ITEM 1.
|
FINANCIAL STATEMENTS
|
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
316,189
|
|
|
$
|
781,740
|
|
Restricted cash
|
|
|
78,479
|
|
|
|
77,473
|
|
Notes receivable
|
|
|
72,580
|
|
|
|
149,757
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
3,130,438
|
|
|
|
4,327,980
|
|
Inventories, net of inventory reserve
|
|
|
2,551,669
|
|
|
|
6,414,305
|
|
Advances to suppliers
|
|
|
494,450
|
|
|
|
565,295
|
|
Receivable from sale of subsidiary
|
|
|
-
|
|
|
|
2,791,590
|
|
Prepaid license fee - related party, net
|
|
|
497,872
|
|
|
|
663,830
|
|
Prepaid expenses and other
|
|
|
3,055,169
|
|
|
|
5,235,113
|
|
Assets of discontinued operations
|
|
|
218,232
|
|
|
|
209,926
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,415,078
|
|
|
|
21,217,009
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7
,746,203
|
|
|
|
21,563,420
|
|
Intangible assets, net
|
|
|
3,544,484
|
|
|
|
3,562,513
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
11
,290,687
|
|
|
|
25,125,933
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21
,705,765
|
|
|
$
|
46,342,942
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
2,066,986
|
|
|
$
|
2,182,960
|
|
Bank acceptance notes payable
|
|
|
74,502
|
|
|
|
72,698
|
|
Convertible note payable
|
|
|
745,903
|
|
|
|
710,504
|
|
Accounts payable
|
|
|
3,987,676
|
|
|
|
4,254,598
|
|
Accrued expenses
|
|
|
344,363
|
|
|
|
779,948
|
|
Advances from customers
|
|
|
1,687,081
|
|
|
|
1,073,797
|
|
Due to related parties
|
|
|
1,382,568
|
|
|
|
1,257,505
|
|
Income taxes payable
|
|
|
61,556
|
|
|
|
60,065
|
|
Liabilities of discontinued operations
|
|
|
319,929
|
|
|
|
268,532
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,670,564
|
|
|
|
10,660,607
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
210,983
|
|
|
|
244,910
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,881,547
|
|
|
|
10,905,517
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; Series A Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 and 0 issued and outstanding at March 31, 2019 and December 31, 2018, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common stock ($0.001 par value; 12,500,000 shares authorized; 9,122,729 and 7,449,123 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)
|
|
|
9,123
|
|
|
|
7,449
|
|
Additional paid-in capital
|
|
|
58,203,963
|
|
|
|
58,452,131
|
|
Retained earnings
|
|
|
(52,339,233
|
)
|
|
|
(27,492,559
|
)
|
Statutory reserve
|
|
|
2,352,592
|
|
|
|
2,352,592
|
|
Accumulated other comprehensive income - foreign currency translation adjustment
|
|
|
3
,340,006
|
|
|
|
2,657,614
|
|
Total stockholder’s equity
|
|
|
11,566
,451
|
|
|
|
35,977,227
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(742,233
|
)
|
|
|
(539,802
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
10
,824,218
|
|
|
|
35,437,425
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
21
,705,765
|
|
|
$
|
46,342,942
|
|
See notes to unaudited condensed consolidated
financial statements.
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,891,054
|
|
|
$
|
2,568,527
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
5,886,591
|
|
|
|
2,927,892
|
|
|
|
|
|
|
|
|
|
|
GROSS LOSS
|
|
|
(3,995,537
|
)
|
|
|
(359,365
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
277,333
|
|
|
|
243,003
|
|
Selling, general and administrative
|
|
|
2,580,061
|
|
|
|
2,746,984
|
|
Research and development
|
|
|
93,378
|
|
|
|
113,447
|
|
Bad debt expense
|
|
|
4,381,441
|
|
|
|
1,318,204
|
|
Impairment loss
|
|
|
13,586,059
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,918,272
|
|
|
|
4,421,638
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(24,913,809
|
)
|
|
|
(4,781,003
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
95
|
|
|
|
1,461
|
|
Interest expense
|
|
|
(132,813
|
)
|
|
|
(30,452
|
)
|
Loss on equity method investment
|
|
|
-
|
|
|
|
(72,412
|
)
|
Foreign currency transaction loss
|
|
|
(1,492
|
)
|
|
|
(1,155
|
)
|
Other loss
|
|
|
(723
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(134,933
|
)
|
|
|
(102,558
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(25,048,742
|
)
|
|
|
(4,883,561
|
)
|
|
|
|
|
|
|
|
|
|
PROVISIONS FOR INCOME TAXES:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Income taxes provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(25,048,742
|
)
|
|
|
(4,883,561
|
)
|
|
|
|
|
|
|
|
|
|
DISCONTINUTED OPERATIONS:
|
|
|
|
|
|
|
|
|
Gain from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
16,899
|
|
|
|
|
|
|
|
|
|
|
GAIN FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
|
|
|
-
|
|
|
|
16,899
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(25,048,742
|
)
|
|
|
(4,866,662
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
|
(202,068
|
)
|
|
|
(86,248
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(24,846,674
|
)
|
|
$
|
(4,780,414
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,048,742
|
)
|
|
$
|
(4,866,662
|
)
|
Unrealized foreign currency translation gain
|
|
|
682
,029
|
|
|
|
2,049,408
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(24
,366,713
|
)
|
|
$
|
(2,817,254
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
$
|
(202,068
|
)
|
|
$
|
(86,248
|
)
|
Unrealized foreign currency translation loss from non-controlling interest
|
|
|
(363
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to common stockholders
|
|
$
|
(24
,164,282
|
)
|
|
$
|
(2,730,779
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Continuing operations - basic and diluted
|
|
$
|
(3.06
|
)
|
|
$
|
(1.60
|
)
|
Discontinued operations - basic and diluted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(3.06
|
)
|
|
$
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,118,610
|
|
|
|
2,992,879
|
|
See notes to unaudited condensed consolidated
financial statements.
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
For Three Months Ended March 31, 2019 and
2018
(Unaudited)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Non-
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Statutory
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Reserve
|
|
|
Income
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
690,000
|
|
|
|
690
|
|
|
|
199,410
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services to consultants and service providers
|
|
|
901,948
|
|
|
|
902
|
|
|
|
190,854
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
191,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock surrendered for services from consultants and service providers
|
|
|
(270,479
|
)
|
|
|
(270
|
)
|
|
|
(947,678
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(947,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of debt
|
|
|
266,667
|
|
|
|
267
|
|
|
|
49,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for donation
|
|
|
85,470
|
|
|
|
85
|
|
|
|
259,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,846,674
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(202,068
|
)
|
|
|
(25,048,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
682,392
|
|
|
|
(363
|
)
|
|
|
682,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
9,122,729
|
|
|
$
|
9,123
|
|
|
$
|
58,203,963
|
|
|
$
|
(52,339,233
|
)
|
|
$
|
2,352,592
|
|
|
$
|
3,340,006
|
|
|
$
|
(742,233
|
)
|
|
$
|
10,824,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Non-
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Statutory
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Reserve
|
|
|
Income
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,223,269
|
|
|
|
1,223
|
|
|
|
6,197,204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,198,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services to employees and directors
|
|
|
249,870
|
|
|
|
250
|
|
|
|
818,962
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
819,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of debt
|
|
|
200,100
|
|
|
|
200
|
|
|
|
670,135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
670,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of majority-owned subsidiaries
|
|
|
175,074
|
|
|
|
175
|
|
|
|
976,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
976,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of reserve arising from acquisition of a non-wholly owned subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,987
|
|
|
|
403,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,780,414
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(86,248
|
)
|
|
|
(4,866,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,049,635
|
|
|
|
(227
|
)
|
|
|
2,049,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
4,445,709
|
|
|
$
|
4,446
|
|
|
$
|
49,160,622
|
|
|
$
|
8,844,315
|
|
|
$
|
2,352,592
|
|
|
$
|
6,973,464
|
|
|
$
|
341,742
|
|
|
$
|
67,677,181
|
|
See notes to unaudited condensed consolidated
financial statements.
SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,048,742
|
)
|
|
$
|
(4,866,662
|
)
|
Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
693,743
|
|
|
|
1,051,740
|
|
Amortization of intangible assets
|
|
|
88,605
|
|
|
|
98,482
|
|
Allowance for doubtful accounts
|
|
|
4,381,441
|
|
|
|
1,318,204
|
|
Allowance for doubtful accounts - discontinued operations
|
|
|
-
|
|
|
|
(16,899
|
)
|
Impairment loss of Property and equipment
|
|
|
13,586,059
|
|
|
|
-
|
|
Loss on equity method investment
|
|
|
-
|
|
|
|
72,412
|
|
Stock-based professional fees
|
|
|
1,355,054
|
|
|
|
1,643,047
|
|
Stock-based donation
|
|
|
259,598
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
69,502
|
|
|
|
-
|
|
Amortization of license fee
|
|
|
165,958
|
|
|
|
-
|
|
Write-off of inventory
|
|
|
3,672,019
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
80,493
|
|
|
|
(269,450
|
)
|
Accounts receivable
|
|
|
(238,319
|
)
|
|
|
1,671,900
|
|
Inventories
|
|
|
330,176
|
|
|
|
(485,743
|
)
|
Prepaid and other current assets
|
|
|
89,816
|
|
|
|
(130
|
)
|
Advances to suppliers
|
|
|
84,456
|
|
|
|
181,736
|
|
Assets of discontinued operations
|
|
|
(3,080
|
)
|
|
|
139,247
|
|
Accounts payable
|
|
|
(362,123
|
)
|
|
|
(634,599
|
)
|
Accrued expenses
|
|
|
(435,972
|
)
|
|
|
(3,047
|
)
|
Advances from customers
|
|
|
583,713
|
|
|
|
772,306
|
|
Liabilities of discontinued operations
|
|
|
44,509
|
|
|
|
(136,379
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(603,094
|
)
|
|
|
536,165
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(54,835
|
)
|
Proceed received from acquisition
|
|
|
-
|
|
|
|
2,341
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(52,494
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from bank loan
|
|
|
444,794
|
|
|
|
707,614
|
|
Repayments of bank loan
|
|
|
(653,921
|
)
|
|
|
(707,614
|
)
|
Decrease in bank acceptance notes payable
|
|
|
-
|
|
|
|
(314,495
|
)
|
Advance from related party
|
|
|
156,667
|
|
|
|
367,778
|
|
Repayment of related party advances
|
|
|
(31,604
|
)
|
|
|
-
|
|
Proceeds from sale of common stock, net
|
|
|
200,100
|
|
|
|
256,410
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
116,036
|
|
|
|
309,693
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
22,513
|
|
|
|
20,335
|
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
(464,545
|
)
|
|
|
813,699
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - beginning of period
|
|
|
859,213
|
|
|
|
1,292,428
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash - end of period
|
|
$
|
394,668
|
|
|
$
|
2,106,127
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid in continuing operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
30,093
|
|
|
$
|
30,452
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash paid in discontinued operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Stock issued for future services to consultants and vendors
|
|
$
|
111,280
|
|
|
$
|
6,228,976
|
|
Stock issued for future services to employees and directors
|
|
$
|
-
|
|
|
$
|
819,212
|
|
Stock issued for repayment of convertible note
|
|
$
|
-
|
|
|
$
|
670,335
|
|
Stock issued for redemption of convertible note and accrued interest
|
|
$
|
50,000
|
|
|
$
|
-
|
|
Stock issued for acquisition of non-wholly owned subsidiaries
|
|
$
|
-
|
|
|
$
|
976,984
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF CASH,CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
781,740
|
|
|
$
|
1,019,437
|
|
Restricted cash at beginning of period
|
|
|
77,473
|
|
|
|
272,991
|
|
Total cash, cash equivalents and restricted cash at beginning of period
|
|
$
|
859,213
|
|
|
$
|
1,292,428
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
316,189
|
|
|
$
|
1,982,661
|
|
Restricted cash at end of period
|
|
|
78,479
|
|
|
|
123,466
|
|
Total cash, cash equivalents and restricted cash at ended of period
|
|
$
|
394,668
|
|
|
$
|
2,106,127
|
|
See notes to unaudited condensed consolidated
financial statements.
NOTE 1 –
DESCRIPTION OF BUSINESS
AND ORGANIZATION
Sharing Economy
International Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December
18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc. and on June 13, 2011, the Company changed
its corporate name to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into a Nevada corporation.
On January 8, 2018, the Company changed its corporate name to Sharing Economy International Inc.
Through its affiliated companies, the Company
manufactures and sells textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”),
a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland owns 100% of the capital stock of Green
Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and, until December 30, 2016, Fulland owned 100%
of Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind”). Green Power is and Fulland Wind was a wholly foreign-owned
enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”).
Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang
Heavy Industries, Co., Ltd. (“Heavy Industries”), formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd.,
and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under
the laws of, and based in, the PRC. Heavy Industries and Dyeing are sometimes collectively referred to as the “Huayang Companies.”
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 5).
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.
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 2). As a result of the discontinuation of 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.
|
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 loss from continuing operations of approximately $25,049,000 for the three months ended March 31, 2019. The net cash used in
operations were approximately $603,000 for the three months ended March 31, 2019. Additionally, during the three months ended March
31, 2019, revenues, substantially all of which are derived from the manufacture and sales of textile dyeing and finishing equipment,
decreased by 26.4% as compared to the three months ended March 31, 2018. 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 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.
Management believes that these matters
raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments related to the recoverability and classification of recorded asset amounts 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
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December
31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements as of and for the year ended December 31, 2018 and footnotes thereto included in the Company’s Annual
Report on
Form 10-K
filed with the SEC on April 16, 2019. The consolidated balance sheet as of December 31, 2018 contained herein
has been derived from the audited consolidated financial statements as of December 31, 2018, but does not include all disclosures
required by the generally accepted accounting principles in the U.S. (“U.S. GAAP”).
Principles of Consolidation
The Company’s unaudited condensed
consolidated financial statements include the financial statements of its wholly-owned and majority owned subsidiaries, as well
as the financial statements of the Huayang Companies, including Dyeing, which conducts the Company’s continuing operations,
and Heavy Industries, which operated discontinued operations. All significant intercompany accounts and transactions have been
eliminated in consolidation.
On December 30, 2016, the Company sold
and transferred its 100% interest in Fulland Wind to an unrelated party. 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, 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 March 31, 2019 and December 31, 2018. The operating results of the petroleum
and chemical segments have been classified as discontinued operations in our consolidated statements of operations for all periods
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.
Because of the contractual arrangements,
the Company has a pecuniary interest in the Huayang Companies that requires the Company to consolidate the Huayang Companies in
its financial statements as if they are wholly owned subsidiaries of the Company.
Use of estimates
The preparation of the unaudited condensed
consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures
at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.
Significant estimates in the three months ended March 31, 2019 and 2018 include the allowance for doubtful accounts on accounts
and other receivables, the allowance for inventory reserve, the useful life of property and equipment and intangible assets, assumptions
used in assessing impairment of long-term assets, valuation of deferred tax assets, and the value of stock-based compensation.
Cash and cash equivalents
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. As of March 31, 2019 and December 31, 2018, cash
balances held in PRC and Hong Kong banks of $224,828 and $774,316, respectively, are uninsured.
Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, 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 related parties, and income taxes payable approximate their
fair market value based on the short-term maturity of these instruments .
Transactions involving related parties
cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings
may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions
were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be
substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related
party nature.
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.
As of March 31,
2019 and December 31, 2018, the Company’s cash balances by geographic area were as follows:
Country:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
United States
|
|
$
|
91,361
|
|
|
|
28.89
|
%
|
|
$
|
7,424
|
|
|
|
0.95
|
%
|
Hong Kong
|
|
|
97,626
|
|
|
|
30.88
|
%
|
|
|
182,800
|
|
|
|
23.38
|
%
|
China
|
|
|
127,202
|
|
|
|
40.23
|
%
|
|
|
591,516
|
|
|
|
75.67
|
%
|
Total cash and cash equivalents
|
|
$
|
316,189
|
|
|
|
100.00
|
%
|
|
$
|
781,740
|
|
|
|
100.00
|
%
|
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 March 31, 2019 and December 31, 2018, the Company has
established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $11,305,983 and
$9,527,060, 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 $4,929,768 and $1,212,706 as of March 31, 2019 and
December 31, 2018, 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. Impairment loss has been recorded
in current period (see note 6).
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 under other income (expense) 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. A loss would be recorded if a decline in the value of an equity method investment is determined
to be other than temporary (see Note 5).
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.
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.
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 $68,365 and $71,503 for the three months ended March
31, 2019 and 2018, 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 three months ended March 31, 2019
and 2018 was $22,513 and $20,335, respectively.
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
as of March 31, 2019 and December 31, 2018 were translated at 6.7112 RMB to $1.00 and at 6.8778 to $1.00, respectively, which were
the exchange rates on the balance sheet dates. For operating subsidiaries in Hong Kong, asset and liability accounts as of March
31, 2019 and December 31, 2018 were translated at 7.8498 and 7.8305 HKD to $1.00, respectively, which were the exchange rates on
the balance sheet date. For operating subsidiaries and VIE’s located in the PRC, the average translation rates applied to
the statements of operations for the three months ended March 31, 2019 and 2018 were 6.7447 RMB and 6.3594 RMB to $1.00, respectively.
For operating subsidiaries located in Hong Kong, the average translation rates applied to the statements of operations for the
three months ended March 31, 2019 was 7.8 HKD to $1.00. Cash flows from the Company’s operations are calculated based upon
the local currencies using the average translation rate.
Loss per share of common stock
Basic net loss
per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company
did not have any common stock equivalents or potentially dilutive common stock outstanding during the three months ended March
31, 2019 and 2018. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation
of diluted shares outstanding as they would have had an anti-dilutive impact.
The following
table presents a reconciliation of basic and diluted net loss per share:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net Loss for basic and diluted attributable to common shareholders
|
|
$
|
(24,846,674
|
)
|
|
$
|
(4,780,414
|
)
|
From continuing operations
|
|
|
(24,846,674
|
)
|
|
|
(4,797,313
|
)
|
From discontinued operations
|
|
$
|
-
|
|
|
$
|
16,899
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic and diluted
|
|
|
8,118,610
|
|
|
|
2,992,879
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock
|
|
|
|
|
|
|
|
|
From continuing operations – basic and diluted
|
|
$
|
(3.06
|
)
|
|
$
|
(1.60
|
)
|
From discontinued operations – basic and diluted
|
|
|
0.00
|
|
|
|
0.00
|
|
Net loss per common share – basic and diluted
|
|
$
|
(3.06
|
)
|
|
$
|
(1.60
|
)
|
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 income for the three months ended March
31, 2019 and 2018 included net loss and unrealized gain from foreign currency translation adjustments.
Reclassification
Certain reclassifications have been made
in prior period’s consolidated financial statements to conform to the current year’s financial presentation. The reclassifications
have no effect on previously reported net loss.
Recent accounting
pronouncements
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”. Under ASU 2016-02, lessees will be required to recognize all leases (with the exception of short-term
leases) at the commencement date including a lease liability, which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis; and a right-of-use (ROU) asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. Leases with a term of twelve months or less will be
accounted for similar to existing guidance for operating leases. In December 2017, January 2018, July 2018, December 2018 and March
2019, the FASB issued ASU 2017-13, ASU 2018-01, ASU 2018-10 & 11, ASU 2018-20 and ASU 2019-01, respectively, which contain
modifications and improvements to ASU 2016-02. The amendments provide entities with an additional (and optional) transition method
to adopt the new leases standard. Under the Optional Transition Method, an entity initially applies the new leases standard at
the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
On January 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective approach and elected to utilize the Optional
Transition Method. In addition, the Company elected the land easement transition practical expedient and did not reassess whether
an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease. The
adoption did not impact the Company’s previously reported consolidated financial statements nor did it result in a cumulative
effect adjustment to retained earnings as of January 1, 2019.
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. The Company early adopted
ASU No. 2018-07 in the fourth quarter of 2018 and there was no cumulative effect of adoption. 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 –
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. During the three months ended March 2019, the Company believed that the final payment of RMB
19,200,000 (approximately $2.7 million) is uncollectible and the write off of such receivable is included in bad debt expense.
Additionally,
in December 2016, the Company’s management decided to discontinue its petroleum and chemical equipment segment under Heavy
Industries 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.
The results of operations from chemical
equipment segment of Heavy Industries for the three months ended March 31, 2019 and 2018 have been classified to the loss from
discontinued operations line on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss
presented herein.
The assets and liabilities classified as
discontinued operations in the Company’s consolidated financial statements as of March 31, 2019 and December 31, 2018,
and for the three months ended March 31, 2019 and 2018 is set forth below.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Assets:
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
9,831
|
|
|
$
|
9,593
|
|
Prepaid expenses and other
|
|
|
208,401
|
|
|
|
200,333
|
|
Total current assets
|
|
|
218,232
|
|
|
|
209,926
|
|
Total assets
|
|
$
|
218,232
|
|
|
$
|
209,926
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
248,754
|
|
|
$
|
242,555
|
|
Advances from customers
|
|
|
44,552
|
|
|
|
-
|
|
Accrued expenses and other liabilities
|
|
|
26,623
|
|
|
|
25,977
|
|
Total current liabilities
|
|
|
319,929
|
|
|
|
268,532
|
|
Total liabilities
|
|
$
|
319,929
|
|
|
$
|
268,532
|
|
The summarized operating result of discontinued
operations included in the Company’s unaudited condensed consolidated statements of operations is as follows:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Other operating income – bad debt recovery
|
|
|
-
|
|
|
|
16,899
|
|
Total operating income
|
|
|
-
|
|
|
|
16,899
|
|
Gain from operations
|
|
|
-
|
|
|
|
16,899
|
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
Gain from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
16,899
|
|
NOTE 3 –
ACCOUNTS RECEIVABLE
As of March 31, 2019 and December 31, 2018, accounts receivable
consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Accounts receivable
|
|
$
|
14,436,421
|
|
|
$
|
13,855,040
|
|
Less: allowance for doubtful accounts
|
|
|
(11,305,983
|
)
|
|
|
(9,527,060
|
)
|
|
|
$
|
3,130,438
|
|
|
$
|
4,327,980
|
|
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 three months ended March 31, 2019 and 2018, bad debt expense amounted to $1,534,761 and $1,318,204, respectively.
NOTE 4 –
INVENTORIES
As of March 31, 2019 and December 31, 2018, inventories consisted
of the following:
|
|
March 31,
2019
|
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
1,030,504
|
|
|
$
|
1,207,334
|
|
Work-in-process
|
|
|
774,260
|
|
|
|
872,376
|
|
Finished goods
|
|
|
5,676,673
|
|
|
|
5,547,301
|
|
|
|
|
7,481,437
|
|
|
|
7,627,011
|
|
Less: inventory reserve
|
|
|
(4,929,768
|
)
|
|
|
(1,212,706
|
)
|
|
|
$
|
2,551,669
|
|
|
$
|
6,414,305
|
|
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
three months ended March 31, 2019 and 2018, the Company increased its inventory reserve for $3,672,019 and $0, respectively.
NOTE 5 –
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 $8.9 million) and had invested RMB 59.8 million (approximately $8.9 million as of March 31, 2019),
for which it received a 30% interest, and Mr. Xue has a commitment to invest RMB 140,000,000 (approximately $20.9 million), of
which Mr. Xue has contributed RMB 60,000,000 (approximately $8.9 million), for which Mr. Xue received a 70% interest in Shengxin.
Shengxin’s registered capital is RMB 200 million (approximately $29.8 million). Mr. Xue had advised Dyeing that he anticipated
that he will fund the remaining RMB 80,000,000 (approximately $11.9 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.
In April 2018, Shengxin secured and invested
in a large solar PV project in GuiZhou province. Shengxin paid RMB40.0 million for the project rights and also engaged a local
contractor to proceed with building the project. However, on June 1, 2018, the Chinese government halted installation of new solar
farms for the remainder of the year and reduced subsidies for projects already under construction. Accordingly, there is no guarantee
that the Chinese government will invest in new solar farm or provide the subsidies needed to fund projects. In September 2018,
due to significance doubt about the status of this project and recoverability of our investment, the Company fully impaired the
value of the investment in Shengxin.
For the three
months ended March 31, 2019 and 2018, the Company recorded a loss on equity method investment of $0 and $72,412, respectively.
NOTE 6 –
PROPERTY AND EQUIPMENT
As of March 31, 2019 and December 31, 2018,
property and equipment consisted of the following:
|
|
Useful life
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Office equipment and furniture
|
|
5 years
|
|
$
|
88,419
|
|
|
$
|
86,724
|
|
Manufacturing equipment
|
|
5 -10 years
|
|
|
11,516,742
|
|
|
|
20,297,029
|
|
Vehicles
|
|
5 years
|
|
|
179,478
|
|
|
|
176,884
|
|
Building and building improvements
|
|
5 - 20 years
|
|
|
-
|
|
|
|
21,341,612
|
|
Manufacturing equipment in progress
|
|
-
|
|
|
3,465,848
|
|
|
|
338,190
|
|
Construction in progress
|
|
-
|
|
|
1,683,753
|
|
|
|
4,686,673
|
|
|
|
|
|
|
16,934,240
|
|
|
|
46,927,112
|
|
Less: accumulated depreciation
|
|
|
|
|
(9,188,037
|
)
|
|
|
(25,363,692
|
)
|
|
|
|
|
$
|
7,746,203
|
|
|
$
|
21,563,420
|
|
For the three months ended March 31, 2019
and 2018, depreciation expense amounted to $693,743 and $1,051,657, respectively, of which $416,410 and $808,654, respectively,
was included in cost of revenues, and the remainder was included in operating expenses.
As
of March 31, 2019, the Company conducted an impairment assessment on property and equipment
. Accordingly, the Company recorded
an impairment loss of $13,586,059 on certain equipment and buildings for the three months ended
March
31, 2019
. For the three months ended March 31, 2018, the impairment loss was $0.
NOTE 7 –
INTANGIBLE
ASSETS
As of March 31, 2019 and December 31, 2018,
intangible assets consisted of the following:
|
|
Useful life
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Land use rights
|
|
45 - 50 years
|
|
$
|
4,023,244
|
|
|
$
|
3,925,789
|
|
Other intangible assets
|
|
3 – 5 years
|
|
|
843,102
|
|
|
|
845,180
|
|
Goodwill
|
|
-
|
|
|
27,353
|
|
|
|
27,421
|
|
|
|
|
|
|
4,893,699
|
|
|
|
4,798,390
|
|
Less: accumulated amortization
|
|
|
|
|
(1,349,215
|
)
|
|
|
(1,235,877
|
)
|
|
|
|
|
$
|
3,544,484
|
|
|
$
|
3,562,513
|
|
Amortization of intangible assets attributable to future periods
is as follows:
Year ending March 31:
|
|
Amount
|
|
2020
|
|
$
|
357,257
|
|
2021
|
|
|
312,812
|
|
2022
|
|
|
105,871
|
|
2023
|
|
|
105,871
|
|
2024
|
|
|
91,047
|
|
Thereafter
|
|
|
2,544,273
|
|
|
|
$
|
3,517,131
|
|
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 January 2018,
in connection the acquisition of 3D Discovery, the Company acquired their technologies valued at $754,159. The technology of 3D
Discovery covers a 3D virtual tour solution for the property industry. The Company amortizes this technology over a term of five
years.
For the three
months ended March 31, 2019 and 2018, amortization of intangible assets amounted to $88,605 and $98,482, respectively.
NOTE 8 –
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.
As of March 31, 2019 and December 31, 2018, short-term bank loans consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Loan from Bank of China, due on November 20, 2019 with annual interest rate of 4.60%, secured by certain assets of the Company and guaranteed by the Company’s CEO, Jianhua Wu, and Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO
|
|
$
|
372,512
|
|
|
$
|
363,488
|
|
Loan from Bank of China, due on November 25, 2019 with annual interest rate of 4.60%, secured by certain assets of the Company and guaranteed by the Company’s CEO, Jianhua Wu, and Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO
|
|
|
372,512
|
|
|
|
363,488
|
|
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 Wuxi Nongshuang, due on November 6, 2019 with annual interest rate of 5.87%, secured by certain assets of the Company
|
|
|
670,520
|
|
|
|
-
|
|
Loan from Bank of Communication, due on September 25, 2019 with annual interest rate of 4.35%, secured by certain assets of the Company
|
|
|
-
|
|
|
|
581,582
|
|
Loan from Bank of Communication, due on September 25, 2019 with annual interest rate of 4.35%, secured by certain assets of the Company
|
|
|
447,014
|
|
|
|
-
|
|
Current portion of loan from Zhongli International Finance Corporation, credit line of RMB4,500,000 (approximately $670,521), with a security deposit of RMB900,000 (approximately $134,104) which will be returned in 36 months, monthly installment of RMB210,000 (approximately $31,291) in the 1
st
– 12
th
month; RMB138,000 (approximately $20,563) in the 13
th
- 24
th
month; RMB98,000 (approximately $14,602) in the 25
th
– 36
th
month; secured by certain assets of the Company *
|
|
|
204,428
|
|
|
|
220,123
|
|
Total short-term bank loans
|
|
$
|
2,066,986
|
|
|
$
|
2,182,960
|
|
* Long-term loans represent amounts due
to Zhongli International Finance Corporation that are due more than one year. Long-term loan amounts to $210,983 and $244,910 as
of March 31, 2019 and December 31, 2018, respectively.
Minimum 36-month installments for the loan from Zhongli International
Finance Corporation under the loan agreement are as follows:
12-month periods ending March 31,
|
|
Amount
|
|
2020
|
|
$
|
311,122
|
|
2021
|
|
|
210,991
|
|
2022
|
|
|
87,615
|
|
Total minimum loan payments
|
|
|
609,728
|
|
Less: amount representing interest
|
|
|
(90,412
|
)
|
Less: security deposit due
|
|
|
(103,905
|
)
|
Present value of net minimum loan payment
|
|
|
415,411
|
|
Less: current portion
|
|
|
(204,428
|
)
|
Long-term portion
|
|
$
|
210,983
|
|
Interest related
to the bank loans, which was $41,998 and $30,452 for the three months ended March 31, 2019 and 2018, respectively, is included
in interest expense on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
NOTE 9 –
CONVERTIBLE
NOTE PAYABLE
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. 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.
The Investor has the right at any time
after May 2, 2018 until the outstanding balance has been paid in full to convert all or any part of the outstanding balance into
shares of common stock of the Company at conversion price of $6.70 per share (the “Lender Conversion Price”). The Lender
Conversion Price is subject to certain adjustments set forth in the Iliad Note. 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”)
unless the Company waive the 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.
As of March 31, 2019 and December 31,2018,
convertible debt consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Principal
|
|
$
|
838,571
|
|
|
$
|
872,674
|
|
Unamortized discount
|
|
|
(92,668
|
)
|
|
|
(162,170)
|
|
Convertible debt, net
|
|
$
|
745,903
|
|
|
$
|
710,504
|
|
For the three
months ended March 31, 2019, amortization of debt discount and interest expenses amounted to $69,502 and $21,313, respectively.
There was no such expenses for the three months ended March 31, 2018. As of March 31, 2019 and December 31, 2018, accrued interest
amounted to $18,603 and $13,187, respectively.
NOTE 10 –
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 former affiliate of Chan Tin Chi Family Company Limited
(formerly known
as YSK 1860 Co., Limited)
, which is a major shareholder of the Company, controlled 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
January 25, 2019, Sharing Economy International, Inc. terminated the Exclusivity Agreement entered into with ECrent Capital Holdings
Limited on June 11, 2017, as amended.
On May 8, 2018, amended on May 24, 2018
and amended on August 30, 2018, Sharing Economy entered into a License Agreement (the “Agreement”) with ECrent. In
accordance with the terms of the Amendment, ECrent shall grant the Company an exclusive license to utilize certain software and
trademarks in order to develop, launch, operate, commercialize, and maintain an online website platform in Taiwan, Thailand, India,
Indonesia, Singapore, Malaysia, Philippines, Vietnam, Cambodia, Japan, and Korea until December 31, 2019. In consideration for
the license, the Company granted ECrent 250,000 shares of common stock (the “Consideration Shares”), at an issue price
of $1,040,000, or $4.16 per share, (based on the quoted market price of the Company’s common stock on the amended Agreement
date of May 24, 2018). Pursuant to the terms of the Agreement, ECrent shall provide a guarantee on revenue and profit of $13,000,000
and $2,522,000, respectively. The Consideration Shares shall be reduced on a pro rata basis if there is a shortfall in the guaranteed
revenue and/or profit. In connection with this agreement, during the three months ended March 31, 2019, the Company recorded license
fee expense of $165,958, which is included in cost of sales, and as of March 31, 2019, recorded a prepaid license fee – related
party of $497,872 which will be amortized over the remaining license period.
Due to related parties
Mr. Chan Tin Chi owns 99% of the issued
and outstanding ordinary shares of Chan Tin Chi Family Company Limited (formerly known as YSK 1860 Co., Limited). From time to
time, during 2018 and 2019, the Company receive advances from Mr. Chan Tin Chi and Chan Tin Chi Family Company 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 three months ended March 31, 2019 and 2018, the Company received advances from Mr. Chan Tin Chi and Chan Tin
Chi Family Company Limited for working capital totaled $156,667 and $392,308, respectively, and repaid to Mr. Chan Tin Chi and
Chan Tin Chi Family Company Limited a total of $31,604 and $24,529, respectively. At March 31, 2019 and December 31, 2018, amounts
due to Mr. Chan Tin Chi and Chan Tin Chi Family Company Limited amounted to $1,382,568 and $1,257,505, respectively.
Bank loan guaranteed by related parties
The company obtains two bank loans from
Bank of China, due on November 20, 2019 and November 25, 2019, respectively. These loans are guaranteed by Jianhua Wu, CEO, and
Wuxi Angyida Machinery Co., Ltd, a company whose corporate representative is a brother of the Company’s CEO (see Note 8).
NOTE 11 –
STOCKHOLDERS’
EQUITY
Common stock issued for services
and common stock surrendered
During the three
months ended March 31, 2019, pursuant to consulting and service agreements, the Company issued an aggregate of 901,948 shares of
common stock to nineteen 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. Additionally, the Company issued/will
issue an additional 376,270 shares of common stock to fifteen consultants and vendors between April 2019 and December 2019 for
services they have started, provided that these agreements are not terminated prior to the issuance of such shares. At the end
of each financial reporting period prior to issuance of these shares, the fair value of these shares is measured using the fair
value of the Company’s common stock at reporting date. During the three months ended March 31, 2019, the fair value of the
above mentioned shares issued and the change in value of the shares to be issued was $191,756. The Company recognize stock-based
professional fees over the period during which the services are rendered by such consultant or vendor. For the three months ended
March 31, 2019, the Company recorded stock-based consulting and service fees to service provider and employees of $1,355,054. In
connection with the issuance/future issuance of shares to consultants and vendors, the Company recorded prepaid expenses of $2,277,824
which will be amortized over the remaining service period.
During the three months ended March 31,
2019, the Company terminated the consulting agreements of four consultants. The consultants surrendered an aggregate of 270,479
shares issued in prior periods. In addition, the Company also mutually agreed or terminated the consulting and service agreements
of three consultants and vendors. Both parties forgo their respective rights as stated in the agreements; and the Company has no
obligation to issue in aggregate of 223,135 shares in effect. As a result of the above mentioned transactions, the Company reversed
the fair value of $947,948 recognized in stockholders’ equity in prior periods.
Common stock issued for cash
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.
Common stock issued for debt conversion
In January 2019, the Company issued 266,667
shares of its common stock upon conversion of debt (see Note 9).
Shares issued for donation
In February 2019, the Company issued 85,470
shares as donation to Hong Kong Baptist University (“HKBU”). The Foundation would use the funds raised from the donation
to support the delivery of education, operation, facilities enhancement and study of the Academy of Film of HKBU. These shares
were valued at $259,598, or $3.04 per share. In connection with this donation, during the three months ended March 31, 2019, the
Company recorded donation expense of $259,598, which is included in operating expenses.
NOTE 12 –
SEGMENT
INFORMATION
During the three
months ended March 31, 2018 and 2019, 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 three
months ended March 31, 2018 and 2019, the Company’s dyeing and finishing equipment operations were conducted in the PRC.
The Sharing Economy Segment is based in Hong Kong.
Information with
respect to these reportable business segments for the three months ended March 31, 2019 and 2018 was as follows:
|
|
For the Three Months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
1,887,265
|
|
|
$
|
2,537,506
|
|
Sharing economy
|
|
|
3,789
|
|
|
|
31,021
|
|
|
|
|
1,891,054
|
|
|
|
2,568,527
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
689,317
|
|
|
|
1,047,413
|
|
Sharing economy
|
|
|
4,426
|
|
|
|
4,327
|
|
|
|
|
693,743
|
|
|
|
1,051,740
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
41,998
|
|
|
|
30,452
|
|
Sharing economy
|
|
|
90,815
|
|
|
|
-
|
|
|
|
|
132,813
|
|
|
|
30,452
|
|
Net loss
|
|
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
|
(22,564,654
|
)
|
|
|
(2,570,941
|
)
|
Sharing economy
|
|
|
(1,612,786
|
)
|
|
|
(1,119,403
|
)
|
Discontinued segments
|
|
|
-
|
|
|
|
16,899
|
|
Other (a)
|
|
|
(871,302
|
)
|
|
|
(1,193,217
|
)
|
|
|
$
|
(25,048,742
|
)
|
|
$
|
(4,866,662
|
)
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable long-lived tangible assets as of March 31, 2019 and December 31, 2018 by segment
|
|
|
|
|
|
|
Dyeing and finishing equipment
|
|
$
|
2,544,307
|
|
|
$
|
16,481,795
|
|
Sharing economy
|
|
|
52,295
|
|
|
|
56,762
|
|
Other (b)
|
|
|
5,149,601
|
|
|
|
5,024,863
|
|
|
|
$
|
7,746,203
|
|
|
$
|
21,563,420
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable long-lived tangible assets as of March 31, 2019 and December 31, 2018 by geographical location
|
|
|
|
|
|
|
China
|
|
$
|
7,693,908
|
|
|
$
|
21,506,658
|
|
Hong Kong
|
|
|
52,295
|
|
|
|
56,762
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
7,746,203
|
|
|
$
|
21,563,420
|
|
(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 13 –
CONCENTRATIONS
Customers
Five customers accounted for approximately
70% (18%, 16%, 14%, 12% and 11%) of the Company’s revenues for the three months ended March 31, 2019 and two customers accounted
for approximately 65% (55% and 10%) of the Company’s revenues for the three months ended March 31, 2018.
No customer accounted
for 10% of the Company’s total outstanding accounts receivable as of March 31, 2019 and December 31, 2018.
Suppliers
Two suppliers accounted for approximately
45% (34% and 11%) of the Company’s inventories purchases for the three months ended March 31, 2019 and four suppliers accounted
for approximately 74% (22%, 22%, 18% and 12%) of the Company’s revenues for the three months ended March 31, 2018.
Two suppliers
accounted for approximately 27% (13% and 14%) of the Company’s total outstanding accounts payable as of March 31, 2019. No
supplier accounted for approximately 10% of the Company’s total outstanding accounts payable at December 31, 2018.
NOTE 14 –
COMMITMENT AND CONTINGENCIES
Litigation:
On April 25, 2019, ECPower (HK) Company
Limited (“EC Power”), a subsidiary of SEII, filed a claim against The Dairy Farm Limited (“Dairy Farm”) in
respect of the cooperation agreement between the two parties for the battery rental business at 7-Eleven outlets in Hong Kong during
the period from September 2017 to February 2018. The claim is for a total compensation of HK$1,395,000 (approximately $178,846)
which comprises of (i) HK$45,000 (approximately $5,769) as compensation for interest and administration cost incurred as a result
of Dairy Farm’s delay in payment of EC Power’s share of the rental income, and (ii) HK$1,350,000 (approximately $173,077) as compensation
for Dairy Farm’s early termination of the cooperation agreement without any valid proof of fault on the part of EC Power.
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.
NOTE 15 –
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 March 31,
2019 and December 31, 2018, 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 (liabilities) as of March 31, 2019 and December 31,
2018 were approximately ($190,000) and $21,923,000, respectively.
NOTE 16 –
SUBSEQUENT EVENTS
From April 1, 2019 to the date of filing,
pursuant to consulting and service agreements, the Company issued an aggregate of 47,399 shares of common stock to three consultants
and vendors for the Shortfall (the closing price of the Shares drops below the Issue Price, the Company will compensate the Consultant
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) of the consulting and service agreements. 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 April 1, 2019 to the date of filing,
four consultants surrendered an aggregate of 282,522 shares of common stock for the services rendered and to be rendered.
On April 1, 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 $3,712 in cash.
From April 1, 2019 to the date of filing,
the Company issued 400,000 shares as bonus to an employee and a consultant for performance targets to be achieved.
On May 10, 2019, an employee surrendered
an aggregate of 8,300 shares of common stock for his bonus.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Historically,
our primary operations involved the design, manufacture and distribution of a line of proprietary high and low temperature dyeing
and finishing machinery to the textile industry. Our products feature a high degree of both automation and mechanical-electrical
integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic
fiber, nylon, cotton ramie, and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products
to meet demand in new and existing end markets.
We design and
produce airflow dyeing machines, which use air instead of water. Water is used in the traditional dyeing process. We believe that
our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input
costs, fewer wrinkles, less damage to the textile, and reduced emissions. Historically, the Chinese government’s mandate
to phase out older machinery in China’s textile industry that does not meet the new environmental standards has benefitted
us. However, in recent years, challenging economic conditions, increases in raw materials prices and the Chinese government’s
more aggressive stance toward shutting down factories, including textile manufacturers, that are not compliant with emission standards,
have adversely impacted our dyeing and finishing businesses. Due to rising production costs, many other textile manufacturers are
closing or relocating to other countries outside of China in Southeast Asia.
In an effort to
improve our product offering and appeal to textile manufacturers outside of our current customer base in China, we have developed
prototypes of next generation dyeing and finishing equipment utilizing a patent we purchased in August 2016 that covers ozone-ultrasonic
textile dyeing equipment. 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).
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.
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 or during the three months ended
March 31, 2019.
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 received are for on-demand urgent delivery of items such as documents, flowers and cakes. Food delivery
services are also available. During the period from June 2018 to March 31, 2019, over 1,200 individuals have officially registered
as sell-side buddies, who completed over 600 delivery orders from June 2018 to March 31, 2019, majority orders were happened in
the third quarter of year 2018. 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 $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.”.
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 $13,000,000 (increased from $10,000,000 according to the previously amended agreement) and gross profit of $2,522,000 (up from
$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 2018, 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. Two major suppliers provided approximately 45% of our purchases of inventories for the three
months ended March 31, 2019. Four major suppliers provided 74% of our purchases of inventories for the three months ended March
31, 2018.
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 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 and Heavy
Industries are considered VIEs, 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 and Heavy Industries are consolidated in the accompanying financial statements. As a VIE, Dyeing and Heavy Industries’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.
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.
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)”. Under ASU 2016-02, lessees will be required to recognize all leases (with the exception of short-term
leases) at the commencement date including a lease liability, which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis; and a right-of-use (ROU) asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. Leases with a term of twelve months or less will be
accounted for similar to existing guidance for operating leases. In December 2017, January 2018, July 2018, December 2018 and March
2019, the FASB issued ASU 2017-13, ASU 2018-01, ASU 2018-10 & 11, ASU 2018-20 and ASU 2019-01, respectively, which contain
modifications and improvements to ASU 2016-02. The amendments provide entities with an additional (and optional) transition method
to adopt the new leases standard. Under the Optional Transition Method, an entity initially applies the new leases standard at
the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
On January 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective approach and elected to utilize the Optional
Transition Method. In addition, the Company elected the land easement transition practical expedient and did not reassess whether
an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease. The
adoption did not impact the Company’s previously reported consolidated financial statements nor did it result in a cumulative
effect adjustment to retained earnings as of January 1, 2019.
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. The Company early adopted
ASU No. 2018-07 in the fourth quarter of 2018 and there was no cumulative effect of adoption. The adoption of this ASU did not
have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
RESULTS OF OPERATIONS
Three months ended March 31, 2019 and
2018
The following table sets forth the results
of our operations for the three months ended March 31, 2019 and 2018 indicated as a percentage of revenues (dollars in thousands):
|
|
Three Months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Dollars
|
|
|
Percentage
|
|
|
Dollars
|
|
|
Percentage
|
|
Revenues
|
|
$
|
1,891
|
|
|
|
100
|
%
|
|
$
|
2,569
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
5,887
|
|
|
|
311.3
|
%
|
|
|
2,928
|
|
|
|
114.0
|
%
|
Gross loss
|
|
|
(3,996
|
)
|
|
|
(211.3
|
)%
|
|
|
(359
|
)
|
|
|
(14.0
|
)%
|
Operating expenses
|
|
|
20,918
|
|
|
|
1,106.2
|
%
|
|
|
4,422
|
|
|
|
172.1
|
%
|
Loss from operations
|
|
|
(24,914
|
)
|
|
|
(1,317.5
|
)%
|
|
|
(4,781
|
)
|
|
|
(186.1
|
)%
|
Other expense, net
|
|
|
(135
|
)
|
|
|
(7.1
|
)%
|
|
|
(103
|
)
|
|
|
(4.0
|
)%
|
Loss from continuing operations before provision for income taxes
|
|
|
(25,049
|
)
|
|
|
(1,324.6
|
)%
|
|
|
(4,884
|
)
|
|
|
(190.1
|
)%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Loss from continuing operations
|
|
|
(25,049
|
)
|
|
|
(1,324.6
|
)%
|
|
|
(4,884
|
)
|
|
|
(190.1
|
)%
|
Gain from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
|
%
|
|
|
17
|
|
|
|
0.7
|
%
|
Net loss
|
|
|
(25,049
|
)
|
|
|
(1,324.6
|
)%
|
|
|
(4,867
|
)
|
|
|
(189.5
|
)%
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
682
|
|
|
|
36.1
|
%
|
|
|
2,050
|
|
|
|
79.8
|
%
|
Comprehensive loss
|
|
$
|
(24,366
|
)
|
|
|
(1,288.5
|
)%
|
|
$
|
(2,817
|
)
|
|
|
(109.7
|
)%
|
Revenues.
For the three months
ended March 31, 2019, revenues from the sale of dyeing and finishing equipment decreased by $650,000, or 25.6%, as compared to
the three months ended March 31, 2018. We experienced an anticipated slowdown in sales of our low-emission airflow dyeing machines
as many customers had replaced older dyeing equipment with our low-emission airflow dyeing machine, and we believe that orders
for new low-emission airflow dyeing machines have slowed down in 2018 and 2017 because the remaining potential customer base included
many companies that did not have the ability to make the significant capital expenditures necessary to upgrade their equipment.
Additionally, the textile industry in China has been facing significant headwinds recently. Difficult economic conditions, a continuing
decline in oil prices and limited availability of credit in China, presented numerous challenges for our dyeing machine business.
Additionally, apparel factories and other factories have been shut down throughout the last year by China’s environmental
bureau, which has been cutting electricity and gas supply to determine compliance with China’s environmental laws. Accordingly,
our revenues decreased in the 2019 period as compared to the 2018 period. We expect that our revenues from dyeing and finishing
equipment segment will remain at or about its’ current level in the near future, although declines are possible.
During the three months ended March 31,
2019, we recognized revenues from our sharing economy business of $3,789 compared to $31,021 for the three months ended March 31,
2018.
Cost of revenues.
Cost of
revenues includes the cost of raw materials, labor, depreciation and other fixed and variable overhead costs. For the three months
ended March 31, 2019, cost of revenues was approximately $5,587,000 as compared to approximately $2,928,000 for the three months
ended March 31, 2018, an increase of $2,959,000, or 101.1%.
Gross loss and gross margin.
Our
gross loss was approximately $3,995,000 for the three months ended March 31, 2019 as compared to gross loss of approximately $359,000
for the three months ended March 31, 2018, representing gross margins of (211.3%) and (14.0%), respectively, a decrease period
over period. The decrease in our gross margin for the three months ended March 31, 2019 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, an increase in labor and raw material costs, and the increase in impairment loss on inventory.
Operating expenses.
For the
three months ended March 31, 2019, operating expenses were approximately $20,918,000 as compared to approximately $4,422,000 for
the three months ended March 31, 2018, a decrease of approximately $16,497,000, or 373.1%, and consisted of the following:
Depreciation
.
Depreciation
was approximately $694,000 and $1,052,000 for the three months ended March 31, 2019 and 2018, respectively. Depreciation for the
three months ended March 31, 2019 and 2018 was included in the following categories (dollars in thousands):
|
|
Three Months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
417
|
|
|
$
|
809
|
|
Operating expenses
|
|
|
277
|
|
|
|
243
|
|
Total
|
|
$
|
694
|
|
|
$
|
1,052
|
|
Selling, general and administrative
expenses.
Selling, general and administrative expenses totaled approximately $2,580,000 for the three months ended March
31, 2017, as compared to approximately $2,747,000 for the three months ended March 31, 2018, a decrease of approximately $167,000,
or 6.1%. Selling, general and administrative expenses for the three months ended March 31, 2019 and 2018 consisted of the following
(dollars in thousands):
|
|
Three Months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Professional fees
|
|
$
|
1,838
|
|
|
$
|
2,065
|
|
Payroll and related benefits
|
|
|
222
|
|
|
|
291
|
|
Travel and entertainment
|
|
|
69
|
|
|
|
68
|
|
Shipping
|
|
|
13
|
|
|
|
17
|
|
Other
|
|
|
438
|
|
|
|
306
|
|
Total
|
|
$
|
2,580
|
|
|
$
|
2,747
|
|
|
●
|
Professional fees for the three months ended March 31, 2019 decreased by $227,000, or 11.0%, as compared to the three months ended March 31, 2018. The decrease was primarily attributable to a decrease in stock-based consulting and service fees of approximately $274,000 incurred and paid to individuals and companies which performed consulting and service.
|
|
●
|
Payroll and related benefits for the three months ended March 31, 2019 decreased by approximately $69,000, or 23.7%, as compared to the three months ended March 31, 2018. The decrease was mainly attributable to a decrease in employee salaries and related benefits due to the decrease in executive management in Hong Kong during the three months ended March 31, 2019 as compared to the comparable period in 2018.
|
|
●
|
Travel and entertainment expense for the three months ended March 31, 2019 increased by approximately $1,000, or 2.1%, as compared to the three months ended March 31, 2018. The increase in the three months ended March 31, 2019 was primarily attributable to the increase in travel and entertainment activities related to our new business initiatives.
|
|
●
|
Shipping expense for the three months ended March 31, 2019 decreased by approximately $3,000, or 19.8%, as compared to the three months ended March 31, 2018. The decrease for the three months ended March 31, 2019 was mainly attributable to the decrease in our revenues resulting in a decrease in shipping, as compared to the three months ended March 31, 2018.
|
|
●
|
Other selling, general and administrative expenses for the three months ended March 31, 2019 increased by approximately $132,000, or 43.1%, as compared to the three months ended March 31, 2018. The increase in the three months ended March 31, 2018 was primarily attributable to an increase in share-based donation of approximately $260,000.
|
Research and development expenses
.
Research and development expenses were approximately $93,000 for the three months ended March 31, 2019, as compared to approximately
$113,000 for the three months ended March 31, 2018, a decrease of approximately $20,000, or 17.7%.
Bad debt expense
.
Bad debt
expense was approximately $4,381,000 for the three months ended March 31, 2019, as compared to approximately $1,318,000 for the
three months ended March 31, 2018, an increase of approximately $3,063,000. 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. The increase in bad debt expense,
was primarily attributable to the write off of receivable from sale of subsidiary.
Impairment expense.
At
March 31, 2019, the Company conducted an impairment assessment on property and equipment based on the guidelines established in
ASC Topic 360. Upon completion of the impairment analysis, the Company recorded impairment charges of approximately $13,586,000
for the three ended March 31, 2019.
Loss from operations.
As
a result of the factors described above, for the three months ended March 31, 2019, loss from operations amounted to approximately
$24,914,000, as compared to approximately $4,781,000 for the three months ended March 31, 2018.
Other income (expense)
.
Other
income (expense) includes interest income, interest expense, foreign currency transaction gain (loss), loss on equity method investment,
and other income. For the three months ended March 31, 2019, total other expense, net, amounted to approximately $135,000 as compared
to approximately $103,000 for the three months ended March 31, 2018, an increase of approximately $32,000, or 31.6%. The increase
in other expense, net, was primarily attributable to losses incurred in the three months ended March 31, 2019 related to interest
expense of approximately $133,000.
Income tax
provision
.
Income tax expense was $0 for the three months ended March 31, 2019 and 2018.
Loss from continuing operations.
As a result of the foregoing, our loss from continuing operations was approximately $25,049,000, or $(3.06) per share (basic
and diluted), for the three months ended March 31, 2019, as compared with loss from continuing operations of approximately $4,884,000,
or $(1.60) per share (basic and diluted), for the three months ended March 31, 2018, a change of approximately $20,165,000, or
412.9%.
Loss from discontinued operations,
net of income taxes.
Our loss from discontinued operations was $0, or $0.00 per share (basic and diluted), for the three
months ended March 31, 2019, as compared with a gain from discontinued operations of approximately $17,000, or $0.00 per share
(basic and diluted), for the three months ended March 31, 2018, a change of approximately $17,000.
The summarized operating result of discontinued
operations included our consolidated statements of operations is as follows:
|
|
Three Months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
Gross (loss) profit
|
|
|
-
|
|
|
|
-
|
|
Gain from operations – bad debt recovery
|
|
|
-
|
|
|
|
16,899
|
|
Other expense, net
|
|
|
-
|
|
|
|
-
|
|
Gain from discontinued operations before income taxes
|
|
|
-
|
|
|
|
16,899
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Gain from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
16,899
|
|
Gain on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Gain from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
16,899
|
|
Net loss.
As a result of
the foregoing, our net loss was approximately $25,049,000, or $(3.06) per share (basic and diluted), for the three months ended
March 31, 2019, as compared with net loss approximately $4,867,000, or $(1.60) per share (basic and diluted), for the three months
ended March 31, 2018, a change of approximately $20,182,000, or 414.7%.
Foreign currency translation gain.
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 gain of approximately
$682,000 for the three months ended March 31, 2019, as compared to a foreign currency translation gain of approximately $2,050,000
for the three months ended March 31, 2018. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive loss.
As a
result of our foreign currency translation loss, we had comprehensive loss for the three months ended March 31, 2019 of $ approximately
24,366,000, compared to comprehensive loss of approximately $2,817,000 for the three months ended March 31, 2018.
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 March 31, 2019 and December 31, 2018, we had cash balances of approximately $316,000 and $782,000, respectively. These funds
are located in financial institutions located as follows (dollars in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
91
|
|
|
|
28.8
|
%
|
|
$
|
7
|
|
|
|
0.9
|
%
|
Hong Kong
|
|
|
98
|
|
|
|
31.0
|
%
|
|
|
183
|
|
|
|
23.4
|
%
|
China (PRC)
|
|
|
127
|
|
|
|
40.2
|
%
|
|
|
592
|
|
|
|
75.7
|
%
|
Total cash and cash equivalents
|
|
$
|
316
|
|
|
|
100.0
|
%
|
|
$
|
782
|
|
|
|
100.0
|
%
|
The following table sets forth a summary of changes in our working
capital from December 31, 2018 to March 31, 2019 (dollars in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
Change in Working Capital
|
|
|
Percentage Change
|
|
Working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
10,415
|
|
|
$
|
21,217
|
|
|
$
|
(10,802
|
)
|
|
|
(50.9
|
)%
|
Total current liabilities
|
|
|
10,671
|
|
|
|
10,661
|
|
|
|
10
|
|
|
|
0.1
|
%
|
Working capital
|
|
$
|
(256
|
)
|
|
$
|
10,556
|
|
|
$
|
(10,812
|
)
|
|
|
(102.4
|
)%
|
Our working capital decreased by approximately
$10,812,000 to ($256,000) at March 31, 2019 from approximately $10,556,000 at December 31, 2018. This decrease in working capital
is primarily attributable to:
|
●
|
An increase in restricted cash of approximately $1,000;
|
|
●
|
An increase in assets of discontinued operations related to the sale of our subsidiary of approximately $8,000;
|
|
●
|
A decrease in short-term loan of approximately $116,000;
|
|
●
|
A decrease in account payable of approximately $267,000; and
|
|
●
|
A decrease in accrued expenses of approximately $436,000.
|
Offset by:
|
●
|
An increase in advances from customers of approximately $613,000;
|
|
●
|
An increase in due to related party of approximately $125,000;
|
|
●
|
An increase in income taxes payable of approximately $1,000;
|
|
●
|
An Increase in bank acceptance notes payable of approximately $2,000;
|
|
●
|
An Increase in liabilities of discontinued operations related to the sale of our subsidiary of approximately $51,000;
|
|
●
|
An Increase in convertible note payable of approximately 35,000;
|
|
●
|
A decrease in receivable from sale of subsidiary, of approximately $2,792,000
|
|
●
|
A decrease in accounts receivable, net of allowance for doubtful accounts, of approximately $1,198,000
|
|
●
|
A decrease in advances to suppliers of approximately $71,000;
|
|
●
|
A decrease in cash and cash equivalent of approximately $466,000;
|
|
●
|
A decrease in notes receivable of approximately $77,000;
|
|
●
|
A decrease in inventories, net of inventory reserve, of approximately $3,863,000;
|
|
●
|
A decrease in prepaid license fee – related party, of approximately $166,000; and
|
|
●
|
A decrease in prepaid expenses and other current assets of approximately $2,180,000.
|
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 by operating activities was approximately $603,000 for the three months ended March 31, 2019 as compared to net cash flow
provided by operating activities of $536,000 for the three months ended March 31, 2018, a decrease of approximately $1,139,000.
|
●
|
Net cash flow provided by operating activities for the three months ended March 31, 2019 primarily reflected our net loss of approximately $25,049,000, and add-back of non-cash items primarily consisting of depreciation of approximately $694,000, amortization of intangible assets of approximately $89,000, allowance for doubtful accounts of approximately $4,381,000, impairment loss of property and equipment of approximately 13,586,000, stock-based compensation and fees of approximately $1,355,000, stock-base donation of approximately $260,000, amortization of debt discount of approximately $70,000, amortization of license fee of approximately $166,000, inventory reserve of approximately $3,672,000 and changes in operating assets and liabilities primarily consisting of an increase in advances from customer of approximately $584,000, an increase in accounts receivable of approximately $238,000, a decrease in advances to suppliers of approximately $84,000, an increase in assets of discontinued operations of approximately $3,000, and a decrease in prepaid and other current assets of approximately $90,000, offset by a decrease in note receivable of approximately $80,000, a decrease in inventories of approximately $330,000, a decrease in accounts payable of approximately $362,000, a decrease in accrued expenses of approximately $436,000, and an increase in liabilities of discontinued operations of approximately $45,000.
|
|
●
|
Net cash flow provided by operating activities for the three months ended March 31, 2018 primarily reflected our net loss of approximately 4,867,000, and add-back of non-cash items primarily consisting of depreciation of approximately $1,052,000, amortization of intangible assets of approximately $98,000, stock-based compensation and fees of approximately $1,643,000, a non-cash bad debt allowance of approximately $1,318,000, and a non-cash bad debt recovery of approximately $17,000, loss on equity method investment of approximately $72,000, and changes in operating assets and liabilities mainly consisting of an increase in advances from customer of approximately $772,000, a decrease in accounts receivable of approximately $1,672,000, a decrease in advances to suppliers of approximately $182,000, a decrease in assets of discontinued operations of approximately $139,000, and an increase in prepaid and other current assets of $130, offset by an increase in note receivable of $269,000, an increase in inventories of approximately $486,000, a decrease in accounts payable of approximately $635,000, a decrease in accrued expenses of approximately $3,000, and a decrease in liabilities of discontinued operations of approximately $136,000, and our net loss of approximately $4,867,000.
|
Net cash flow used in investing activities
was $0 for the three months ended March 31, 2019 as compared to approximately $52,000 for the three months ended March 31, 2018.
For the three months ended March 31, 2018 net cash flow used in investing activities reflects the purchase of property and equipment
of approximately $55,000, offset by cash received from the purchase subsidiary operations of approximately $2,000.
Net cash flow
provided by financing activities was approximately $116,000 for the three months ended March 31, 2019 as compared to approximately
$310,000 for the three months ended March 31, 2018. During the three months ended March 31, 2019, we received proceeds from bank
loans of approximately $445,000, advanced from related party of approximately $157,000 and received proceeds from sale of common
stock of approximately $200,100, offset by repayments for bank loans of approximately $654,000 and payments for the decrease in
related party advances of approximately $32,000. During the three months ended March 31, 2018, we received proceeds from bank loans
of approximately $707,000, advanced from related party of approximately $367,000 and received proceeds from sale of common stock
approximately of $256,000, offset by repayments for bank loans approximately of $708,000 and payments for the decrease in bank
acceptance notes payable of approximately $314,000.
We have historically
funded our capital expenditures through cash flow provided by operations and bank loans. We intend to fund the cost 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 March
31, 2019 (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)
|
|
$
|
2,278
|
|
|
$
|
2,067
|
|
|
$
|
211
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bank acceptance notes payable
|
|
|
75
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,352
|
|
|
$
|
2,141
|
|
|
$
|
211
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(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.
|
Off-balance Sheet Arrangements
We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development
services with us.
Foreign Currency Exchange Rate Risk
We produce and sell almost all of our products
in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars.
For the three months ended March 31, 2019 and 2018, we had unrealized foreign currency translation gain of approximately $682,000
and unrealized foreign currency translation gain of approximately $2,050,000, respectively, because of changes in the exchange
rate.
Inflation
The effect of inflation on our revenue
and operating results was not significant.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for
smaller reporting companies.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As required by
Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Wanfen Xu, our chief
financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March
31, 2019.
Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit
under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to
apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of
disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based
on that evaluation, Mr. Wu and Ms. Xu concluded that, because our internal controls over financial reporting are not effective,
as described below, our disclosure controls and procedures were not effective as of March 31, 2019.
Management’s Report on Internal
Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our management identified
material weaknesses related to (i) Lack of segregation of duties within accounting functions, (ii) Lack of accounting expertise
in US GAAP, and (iii) Insufficient written policies and procedures for accounting and financial reporting with respect to the requirements
and application of both US GAAP and SEC guidelines. Our internal controls over financial reporting were not effective at March
31, 2019.
We currently have no plans to expand our
company-wide Enterprise Resource Planning (“ERP”) system during 2019 and have not implemented further ERP modules to
manage inventory and to expand existing ERP systems to other areas of our factory. Due to our working capital requirements and
the lack of local professionals with the necessary experience in implementing the ERP system, we postponed the hiring of professional
staff to implement ERP system. We have found that engaging professionals who are based outside of Wuxi is very costly and we have
not been able to find qualified personnel in the Wuxi area.
Due to our size and nature, particularly
in view of the reduced scope of our operations, segregation of all conflicting duties may not always be possible and may not be
economically feasible, and we continue to rely on third parties for a significant portion of the preparation of our financial statements.
As a result, we have not been able to take steps to improve our internal controls over financial reporting. However, to the extent
possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of
transactions will be performed by separate individuals.
A material weakness (within the meaning
of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of the company’s financial reporting.
In light of these material weaknesses,
we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the three months
ended March 31, 2019 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with the U.S. GAAP. Accordingly,
management believes that despite our material weaknesses, our consolidated financial statements for the three months ended March
31, 2019 are fairly stated, in all material respects, in accordance with the U.S. GAAP.
Changes in Internal Controls over
Financial Reporting
There were no changes (including corrective
actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that
occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER
INFORMATION
ITEM 5. EXHIBITS
* Filed herein