ended September 30, 2018 as compared to net cash flow provided
by financing activities of $800,000 for the nine months ended September 30, 2017. During the nine months ended September 30, 2018,
we received proceeds from convertible note of $900,000 and deducted offering costs paid by $195,000, we also received proceeds
from bank loan of $1,856,000, advanced from related party of $1,811,000 and received proceeds from sale of common stock of $256,000,
offset by repayments for bank loan of $1,304,000 and payments for the decrease in bank acceptance notes payable of $268,000. Net
cash flow provided by financing activities was $800,000 for the nine months ended September 30, 2017, which reflects the proceeds
from sale of common stock of $860,000, proceeds from bank loans of $1,249,000 and proceeds from related party advances of $350,000,
offset by repayment of bank loans of $1,469,000.
We have historically
funded our capital expenditures through cash flow provided by operations and bank loans. We intend to fund the cost with cash flow
from our operations and by obtaining financing mainly from local banking institutions with which we have done business in the past.
We believe that the relationships with local banks are in good standing and we have not encountered difficulties in obtaining needed
borrowings from local banks.
Contractual Obligations and Off-Balance
Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations
and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest
rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination
of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated
financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September
30, 2018 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future
periods.
|
|
Payments Due by Period
|
|
Contractual obligations:
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5
+
years
|
|
Bank loans (1)
|
|
$
|
2,485
|
|
|
$
|
2,202
|
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible debt
|
|
|
900
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank acceptance notes payable
|
|
|
145
|
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,530
|
|
|
$
|
3,247
|
|
|
$
|
283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Bank loans consisted of short and long term bank loans. Historically, we have refinanced these bank loans for an additional term of nine months to one year and we expect to continue to refinance these loans upon expiration.
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Off-balance Sheet Arrangements
We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development
services with us.
Foreign Currency Exchange Rate Risk
We produce and sell almost all of our products
in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars.
For the nine months ended September 30, 2018 and 2017, we had unrealized foreign currency translation loss of approximately $2,374,000
and unrealized foreign currency translation gain of approximately $2,808,000, respectively, because of changes in the exchange
rate.
Inflation
The effect of inflation on our revenue
and operating results was not significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not required for
smaller reporting companies.
ITEM 4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As required by
Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Wanfen Xu, our chief
financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September
30, 2018.
Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit
under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to
apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of
disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based
on that evaluation, Mr. Wu and Ms. Xu concluded that, because our internal controls over financial reporting are not effective,
as described below, our disclosure controls and procedures were not effective as of September 30, 2018.
Management’s Report on Internal
Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). As reported in our Form
10-K for the year ended December 31, 2017, management assessed the effectiveness of our internal control over financial reporting
as of December 31, 2017 and, during our assessment, management identified significant deficiencies related to (i) the U.S. GAAP
expertise of our internal accounting staff and recently elected chief financial officer, (ii) our internal audit functions and
(iii) a lack of segregation of duties within accounting functions. Although management believes that these deficiencies do not
amount to a material weakness, our internal controls over financial reporting were not effective at December 31, 2017.
We currently have no plans to expand our
company-wide Enterprise Resource Planning (“ERP”) system during the remainder of 2018. We have not implemented further
ERP modules to manage inventory and to expand existing ERP systems to other areas of our factory. Due to our working capital requirements
and the lack of local professionals with the necessary experience to implement the ERP system, we postponed the hiring of professional
staff. We have found that engaging professionals who are based outside of Wuxi is very costly. We have not been able to find qualified
personnel in the Wuxi area.
Due to our size
and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. As a result,
we have not been able to take steps to improve our internal controls over financial reporting during the three and nine months
ended September 30, 2018. However, to the extent possible, we will implement procedures to assure that the initiation of transactions,
the custody of assets and the recording of transactions will be performed by separate individuals.
A material weakness (within the meaning
of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of the company’s financial reporting.
In light of this significant deficiency,
we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the three and
nine months ended September 30, 2018 included in this quarterly report on Form 10-Q were fairly stated in accordance with the U.S.
GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the three
and nine months ended September 30, 2018 are fairly stated, in all material respects, in accordance with the U.S. GAAP.
Changes in Internal Controls over
Financial Reporting
There were no changes (including corrective
actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER
INFORMATION
ITEM 5. EXHIBITS
31.1
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Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer *
|
31.2
|
Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer *
|
32.1
|
Section 1350 certification of Chief Executive Officer and Chief Financial Officer *
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|