ITEM 7. 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. Due to the challenging conditions facing our customers, increasing raw materials prices and labor costs,
we have not recorded any revenues from this patent and believe it is unlikely to yield significant value to the Company. As a
result, we recorded 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 are constructing a mobile phone cover
production line. As of the date of this annual report, the line is nearly completed and we expect to begin production in the first
half 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, 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. Accordingly, there
is no guarantee that the Chinese government will invest in new solar farm or provide the subsidies needed to fund projects.
Our investment in Shengxin is subject
to a high degree of risk. We 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 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 approximately $8,7 million (equivalent to RMB59.8 million). At December 31, 2018, Shengxin’s
assets consisted of cash, advances to supplier and fixed assets of approximately $15,000, $16.3 million and $14,000, respectively,
and liabilities consisted of other payables of approximately $51,000. 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. Additionally, for the year ended December 31, 2018 and 2017, the Company’s share of Shengxin’s net loss
were $199,410 and $130,498, 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, environmental 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, tariffs levied on Chinese textile manufacturers by the US
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.
Given the headwinds affecting our manufacturing
business, we continued to pursue what we believe are high growth opportunities for the Company, particularly our new business
divisions focused on the development of sharing economy platforms and related rental businesses within the company. These initiatives
are still in an early stage and are dependent in large part on availability of capital to fund their future growth. We did not
generate significant revenues from our sharing economy business initiatives in 2018.
Recent developments
Inspirit Studio
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 [to be updated] received are for on-demand urgent delivery of items such as documents, flowers
and cakes. Food delivery services are also available. During 2018, over 1,200 individuals have officially registered as sell-side
buddies, who completed over 500 delivery orders in 2018, majority orders were happened in the third quarter. In addition, BuddiGo
has signed up with a number of local business partners to provide ongoing delivery services for these clients. BuddiGo’s
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
Anyworkspace, our coworking business unit,
is focused on enlarging its exposure to the general public. 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. AnyWorkspace will also focus on digital marketing activities for its market expansion plans when
there is available cash flow or funds from investors.
Given the existing coworking spaces providers
marketing their available spaces and managing individual online business platform themselves, we expect our current global online
platform will take years to materialize its worldwide customer base. Therefore, the intangible asset amounted to $0.6 million
(equivalent to HK$4.97 million) representing the online platform acquired has been fully impaired in the last quarter of 2018.
3D Discovery Co. Limited
3D Discovery, an IT service provider that
develops virtual tours for the real estate, hospitality and interior design industries. 3D Discovery’s space capturing and
modeling technology is already used by some of Hong Kong's leading property agencies to provide their clients with a
truly immersive, first-hand experience of a physical space while saving them time and money. According to Goldman Sachs, the Real
Estate virtual reality ("VR") industry is predicted to reach US$2.6 billion in 2025, supported by a potential
user base of over 1.4 million registered real estate agents in some of the world's largest markets. Apart from its existing profitable
operations, 3D Discovery is developing a mobile app, Autocap, which allows users to create an interactive virtual tour of a physical
space by using a mobile phone camera.
3D Discovery successfully completed a number of projects during
the year. First, its “3D Virtual Tours in Hong Kong” generated about 1,371,000 impressions in 2018. 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.” This business unit generated HK$1.7 million in revenue in 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. 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
Asia Region:
In 2018, our subsidiary SEIL entered into
a license agreement with 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 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.
Europe Region:
In August 2018, our subsidiary SEIL entered
into a License Agreement with 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.
Going forward,
we will continue 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.
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 55% of our purchases of inventories for the year ended December
31, 2018. Four major suppliers provided 50% of our purchases of inventories for the year ended December 31, 2017. No supplier
accounted for approximately 10% of the Company’s total outstanding accounts payable at December 31, 2018. One supplier accounted
for approximately 15% of the Company’s total outstanding accounts payable at December 31, 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.
Patent Use
Rights
In August 2016,
we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile
dyeing equipment. We amortize the exclusive patent use right over the term of the patent.
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.
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 have 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 recognized 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, President Trump
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 35%. 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.
Additionally, effective January 1, 2017,
the Company adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09
”), Improvements to Employee Share-Based
Payment Accounting
. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards,
either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected
to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s
consolidated financial statements and related disclosures.
Through September 30, 2018, pursuant to
ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including
grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period
of the consulting arrangement or until performance conditions are expected to be met. The Company periodically reassessed the
fair value of non-employee share based payments until service conditions are met, which generally aligns with the vesting period
of the equity instrument, and the Company adjusts the expense recognized in the consolidated financial statements accordingly.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several
aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation
guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07
is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early
adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company
early adopted ASU No. 2018-07 in the fourth quarter of 2018 and there was no cumulative effect of adoption.
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 February 2016, the FASB issued ASU
2016-02, “
Leases (Topic 842)
“. ASU 2016-02 sets out the principles for the recognition, measurement, presentation
and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply
a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is
effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on
an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a
right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.
Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new
standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type
leases, direct financing leases and operating leases. The pronouncement requires a modified retrospective method of adoption and
is effective on January 1, 2019, with early adoption permitted. The adoption of ASU 2016-02 is not expected to have an impact
on the Company’s consolidated financial position, results of operations and cash flows.
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.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends
Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax
Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting
under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance.
As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment
of the Tax Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects
on our existing deferred tax balances and valuation allowance. The Company determined that the $5.4 million recorded in connection
with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance was a provisional
amount and a reasonable estimate at December 31, 2018.
In June 2018, the FASB issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment. ASU 2018-07 aligns the accounting
for share based payments granted to non-employees with that of share based payments granted to employees. We adopted this ASU
on its effective date of January 1, 2019. The adoption of this ASU did not have a material impact on our financial position,
results of operations, cash flows, or presentation thereof.
In July 2018, the FASB issued ASU 2018-09,
Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to
all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety
and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions
that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income
Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in
which the amount of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal
years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new standard
to have a material impact on the Company’s Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-10
Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional
guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance
such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that
should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method
and practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU
2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing
and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new
lease standards”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company
is currently evaluating the effect the new lease standards will have on its Consolidated Financial Statements; however, the Company
anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards
on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Consolidated Financial
Statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU
2018-13 removes or modifies certain disclosures and in certain instances requires additional disclosures. The standard is effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.
We will adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material
impact on our financial position, results of operations, cash flows, or presentation thereof.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective
date of January 1, 2020. We are currently evaluating the impact of this ASU on our financial position, results of operations,
cash flows, or presentation thereof.
In October 2018, the FASB issued ASU 2018-17,
Targeted Improvements to Related Party Guidance for Variable Interest Entites, that changes the guidance for determining whether
a decision-making fee paid to a decision makers and service providers are variable interests. The guidance is effective for fiscal
years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. We will
adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material impact
on our consolidated financial position, results of operations, cash flows, or presentation thereof.
In March 2019, the FASB issued ASU 2019-01,
Leases (Topic 842) Codification Improvements, which provides clarification on implementation issues associated with adopting ASU
2016-02. The implementation issues noted in ASU 2019-01 include determining the fair value of the underlying asset by lessors
that are not manufacturers or dealers, presentation on the statement of cash flows for sales-type and direct financing leases,
and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. We will apply the guidance, if applicable,
as of January 1, 2019, the date we adopted ASU 2016-02. The adoption of this ASU did not have a material impact on our financial
position, results of operations, cash flows, or presentation thereof.
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
Years Ended December 31, 2018 and 2017
The following table sets forth the results
of our operations for the years ended December 31, 2018 and 2017 indicated as a percentage of revenues (dollars in thousands):
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Dollars
|
|
|
Percentage
|
|
|
Dollars
|
|
|
Percentage
|
|
Revenues
|
|
$
|
9,508
|
|
|
|
100.0
|
%
|
|
$
|
13,522
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
13,924
|
|
|
|
146.4
|
%
|
|
|
13,678
|
|
|
|
101.2
|
%
|
Gross (loss) profit
|
|
|
(4,416
|
)
|
|
|
(46.4
|
)%
|
|
|
(156
|
)
|
|
|
(1.2
|
)%
|
Operating expenses
|
|
|
28,382
|
|
|
|
298.5
|
%
|
|
|
12,076
|
|
|
|
89.3
|
%
|
Loss from operations
|
|
|
(32,798
|
)
|
|
|
(344.9
|
)%
|
|
|
(12,232
|
)
|
|
|
(90.5
|
)%
|
Other expense, net
|
|
|
(9,304
|
)
|
|
|
(97.9
|
)%
|
|
|
(188
|
)
|
|
|
(1.4
|
)%
|
Loss from continuing operations before provision for income taxes
|
|
|
(42,102
|
)
|
|
|
(442.8
|
)%
|
|
|
(12,420
|
)
|
|
|
(91.9
|
)%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(408
|
)
|
|
|
(3.0
|
)%
|
Loss from continuing operations
|
|
|
(42,102
|
)
|
|
|
(442.8
|
)%
|
|
|
(12,828
|
)
|
|
|
(94.9
|
)%
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
16
|
|
|
|
0.2
|
%
|
|
|
(98
|
)
|
|
|
(0.7
|
)%
|
Net loss
|
|
|
(42,086
|
)
|
|
|
(442.6
|
)%
|
|
|
(12,926
|
)
|
|
|
(95.6
|
)%
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(2,266
|
)
|
|
|
(23.8
|
)%
|
|
|
4,047
|
|
|
|
29.9
|
%
|
Comprehensive loss
|
|
$
|
(44,352
|
)
|
|
|
(466.5
|
)%
|
|
$
|
(8,879
|
)
|
|
|
(65.7
|
)%
|
Revenues.
For the year ended
December 31, 2018, revenues from the sale of dyeing and finishing equipment decreased by $4,164,000, or 30.9%, as compared to
the year ended December 31, 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 2018 as compared to 2017. 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 year ended December 31, 2018,
we recognized revenues from our sharing economy business of $208,175 compared to $58,499 for the year ended December 31, 2017.
Cost of revenues.
Cost of
revenues includes the cost of raw materials, labor, depreciation and other fixed and variable overhead costs. For the year ended
December 31, 2018, cost of revenues was $13,924,000 as compared to $13,678,000 for the year ended December 31, 2017, an increase
of $246,000, or 1.8%.
Gross profit (loss) and gross margin.
Our gross loss was approximately $(4,416,000) for the year ended December 31, 2018 as compared to gross profit of $(156,000)
for the year ended December 31, 2017, representing gross margins of (46.4)% and (1.2)%, respectively, a decrease year over year.
The decrease in our gross margin for 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 year ended December 31, 2018, operating expenses were $28,382,000 as compared to $12,076,000 for the year ended December 31,
2017, an increase of $16,306,000, or 135.0%, and consisted of the following:
Depreciation
.
Depreciation
was $4,046,000 and $3,951,000 for the years ended December 31, 2018 and 2017, respectively. Depreciation for the years ended December
31, 2018 and 2017 was included in the following categories (dollars in thousands):
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
2,914
|
|
|
$
|
2,850
|
|
Operating expenses
|
|
|
1,132
|
|
|
|
1,101
|
|
Total
|
|
$
|
4,046
|
|
|
$
|
3,951
|
|
Selling, general and administrative
expenses.
Selling, general and administrative expenses totaled $16,211,000 for the year ended December 31, 2018, as compared
to $3,619,000 for the year ended December 31, 2017, an increase of $12,592,000, or 347.9%. Selling, general and administrative
expenses for the years ended December 31, 2018 and 2017 consisted of the following (dollars in thousands):
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Professional fees
|
|
$
|
11,682
|
|
|
$
|
2,093
|
|
Payroll and related benefits
|
|
|
1,367
|
|
|
|
686
|
|
Travel and entertainment
|
|
|
186
|
|
|
|
209
|
|
Shipping
|
|
|
54
|
|
|
|
112
|
|
Intangible amortization
|
|
|
711
|
|
|
|
324
|
|
Director fees
|
|
|
131
|
|
|
|
27
|
|
Donation expense
|
|
|
259
|
|
|
|
-
|
|
Rents
|
|
|
1,358
|
|
|
|
-
|
|
Other
|
|
|
463
|
|
|
|
168
|
|
Total
|
|
$
|
16,211
|
|
|
$
|
3,619
|
|
|
●
|
Professional
fees for the year ended December 31, 2018 increased by $9,589,000, or 458.1%, as compared to the year ended December 31, 2017.
The increase was primarily attributable to an increase in stock-based consulting fees of approximately $8,881,000 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 stock-based
consulting service fees of approximately $8,881,000 and an increase in cash payments of consulting service fees including
auditing and legal fees of approximately $708,000.
|
|
●
|
Payroll
and related benefits for the year ended December 31, 2018 increased by $681,000, or 99.3%, as compared to the year ended December
31, 2017. 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 year ended December 31, 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 year ended December 31, 2018 decreased by $23,000, or 11.1%, as compared to the year ended
December 31, 2017. The decrease in the year ended December 31, 2018 was primarily attributable to the decrease in travel
and entertainment activities related to our dyeing business.
|
|
|
|
|
●
|
Shipping expense for
the year ended December 31, 2018 decreased by $58,000, or 51.9%, as compared to the year ended December 31, 2017. The
decrease for the year ended December 31, 2018 was mainly attributable to the decrease in our revenues resulting in a decrease
in shipping, as compared to the year ended December 31, 2017.
|
|
●
|
Intangible amortization
for the year ended December 31, 2018 increased by $386,000, or 119.2%, as compared to the year ended December 31, 2017.
The increase for the year ended December 31, 2018 was mainly attributable to the increase in amortization for intangible
assets we purchased in the year ended December 31, 2018.
|
|
|
|
|
●
|
Director fees for the year ended December 31, 2018 increased by
$105,000, or 391.6%, as compared to the year ended December 31, 2017. The increase in the year ended December 31, 2018 was
primarily attributable to the increase in numbers of our directors and increase in activities related to public company.
|
|
|
|
|
●
|
Donation expense for the years ended December 31, 2018 and 2017
approximately amounted $259,000 and $0, respectively. The increase for the year ended December 31, 2018 was mainly related
to the Company issued 58,000 shares, value at approximately $242,000, as donation to an education foundation that would use
the funds raised from the donation to support and promote the delivery of education and the operation.
|
|
|
|
|
●
|
Rents for the years
ended December 31, 2018 and 2017 approximately amounted $1,358,000 and $0, respectively. The increase for the year ended
December 31, 2018 was mainly due to a wholly owned subsidiary of the Company entered into a tenancy agreement for commencing
from November 1, 2018 to January 11, 2019. On July 24, 2018, the Company issued 366,134 shares, a total of value at $1,268,727
as the payment for the annual rental, part of the management fee and part of the tenancy deposit. During the year ended
December 31, 2018, the Company recorded stock-based rental and management fee of approximately $1,269,000.
|
|
|
|
|
●
|
Other
selling, general and administrative expenses for the year ended December 31, 2018 increased by $292,000, or 173.8%, as compared
to the year ended December 31, 2017. The increase in the year ended December 31, 2018 was primarily attributable to an increase
in advertising and promotion of selling expense and vehicle expense related to our new business initiatives.
|
Bad debt expense.
For the
years ended December 31, 2018 and 2017, we recorded bad debt expense of $1,920,000 and $6,474,000, 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 expense.
For
the years ended December 31, 2018 and 2017, we recorded impairment expense of $8,619,000 and $462,000, respectively.
|
●
|
Based
on the purchase price exceeded the fair value of the net assets acquired was initially
recorded as goodwill. Based on the Company’s annual analysis of goodwill, the Company
recorded an impairment expense of $26,000 and $462,000 in December 2018 and 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 $1,894,000.
|
|
●
|
On
January 30, 2018, in connection with the acquisition AnyWorkspace Limited, the Company
acquired a management software for an online, real-time marketplace that connects workspace
providers with clients who need temporary office and meeting spaces, technology, valued
at $683,788. Upon completion of the 2018 impairment test, the Company decided to impair
the carrying amount of this intangible asset and recorded impairment loss of approximately
$442,000 at December 31, 2018.
|
|
●
|
At
December 31, 2018 and 2017, the Company conducted an impairment assessment on property
and equipment based on the guidelines established in ASC Topic 360 to determine the estimated
fair market value of property and equipment. Such analysis considered future use of such
equipment, consultation with equipment resellers, and other industry factors. Upon completion
of the 2018 and 2017 impairment analysis, the Company determined that the carrying value
exceeded the fair market value on certain equipment formerly used in the Company’s
forging and related components, and chemical equipment segments. Accordingly, in connection
with the impairment of such equipment, the Company recorded impairment charges of approximately
$6,257,000 and $0 for the years at December 31, 2018 and 2017, respectively.
|
Research and development expenses
.
Research and development expenses were $499,000 for the year ended December 31, 2018, as compared to $420,000 for the year
ended December 31, 2017, an increase of $79,000, or 18.8%. The increase in 2018 was primarily attributable to the increase in
research and development activities related to the development of new dyeing and finishing products.
Loss from operations.
As
a result of the factors described above, for the year ended December 31, 2018, loss from operations amounted to $32,798,000, as
compared to $12,232,000 for the year ended December 31, 2017.
Other expense
.
Other expense,
net of other income, includes interest income, interest expense, foreign currency transaction loss, loss on equity method investment,
and other income. For the year ended December 31, 2018, total other expense, net, amounted to $9,304,000 as compared to $188,000
for the year ended December 31, 2017, an increase of $9,116,000, or 4,849.8%. The increase in other expense, net, was primarily
attributable to losses incurred in the 2018 periods related to our equity method investment of $8,771,000, including a write off
of our equity method investment in September 2018.
Income
tax provision
.
Income tax expense was $0 for the year ended December 31, 2017, as compared to $408,000 for the year
ended December 31, 2017, a change of $408,000.
Loss from continuing operations.
As a result of the foregoing, our loss from continuing operations was $42,102,000, or $(7.15) per share (basic and diluted),
for the year ended December 31, 2018, as compared with loss from continuing operations of $12,828,000, or $(6.99) per share (basic
and diluted), for the year ended December 31, 2017, a change of $29,682,000, or 239.0%.
Gain (loss) from discontinued operations,
net of income taxes.
Our gain from discontinued operations was $16,000, or $0.00 per share (basic and diluted), for the
year ended December 31, 2018, as compared with loss from discontinued operations of $98,000, or $(0.05) per share (basic and diluted),
for the year ended December 31, 2017, a change of $114,000 or 116.6%.
The summarized operating result of discontinued
operations included our consolidated statements of operations is as follows:
|
|
Fiscal Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
-
|
|
|
|
31,872
|
|
Gross (loss) profit
|
|
|
-
|
|
|
|
(31,872
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Gain from operations – bad debt recovery
|
|
|
16,237
|
|
|
|
-
|
|
Other operating expenses
|
|
|
-
|
|
|
|
66,085
|
|
Gain (loss) from discontinued operations before income taxes
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
Gain (loss) on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) from discontinued operations, net of income taxes
|
|
$
|
16,237
|
|
|
$
|
(97,957
|
)
|
Net loss.
As a result of
the foregoing, our net loss was $42,086,000, or $(7.15) per share (basic and diluted), for the year ended December 31, 2018, as
compared with net loss $12,926,000, or $(7.04) per share (basic and diluted), for the year ended December 31, 2017, a change of
$29,160,000, or 225.6%.
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 $2,266,000
for the year ended December 31, 2018, as compared to a foreign currency translation gain of $4,047,000 for the year ended December
31, 2017. 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 year ended December 31, 2018 of $44,352,000,
compared to comprehensive loss of $8,879,000 for the year ended December 31, 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 December 31, 2018 and 2017, we had cash balances of $782,000 and $1,019,000, respectively. These funds are located in financial
institutions located as follows (dollars in thousands):
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7
|
|
|
|
0.9
|
%
|
|
$
|
67
|
|
|
|
6.6
|
%
|
Hong Kong
|
|
|
183
|
|
|
|
23.4
|
%
|
|
|
143
|
|
|
|
14.0
|
%
|
China (PRC)
|
|
|
592
|
|
|
|
75.7
|
%
|
|
|
809
|
|
|
|
79.4
|
%
|
Total cash and cash equivalents
|
|
$
|
782
|
|
|
|
100.0
|
%
|
|
$
|
1,019
|
|
|
|
100.0
|
%
|
The following table sets forth a summary
of changes in our working capital from December 31, 2017 to December 31, 2018 (dollars in thousands):
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Change
|
|
|
Percentage Change
|
|
Working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
21,217
|
|
|
$
|
22,926
|
|
|
$
|
(1,709
|
)
|
|
|
(7.5
|
)%
|
Total current liabilities
|
|
|
10,661
|
|
|
|
9,387
|
|
|
|
1,274
|
|
|
|
13.6
|
%
|
Working capital
|
|
$
|
10,556
|
|
|
$
|
13,539
|
|
|
$
|
(2,983
|
)
|
|
|
(22.0
|
)%
|
Our working capital decreased by $2,983,000
to $10,556,000 at December 31, 2018 from $13,539,000 at December 31, 2017. This decrease in working capital is primarily attributable
to:
|
●
|
An
increase in short-term bank loans of $108,000;
|
|
|
|
|
●
|
An increase in
accounts payable of $1,456,000;
|
|
|
|
|
●
●
|
An increase in accrued expenses of $614,000;
An
increase in convertible note payable of $41,000;
|
|
|
|
|
●
|
An increase in
due to related party of $910,000;
|
|
|
|
|
●
|
A decrease in cash
and cash equivalent of $238,000;
|
|
|
|
|
●
|
A decrease in restricted
cash of $196,000;
|
|
|
|
|
●
|
A decrease in notes
receivable of $312,000;
|
|
|
|
|
●
|
A decrease in accounts
receivable, net of allowance for doubtful accounts, of $4,765,000;
|
|
|
|
|
●
|
A decrease in advances
to suppliers of $1,458,000;
|
|
|
|
|
●
|
A decrease in receivable
from sale of subsidiary of $159,000; and
|
|
|
|
|
●
|
A decrease in assets
of discontinued operations of $198,000.
|
Offset by:
|
●
|
An
increase in inventories, net of reserve for obsolete inventories, of $1,861,000 in order to satisfy expected increase in customers’
orders;
|
|
|
|
|
●
|
An increase in
prepaid expenses of $3,090,000;
|
|
|
|
|
●
|
An increase in
prepaid license fee – related party, net of $664,000;
|
|
●
|
A decrease
in liabilities of discontinued operations of $121,000;
|
|
|
|
|
●
|
A decrease in advances
from customer of $1,381,000;
|
|
|
|
|
●
|
A decrease in bank
acceptance notes payable of $350,000; and
|
|
|
|
|
●
|
A decrease in income
taxes payable of $3,000.
|
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 $2,457,000 for the year ended December 31, 2018 as compared to net cash flow used in operating
activities of $410,000 for the year ended December 31, 2017, a change of $2,047,000.
|
●
|
Net
cash flow used in operating activities for the year ended December 31, 2018 primarily reflected our net loss
of $42,086,000, and add-back of non-cash items primarily consisting of depreciation of $4,046,000, amortization of intangible assets
of $707,000, increase in allowance for doubtful accounts of $1,904,000, loss from impairment of disposition for manufacturing equipment
of $6,258,000, loss from impairment of intangible asset of $2,336,000, loss from impairment of goodwill of $26,000, loss on equity
method investment of $8,902,000, stock-based employment compensation of $352,000, stock-based professional fees of $ 10,468,000,
stock-based donation expense of $242,000, stock-based rents of $1,269,000, amortization of debt discount of $185,000, amortization
of license fee of $376,000, an increase in inventory reserve of $945,000, and changes in operating assets and liabilities
primarily consisting of an increase in inventories of $3,133,000, an increase in prepaid and other current assets of $640,000,
a decrease in advances from customer of $1,297,000, and a decrease in liabilities of discontinued operations of $104,000, offset
by a decrease in note receivable of $298,000, a decrease in accounts receivable of $2,548,000, a decrease in advances to suppliers
of $1,402,000, a decrease in assets of discontinued operations of $199,000, an increase in accounts payable of $1,701,000, and
an increase in accrued expenses of $640,000.
|
|
●
|
Net
cash flow used in operating activities for the year ended December 31, 2017 primarily reflected our net loss of $12,926,000,
and add-back of non-cash items primarily consisting of depreciation of $3,951,000, amortization of intangible assets of $324,000,
increase in allowance for doubtful accounts of $6,540,000, loss from impairment of acquisition of a non-wholly owned subsidiary
of $462,000, loss on equity method investment of $130,000, stock-based compensation and fees of $ 1,587,000 and an increase
in inventory reserve of $285,000, and changes in operating assets and liabilities primarily consisting of an increase in note
receivable of $307,000, an increase in accounts receivable of $924,000, an increase in inventories of $2,210,000, an increase
in prepaid and other current assets of $255,000, an increase in advances to suppliers of $801,000, a decrease in accrued expenses
of $210,000, a decrease in VAT and service taxes payable of $49,000, a decrease in income taxes payable of $21,000, and a
decrease in liabilities of discontinued operations of $199,000, offset by a decrease in deferred tax assets of $397,000, a
decrease in assets of discontinued operations of $42,000, an increase in accounts payable of $1,849,000, and an increase in
advances from customer of $1,924,000.
|
Net cash flow used in investing activities
was $72,000 for the year ended December 31, 2018 as compared to $1,922,000 for the year ended December 31, 2017. For the year
ended December 31, 2018, net cash flow used in purchase of property and equipment of $75,000, offset by cash received from acquisition
of $2,000. For the year ended December 31, 2017, net cash flow used in purchase of property and equipment of $5,200,000, offset
by cash received from sale of Fulland Wind of $2,131,000 and cash received from the sale of assets of discontinued operations
of $1,147,000.
Net cash flow
provided by financing activities was $2,015,000 for the year ended December 31, 2018 as compared to $1,500,000 for the year ended
December 31, 2017. During the year ended December 31, 2018, we received proceeds from bank loans of $2,523,000, received proceeds
from note payable of $900,000, advanced from related party of $1,395,000 and received proceeds from sale of common stock of $256,000,
offset by repayments for bank loans of $2,040,000, payments for the decrease in bank acceptance notes payable of $340,000, repayment
of related party advances of $485,000 and offering cost payment of $195,000. During the year ended December 31, 2017, we received
proceeds from bank loans of $1,258,000, received proceeds from note payable of $670,000, advanced from related party of $348,000
and received proceeds from sale of common stock of $860,000, offset by repayments for bank loans of $1,480,000 and payments for
the decrease in bank acceptance notes payable of $155,000.
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 December
31, 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)
|
|
$
|
2,428
|
|
|
$
|
2,183
|
|
|
$
|
245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible note payable (2)
|
|
|
710
|
|
|
|
710
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bank acceptance notes payable
|
|
|
73
|
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,211
|
|
|
$
|
2,966
|
|
|
$
|
245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Bank
loans consisted of short term bank loans. Historically, we have refinanced these bank loans for an additional term of six
months to one year and we expect to continue to refinance these loans upon expiration.
|
(2)
|
Amount converted
into common shares in 2019.
|
Off-balance Sheet Arrangements
Except as discussed below, 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 years ended December 31, 2018 and 2017, we had unrealized foreign currency translation loss of approximately
$2,266,000 and unrealized foreign currency translation gain of approximately $4,047,000, respectively, because of changes in the
exchange rate.
Inflation
The effect of inflation on our revenue
and operating results was not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
SHARING ECONOMY INTERNATIONAL INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31,
2018 and 2017
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and Stockholders of
Sharing
Economy International Inc. and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Sharing Economy International Inc. and subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, consolidated statements
of changes in stockholders’ equity, and consolidated statements of cash flows for each of the years in the two-year period
ended December 31, 2018, and the related notes (collectively referred to as the notes to consolidated financial statements). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years ended December
31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.
The
Company's Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note
1 to the accompanying financial statements, the Company has suffered recurring losses from operations, generated negative cash
flows from operating activities, has an accumulated deficit that raise substantial doubt exists about Company’s ability
to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding
these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/RBSM
LLP
We
have served as the Company’s auditor since 2012.
New York, New York
April
16, 2019
SHARING ECONOMY INTERNATIONAL INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
781,740
|
|
|
$
|
1,019,437
|
|
Restricted cash
|
|
|
77,473
|
|
|
|
272,991
|
|
Notes receivable
|
|
|
149,757
|
|
|
|
461,292
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
4,327,980
|
|
|
|
9,092,709
|
|
Inventories, net of reserve for obsolete inventories
|
|
|
6,414,305
|
|
|
|
4,553,559
|
|
Advances to suppliers
|
|
|
565,295
|
|
|
|
2,023,779
|
|
Receivable from sale of subsidiary
|
|
|
2,791,590
|
|
|
|
2,950,442
|
|
Prepaid license fee - related party, net
|
|
|
663,830
|
|
|
|
-
|
|
Prepaid expenses and other
|
|
|
5,235,113
|
|
|
|
2,144,624
|
|
Assets of discontinued operations
|
|
|
209,926
|
|
|
|
407,510
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
21,217,009
|
|
|
|
22,926,343
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
-
|
|
|
|
9,053,859
|
|
Property and equipment, net
|
|
|
21,563,420
|
|
|
|
33,181,119
|
|
Intangible assets, net
|
|
|
3,562,513
|
|
|
|
5,394,296
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
25,125,933
|
|
|
|
47,629,274
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,342,942
|
|
|
$
|
70,555,617
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
2,182,960
|
|
|
$
|
2,074,529
|
|
Bank acceptance notes payable
|
|
|
72,698
|
|
|
|
422,589
|
|
Convertible note payable, net of unamortized debt discount
|
|
|
710,504
|
|
|
|
670,000
|
|
Accounts payable
|
|
|
4,254,598
|
|
|
|
2,798,590
|
|
Accrued expenses
|
|
|
779,948
|
|
|
|
165,749
|
|
Advances from customers
|
|
|
1,073,797
|
|
|
|
2,454,375
|
|
Due to related parties
|
|
|
1,257,505
|
|
|
|
347,589
|
|
Income taxes payable
|
|
|
60,065
|
|
|
|
63,483
|
|
Liabilities of discontinued operations
|
|
|
268,532
|
|
|
|
389,633
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,660,607
|
|
|
|
9,386,537
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
244,910
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,905,517
|
|
|
|
9,386,537
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A Preferred stock ($0.001 par value; 10,000,000 and 0 shares authorized; 0 and 0 issued and outstanding at December 31, 2018 and 2017, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common stock ($0.001 par value; 12,500,000 shares authorized; 7,449,123 and 2,527,720 shares issued and outstanding
at December 31, 2018 and 2017, respectively)
|
|
|
7,449
|
|
|
|
2,528
|
|
Additional paid-in capital
|
|
|
58,452,131
|
|
|
|
40,241,172
|
|
Retained earnings
|
|
|
(27,492,559
|
)
|
|
|
13,624,729
|
|
Statutory reserve
|
|
|
2,352,592
|
|
|
|
2,352,592
|
|
Accumulated other comprehensive income - foreign currency translation adjustment
|
|
|
2,657,614
|
|
|
|
4,923,829
|
|
Total stockholder’s equity
|
|
|
35,977,227
|
|
|
|
61,144,850
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(539,802
|
)
|
|
|
24,230
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
35,437,425
|
|
|
|
61,169,080
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
46,342,942
|
|
|
$
|
70,555,617
|
|
See
notes to consolidated financial statements.
SHARING
ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
9,508,042
|
|
|
$
|
13,522,056
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
13,924,107
|
|
|
|
13,677,889
|
|
|
|
|
|
|
|
|
|
|
GROSS (LOSS) PROFIT
|
|
|
(4,416,065
|
)
|
|
|
(155,833
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,132,052
|
|
|
|
1,100,944
|
|
Selling, general and administrative
|
|
|
16,211,430
|
|
|
|
3,619,382
|
|
Research and development
|
|
|
498,803
|
|
|
|
420,023
|
|
Bad debt expense
|
|
|
1,920,490
|
|
|
|
6,473,838
|
|
Impairment loss
|
|
|
8,619,109
|
|
|
|
462,111
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,381,884
|
|
|
|
12,076,298
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(32,797,949
|
)
|
|
|
(12,232,131
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16,108
|
|
|
|
12,574
|
|
Interest expense
|
|
|
(374,387
|
)
|
|
|
(137,823
|
)
|
Loss on equity method investment
|
|
|
(8,901,746
|
)
|
|
|
(130,498
|
)
|
Foreign currency transaction loss
|
|
|
(2,764
|
)
|
|
|
(1,812
|
)
|
Other (loss) income
|
|
|
(41,580
|
)
|
|
|
69,584
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(9,304,369
|
)
|
|
|
(187,975
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(42,102,318
|
)
|
|
|
(12,420,106
|
)
|
|
|
|
|
|
|
|
|
|
PROVISIONS FOR INCOME TAXES:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
(11,273
|
)
|
Deferred
|
|
|
-
|
|
|
|
(397,014
|
)
|
|
|
|
|
|
|
|
|
|
Total Income taxes provision
|
|
|
-
|
|
|
|
(408,287
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(42,102,318
|
)
|
|
|
(12,828,393
|
)
|
|
|
|
|
|
|
|
|
|
DISCONTINUTED OPERATIONS:
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
|
|
|
|
|
|
|
|
|
GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(42,086,081
|
)
|
|
|
(12,926,350
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
(968,793
|
)
|
|
|
(19,581
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(41,117,288
|
)
|
|
$
|
(12,906,769
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) GAIN:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,086,081
|
)
|
|
$
|
(12,926,350
|
)
|
Unrealized foreign currency translation gain
|
|
|
(2,266,215
|
)
|
|
|
4,046,840
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(44,352,296
|
)
|
|
$
|
(8,879,510
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
$
|
(968,793
|
)
|
|
$
|
(19,581
|
)
|
Unrealized foreign currency translation gain (loss) from non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders
|
|
$
|
(43,383,503
|
)
|
|
$
|
(8,859,929
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Continuing operations - basic and diluted
|
|
$
|
(7.15
|
)
|
|
$
|
(6.99
|
)
|
Discontinued operations - basic and diluted
|
|
|
0.00
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(7.15
|
)
|
|
$
|
(7.04
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
5,753,698
|
|
|
|
1,832,900
|
|
See
notes to consolidated financial statements.
SHARING
ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2018 and 2017
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Statutory
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Reserve
|
|
|
Income
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
1,415,441
|
|
|
$
|
1,415
|
|
|
$
|
35,549,542
|
|
|
$
|
26,531,498
|
|
|
$
|
2,352,592
|
|
|
$
|
876,989
|
|
|
$
|
-
|
|
|
$
|
65,312,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
736,806
|
|
|
|
737
|
|
|
|
3,324,296
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,325,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock sold for cash
|
|
|
290,000
|
|
|
|
290
|
|
|
|
859,710
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of subsidiary
|
|
|
85,473
|
|
|
|
86
|
|
|
|
507,624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
507,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of reserve arising from acquisition of a non-wholly owned subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,811
|
|
|
|
43,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,906,769
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,581
|
)
|
|
|
(12,926,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,046,840
|
|
|
|
-
|
|
|
|
4,046,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
2,527,720
|
|
|
$
|
2,528
|
|
|
$
|
40,241,172
|
|
|
$
|
13,624,729
|
|
|
$
|
2,352,592
|
|
|
$
|
4,923,829
|
|
|
$
|
24,230
|
|
|
$
|
61,169,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
69,676
|
|
|
|
70
|
|
|
|
256,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services to consultants and service providers
|
|
|
3,410,318
|
|
|
|
3,410
|
|
|
|
13,177,341
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,180,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services to employees and directors
|
|
|
355,480
|
|
|
|
355
|
|
|
|
352,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of debt
|
|
|
236,721
|
|
|
|
237
|
|
|
|
745,098
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
745,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value of warrants granted
|
|
|
-
|
|
|
|
-
|
|
|
|
152,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of majority-owned subsidiaries
|
|
|
175,074
|
|
|
|
175
|
|
|
|
976,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
976,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for prepayment for acquisition of intangible asset
|
|
|
250,000
|
|
|
|
250
|
|
|
|
1,039,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,040,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of reserve arising from acquisition of a non-wholly owned subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,833
|
|
|
|
403,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for donation
|
|
|
58,000
|
|
|
|
58
|
|
|
|
241,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for rental expense
|
|
|
366,134
|
|
|
|
366
|
|
|
|
1,268,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,268,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41,117,288
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(968,793
|
)
|
|
|
(42,086,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(2,266,215
|
)
|
|
|
928
|
|
|
|
(2,265,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
7,449,123
|
|
|
$
|
7,449
|
|
|
$
|
58,452,131
|
|
|
$
|
(27,492,559
|
)
|
|
$
|
2,352,592
|
|
|
$
|
2,657,614
|
|
|
$
|
(539,802
|
)
|
|
$
|
35,437,425
|
|
See
notes to consolidated financial statements.
SHARING
ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(42,086,081
|
)
|
|
$
|
(12,926,350
|
)
|
Adjustments to reconcile net loss from operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,045,881
|
|
|
|
3,950,932
|
|
Amortization of intangible assets
|
|
|
707,390
|
|
|
|
324,190
|
|
Allowance for doubtful accounts
|
|
|
1,920,490
|
|
|
|
6,473,838
|
|
Allowance for doubtful accounts - discontinued operations
|
|
|
(16,237
|
)
|
|
|
66,085
|
|
Loss from impairment of acquisition of a non-wholly owned subsidiary
|
|
|
-
|
|
|
|
462,111
|
|
Impairment loss of disposition for manufacturing equipment
|
|
|
6,257,583
|
|
|
|
-
|
|
Impairment loss of intangible assets
|
|
|
2,335,562
|
|
|
|
-
|
|
Impairment loss of goodwill
|
|
|
25,965
|
|
|
|
-
|
|
Loss on equity method investment
|
|
|
8,901,746
|
|
|
|
130,498
|
|
Stock-based employment compensation
|
|
|
352,391
|
|
|
|
-
|
|
Stock-based professional fees
|
|
|
10,467,783
|
|
|
|
1,586,643
|
|
Stock-based donation
|
|
|
241,860
|
|
|
|
-
|
|
Stock-based rents
|
|
|
1,268,727
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
185,336
|
|
|
|
-
|
|
Amortization of license fee
|
|
|
376,170
|
|
|
|
-
|
|
Inventory reserve
|
|
|
944,567
|
|
|
|
285,334
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
297,922
|
|
|
|
(306,542
|
)
|
Accounts receivable
|
|
|
2,547,860
|
|
|
|
(924,212
|
)
|
Inventories
|
|
|
(3,132,915
|
)
|
|
|
(2,209,520
|
)
|
Prepaid and other current assets
|
|
|
(640,312
|
)
|
|
|
(255,321
|
)
|
Advances to suppliers
|
|
|
1,402,354
|
|
|
|
(801,282
|
)
|
Deferred tax assets
|
|
|
-
|
|
|
|
397,014
|
|
Assets of discontinued operations
|
|
|
198,757
|
|
|
|
42,273
|
|
Accounts payable
|
|
|
1,700,787
|
|
|
|
1,849,047
|
|
Accrued expenses
|
|
|
640,344
|
|
|
|
(210,396
|
)
|
VAT and service taxes payable
|
|
|
-
|
|
|
|
(48,621
|
)
|
Income taxes payable
|
|
|
-
|
|
|
|
(20,532
|
)
|
Advances from customers
|
|
|
(1,297,307
|
)
|
|
|
1,923,909
|
|
Liabilities of discontinued operations
|
|
|
(104,043
|
)
|
|
|
(198,889
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,457,419
|
)
|
|
|
(409,791
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(74,832
|
)
|
|
|
(5,199,833
|
)
|
Proceed received from acquisition
|
|
|
2,341
|
|
|
|
-
|
|
Proceed received from sale of subsidiary in cash
|
|
|
-
|
|
|
|
2,130,556
|
|
Proceeds from sales of equipment from discontinued operations
|
|
|
-
|
|
|
|
1,146,959
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,491
|
)
|
|
|
(1,922,318
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Offering costs paid
|
|
|
(195,018
|
)
|
|
|
-
|
|
Proceeds from bank loan
|
|
|
2,522,913
|
|
|
|
1,257,620
|
|
Repayments of bank loan
|
|
|
(2,039,675
|
)
|
|
|
(1,479,553
|
)
|
Proceed from convertible note
|
|
|
900,000
|
|
|
|
670,000
|
|
Decrease in bank acceptance notes payable
|
|
|
(339,946
|
)
|
|
|
(155,353
|
)
|
Advance from related party
|
|
|
1,394,872
|
|
|
|
347,589
|
|
Repayment of related party advances
|
|
|
(484,956
|
)
|
|
|
-
|
|
Proceeds from sale of common stock, net
|
|
|
256,410
|
|
|
|
860,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,014,600
|
|
|
|
1,500,303
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
82,095
|
|
|
|
369,745
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(433,215
|
)
|
|
|
(462,061
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
1,292,428
|
|
|
|
1,481,498
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
859,213
|
|
|
$
|
1,019,437
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid in continuing operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
131,684
|
|
|
$
|
134,459
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash paid in discontinued operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Stock issued for future services
|
|
$
|
4,189,028
|
|
|
$
|
1,709,989
|
|
Stock issued for future services to employees and directors
|
|
$
|
932
|
|
|
$
|
-
|
|
Stock issued for prepayment of license fee - related party
|
|
$
|
663,830
|
|
|
$
|
-
|
|
Stock issued for repayment of convertible note
|
|
$
|
670,335
|
|
|
$
|
-
|
|
Stock issued for redemption of convertible note and accrued interest
|
|
$
|
75,000
|
|
|
$
|
-
|
|
Stock issued for acquisition of non-wholly owned subsidiaries
|
|
$
|
976,984
|
|
|
$
|
507,710
|
|
Stock issued for accrued liabilities
|
|
$
|
-
|
|
|
$
|
37,835
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
781,740
|
|
|
$
|
1,019,437
|
|
Restricted cash at end of period
|
|
|
77,473
|
|
|
|
272,991
|
|
Restricted cash included in discontinued operations at end of period
|
|
|
-
|
|
|
|
-
|
|
Total cash, cash equivalents and restricted cash at ended of period
|
|
$
|
859,213
|
|
|
$
|
1,292,428
|
|
See
notes to 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.
|
|
●
|
Cleantech Solutions Limited (formerly known as 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 $42,086,000 for the year ended December 31, 2018. The net cash used in operations was approximately $2,457,000
for the year ended December 31, 2018. During the year ended December 31, 2018, revenues, substantially all of which are derived
from the manufacture and sales of textile dyeing and finishing equipment, decreased by 32% as compared to the year ended December
31, 2017, respectively. Additionally, the Company recorded an impairment loss of approximately $8,619,000 primarily related to
an impairment loss of $2,361,000 related to the write off its patent of use rights in September 2018 and the write off of other
intangibles, and an impairment loss of approximately $6,258,000 related to the disposition of manufacturing equipment in December
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.
Listing status
On November 26, 2018, Sharing Economy International
Inc. (the "Company") received a staff determination notice from The Nasdaq Stock Market ("Nasdaq") informing
the Company that as a result of its failure to comply with Nasdaq's shareholder approval requirements set forth in Listing Rule
5635(c) (the "Rule"), the staff determined to deny the Company's request for continued listing based on a plan of compliance
submitted on October 26, 2018. The Company's common stock was delisted from Nasdaq at the open of trading on December 5, 2018.
The Company's common stock is currently trading on the OTC Markets under the symbol "SEII".
Basis of presentation
The Company is on a fiscal year ending December 31; as such the year
ended December 31, 2018 is referred to as “fiscal 2018”, and the year ended December 31, 2017 is referred to as “fiscal
2017”.
Principles of Consolidation
The Company’s 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 December 31, 2018 and 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:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
588,633
|
|
|
$
|
806,672
|
|
Accounts receivable, net
|
|
|
4,236,447
|
|
|
|
9,059,015
|
|
Inventory, net
|
|
|
6,414,305
|
|
|
|
4,553,559
|
|
Other current assets
|
|
|
4,298,439
|
|
|
|
5,901,119
|
|
Total current assets
|
|
|
15,537,824
|
|
|
|
20,320,365
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
-
|
|
|
|
9,053,859
|
|
Property and equipment, net
|
|
|
21,506,658
|
|
|
|
33,115,975
|
|
Intangible assets, net
|
|
|
2,933,874
|
|
|
|
5,302,047
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
39,978,356
|
|
|
|
67,792,246
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
7,970,259
|
|
|
|
7,629,783
|
|
Intercompany payables *
|
|
|
13,326,298
|
|
|
|
13,855,768
|
|
Other liabilities, non-current
|
|
|
244,910
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
21,541,467
|
|
|
|
21,485,551
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
18,436,889
|
|
|
$
|
46,306,695
|
|
*
|
Intercompany payables are eliminated in consolidation.
|
Use of estimates
The preparation of the 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 years ended December 31, 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 December 31, 2018 and 2017, cash balances held in PRC and Hong Kong banks of $
774,316
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 December 31, 2018
and 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 December 31, 2018 and 2017, the Company’s
cash balances by geographic area were as follows:
Country:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
United States
|
|
$
|
7,424
|
|
|
|
0.95
|
%
|
|
$
|
66,774
|
|
|
|
6.55
|
%
|
Hong Kong
|
|
|
182,800
|
|
|
|
23.38
|
%
|
|
|
142,944
|
|
|
|
14.02
|
%
|
China
|
|
|
591,516
|
|
|
|
75.67
|
%
|
|
|
809,719
|
|
|
|
79.43
|
%
|
Total cash and cash equivalents
|
|
$
|
781,740
|
|
|
|
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 $77,473 and
$272,991 at December 31, 2018 and 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 six months. Historically, the Company has experienced no losses on notes receivable. The Company’s
notes receivable totaled $149,757 and $461,292 at December 31, 2018 and 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 December 31, 2018 and 2017, the Company has established, based on a
review of its outstanding balances, an allowance for doubtful accounts in the amounts of $9,527,060 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 $1,212,706 and $313,930 at December 31, 2018 and 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 $565,295 and $2,023,779 at December 31, 2018 and 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 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.
At December 31, 2018
and 2017, the Company conducted an impairment assessment on property, equipment and intangible asset based on the guidelines established
in ASC Topic 360 to determine the estimated fair market value of property, equipment and intangible asset as of December 31, 2018
and 2017. Such analysis considered future use of such equipment, consultation with equipment resellers, subsequent sales of price
of equipment held for sale, and other industry factors. Upon completion of the 2018 and 2017 impairment analysis, the Company determined
that the carrying value exceeded the fair market value on certain equipment formerly used in the Company’s forging and related
components, and chemical equipment segments. Accordingly, in connection with the impairment of such equipment, the Company recorded
impairment charges on long-lived assets of $6,257,583 and impairment loss on intangible assets of $2,335,562 for the year at December
31, 2018. The Company did not record impairment charges on long-lived assets and impairment loss on intangible asset for the year
at December 31, 2017.
Impairment of goodwill
In accordance
with
ASC 350-30-35-4 requirement,
the Company hired specialist to review goodwill
value for impairment whenever
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. 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. Upon completion of the 2018 impairment analysis
for goodwill, the Company determined that the carrying value exceeded the fair market value on certain goodwill formerly on the
Company’s book, and in connection with the impairment of goodwill, the Company recorded impairment loss on goodwill of $25,965
for the year at December 31, 2018.
Advances from customers
Advances from customers at December 31, 2018 and
2017 amounted to $1,073,797 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 35%. 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 December 31, 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.
Additionally, effective January 1, 2017, the Company
adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09
”), Improvements to Employee Share-Based Payment
Accounting
. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards, either
to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected to
recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s consolidated
financial statements and related disclosures.
Through September 30, 2018, pursuant to ASC 505-50
– “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock
options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting
arrangement or until performance conditions are expected to be met. The Company periodically reassessed the fair value of non-employee
share based payments until service conditions are met, which generally aligns with the vesting period of the equity instrument,
and the Company adjusts the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued
ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting
for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to
include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for
annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted,
but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No.
2018-07 in the fourth quarter of 2018 and there was no cumulative effect of adoption.
Shipping costs
Shipping
costs are included in selling expenses, general and administrative and totaled $53,740 and $111,776 for the years ended December
31, 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 $284,278 and $162,531
for the years ended December 31, 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
$498,803
and $420,023 for the years ended December 31, 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 years ended December 31, 2018 and 2017 was $82,095 and $369,745,
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 December 31, 2018 and December 31, 2017 were translated at 6.8778 RMB to $1.00 and at 6.5075 RMB 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 December
31, 2018 and December 31, 2017 were translated at 7.8305 HKD to $1.00 and 7.8128 HKD to $1.00, 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 years ended December 31, 2018 and 2017 were 6.6187 RMB and 6.7588 RMB to $1.00, respectively.
For operating subsidiaries located in Hong Kong, the average translation rates applied to the statements of operations for the
year ended December 31, 2018 and 2017 were 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 years ended December 31, 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:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net Loss for basic and diluted attributable to common shareholders
|
|
$
|
(41,117,288
|
)
|
|
$
|
(12,906,769
|
)
|
From continuing operations
|
|
|
(41,133,525
|
)
|
|
|
(12,808,812
|
)
|
From discontinued operations
|
|
$
|
16,237
|
|
|
$
|
(97,957
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding– basic and diluted
|
|
|
5,753,698
|
|
|
|
1,832,900
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
|
|
|
|
|
|
|
From continuing operations – basic and diluted
|
|
$
|
(7.15
|
)
|
|
$
|
(6.99
|
)
|
From discontinued operations – basic and diluted
|
|
|
0.00
|
|
|
|
(0.05
|
)
|
Net (loss) income per common share - basic and diluted
|
|
$
|
(7.15
|
)
|
|
$
|
(7.04
|
)
|
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
Comprehensive loss 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 for the years ended December 31, 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 February 2016, the FASB issued ASU 2016-02,
“
Leases (Topic 842)
“. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively
a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease. A lessee is also required to recognize a right-of-use asset
and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. The pronouncement requires a modified retrospective method of adoption and is effective on January
1, 2019, with early adoption permitted. The adoption of ASU 2016-02 is not expected to have an impact on the Company’s consolidated
financial position, results of operations and cash flows.
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.
In March 2018, the FASB issued ASU 2018-05, Income
Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting
Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs
Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under
ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described
in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax
Reform Act is being assessed; however, in certain cases, as described below, we made a reasonable estimate of the effects on our
existing deferred tax balances and valuation allowance. The Company determined that the $5.4 million recorded in connection with
the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance was a provisional amount
and a reasonable estimate at December 31, 2018.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment. ASU 2018-07 aligns the accounting for share based payments
granted to non-employees with that of share based payments granted to employees. We adopted this ASU on its effective date of January 1,
2019. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or
presentation thereof.
In July 2018, the FASB issued ASU 2018-09, Codification
Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting
entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined
that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions that currently
apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, clarify
that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount
of the deduction is determined. The amendments in ASU 2018-09 related to Topic 718-740 are effective for fiscal years beginning
after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new standard to have a
material impact on the Company’s Consolidated Financial Statements.
In July 2018, the FASB issued ASU 2018-10 Leases
(Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance
for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such
as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should
be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and
practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU 2016-02
Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating
leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”)
are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating
the effect the new lease standards will have on its Consolidated Financial Statements; however, the Company anticipates recognizing
assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and
including qualitative and quantitative disclosures in the Company’s Notes to the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13
removes or modifies certain disclosures and in certain instances requires additional disclosures. The standard is effective for
fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.
We will adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material
impact on our financial position, results of operations, cash flows, or presentation thereof.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill
and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January
1, 2020. We are currently evaluating the impact of this ASU on our financial position, results of operations, cash flows, or presentation
thereof.
In October 2018, the FASB issued ASU 2018-17,
Targeted Improvements to Related Party Guidance for Variable Interest Entites, that changes the guidance for determining whether
a decision-making fee paid to a decision makers and service providers are variable interests. The guidance is effective for fiscal
years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. We will
adopt this standard on its effective date of January 1, 2020. We do not expect the adoption of this ASU to have a material impact
on our consolidated financial position, results of operations, cash flows, or presentation thereof.
In March 2019, the FASB issued ASU 2019-01, Leases
(Topic 842) Codification Improvements, which provides clarification on implementation issues associated with adopting ASU 2016-02.
The implementation issues noted in ASU 2019-01 include determining the fair value of the underlying asset by lessors that are not
manufacturers or dealers, presentation on the statement of cash flows for sales-type and direct financing leases, and transition
disclosures related to Topic 250, Accounting Changes and Error Corrections. We will apply the guidance, if applicable, as of January
1, 2019, the date we adopted ASU 2016-02. The adoption of this ASU did not have a material impact on our financial position, results
of operations, cash flows, or presentation thereof.
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
|
|
|
53,431
|
|
Other intangible assets
|
|
|
1,300,805
|
|
Total assets acquired at fair value
|
|
|
1,387,495
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(6,677
|
)
|
Non-controlling interest assumed
|
|
|
(403,833
|
)
|
Total liabilities and non-controlling interest assumed
|
|
|
(410,511
|
)
|
|
|
|
|
|
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 $53,431, 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. Upon completion of the 2018 impairment test, the Company
decided to impair the carrying amount of goodwill and intangible asset for AnyWorkspace, and recorded impairment loss of $25,965
during the year ended December 31, 2018. Based on the Company’s annual analysis of goodwill, in December 2017, the Company
recorded an impairment expense of $462,111 during the year ended December 31, 2017.
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, 2018, 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, 2019. 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 years ended December 31, 2018 and 2017 have been classified to the loss from discontinued
operations line on the accompanying 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 December 31, 2018 and 2017, and for the years ended
December 31, 2018 and 2017 is set forth below.
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Assets:
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
9,593
|
|
|
$
|
33,646
|
|
Advances to suppliers
|
|
|
-
|
|
|
|
144,583
|
|
Prepaid expenses and other
|
|
|
200,333
|
|
|
|
229,281
|
|
Total current assets
|
|
|
209,926
|
|
|
|
407,510
|
|
Total assets
|
|
$
|
209,926
|
|
|
$
|
407,510
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
242,555
|
|
|
$
|
387,887
|
|
Accrued expenses and other liabilities
|
|
|
25,977
|
|
|
|
1,746
|
|
Total current liabilities
|
|
|
268,532
|
|
|
|
389,633
|
|
Total liabilities
|
|
$
|
268,532
|
|
|
$
|
389,633
|
|
The summarized operating result of discontinued
operations included in the Company’s consolidated statements of operations is as follows:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
-
|
|
|
|
31,872
|
|
Gross loss
|
|
|
-
|
|
|
|
(31,872
|
)
|
Operating income (expenses)
|
|
|
16,237
|
|
|
|
(66,085
|
)
|
Gain (loss) from operations
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
Other expense, net
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) from discontinued operations, net of income taxes
|
|
$
|
16,237
|
|
|
$
|
(97,957
|
)
|
NOTE 4 –
ACCOUNTS RECEIVABLE
At December 31, 2018 and 2017, accounts receivable consisted of the
following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable
|
|
$
|
13,855,040
|
|
|
$
|
17,208,585
|
|
Less: allowance for doubtful accounts
|
|
|
(9,527,060
|
)
|
|
|
(8,115,876
|
)
|
|
|
$
|
4,327,980
|
|
|
$
|
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.
For the years ended December 31, 2018 and 2017, bad debt expense amounted to $1,920,490 and $6,473,838, respectively.
NOTE 5 –
INVENTORIES
At December 31, 2018 and 2017, inventories consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
1,207,334
|
|
|
$
|
998,751
|
|
Work-in-process
|
|
|
872,376
|
|
|
|
2,629,570
|
|
Finished goods
|
|
|
5,547,301
|
|
|
|
1,239,168
|
|
|
|
|
7,627,011
|
|
|
|
4,867,489
|
|
Less: reserve for obsolete inventories
|
|
|
(1,212,706
|
)
|
|
|
(313,930
|
)
|
|
|
$
|
6,414,305
|
|
|
$
|
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
years ended December 31, 2018 and 2017, the Company increased its reserve for obsolete inventory of $944,567 and $285,334, respectively.
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 December 31, 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.
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 December 31, 2018, Shengxin’s
assets consisted of cash, advances to supplier and fixed assets of approximately $15,000, $16.3 million and $14,000, respectively,
and liabilities consisted of other payables of approximately $51,000. 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 $8,711,336 which is included in the Company’s share of Shengxin losses on the accompanying consolidated
statements of operations. Additionally, for the year ended December 31, 2018 and 2017, the Company’s share of Shengxin’s
net loss were $190,410 and $130,498, respectively. For the year ended December 31, 2018, the total aggregate loss on equity method
investment in Shengxin were $8,901,746.
NOTE 7 –
PROPERTY AND EQUIPMENT
At December 31, 2018 and December 31, 2017, property
and equipment consisted of the following:
|
|
Useful life
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Office equipment and furniture
|
|
5 years
|
|
|
$
|
86,724
|
|
|
$
|
71,120
|
|
Manufacturing equipment
|
|
5 - 10 years
|
|
|
|
20,297,029
|
|
|
|
34,419,653
|
|
Vehicles
|
|
5 years
|
|
|
|
176,884
|
|
|
|
253,564
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
|
21,341,612
|
|
|
|
22,556,026
|
|
Manufacturing equipment in progress
|
|
-
|
|
|
|
338,190
|
|
|
|
3,657,936
|
|
Construction in progress
|
|
-
|
|
|
|
4,686,673
|
|
|
|
1,652,859
|
|
|
|
|
|
|
|
46,927,112
|
|
|
|
62,611,158
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(25,363,692
|
)
|
|
|
(29,430,039
|
)
|
|
|
|
|
|
$
|
21,563,420
|
|
|
$
|
33,181,119
|
|
For the years
ended December 31, 2018 and 2017, depreciation expense amounted to $4,045,881 and $3,950,932, respectively, of which $2,913,829
and $2,849,988, respectively, was included in cost of revenues, and the remainder was included in operating expenses.
At December
31, 2018 and 2017, the Company conducted an impairment assessment on property and equipment based on the guidelines established
in ASC Topic 360 to determine the estimated fair market value of property and equipment as of December 31, 2018 and 2017. Such
analysis considered future use of such equipment, consultation with equipment resellers, and other industry factors.
Upon
completion of the 2018 and 2017 impairment analysis, the Company determined that the carrying value exceeded the fair market value
on certain equipment formerly used in the Company’s forging and related components, and chemical equipment segments. Accordingly,
in connection with the impairment of such equipment, the Company recorded impairment charges of $6,257,583 and $0 for the years
at December 31, 2018 and 2017, respectively.
NOTE 8 –
INTANGIBLE ASSETS
At December 31, 2018 and 2017, intangible assets consisted
of the following:
|
|
Useful life
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Land use rights
|
|
45 - 50 years
|
|
|
$
|
3,925,789
|
|
|
$
|
4,149,181
|
|
Patent use rights
|
|
10 years
|
|
|
|
-
|
|
|
|
2,458,701
|
|
Other intangible assets
|
|
3 - 5 years
|
|
|
|
845,180
|
|
|
|
92,249
|
|
Goodwill
|
|
-
|
|
|
|
27,421
|
|
|
|
-
|
|
|
|
|
|
|
|
4,798,390
|
|
|
|
6,700,131
|
|
Less: accumulated amortization
|
|
|
|
|
|
(1,235,877
|
)
|
|
|
(1,305,835
|
)
|
|
|
|
|
|
$
|
3,562,513
|
|
|
$
|
5,394,296
|
|
Amortization of intangible assets attributable to future periods is
as follows:
Year ending December 31:
|
|
Amount
|
|
2019
|
|
$
|
355,788
|
|
2020
|
|
|
355,788
|
|
2021
|
|
|
111,826
|
|
2022
|
|
|
85,949
|
|
2023
|
|
|
85,949
|
|
Thereafter
|
|
|
2,539,792
|
|
|
|
$
|
3,535,092
|
|
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 $1,893,625. Management
determined that there was a significant adverse change in the extent or manner in which this long-lived asset was being used.
In January 2018, in connection the acquisition
of 3D Discovery, the Company acquired their technologies valued at $754,495. The technology of 3D Discovery covers a 3D virtual
tour solution for the property industry. Additionally. during the year ended December 31, 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 years ended December 31, 2018 and 2017,
amortization of intangible assets amounted to $707,390 and $324,190, 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 December 31, 2018 and
2017, short-term bank loans consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Loan from Bank of China, due on November 20, 2019 with annual interest rate of 4.64%, secured by certain assets of the Company
|
|
$
|
363,488
|
|
|
$
|
384,172
|
|
Loan from Bank of China, due on November 20, 2019 with annual interest rate of 4.64%, secured by certain assets of the Company
|
|
|
363,488
|
|
|
|
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
|
|
|
654,279
|
|
|
|
-
|
|
Loan from Bank of Communication, due on September 20, 2018 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, 2019 with annual interest rate of 5.85%, secured by certain assets of the Company
|
|
|
581,582
|
|
|
|
|
|
Loan from Zhongli International Finance Corporation, credit line of RMB4,500,000 (approximately $654,279), with a security deposit of RMB900,000 (approximately $130,856) which will be returned in 36 months, monthly installment of RMB210,000 (approximately $30,533) in the 1
st
– 12
th
month; RMB138,000 (approximately $20,065) in the 13
th
- 24
th
month; RMB98,000 (approximately $14,249) in the 25
th
– 36
th
month; secured by certain assets of the Company *
|
|
|
220,123
|
|
|
|
-
|
|
Total short-term bank loans
|
|
$
|
2,182,960
|
|
|
$
|
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 $244,910 as of December 31, 2018.
|
Minimum 36-month installments under the loan agreement are as follows:
12-month periods ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
334,991
|
|
2020
|
|
|
223,327
|
|
2021
|
|
|
128,205
|
|
Total minimum loan payments
|
|
|
686,523
|
|
Less: amount representing interest
|
|
|
(105,223
|
)
|
Less: security deposit due
|
|
|
(116,267
|
)
|
Present value of net minimum loan payment
|
|
|
465,033
|
|
Less: current portion
|
|
|
(220,123)
|
|
Long-term portion
|
|
$
|
244,910
|
|
Interest related to the bank loans, which was $131,684
and $134,459 for the years ended December 31, 2018 and 2017, respectively, is included in interest expense on the accompanying
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 December 31, 2018 and 2017, the Company’s bank acceptance notes payables consisted
of the following:
|
|
December 31,
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 June 25, 2019, collateralized by 100% of restricted cash deposited
|
|
|
72,698
|
|
|
|
-
|
|
Total
|
|
$
|
72,698
|
|
|
$
|
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 converted into shares of common stock of the Company at a conversion price equal to $3.35 per share on January
8, 2018. Accordingly, 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. 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 a total of 36,621 shares of its common stock (Details of conversion subsequent to the year
end are disclosed in Note 21).
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 December 31, 2018 and 2017, convertible debt
consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Principal
|
|
$
|
872,674
|
|
|
$
|
670,000
|
|
Unamortized discount
|
|
|
(162,170
|
)
|
|
|
-
|
|
Convertible debt, net
|
|
$
|
710,504
|
|
|
$
|
670,000
|
|
For the year ended December 31, 2018 and 2017,
amortization of debt discount and interest expenses amounted to $242,699 and $3,350, respectively. At December 31, 2018 and 2017,
accrued interest amounted to $13,187 and $3,350, 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 year ended December 31, 2018, the Company recorded license fee expense of $376,170,
which is included in cost of sales, and at December 31, 2018, recorded a prepaid license fee – related party of $663,830
which will be amortized over the remaining license period.
Due to related parties
From time to time, during 2017 and 2018, the Company
receive advances from Chan Tin Chi Family Company Limited
(formerly known as 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. During the years ended December 31, 2018 and 2017, the Company received advances from Chan Tin Chi Family
Company Limited for working capital totaled $1,394,872 and $347,589, respectively, and repaid to Chan Tin Chi Family Company Limited
a total of $484,956 and $0, respectively. At December 31, 2018 and 2017, amounts due to Chan Tin Chi Family Company Limited amounted
to $1,257,505 and $347,589, respectively.
NOTE
13 –
ACCRUED EXPENSES
At December 31, 2018 and
2017, accrued expenses consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Accrued salaries and related benefits
|
|
$
|
145,688
|
|
|
$
|
62,726
|
|
Other payables
|
|
|
634,260
|
|
|
|
103,023
|
|
|
|
$
|
779,948
|
|
|
$
|
165,749
|
|
NOTE 14 –
INCOME TAXES
The Company accounts for
income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition of deferred tax assets
and liabilities for the differences between the financial statements and the tax basis of assets and liabilities, and for the expected
future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require
the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred
tax assets, including those related to the U.S. net operating loss carry forwards for income tax purposes as compared to financial
statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along with any
other positive and negative evidence during the periods in which those temporary differences become deductible or are utilized.
The Company is governed
by the Income Tax Laws of the PRC,
Inland Revenue Ordinance of Hong Kong
, and the
U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC and Hong Kong, Chinese companies are generally
subject to an income tax at an effective rate of 25% and 16.5%, respectively, on income reported in the statutory financial statements
after appropriate tax adjustments. The Company’s subsidiary, Green Power, and VIEs (Dyeing and Heavy Industries) are subject
to PRC statutory rates and certain subsidiaries domiciled in Hong Kong are subject to the Hong Kong statutory rate. The Company’s
wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands and certain subsidiaries were incorporated in the
British Virgin Islands. Under the current laws of the Cayman Islands and British Virgin Islands, these entities are not subject
to income taxes.
Sharing Economy International
Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $9,578,000 for income
taxes purposes through December 31, 2018 and Foreign Tax Credits related to the Income Tax Laws of the PRC of approximately $982,409,
subject to the Internal Revenue Code (“IRC”) Section 382, which places a limitation on the amount of taxable income
that can be offset by net operating losses after a change in ownership. The Company has not calculated its IRC Section 382 change
of ownership to date, but there seems to have been a change of ownership within the meaning of IRC Section 382, which has not limited
the use of net operating losses, nor foreign tax credits as of December 31, 2018, based upon Managements review. The net operating
loss carries forward and foreign tax credit carry forward for United States income taxes may be available to reduce future years’
taxable income. Net operating loss carry forwards through December 31, 2017 of $8,402,000 will expire, if not utilized, through
2037 and the remaining foreign tax credits expire, if not utilized, through 2026. Net operating loss carry forwards for 2018 of
$1,176,000 forward may be carried forward indefinitely subject to annual usage limitations. As of December 31, 2018, the Company
had net operating loss carryforwards of approximately $10,812,000 for PRC income tax purposes, such losses are set to expire in
2023 for PRC income tax purposes. As of December 31, 2018, the Company had net operating loss carryforwards of approximately $2,670,000
for Hong Kong income tax purposes.
On December 22, 2017, the Tax Cuts and Jobs Act
of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but
are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December
31, 2017 and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
The Company believes it is subject to the one-time transition tax on the mandatory deemed repatriation of foreign earnings. Such
deemed repatriation tax was estimated to be approximately $5,256,000, which has been reduced to zero by the use of Foreign Tax
Credit carryforward utilization at December 31, 2017 related to the Income Tax Laws of the PRC. Management is in the process of
reviewing its IRC Section 382 change of ownership, relating to such amount.
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.
In 2017, as a result of the reduction of the United
States federal corporate income tax rate, the Company reduced the value of its net deferred tax asset by $1,092,239 which was recorded
as a corresponding reduction to the valuation allowance during the fourth quarter of 2017.
Management believes that
it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing losses
for United States income taxes purposes, and losses in PRC and Hong Kong. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit related to its U.S. and foreign net operating loss carry forwards to reduce the asset
to zero. Management will review this valuation allowance periodically and make adjustments as necessary.
The Company has cumulative
undistributed earnings from its China subsidiary and VIEs of approximately $0 and $40.2 million as of December 31, 2018 and 2017,
respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s
PRC operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings,
nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings
will be remitted in the future.
The table below summarizes
the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the years ended December
31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
U.S. statutory rates
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
U.S. effective rate different than China tax rate
|
|
|
0.4
|
%
|
|
|
(3.3
|
)%
|
Non-deductible expenses
|
|
|
(16.3
|
)%
|
|
|
(17.9
|
)%
|
Effect of change in U.S statutory rate from 35% to 21%
|
|
|
-
|
%
|
|
|
(2.1
|
)%
|
China valuation allowance
|
|
|
(4.5
|
)%
|
|
|
(7.2
|
)%
|
U.S. valuation allowance
|
|
|
(0.6
|
)%
|
|
|
(3.5
|
)%
|
Total provision for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
For the years ended December
31, 2018 and 2017, income taxes expense was related to our operations in the PRC and amounted to $0 and $408,287, respectively.
The tax effects of temporary
differences under ASC 740 “Accounting for Income Taxes” that give rise to significant portions of deferred tax assets
and liabilities as of December 31, 2018 and 2017 were as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net U.S. operating loss carry forward
|
|
$
|
2,011,408
|
|
|
$
|
1,764,385
|
|
Net PRC and Hong Kong operating loss carry forward
|
|
|
3,143,666
|
|
|
|
1,252,015
|
|
Foreign tax credit
|
|
|
206,306
|
|
|
|
206,306
|
|
Total gross deferred tax assets
|
|
|
5,361,380
|
|
|
|
3,222,706
|
|
Less: valuation allowance
|
|
|
(5,361,380
|
)
|
|
|
(3,222,706
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December
31, 2018 and 2017, the valuation allowance were $5,361,380 and $3,222,706 related to the U.S. and foreign net operating loss carry
forwards and foreign tax credit, respectively. During the year ended December 31, 2018, the valuation allowance increased by $2,138,674.
NOTE 15 –
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. There is no issue of
Series A Preferred Stock as of December 31, 2018 and 2017.
Common stock issued for services
During the year ended December 31, 2017, pursuant
to consulting and service agreements, the Company issued an aggregate of 736,806 shares of common stock to seventeen 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. During the year ended December 31, 2018, pursuant to consulting and service
agreements, the Company issued an aggregate of 3,499,120 shares of common stock to ninety-five consultants and vendors for the
services rendered and to be rendered and two consultants surrendered an aggregate of 88,802 shares. These shares were valued at
the fair market value on the grant date using the reported closing share price on the date of grant. In connection with the issuance
of the shares to consultants and vendors, the Company recorded prepaid expenses of $1,709,989 and $4,189,960 which is being amortized
over the respective service period as of December 31, 2017 and 2018, respectively. For the years ended December 31, 2018 and 2017,
the Company recorded stock-based consulting and service fees of $10,467,783 and $1,586,643.
Additionally, the Company issued/will issue
an additional 1,338,218 shares of common stock to thirty-one consultants and vendors during year 2019, provided that these agreements
are not terminated prior to the issuance of such shares. 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 December 31, 2018, there was $449,473 of unvested stock-based consulting
and service fees to be recognized over the remaining service periods.
In October and December 2018, the Company mutually
agreed or terminated the consulting and service agreements of seven consultants and vendors. Both parties forgo their respective
rights as stated in the agreements, the Company has no obligation to issue in aggregate of 648,601 shares in effect.
During the year ended December 31, 2018, the
Company has issued 349,870 shares as bonus to certain directors and employees 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
year ended December 31, 2018, the Company recorded stock-based compensation expense of $352,391 and prepaid expenses of $932 which
will be amortized over the remaining service period.
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 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 264,169 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 June 2017, pursuant
to stock purchase agreements, the Company sold an aggregate of 290,000 shares of common stock to three investors
at
a purchase price of $3.00 per share for net cash proceeds a total of $860,000
. The Company did not engage a placement agent
with respect to these sales.
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 the year ended December 31, 2018, the Company
issued 236,721 shares of its common stock upon conversion of debt (see Note 11).
Common stock issued in connection with acquisitions
On December 8, 2017 (the “Closing Date”),
the Company completed the acquisition of 51% of the issued and outstanding capital stock of Inspirit.
In
connection with the acquisition, the Company issued 85,473 unregistered shares of its common stock valued at $507,710, based on
the acquisition-date fair value of our common stock of $5.94 per share based on the quoted market price of the Company’s
common stock on the Closing Date.
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 year ended December 31,
2018, the Company recorded license fee expense of $376,170, which is included in cost of sales, and at December 31, 2018, recorded
a prepaid license fee – related party of $663,830 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 year ended December 31, 2018, the Company recorded
donation expense of $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 November 1, 2018 renewable on a yearly basis. On July 24, 2018, the Company issued a total of 366,134 shares, including 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. These shares were valued at $1,268,727. Upon the Company's common stock price decreased, on January
11, 2019, Sharing Film entered into a deed of surrender with the Landlord. Sharing Film surrendered and delivered back vacant possession
of one level of office complex of Shaw Movie City to the Landlord. The Landlord forfeited all the deposits paid and terminated
the tenancy agreement. During the year ended December 31, 2018, the Company recorded stock-based rental and management fee of $1,268,727
(see Note 21).
Warrants
On
May 2, 2018, pursuant to a securities purchase agreement, the Company closed a private placement of securities and issued two year
Warrant to purchase 134,328 shares of Common Stock at an exercise price of $7.18 per share (see Note 11). Since these warrants
were issued with a Convertible Note, the proceeds of the Note were allocated to the instruments based on relative fair value as
the warrants did not contain any features requiring liability treatment and therefore were classified as equity. The value allocated
to the warrants was $152,490.
During the year ended December 31, 2018, the fair value of the warrants was estimated using
the Black-Sholes valuation model with the following assumptions:
|
|
2018
|
|
Dividend rate
|
|
|
0
|
%
|
Term (in years)
|
|
|
2.0 years
|
|
Volatility
|
|
|
111.9
|
%
|
Risk—free interest rate
|
|
|
2.24
|
%
|
There was no warrant activity in 2017. Warrant
activities for the year ended December 31, 2018 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
134,328
|
|
|
|
7.18
|
|
|
|
2.0
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2018
|
|
|
134,328
|
|
|
$
|
7.18
|
|
|
|
1.4
|
|
|
$
|
0
|
|
Exercisable, December 31, 2018
|
|
|
134,328
|
|
|
$
|
7.18
|
|
|
|
1.4
|
|
|
$
|
0
|
|
NOTE 16 –
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 December 31, 2018 and 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 December 31, 2018. Green Power had loss since its establishment. No appropriation
to statutory reserves for it was required as it incurred recurring net loss.
NOTE 17 –
SEGMENT INFORMATION
During the year ended December 31, 2017, the Company
operated in one reportable business segments, the manufacture of textile dyeing and finishing equipment segment. During the year
ended December 31, 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 2018 and 2017 periods, 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 years ended December 31, 2018 and 2017 were as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
9,299,867
|
|
|
$
|
13,463,557
|
|
Sharing economy
|
|
|
208,175
|
|
|
|
58,499
|
|
|
|
|
9,508,042
|
|
|
|
13,522,056
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
4,028,214
|
|
|
|
3,943,694
|
|
Sharing economy
|
|
|
17,667
|
|
|
|
7,238
|
|
|
|
|
4,045,881
|
|
|
|
3,950,932
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
131,684
|
|
|
|
134,459
|
|
Sharing economy
|
|
|
242,703
|
|
|
|
3,364
|
|
|
|
|
374,387
|
|
|
|
137,823
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
(26,386,311
|
)
|
|
|
(9,914,743
|
)
|
Sharing economy
|
|
|
(11,850,496
|
)
|
|
|
(1,211,499
|
)
|
Discontinued segments
|
|
|
16,237
|
|
|
|
(97,957
|
)
|
Other (a)
|
|
|
(3,865,511
|
)
|
|
|
(1,702,151
|
)
|
|
|
$
|
(42,086,081
|
)
|
|
$
|
(12,926,350
|
)
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Identifiable long-lived tangible assets at December 31, 2018 and 2017 by segment
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
16,481,795
|
|
|
$
|
27,805,180
|
|
Sharing economy
|
|
|
56,762
|
|
|
|
65,144
|
|
Other (b)
|
|
|
5,024,863
|
|
|
|
5,310,795
|
|
|
|
$
|
21,563,420
|
|
|
$
|
33,181,119
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Identifiable long-lived tangible assets at December 31, 2018 and 2017 by geographical location
|
|
|
|
|
|
|
China
|
|
$
|
21,506,658
|
|
|
$
|
33,115,975
|
|
Hong Kong
|
|
|
56,762
|
|
|
|
65,144
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
21,563,420
|
|
|
$
|
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 18 –
CONCENTRATIONS
Customers
Two customers accounted for approximately 27% (14%
and 13%) of the Company’s revenues for the year ended December 31, 2018 and one customer accounted for approximately 14%
of the Company’s revenues for the year ended December 31, 2017.
No customer accounted for 10% of the Company’s
total outstanding accounts receivable at December 31, 2018 and 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 years ended December 31, 2018
and 2017.
|
|
Years Ended
December 31,
|
|
Supplier
|
|
2018
|
|
|
2017
|
|
A
|
|
|
*
|
|
|
|
17
|
%
|
B
|
|
|
16
|
%
|
|
|
12
|
%
|
C
|
|
|
*
|
|
|
|
10
|
%
|
D
|
|
|
12
|
%
|
|
|
10
|
%
|
E
|
|
|
17
|
%
|
|
|
*
|
|
F
|
|
|
10
|
%
|
|
|
*
|
|
No supplier accounted for approximately 10% of
the Company’s total outstanding accounts payable at December 31, 2018. One supplier accounted for approximately 15% of the
Company’s total outstanding accounts payable at December 31, 2017.
NOTE 19 – COMMITMENT AND CONTINGENCIES
Litigation
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 December 31, 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 (see Note 21).
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 15) during the period.
NOTE 20 –
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 December 31, 2018 and 2017, 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 December 31, 2018 and 2017 were approximately $21,923,000 and $50,873,000, respectively.
NOTE 21 –
SUBSEQUENT EVENTS
On January 11, 2019, the Company converted an aggregate
of $34,103 and $15,897 outstanding principal and interest of the Iliad Note, respectively, into 266,667 shares of its common stock
(see Note 11).
On February 25, 2019, the Company issued 85,470
shares as donation to Hong Kong Baptist University (“HKBU”). HKBU would use the funds raised from the donation to support
the delivery of education, operation, facilities enhancement and study support of the Academy of Film of HKBU.
In March 2019, pursuant to a stock purchase agreement,
the Company sold 690,000 shares of common stock to an investor at a purchase price of $0.29 per share for net cash proceeds a total
of $200,100. The Company did not engage a placement agent with respect to these sales.
From January 1, 2019 to the date of filing, pursuant
to consulting and service agreements, the Company issued an aggregate of 901,948 shares of common stock to twenty-one 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.
From January 1, 2019 to the date of filing, six
consultants and vendors resigned from their position and surrendered an aggregate of 342,175 shares of common stock for the services
rendered and to be rendered. As of the date of filing, among these 342,175 shares of common stock, the registration for 71,696
shares of common stock are still in progress.
In March 2019, two employees surrendered an aggregate
of 1,200 shares of common stock for their part of salaries from April 2018 to March 2019. The company compensated these two employees
USD$3,712 in cash.
Upon the Company's common stock price decreased,
on January 11, 2019, Sharing Film entered into a deed of surrender with the Landlord. Sharing Film surrendered and delivered back
vacant possession of one level of office complex of Shaw Movie City to the Landlord. The Landlord forfeited all the deposits paid
and terminated the tenancy agreement.