UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ended: September 30, 20172021
ORor
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. file number: 000-12536
China Recycling Energy Corporation
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
| Nevada | 90-0093373 | |
(State or other jurisdiction of
| ( Identification No.) |
12/4/F, Tower AC
ChangRong Cheng Yun Gu Building Keji 3rd Road, Yanta District
Xi An International Building
No. 88 Nan Guan Zheng Jie
Xi’an City, ShaanxiShaan Xi Province,
China 710075
(Address of Principal Executive Offices, Zip Code)principal executive offices)
(011) 86-29-8765-1098
(Registrant’s Telephone Number, Including Area Code: + 86-29-8765-1098telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.001 par value | CREG | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingpast 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” accelerated filer”“accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
| Emerging | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Sectionsection 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The numberAs of November 11, 2021, there were 6,926,802 shares outstanding of the registrant’s Common Stock, as of November 10, 2017 was 8,310,198.common stock outstanding.
INDEX
CHINA RECYCLING ENERGY CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Item 1.Financial Statements
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016
| SEPTEMBER 30 | DECEMBER 31 | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and equivalents | $ | 48,307,948 | $ | 47,752,353 | ||||
| Notes receivable | 1,717,669 | - | ||||||
| Accounts receivable | 13,162,772 | 12,593,340 | ||||||
| Current portion of investment in sales-type leases, net | 13,404,978 | 9,385,453 | ||||||
| Interest receivable on sales type leases | 8,049,073 | 4,621,491 | ||||||
| Prepaid expenses | 223,025 | 682,781 | ||||||
| Other receivables | 3,894,231 | 560,468 | ||||||
| Total current assets | 88,759,696 | 75,595,886 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Investment in sales-type leases, net | 100,783,320 | 101,706,978 | ||||||
| Long term investment | 789,500 | 641,897 | ||||||
| Long term deposit | - | 61,564 | ||||||
| Property and equipment, net | 12,006 | 12,558 | ||||||
| Construction in progress | 92,864,300 | 86,493,182 | ||||||
| Total non-current assets | 194,449,126 | 188,916,179 | ||||||
| TOTAL ASSETS | $ | 283,208,821 | $ | 264,512,065 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 2,736,594 | $ | 1,506,924 | ||||
| Taxes payable | 1,503,831 | 1,202,677 | ||||||
| Accrued liabilities and other payables | 1,567,381 | 1,596,580 | ||||||
| Due to related parties | 41,775 | 44,059 | ||||||
| Loans payable - current | - | 720,773 | ||||||
| Interest payable on entrusted loans | 6,046,477 | 224,090 | ||||||
| Current portion of entrusted loan payable | 50,023,354 | 47,570,996 | ||||||
| Total current liabilities | 61,919,412 | 52,866,099 | ||||||
| NONCURRENT LIABILITIES | ||||||||
| Deferred tax liability, net | 9,436,882 | 8,900,979 | ||||||
| Refundable deposit from customers for systems leasing | 1,069,777 | 1,023,497 | ||||||
| Entrusted loan payable | - | 288,309 | ||||||
| Total noncurrent liabilities | 10,506,659 | 10,212,785 | ||||||
| Total liabilities | 72,426,071 | 63,078,884 | ||||||
| CONTINGENCIES AND COMMITMENTS | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized, 8,310,198 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 8,310 | 8,310 | ||||||
| Additional paid in capital | 111,796,813 | 111,789,166 | ||||||
| Statutory reserve | 14,838,561 | 14,473,924 | ||||||
| Accumulated other comprehensive income | (1,621,265 | ) | (10,544,426 | ) | ||||
| Retained earnings | 86,177,041 | 85,838,638 | ||||||
| Total Company stockholders’ equity | 211,199,460 | 201,565,612 | ||||||
| Noncontrolling interest | (416,709 | ) | (132,431 | ) | ||||
| Total equity | 210,782,751 | 201,433,181 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 283,208,821 | $ | 264,512,065 | ||||
| SEPTEMBER 30, 2021 | DECEMBER 31, 2020 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 149,522,088 | $ | 107,804,013 | ||||
| Accounts receivable, net | - | 308,677 | ||||||
| VAT receivable | 186,415 | - | ||||||
| Prepaid expenses | 38,592 | 55,420 | ||||||
| Other receivables | 881,835 | 35,687 | ||||||
| Total current assets | 150,628,930 | 108,203,797 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Long term deposit | 16,901 | 16,799 | ||||||
| Operating lease right-of-use assets, net | 145,586 | - | ||||||
| Fixed assets, net | 6,266 | 6,228 | ||||||
| Asset subject to buyback | - | 28,910,696 | ||||||
| Total non-current assets | 168,753 | 28,933,723 | ||||||
| TOTAL ASSETS | $ | 150,797,683 | $ | 137,137,520 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 76,537 | $ | 76,074 | ||||
| Taxes payable | 2,443,562 | 3,145,612 | ||||||
| Accrued interest on notes | 221,996 | 18,968 | ||||||
| Notes payable, net of unamortized OID of 275,605 and $144,355, respectively | 7,133,323 | 3,005,645 | ||||||
| Accrued liabilities and other payables | 729,781 | 726,696 | ||||||
| Operating lease liability | 65,941 | - | ||||||
| Due to related parties | 28,418 | 28,440 | ||||||
| Interest payable on entrusted loans | - | 10,144,228 | ||||||
| Entrusted loan payable | - | 21,896,744 | ||||||
| Total current liabilities | 10,699,558 | 39,042,407 | ||||||
| NONCURRENT LIABILITIES | ||||||||
| Income tax payable | 5,174,625 | 5,174,625 | ||||||
| Operating lease liability | 62,744 | - | ||||||
| Long term payable | 462,577 | 459,777 | ||||||
| Entrusted loan payable | 308,385 | 306,518 | ||||||
| Total noncurrent liabilities | 6,008,331 | 5,940,920 | ||||||
| Total liabilities | 16,707,889 | 44,983,327 | ||||||
| CONTINGENCIES AND COMMITMENTS (NOTE 15 & 16) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized, 6,729,030 and 3,177,050 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 6,729 | 3,177 | ||||||
| Additional paid in capital | 159,591,760 | 119,748,999 | ||||||
| Statutory reserve | 15,174,627 | 15,155,042 | ||||||
| Accumulated other comprehensive income | 975,955 | 273,440 | ||||||
| Accumulated deficit | (41,659,277 | ) | (43,026,465 | ) | ||||
| Total Company stockholders’ equity | 134,089,794 | 92,154,193 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 150,797,683 | $ | 137,137,520 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME (LOSS)LOSS
(UNAUDITED)
| NINE MONTHS ENDED SEPTEMBER 30, | THREE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | ||||||||||||||||
| Sales of systems | $ | - | $ | - | $ | - | $ | - | ||||||||
| Contingent rental income | - | - | - | - | ||||||||||||
| Total revenue | - | - | - | - | ||||||||||||
| Cost of sales | ||||||||||||||||
| Cost of systems and contingent rental income | - | - | - | - | ||||||||||||
| Gross profit | - | - | - | - | ||||||||||||
| Interest income on sales-type leases | 6,062,347 | 10,945,411 | 1,731,336 | 2,286,948 | ||||||||||||
| Total operating income | 6,062,347 | 10,945,411 | 1,731,336 | 2,286,948 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 581,308 | 1,153,894 | 242,007 | 299,110 | ||||||||||||
| Total operating expenses | 581,308 | 1,153,894 | 242,007 | 299,110 | ||||||||||||
| Income from operations | 5,481,039 | 9,791,517 | 1,489,329 | 1,987,838 | ||||||||||||
| Non-operating income (expenses) | ||||||||||||||||
| Interest income | 106,764 | 98,790 | 35,887 | 35,288 | ||||||||||||
| Interest expense | (3,986,233 | ) | (5,040,022 | ) | (1,263,491 | ) | (1,658,033 | ) | ||||||||
| Loss on sale of construction in progress of Xuzhou Zhongtai | - | (2,822,679 | ) | - | - | |||||||||||
| Loss on systems repurchase from Yida | - | (417,952 | ) | - | - | |||||||||||
| Other income | 9,389 | 279,200 | 1,591 | 202,782 | ||||||||||||
| Total non-operating expenses, net | (3,870,080 | ) | (7,902,663 | ) | (1,226,013 | ) | (1,419,963 | ) | ||||||||
| Income before income tax | 1,610,959 | 1,888,854 | 263,316 | 567,875 | ||||||||||||
| Income tax expense (benefit) | 1,179,602 | (861,811 | ) | 397,636 | 110,957 | |||||||||||
| Income (loss) before noncontrolling interest | 431,357 | 2,750,665 | (134,320 | ) | 456,918 | |||||||||||
| Less: loss attributable to noncontrolling interest | (271,683 | ) | (227,126 | ) | (93,428 | ) | (79,921 | ) | ||||||||
| Net income (loss) attributable to China Recycling Energy Corporation | 703,040 | 2,977,791 | (40,892 | ) | 536,839 | |||||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translation gain (loss) attributable to China Recycling Energy Corporation | 8,923,161 | (5,899,631 | ) | 4,290,726 | (1,400,319 | ) | ||||||||||
| Foreign currency translation gain (loss) attributable to noncontrolling interest | (12,595 | ) | (5,450 | ) | (6,909 | ) | (27,005 | ) | ||||||||
| Comprehensive income (loss) attributable to China Recycling Energy Corporation | $ | 9,626,201 | $ | (2,921,840 | ) | $ | 4,249,834 | $ | (863,480 | ) | ||||||
| Comprehensive loss attributable to noncontrolling interest | $ | (284,278 | ) | $ | (232,576 | ) | $ | (100,337 | ) | $ | (106,926 | ) | ||||
| Basic and diluted weighted average shares outstanding | 8,310,198 | 8,310,198 | 8,310,198 | 8,310,198 | ||||||||||||
| Basic and diluted earnings per share | $ | 0.08 | $ | 0.36 | $ | 0.00 | $ | 0.06 | ||||||||
| NINE MONTHS ENDED SEPTEMBER 30, | THREE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Contingent rental income | $ | - | $ | - | $ | - | $ | - | ||||||||
| Interest income on sales-type leases | - | - | - | - | ||||||||||||
| Total operating income | - | - | - | - | ||||||||||||
| Operating expenses | ||||||||||||||||
| Bad debts (reversal) | (34,581 | ) | (1,659,101 | ) | - | (9,479 | ) | |||||||||
| General and administrative | 798,773 | 477,358 | 380,040 | 86,494 | ||||||||||||
| Total operating (income) expenses | 764,192 | (1,181,743 | ) | 380,040 | 77,015 | |||||||||||
| Income (loss) from operations | (764,192 | ) | 1,181,743 | (380,040 | ) | (77,015 | ) | |||||||||
| Non-operating income (expenses) | ||||||||||||||||
| Loss on note conversion | (61,155 | ) | (496,853 | ) | (58,436 | ) | (298,523 | ) | ||||||||
| Interest income | 302,426 | 124,305 | 109,269 | 51,688 | ||||||||||||
| Interest expense | (1,212,469 | ) | (1,037,183 | ) | (165,854 | ) | (340,155 | ) | ||||||||
| Gain on termination of buy-back agreement of Chengli project | 3,156,138 | - | 179 | - | ||||||||||||
| Other expenses, net | (121,026 | ) | (47,903 | ) | (50,790 | ) | (7,275 | ) | ||||||||
| Total non-operating income (expenses), net | 2,063,914 | (1,457,634 | ) | (165,632 | ) | (594,265 | ) | |||||||||
| Income (loss) before income tax | 1,299,722 | (275,891 | ) | (545,672 | ) | (671,280 | ) | |||||||||
| Income tax (benefit) expense | (87,051 | ) | - | 10,902 | - | |||||||||||
| Net income | 1,386,773 | (275,891 | ) | (556,574 | ) | (671,280 | ) | |||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translation income (loss) | 702,515 | 2,173,569 | (565,170 | ) | 3,456,157 | |||||||||||
| Comprehensive income (loss) | $ | 2,089,288 | $ | 1,897,678 | $ | (1,121,744 | ) | $ | 2,784,877 | |||||||
| Weighted average shares used for computing basic and diluted loss per share | 5,175,164 | 2,381,180 | 6,615,759 | 2,687,609 | ||||||||||||
| Basic and diluted net income per share | 0.27 | $ | (0.12 | ) | $ | (0.08 | ) | $ | (0.25 | ) | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Income including noncontrolling interest | $ | 431,357 | $ | 2,750,665 | ||||
| Adjustments to reconcile income including noncontrolling interest to net cash provided by (used in) operating activities: | ||||||||
| Changes in bad debt allowance | 61,779 | - | ||||||
| Depreciation and amortization | 1,093 | 3,667 | ||||||
| Stock option expense | 7,647 | - | ||||||
| Investment income (loss) | (115,763 | ) | 300,957 | |||||
| Changes in deferred tax | 130,260 | (2,073,235 | ) | |||||
| Loss on sales of construction in progress of Xuzhou Zhongtai | - | 2,765,716 | ||||||
| Changes in assets and liabilities: | ||||||||
| Interest receivable on sales type leases | (3,142,199 | ) | (2,785,713 | ) | ||||
| Collection of principal on sales type leases | 1,819,850 | 19,264,234 | ||||||
| Prepaid expenses | 478,981 | (68,773 | ) | |||||
| Accounts receivable | - | (10,106,830 | ) | |||||
| Other receivables | (3,167,054 | ) | (344,004 | ) | ||||
| Notes receivable | (1,676,890 | ) | - | |||||
| Construction in progress | (2,401,757 | ) | 20,612,058 | |||||
| Accounts payable | 1,133,988 | 1,066,424 | ||||||
| Taxes payable | 240,914 | (175,134 | ) | |||||
| Interest payable on entrusted loan | 5,674,264 | (49,858 | ) | |||||
| Accrued liabilities and other payables | (364,368 | ) | (727,410 | ) | ||||
| Net cash provided by (used in) operating activities | (887,898 | ) | 30,432,764 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Changes of restricted cash | - | 1,101,308 | ||||||
| Net cash provided by investing activities | - | 1,101,308 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of loans | (735,478 | ) | (30,473,533 | ) | ||||
| Repayment of notes payable | - | (990,277 | ) | |||||
| Net cash used in financing activities | (735,478 | ) | (31,463,810 | ) | ||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS | 2,178,971 | (1,139,134 | ) | |||||
| NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS | 555,595 | (1,068,872 | ) | |||||
| CASH AND EQUIVALENTS, BEGINNING OF PERIOD | 47,752,353 | 41,749,388 | ||||||
| CASH AND EQUIVALENTS, END OF PERIOD | $ | 48,307,948 | $ | 40,680,516 | ||||
| Supplemental cash flow data: | ||||||||
| Income tax paid | $ | 1,433,497 | $ | 1,148,757 | ||||
| Interest paid | $ | 14,363 | $ | 7,888,466 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(UNAUDITED)
| NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | 1,386,773 | $ | (275,891 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Amortization of OID and debt issuing costs of notes | 118,750 | 45,833 | ||||||
| Stock compensation expense | 223,438 | 10,999 | ||||||
| Operating lease expenses | 50,812 | 49,034 | ||||||
| Bad debts expense (reversal) | (34,581 | ) | (1,659,101 | ) | ||||
| Loss on note conversion | 61,155 | 496,853 | ||||||
| Interest expense | 818,914 | - | ||||||
| Gain on termination of buy-back agreement of Chengli project | (3,156,138 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Collection of principal and interest on sales type leases for Pucheng systems | - | 13,959,334 | ||||||
| Accounts receivable | 345,808 | 43,765,943 | ||||||
| Prepaid expenses | 19,253 | (8,339 | ) | |||||
| Other receivables | 1,981 | (3,141 | ) | |||||
| Advance to suppliers | (850,000 | ) | - | |||||
| VAT receivable | (186,817 | ) | - | |||||
| Taxes payable | (707,917 | ) | (2,133,778 | ) | ||||
| Payment of lease liability | (67,750 | ) | (57,442 | ) | ||||
| Interest payable on entrusted loan | - | 962,052 | ||||||
| Accrued liabilities and other payables | 392,401 | 46,968 | ||||||
| Net cash provided by (used in) operating activities | (1,583,918 | ) | 55,199,324 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Issuance of notes payable | 5,000,000 | - | ||||||
| Issuance of common stock | 37,561,720 | 497,187 | ||||||
| Net cash provided by financing activities | 42,561,720 | 497,187 | ||||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH | 740,273 | 1,869,350 | ||||||
| NET INCREASE IN CASH | 41,718,075 | 57,565,861 | ||||||
| CASH, BEGINNING OF PERIOD | 107,804,013 | 16,221,297 | ||||||
| CASH, END OF PERIOD | $ | 149,522,088 | $ | 73,787,158 | ||||
| Supplemental cash flow data: | ||||||||
| Income tax paid | $ | 197,296 | $ | - | ||||
| Interest paid | $ | - | $ | - | ||||
| Supplemental disclosure of non-cash operating activities Repayment of entrusted loan resulting from termination of buy-back option for Chengli project | $ | 29,149,705 | $ | - | ||||
| Transfer of Tian’an project from construction in progress to accounts receivable | $ | - | $ | 23,771,386 | ||||
| Adoption of ASC 842-right-of-use asset | $ | 191,200 | $ | - | ||||
| Adoption of ASC 842-operating lease liability | $ | 191,200 | $ | - | ||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Conversion of notes into common shares | $ | 2,000,000 | $ | 1,442,086 | ||||
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
| Common Stock | Paid in | Statutory | Other Comprehensive | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | (Loss) / Income | Deficit | Total | ||||||||||||||||||||||
| Balance at December 31, 2020 | 3,177,050 | $ | 3,177 | $ | 119,748,999 | $ | 15,155,042 | $ | 273,440 | $ | (43,026,465 | ) | $ | 92,154,193 | ||||||||||||||
| Net loss | - | - | - | - | - | (277,224 | ) | (277,224 | ) | |||||||||||||||||||
| Shares to be issued | - | - | 38,253,041 | - | - | - | 38,253,041 | |||||||||||||||||||||
| Transfer to Statutory Reserves | - | - | - | 1,538 | - | (1,538 | ) | - | ||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | (1,140,163 | ) | - | (1,140,163 | ) | |||||||||||||||||||
| Balance at March 31, 2021 | 3,177,050 | 3,177 | 158,002,040 | 15,156,580 | (866,723 | ) | (43,305,227 | ) | 128,989,847 | |||||||||||||||||||
| Net income | - | - | - | - | - | 2,220,571 | 2,220,571 | |||||||||||||||||||||
| Conversion of long-term notes into common shares | 54,348 | 54 | 502,665 | - | - | - | 502,719 | |||||||||||||||||||||
| Issuance of common stock for equity financing | 3,320,000 | 3,320 | (3,320 | ) | - | - | - | - | ||||||||||||||||||||
| Return of shares issued to CEO for equity financing | (60,000 | ) | (60 | ) | (691,260 | ) | - | - | - | (691,320 | ) | |||||||||||||||||
| Transfer to Statutory Reserves | - | - | - | 14,774 | - | (14,774 | ) | - | ||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | 2,407,848 | - | 2,407,848 | |||||||||||||||||||||
| Balance at June 30, 2021 | 6,491,398 | 6,491 | 157,810,125 | 15,171,354 | 1,541,125 | (41,099,430 | ) | 133,429,665 | ||||||||||||||||||||
| Net income | - | - | - | - | - | (556,574 | ) | (556,574 | ) | |||||||||||||||||||
| Conversion of long-term notes into common shares | 206,382 | 207 | 1,558,228 | - | - | - | 1,558,435 | |||||||||||||||||||||
| Stock compensation expense | 31,250 | 31 | 223,407 | - | - | - | 223,438 | |||||||||||||||||||||
| Transfer to statutory reserves | - | - | - | 3,273 | - | (3,273 | ) | - | ||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | (565,170 | ) | - | (565,170 | ) | |||||||||||||||||||
| Balance at September 30, 2020 | 6,729,030 | $ | 6,729 | $ | 159,591,760 | $ | 15,174,627 | $ | 975,955 | $ | (41,659,277 | ) | $ | 134,089,794 | ||||||||||||||
| Common Stock | Paid in | Statutory | Other Comprehensive | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | Loss | Deficit | Total | ||||||||||||||||||||||
| Balance at December 31, 2019 | 2,032,721 | $ | 2,033 | $ | 116,682,374 | $ | 14,525,712 | $ | (6,132,614 | ) | $ | (46,447,959 | ) | $ | 78,629,546 | |||||||||||||
| Net loss | - | - | - | - | - | (598,551 | ) | (598,551 | ) | |||||||||||||||||||
| Issuance of common stock for stock compensation | 3,333 | 3 | 10,996 | - | - | - | 10,999 | |||||||||||||||||||||
| Conversion of long-term notes into common shares | 143,333 | 143 | 533,024 | - | - | - | 533,167 | |||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | (1,341,276 | ) | - | (1,341,276 | ) | |||||||||||||||||||
| Balance at March 31, 2020 | 2,179,387 | 2,179 | 117,226,394 | 14,525,712 | (7,473,890 | ) | (47,046,510 | ) | 77,233,885 | |||||||||||||||||||
| Conversion of long-term notes into common shares | 304,710 | 305 | 769,444 | - | - | - | 769,749 | |||||||||||||||||||||
| Round-up of fractional shares due to reverse split | 9,100 | 9 | (9 | ) | - | - | - | - | ||||||||||||||||||||
| Net income | - | - | - | - | - | 993,940 | 993,940 | |||||||||||||||||||||
| Transfer to statutory reserves | - | - | - | 140,494 | - | (140,494 | ) | - | ||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | 58,688 | - | 58,688 | |||||||||||||||||||||
| Balance at June 30, 2020 | 2,493,197 | 2,493 | 117,995,829 | 14,666,206 | (7,415,202 | ) | (46,193,064 | ) | 79,056,262 | |||||||||||||||||||
| Conversion of long-term notes into common shares | 242,699 | 243 | 635,779 | - | - | - | 636,022 | |||||||||||||||||||||
| Shares issued for equity financing | 265,250 | 265 | 496,922 | - | - | - | 497,187 | |||||||||||||||||||||
| Net income | - | - | - | - | - | (671,280 | ) | (671,280 | ) | |||||||||||||||||||
| Transfer to statutory reserves | - | - | - | 1,198 | - | (1,198 | ) | - | ||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | 3,456,157 | 3,456,157 | ||||||||||||||||||||||
| Balance at September 30, 2020 | 3,001,146 | $ | 3,001 | $ | 119,128,530 | $ | 14,667,404 | $ | (3,959,045 | ) | $ | (46,865,542 | ) | $ | 82,974,348 | |||||||||||||
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20172021 (UNAUDITED) AND DECEMBER 31, 20162020
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China Recycling Energy Corporation (the “Company” or “CREG”) wasis incorporated on May 8, 1980 as Boulder Brewing Company under the laws of the State of Colorado. On September 6, 2001, the Company changed its state of incorporation to the Nevada. In 2004, the Company changed its name from Boulder Brewing Company to China Digital Wireless, Inc. and on March 8, 2007, again changed its name from China Digital Wireless, Inc. to its current name, China Recycling Energy Corporation.in Nevada state. The Company, through its subsidiaries, provides energy saving solutions and services, including selling and leasing energy saving systems and equipment to customers, and project investment investment management, economic information consulting, technical services, financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial leasing transactions in the Peoples Republic of China (“PRC”).
The Company’s organizational chart as of September 30, 2021 is as follows:
Erdos TCH – Joint Venture
On April 14, 2009, the Company formed a joint venture (the “JV”) with Erdos Metallurgy Co., Ltd. (“Erdos”) to recycle waste heat from Erdos’ metal refining plants to generate power and steam to be sold back to Erdos. The name of the JV was Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd. (“Erdos TCH”) with a term of 20 years. Total investment for the project was estimated at $79 million (RMB 500 million) with an initial investment of $17.55 million (RMB 120 million). Erdos contributed 7% of the total investment of the project, and Xi’an TCH Energy Technology Co., Ltd. (“Xi’an TCH”) contributed 93%. According to the parties’ agreement on profit distribution, Xi’an TCH and Erdos will receive 80% and 20%, respectively, of the profit from the JV until Xi’an TCH receives the complete return of its investment. Xi’an TCH and Erdos will then receive 60% and 40%, respectively, of the profit from the JV. On June 15, 2013, Xi’an TCH and Erdos entered into a share transfer agreement, pursuant to which Erdos sold its 7% ownership interest in the JV to Xi’an TCH for $1.29 million (RMB 8 million), plus certain accumulated profits as described below.profits. Xi’an TCH paid the $1.29 million in July 2013 and, as a result, became the sole stockholder of the JV. In addition, Xi’an TCH paid Erdos accumulated profits from inception up to June 30, 2013 in accordance with a supplementary agreement entered on August 6, 2013. In August 2013, Xi’an TCH paid 20% of the accumulated profit (calculated under PRC GAAP) of $226,000 to Erdos. Erdos TCH currently has two power generation systems in Phase I with a total of 18 MW power capacity, and three power generation systems in Phase II with a total of 27 MW power capacity. On April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement, effective on May 1, 2016, whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and chargesstarted to charge Erdos based on actual electricity sold at RMB 0.30 / KWH. The selling price of each KWH will beis determined annually based on prevailing market conditions. Since May 2019, Erdos TCH has ceased its operations due to renovations and furnace safety upgrades of Erdos, and the Company initially expected the resumption of operations in July 2020, but the resumption of operations was further delayed due to government’s mandate for Erdos to significantly lower its energy consumption per unit of GDP. Erdos and the municipal government are currently under discussion for seeking the solution of achieving the energy saving target. During this period, Erdos will compensate Erdos TCH RMB 1 million ($145,460) per month, until operations resume. The Company has not recognized any income due to the uncertainty of collection.
Pucheng Biomass Power Generation Projects
On June 29, 2010, Xi’anIn addition, Erdos TCH entered into a Biomass Power Generation (“BMPG”) Project Lease Agreement with PuchengXinHeng Yuan Biomass Power Generationhas 30% ownership in DaTangShiDai (BinZhou) Energy Savings Technology Co., Ltd. (“Pucheng”BinZhou Energy Savings”), a limited liability company30% ownership in DaTangShiDai DaTong Recycling Energy Technology Co., Ltd. (“DaTong Recycling Energy”), and 40% ownership in DaTang ShiDai TianYu XuZhou Recycling Energy Technology Co, Ltd. (“TianYu XuZhou Recycling Energy”). These companies were incorporated in China. Under this lease agreement, Xi’an TCH leased a set of 12 MW BMPG systems to Pucheng at a minimum of $279,400 (RMB 1,900,000) per month for 15 years.2012 but there have not been any operations since then nor has any registered capital contribution been made.
On September 11, 2013, Xi’an TCH entered into a BMPG Asset Transfer Agreement (the “Pucheng Transfer Agreement”) with Pucheng. The Pucheng Transfer Agreement provided for the sale by Pucheng to Xi’an TCH of a set of 12 MW BMPG systems with completion of system transformation for RMB 100 million ($16.48 million) in the form of 8,766,547 shares of common stock of the Company at $1.87 per share. These shares were issued to Pucheng on October 29, 2013. Also on September 11, 2013, Xi’an TCH entered into a BMPG Project Lease Agreement with Pucheng (the “Pucheng Lease”). Under the Pucheng Lease, Xi’an TCH leases this same set of 12 MW BMPG system to Pucheng, and combined this lease with the lease for the 12 MW BMPG station of Pucheng Phase I project, under a single lease to Pucheng for RMB 3.8 million ($0.63 million) per month (the “Pucheng Phase II Project”). The term for the combined lease is from September 2013 to June 2025. The lease agreement for the 12 MW station from Pucheng Phase I project terminated upon the effective date of the Pucheng Lease. The ownership of two 12 MW BMPG systems will transfer to Pucheng at no additional charge when the Pucheng Lease expires.
Shenqiu Yuneng Biomass Power Generation Projects
On May 25, 2011, Xi’an TCH entered into a Letter of Intent with ShenqiuYuNeng Thermal Power Co., Ltd. (“Shenqiu”) to reconstruct and transform a Thermal Power Generation System owned by Shenqiu into a 75T/H BMPG System for $3.57 million (RMB 22.5 million). The project commenced in June 2011 and was completed in the third quarter of 2011. On September 28, 2011, Xi’an TCH entered into a BMPG Asset Transfer Agreement with Shenqiu (the “Shenqiu Transfer Agreement”). Pursuant to the Shenqiu Transfer Agreement, Shenqiu sold Xi’an TCH a set of 12 MW BMPG systems (after Xi’an TCH converted the system for BMPG purposes). As consideration for the BMPG systems, Xi’an TCH agreed to pay Shenqiu $10,937,500 (RMB 70 million) in cash in three installments within six months upon the transfer of ownership of the systems. By the end of 2012, all the consideration was paid. On September 28, 2011, Xi’an TCH and Shenqiu also entered into a BMPG Project Lease Agreement (the “2011 Shenqiu Lease”). Under the 2011 Shenqiu Lease, Xi’an TCH agreed to lease a set of 12 MW BMPG systems to Shenqiu at a monthly rental rate of $286,000 (RMB 1,800,000) for 11 years. Upon expiration of the 2011 Shenqiu Lease, ownership of this system will transfer from Xi’an TCH to Shenqiu at no additional cost. In connection with the 2011 Shenqiu Lease, Shenqiu paid one month’s rent as a security deposit to Xi’an TCH, in addition to providing personal guarantees.
On October 8, 2012, Xi’an TCH entered into a Letter of Intent for technical reformation of Shenqiu Project Phase II with Shenqiu for technical reformation to enlarge the capacity of the Shenqiu Project Phase I (the “Shenqiu Phase II Project”). The technical reformation involved the construction of another 12 MW BMPG system. After the reformation, the generation capacity of the power plant increased to 24 MW. The project commenced on October 25, 2012 and was completed during the first quarter of 2013. The total cost of the project was $11.1 million (RMB 68 million). On March 30, 2013, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”). Under the 2013 Shenqiu Lease, Xi’an TCH agreed to lease the second set of 12 MW BMPG systems to Shenqiu for $239,000 (RMB 1.5 million) per month for 9.5 years. When the 2013 Shenqiu Lease expires, ownership of this system will transfer from
As repayment for a loan made by Xi’an TCHZhonghong to Shenqiu at no additional cost.
Yida Coke Oven Gas Power Generation Projects
On June 28, 2014, Xi’an TCH entered into an Asset Transfer Agreement (the “Transfer Agreement”) with Qitaihe City Boli Yida Coal Selection Co., Ltd. (“Yida”), a limited liability company incorporated in China. The Transfer Agreement provided for the sale to Xi’an TCH of a 15 MW coke oven gas power generation station, which had been converted from a 15 MW coal gangue power generation station from Yida. As consideration for the Transfer Asset, Xi’an TCH was to pay to Yida RMB 115 million ($18.69 million) in the form of the common stock shares of the Company at the average closing price per share of the Stock for the 10 trading days prior to the closing date of the transaction ($2.27 per share). The exchange rate between the US Dollar and Chinese RMB in connection with the stock issuance is the rate equal to the middle rate published by the People’s Bank of China on the closing date of the assets transfer. Accordingly, the Company issued 8,233,779 shares (the “Shares”) for the Yida 15 MW coke oven gas power generation station, the fair value of 8,233,779 shares was $14.49 million based on the stock price at the agreement date ($1.76 per share), and was the cost of the power generation station.
On June 28, 2014, Xi’an TCH also entered into a Coke Oven Gas Power Generation Project Lease Agreement (the “Lease Agreement”) with Yida. Under the Lease Agreement, Xi’an TCH leased the Transfer Asset to Yida for RMB 3 million ($0.49 million) per month, and the term of the lease is from June 28, 2014 to June 27, 2029. Yida provided an RMB 3 million ($0.49 million) security deposit (without interest) for the lease. Xi’an TCH will transfer the Transfer Asset back to Yida at no cost at the end of the lease term.
On June 22, 2016, Xi’an TCH entered into a Coal Oven Gas Power Generation Project Repurchase Agreement (the “Repurchase Agreement”) with Yida. Under the Repurchase Agreement, Xi’an TCH agreed to transfer to Yida all the project assets for RMB 112,000,000 ($16.89 million) (the “Transfer Price”) with Yida’s retention of ownership of the Shares. Yida agreed to make the following payments: (i) the outstanding monthly leasing fees for April and May 2016 in total of RMB 6,000,000 ($0.90 million) to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; (ii) a payment of RMB 50,000,000 ($7.54 million) of the Transfer Price to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; and (iii) a payment of the remaining RMB 62,000,000 ($9.35 million) of the Transfer Price to Xi’an TCH within 15 business days from the execution of the Repurchase Agreement. Under the Repurchase Agreement, ownership of the project assets will transfer from Xi’an TCH to Yida within 3 business days after Xi’an TCH receives the full Transfer Price and the outstanding monthly leasing fees. In July 2016, the Company received the full payment of the Transfer Price and title to the system was transferred at that time. The Company recorded a $0.42 million loss from this transaction in 2016.
The Fund Management Company
On June 25, 2013, Xi’an TCH and HongyuanHuifu Venture Capital Co. Ltd. (“HongyuanHuifu”) jointly established Hongyuan Recycling Energy Investment Management Beijing Co., Ltd. (the “Fund Management Company”) with registered capital of RMB 10 million ($1.45 million). Xi’an TCH made an initial capital contribution of RMB 4 million ($650,000) and has a 40% ownership interest in the Fund Management Company. With respect to the Fund Management Company, voting rights and dividend rights are allocated 80% and 20% between HongyuanHuifu and Xi’an TCH, respectively.
The Fund Management Company is the general partner of Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF Fund”“HYREF”) on January 10, 2019 (see further discussion in Note 8); on January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai (or “Mr. Bai”), a limited liability partnership established on July 18, 2013resident of China, entered into a Projects Transfer Agreement (the “Agreement”), pursuant to which Xi’an TCH transferred two BMGP in Beijing. The Fund Management Company made an initial capital contribution ofShenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB 5 million127,066,000 ($830,000) to the HYREF Fund. An initial total of RMB 460 million ($7718.55 million) was fully subscribed by all partners. As consideration for the transfer of the Shenqiu Phase I and II Projects to Mr. Bai (Note 8), Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”) to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”) as repayment for a loan made by Xi’an Zhonghong to HYREF Fund.on January 10, 2019. The HYREF Fund has three limited partners: (1) China Orient Asset Managementtransfer of the projects was completed on February 15, 2019. The Company recorded $208,359 loss from the transfer during the year ended December 31, 2019. Xi’an Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd., which made an initial capital contribution of RMB 280 million ($46.67 million) to the HYREF Fund and is a preferred limited partner; (2) HongyuanHuifu, which made an initial capital contribution of RMB 100 million ($16.67 million) to the HYREF Fund and is an ordinary limited partner; and (3) the Company’s wholly-owned subsidiary, Xi’an TCH, which made an initial capital contribution of RMB 75 million ($12.5 million) to the HYREF Fund and is a secondary limited partner. The term of the HYREF Fund’s partnership is six years from the date of its establishment, expiring July 18, 2019. The term is four years from the date of contributionLtd for the preferred limited partner,repayment of Shenqiu system and four years fromHuayu system. However, Xi’an Hanneng was not able to obtain all the dateHuaxin shares due to halted trading of contributionHuaxin stock by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr. Bai and all the related parties therefore agreed to have Mr. Bai instead make a payment in cash for the ordinary limited partner. The total sizetransfer price of the HYREF Fund is RMB 460 million ($76.66 million)Shenqiu (see Note 8 for detail). The HYREF Fund was formed for the purpose of investing in Xi’an Zhonghong New Energy Technology Co., Ltd., a 90% owned subsidiary of Xi’an TCH, for the construction of two coke dry quenching (“CDQ”) WHPG stations with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”) and one CDQ WHPG station with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”).
Chengli Waste Heat Power Generation Projects
On July 19, 2013, Xi’an TCH formed a new company, “Xi’an Zhonghong New Energy Technology Co., Ltd.” (“Zhonghong”), with registered capital of RMB 30 million ($4.85 million). Xi’an TCH paid RMB 27 million ($4.37 million) andwhich it owns 90% of Zhonghong.Zhonghong, with HYREF owning the other 10%. Zhonghong is engaged to provide energy saving solution and services, including constructing, selling and leasing energy saving systems and equipment to customers. On December 29, 2018, Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF transferred its 10% ownership in Zhonghong to Shanghai TCH for RMB 3 million ($0.44 million). The transfer was completed on January 22, 2019. The Company owns 100% of Xi’an Zhonghong after the transaction.
On July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power Generation Project) with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”). The parties entered into a supplement agreement on July 26, 2013. Pursuant to these agreements, Zhonghong will design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli will pay energy saving fees (the “Chengli Project”).
On December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli will contract CDQ WHPG station (‘the operationStation”) as the repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF. Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai also agreed to a Buy Back Agreement for the Station when certain conditions are met (see Note 8). The transfer of the systemStation was completed on January 22, 2019, at which time the Company recorded a $624,133 loss from this transfer. However, because the loan was not deemed repaid due to a third-party contractor that is mutually agreed to by Zhonghong. In addition, Chengli will provide the landbuyback provision (See Note 8 for detail), the CDQ systemCompany kept the loan and CDQ WHPG system at no cost to Zhonghong. The term of the Agreements is for 20 years. The first 800 million watt hours generated by the Chengli Project will be charged at RMB 0.42 ($0.068) per kilowatt hour (excluding tax); thereafter,project recognized in its consolidated financial statements (“CFS”) until April 9, 2021. The Buy Back Agreement was terminated on April 9, 2021, HYREF did not execute the energy saving fee will be RMB 0.20 ($0.036) per kilowatt hour (excluding tax). The operating time shall be based upon an average 8,000 hours annually. Ifbuy-back option and did not ask for any additional payment from the operating time is lessbuyers other than 8,000 hours per year due to a reason attributable to Chengli, then time charged shall be 8,000 hours a year, and if it is less than 8,000 hours due to a reason attributable to Zhonghong, then it shall be charged at actual operating hours. The construction of the Chengli Project was completed in the second quarter of 2015 and the project successfully completed commissioning tests in the first quarter of 2017. The Chengli Project is now operational, but will not begin operations until the Company receives the required power generating license, which the Company anticipates receiving in the fourth quarter of 2017. When operations begin, Chengli shall ensure its coking production line works properly and that working hours for the CDQ system are at least 8,000 hours per year, and Zhonghong shall ensure that working hours forkeeping the CDQ WHPG system are at least 7,200 hours per year.station.
On July 22, 2013, Zhonghong entered into an Engineering, Procurement and Construction (“EPC”) General Contractor Agreement for the Boxing County Chengli Gas Supply Co., Ltd. CDQ Power Generation Project (the “Chengli Project”) with Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong, as the owner of the Chengli Project, contracted EPC services for a CDQ system and a 25 MW CDQ WHPG system for Chengli from Huaxin. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary services to complete the Huaxin Project and ensure the CDQ system and CDQ WHPG system for Chengli meet the inspection and acceptance requirements and work normally. The Chengli Project is a turn-key project where Huaxin is responsible for monitoring the quality, safety, duration and cost of the Chengli Project. The total contract price is RMB 200 million ($33.34 million), which includes all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety costs.
Tianyu Waste Heat Power Generation Project
On July 19, 2013, Zhonghong entered into a Cooperative Agreement (the “Tianyu Agreement”) for Energy Management of CDQ and CDQ WHPG ProjectProjects with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”). Pursuant to the Tianyu Agreement, Zhonghong will design, build, operate and maintain two sets of 25 MW CDQ systems and CDQ WHPG systems for two subsidiaries of Tianyu – Xuzhou Tian’an Chemical Co., Ltd. (“Xuzhou Tian’an”) and Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu”) – to be located at Xuzhou Tian’an and Xuzhou Huayu’s respective locations (the “Tianyu Project”). Upon completion of the Tianyu Project, Zhonghong will charge Tianyu an energy saving fee of RMB 0.534 ($0.087) per kilowatt hour (excluding tax). The operating time will be based upon an average 8,000 hours annually for each of Xuzhou Tian’an and Xuzhou Huayu. If the operating time is less than 8,000 hours per year due to a reason attributable to Tianyu, then time charged will be 8,000 hours a year. The term of the Tianyu Agreement is 20 years. The construction of the Xuzhou Tian’an Project is anticipated to be completed by the second quarter of 2018. Xuzhou Tian’an will provide the land for the CDQ and CDQ WHPG systems for free. Xuzhou Tian’an also guarantees that it will purchase all the power generated by the CDQ WHPG systems.2020. The Xuzhou Huayu Project is currentlyhas been on hold due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues.
On January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the “Agreement”), pursuant to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million). Mr. Bai agreed that as consideration for the transfer of the Xuzhou Huayu Project to him, as well as Shenqiu discussed above, he would transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan made by Xi’an Zhonghong to HYREF. (Note 8). The local government has acted in its capacity to coordinate the resolution of this issue. The local residents were requested to move from the hygienic buffer zonetransfer of the project location with compensatory paymentswas completed on February 15, 2019. The Company recorded $397,033 loss from this transfer during the government. Xuzhou Huayu was requiredyear ended December 31, 2019. On January 10, 2019, Mr. Chonggong Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng, to stop production and implement technical innovations to mitigate pollution discharge including sewage treatment, dust collection, noise control, and recycling of coal gas. Currently, some local residents have moved. Xuzhou Huayu has completed the implementation of the technical innovations of sewage treatment, dust collection, and noise control, and the Company is waiting for local governmental agencies to approve these technical innovations so that we can resume construction. We expect to complete the recycling of coal gas in the second quarter of 2018. Once Huayu obtains the government’s acceptance and approval of the technical innovations, the project will resume.
On July 22, 2013, Zhonghong entered into an EPC General Contractor AgreementHYREF as repayment for the Tianyu Project withloan. Xi’an Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”)Ltd for the repayment of Huayu system and Shenqiu system. As of September 30, 2019, Xi’an Hanneng already owned 29,948,000 shares of Huaxin, but was not able to obtain the remaining 17,202,000 shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr. Bai and all the related parties agreed to have Mr. Bai instead making a payment in cash for the transfer price of Huayu (see Note 8 for detail).
On January 10, 2020, Zhonghong, asTianyu and Huaxin signed a transfer agreement to transfer all assets under construction and related rights and interests of Xuzhou Tian’an Project to Tianyu for RMB 170 million including VAT ($24.37 million) in three installment payments. The 1st installment payment of RMB 50 million ($7.17 million) to be paid within 20 working days after the ownercontract is signed. The 2nd installment payment of RMB 50 million ($7.34 million) is to be paid within 20 working days after completion of the Tianyuproject construction but no later than July 31, 2020. The final installment payment of RMB 70 million ($10.28 million) is to be paid before December 31, 2020. The Company received the payment in full for Tian’an Project contracted EPC services for two CDQ systems and two 25 MW CDQ WHPG systems for Tianyu to Huaxin. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary services to complete the Tianyu Project and ensure the CDQ and CDQ WHPG systems for Tianyu meet the inspection and acceptance requirements and work normally. The Tianyu Project is a turn-key project where Huaxin is responsible for monitoring the quality, safety, duration and costas of the project. The total contract price is RMB 400 million ($66.68 million), which includes all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety costs.December 31, 2020.
Zhongtai Waste Heat Power Generation Energy Management Cooperative Agreement
On December 6, 2013, Xi’an TCH entered into a CDQ and WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”) with Xuzhou Zhongtai Energy Technology Co., Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu Province, China.
Pursuant to the Zhongtai Agreement, Xi’an TCH willwas to design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG system and sell the power to Zhongtai, and Xi’an TCH willis also to build a furnace to generate steam from the smoke pipeline’s waste heat of the smoke pipeline and sell the steam to Zhongtai.
The construction period of the Project is expected to be 18 months from the date when conditions are ready for construction to begin. Zhongtai will start to pay an energy saving service fee from the date when the WHPG station passes the required 72-hour test run. The payment term is 20 years. For the first 10 years, Zhongtai shall pay an energy saving fee at RMB 0.534 ($0.089) per kilowatt hour (KWH) (including value added tax) for the power generated from the system. For the second 10 years, Zhongtai shall pay an energy saving fee at RMB 0.402 ($0.067) per KWH (including value added tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change of local grid electricity price. Zhongtai shall also pay an energy saving fee for the steam supplied by Xi’an TCH at RMB 100 ($16.67) per ton (including value added tax). Zhongtai and its parent company will provide guarantees to ensure Zhongtai will fulfill its obligations under the Agreement. Upon the completion of the term, Xi’an TCH will transfer the systems to Zhongtai at RMB 1 ($0.16). Zhongtai shall provide waste heat to the systems for no less than 8,000 hours per year and waste gas volume no less than 150,000 Normal Meter Cubed (Nm3) per hour with a temperature no less than 950°C. If these requirements are not met, the term of the Agreement will be extended accordingly. If Zhongtai wants to terminate the Zhongtai Agreement early, it shall provide Xi’an TCH a 60 day notice and pay the termination fee and compensation for the damages to Xi’an TCH according to the following formula: (1) if it is less than five years into the term when Zhongtai requests termination, Zhongtai shall pay: Xi’an TCH’s total investment amount plus Xi’an TCH’s annual investment return times five years minus the years in which the system has already operated; or 2) if it is more than five years into the term when Zhongtai requests the termination, Zhongtai shall pay: Xi’an TCH’s total investment amount minus total amortization cost (the amortization period is 10 years).
In March 2016, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin (the “Transfer Agreement”). Under the Transfer Agreement, Xi’an TCH agreed to transfer to Zhongtai all of the assets associated with the CDQ Waste Heat Power Generation Project (the “Project”), which is under construction pursuant to the Zhongtai Agreement. Additionally, Xi’an TCH agreed to transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. Xi’an Huaxin will continue to construct and complete the Project and Xi’an TCH agreed to transfer all its rights and obligationobligations under the EPC Contract to Zhongtai. As consideration for the transfer of the Project, Zhongtai agreed to pay to Xi’an TCH an aggregate transfer price of RMB 167,360,000 ($25.77 million) including payments of: (i) RMB 152,360,000 ($23.46 million) for the construction of the Project; and (ii) RMB 15,000,000 ($2.31 million) as payment for partial loan interest accrued during the construction period. Those amounts have been, or will be, paid by Zhongtai to Xi’an TCH according to the following schedule: (a) RMB 50,000,000 ($7.70 million) was to be paid within 20 business days after the Transfer Agreement was signed; (b) RMB 30,000,000 ($4.32 million) was to be paid within 20 business days after the Project iswas completed, but no later than July 30, 2016; and (c) RMB 87,360,000 ($13.45 million) willwas to be paid no later than July 30, 2017. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou Taifa”) guaranteed the payments from Zhongtai to Xi’an TCH. The ownership of the Project was conditionally transferred to Zhongtai following the initial payment of RMB 50,000,000 ($7.70 million) by Zhongtai to Xi’an TCH and the full ownership of the Project will be officially transferred to Zhongtai after it completes all payments pursuant to the Transfer Agreement. As of September 30, 2017,In 2016, Xi’an TCH had received the first payment of $7.70 million and the second payment of $4.32 million. The Company recorded a $2.82 million loss from this transaction in 2016. As of the date of this report,However, the Company has not yet received a repayment commitment letter from Zhongtai on February 23, 2018, in which Zhongtai committed to pay the remaining payment of RMB 87,360,000 ($13.45 million). The Company expects to collect part of the remaining balance during the fourth quarter of 2017.
Rongfeng CDQ Power Generation Energy Management Cooperative Agreement
On December 12, 2013, Xi’an TCH entered into a CDQ Power Generation Energy Management Cooperative Agreement with Tangshan Rongfeng Iron & Steel Co., Ltd. (the “Rongfeng Agreement”), a limited liability company incorporated in Hebei Province, China.
Pursuant to the Rongfeng Agreement, Xi’an TCH will design, build and maintain a CDQ and a CDQ WHPG system and sell the power to Rongfeng. The construction period of the Project is expected to be 18 months after the Agreement takes effect and from the date when conditions are ready for construction to begin.
Rongfeng will pay an energy saving fee from the date when the WHPG station passes the required 72-hour test run. The payment term is 20 years. For the first 10 years, Rongfeng shall pay an energy saving fee at RMB 0.582 ($0.095) per KWH (including tax) for the power generated from the system. For the second 10 years, Rongfeng shall pay an energy saving fee at RMB 0.432 ($0.071) per KWH (including tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change of local grid electricity price. Rongfeng and its parent company will provide guarantees to ensure Rongfeng will fulfill its obligations under the Rongfeng Agreement. Upon the completion of the term, Xi’an TCH will transfer the systems to Rongfeng at RMB 1. Rongfeng shall provide waste heat to the systems for no less than 8,000 hours per year with a temperature no less than 950°C. If these requirements are not met, the term of the Agreement will be extended accordingly. If Rongfeng wants to terminate the Agreement early, it shall provide Xi’an TCH a 60 day notice and pay the termination fee and compensation for the damages to Xi’an TCH according to the following formula: 1) if it is less than five years (including five years) into the term when Rongfeng requests termination, Rongfeng shall pay: Xi’an TCH’s total investment amount plus Xi’an TCH’s average annual investment return times (five years minus the years of which the system has already operated); 2) if it is more than five years into the term when Rongfeng requests the termination, Rongfeng shall pay: Xi’an TCH’s total investment amount minus total amortization cost (the amortization period is 10 years). On November 16, 2015, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Rongfeng and Xi’an Huaxin New Energy Co., Ltd., a limited liability company incorporated in China (“Xi’an Huaxin”). The Transfer Agreement provided for the sale to Rongfeng of the CDQ Waste Heat Power Generation Project (the “Project”) from Xi’an TCH. Additionally, Xi’an TCH would transfer to Rongfeng the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. As consideration for the transfer of the Project, Rongfeng is to pay to Xi’an TCH an aggregate purchase price of RMB 165,200, 000 ($25.45 million), whereby (a) RMB 65,200,000 ($10.05 million) was to be paid by Rongfeng to Xi’an TCH within 20 business days after signing the Transfer Agreement, (b) RMB 50,000,000 ($7.70 million) was paid by Rongfeng to Xi’an TCH within 20 business days after the Project is completed, but no later than March 31, 2016the end of July 2018; in July 2018, Zhongtai and (c) RMB 50,000,000 ($7.70 million) wasthe Company reached a further oral agreement to be paid by Rongfeng to Xi’an TCH no later than September 30, 2016. Mr. Cheng Li,extend the largest stockholder of Rongfeng, has personally guaranteed the payments. The ownership of the Project was conditionally transferred to Rongfeng within 3 business days following the initial paymentrepayment term of RMB 65,200,00087,360,000 ($10.0513.45 million) by Rongfenganother two to Xi’an TCHthree months. In January 2020, Zhongtai paid RMB 10 million ($1.41 million); in March 2020, Zhongtai paid RMB 20 million ($2.82 million); in June 2020, Zhongtai paid RMB 10 million ($1.41 million); and the full ownership of the Project will be officially transferred to Rongfeng after it completes the entirein December 2020, Zhongtai paid RMB 30 million ($4.28 million), which was payment pursuant to the Transfer Agreement. The Company recorded a $3.78 million loss from this transaction in 2015. As of December 31, 2016,full. Accordingly, the Company reversed the bad debt expense of $5.80 million in 2020 which had received full payment of $25.45 million.been recorded earlier.
Formation of Zhongxun
On March 24, 2014, Xi’anXi��an TCH incorporated a new subsidiary, Zhongxun Energy Investment (Beijing) Co., LtdLtd. (“Zhongxun”) with registered capital of $5,695,502 (RMB 35,000,000), which must be contributed before October 1, 2028. Zhongxun is 100% owned by Xi’an TCH and will be mainly engaged in project investment, investment management, economic information consulting, and technical services. Zhongxun has not yet commenced operations nor has any capital contribution been made as of the date of this report.
Formation of Yinghua
On February 11, 2015, the Company incorporated a new subsidiary, Shanghai Yinghua Financial Leasing Co., LtdLtd. (“Yinghua”) with registered capital of $30,000,000, to be paid within 10 years from the date the business license is issued. Yinghua is 100% owned by the Company and will be mainly engaged in financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial leasing transactions, and related factoring business. Yinghua has not yet commenced operations nor has any capital contribution been made as of the date of this report.
Summary of Sales-Type Lease at September 30, 2017
Status at September 30, 2017
As of September 30, 2017, Xi’an TCH leases the following systems: (i) BMPG systems to Pucheng Phase I and II (15 and 11 year terms, respectively); (ii) BMPG systems to Shenqiu Phase I (11-year term); and (iii) Shenqiu Phase II (9.5-year term). In addition, as of September 30, 2017, Erdos TCH leased power and steam generating systems for recycling waste heat from metal refining to Erdos (five systems) for a term of 20 years.
Asset Repurchase Agreement
During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company entered into the following Asset Repurchase Agreements:
In March 2016, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin (the “Transfer Agreement”). Under the Transfer Agreement, Xi’an TCH agreed to transfer to Zhongtai all of the assets associated with the CDQ Waste Heat Power Generation Project (the “Project”), which is under construction pursuant to the Zhongtai Agreement. Additionally, Xi’an TCH agreed to transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. Xi’an Huaxin will continue to construct and complete the Project and Xi’an TCH agreed to transfer all its rights and obligation under the “EPC” Contract to Zhongtai. As consideration for the transfer of the Project, Zhongtai agreed to pay to Xi’an TCH an aggregate transfer price of RMB 167,360,000 ($25.77 million) including payments of: (i) RMB 152,360,000 ($23.46 million) for the construction of the Project; and (ii) RMB 15,000,000 ($2.31 million) as payment for partial loan interest accrued during the construction period. Those amounts have been, or will be, paid by Zhongtai to Xi’an TCH according to the following schedule: (a) RMB 50,000,000 ($7.70 million) was paid within 20 business days after the Transfer Agreement was signed; (b) RMB 30,000,000 ($4.32 million) was paid within 20 business days after the Project is completed, but no later than July 30, 2016; and (c) RMB 87,360,000 ($13.45 million) will be paid no later than July 30, 2017. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou Taifa”) has guaranteed the payments from Zhongtai to Xi’an TCH. The ownership of the Project was conditionally transferred to Zhongtai following the initial payment of RMB 50,000,000 ($7.70 million) by Zhongtai to Xi’an TCH and the full ownership of the Project will be officially transferred to Zhongtai after it completes all payments pursuant to the Transfer Agreement. As of September 30, 2017, Xi’an TCH had received the first payment of $7.70 million and the second payment of $4.32 million. The Company recorded a $2.82 million loss from this transaction in 2016. As of this report date, the Company has not yet received the remaining payment of RMB 87,360,000 ($13.45 million) due to the tight cash flow of Zhongtai, the Company expects to collect part of the remaining balance during the fourth quarter of 2017.
On June 22, 2016, Xi’an TCH entered into a Coal Oven Gas Power Generation Project Repurchase Agreement (the “Repurchase Agreement”) with Yida. Under the Repurchase Agreement, Xi’an TCH agreed to transfer to Yida all the project assets for RMB 112,000,000 ($16.89 million) (the “Transfer Price”) with Yida’s retention of ownership of the Shares. Yida agreed to make the following payments: (i) the outstanding monthly leasing fees for April and May 2016 in total of RMB 6,000,000 ($0.90 million) to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; (ii) a payment of RMB 50,000,000 ($7.54 million) of the Transfer Price to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; and (iii) a payment of the remaining RMB 62,000,000 ($9.35 million) of the Transfer Price to Xi’an TCH within 15 business days from the execution of the Repurchase Agreement. Under the Repurchase Agreement, ownership of the project assets will be transferred from Xi’an TCH to Yida within 3 business days after Xi’an TCH receives the full Transfer Price and the outstanding monthly leasing fees. In July 2016, the Company had received the full payment of the Transfer Price and title to the system was transferred at that time. The Company recorded a $0.42 million loss from this transaction in 2016.
Reverse Stock Split
On May 24, 2016,April 13, 2020, the Company filed a certificate of change (“Certificate of ChangeChange”) with the Secretary of State of the State of Nevada, with an effective date of May 25, 2016 (the “Effective Date”), atpursuant to which, timeon April 13, 2020, the Company effected a 1-for-10 reverse stock split of the Company’s authorized sharesits Common Stock, at a rate of common stock, par value $0.001 (the “Common Stock”),1-for-10, accompanied by a corresponding decrease in the Company’s issued and outstanding shares of Common Stock (the “Reverse Stock Split”).
The Company rounded upaccompanying consolidated financial statements and related disclosure in for periods prior to the next full shareReverse Stock Split have been retroactively restated to reflect this reverse stock split.
Other Events
In December 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. However, as a result of PRC government’s effort on disease control, most cities in China were reopened, the outbreak in China is under the control. As of this report date, there are some new Covid-19 cases discovered in a few provinces of China, however, the number of new cases is not significant due to PRC government’s strict control.
On July 27, 2021, the Company filed a certificate of change to the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada to increase the total number of the Company’s Common Stock any fractionalauthorized shares resultingof common stock from the Reverse Stock Split. The Reverse Stock Split was retroactively stated for the periods covered by the financial statements included herein.
10,000,000 shares to 100,000,000 shares, par value $0.001 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements included herein were prepared by the Company, pursuant to the rulesinformation as of and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain informationnine and footnote disclosures normally present in annual financial statementsthree months ended September 30, 2021 and 2020 has been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rulesU.S. for interim financial information and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s 2016 audited financial statements included in the Company’s Annualinstructions to Quarterly Report on Form 10-K. The10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments, unless otherwise indicated) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the nine and three months ended September 30, 20172021 are not necessarily indicative of the results that may be expected for the fullentire year endingor for any other subsequent interim period. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. 2020, previously filed with the SEC on April 15, 2021.
Basis of Consolidation
The consolidated financial statements (“CFS”)CFS include the accounts of CREG and its subsidiaries, Shanghai Yinghua Financial Leasing Co., Ltd. (“Yinghua”) and Sifang Holdings, itsHoldings; Sifang Holdings’ wholly owned subsidiaries, Huahong New Energy Technology Co., Ltd. (“Huahong”) and Shanghai TCH Energy Tech Co., Ltd. (“Shanghai TCH”); Shanghai TCH’s wholly-owned subsidiary, Xi’an TCH Energy Tech Co., Ltd. (“Xi’an TCH”); and Xi’an TCH’s subsidiaries, 1) Erdos TCH Energy Saving Development Co., Ltd (“Erdos TCH”), 100% owned by Xi’an TCH, (See note 1),2) Zhonghong, 90% owned by Xi’an TCH and 10% owned by Shanghai TCH, and 3) Zhongxun, 100% owned by Xi’an TCH. Substantially all the Company’s revenues are derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all the Company’s consolidated assets and liabilities as of September 30, 20172021. However, there was no revenue for the Company for the nine and December 31, 2016, respectively.three months ended September 30, 2021. All significant inter-company accounts and transactions were eliminated in consolidation.
Uses and Sources of Liquidity
For the nine and three months ended September 30, 2021, the Company had a net income of $1.39 million and net loss $0.56 million. For the nine and three months ended September 30, 2020, the Company had net loss of $0.28 million and 0.67 million. The Company had an accumulated deficit of $41.66 million as of September 30, 2021. The Company disposed all of its systems and currently holds only five power generating systems through Erdos TCH, the five power generating systems are currently not producing any electricity. The Company is in the process of transforming and expanding into an energy storage integrated solution provider. The Company plans to pursue disciplined and targeted expansion strategies for market areas the Company currently does not serve. The Company actively seeks and explores opportunities to apply energy storage technologies to new industries or segments with high growth potential, including industrial and commercial complexes, large scale photovoltaic (PV) and wind power stations, remote islands without electricity, and smart energy cities with multi-energy supplies. The Company’s cash flow forecast indicate it will have sufficient cash to fund its operations for the next 12 months from the date of issuance of these financial statements.
Use of Estimates
In preparing these CFS in accordance with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues and expenses during the period reported. Actual results may differ from these estimates. On an on-going basis, management evaluates their estimates, including those related to allowances for bad debt and inventory obsolescence, impairment loss on fixed assets and construction in progress, income taxes, and contingencies and litigation. Management bases their estimates on historical experience and on various other assumptions that are 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 resources.
Revenue Recognition
A)Sales-type Leasing and Related Revenue Recognition
On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. (See Operating lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue recognition fall under ASC 842. During the nine and three months ended September 30, 2021 and 2020, the Company did not sell any new power generating projects.
The Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically transfers legal ownership of the waste energy recycling power generating projects to its customers at the end of the lease. ThePrior to January 1, 2019, the investment in these projects iswas recorded as investment in sales-type leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 840, “Leases,” and its various amendments and interpretations.
The Company finances construction of waste energy recycling power generating projects. The sales and cost of sales are recognized at the inception of the lease.lease, which is when the control is transferred to the lessee. The Company accounts for the transfer of control as a sales type lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded when collection of payments is probable. This is in accordance with the revenue recognition principle in ASC 606 - Revenue from contracts with customers. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and contingent rentals, if any. Unearned interest income is amortized to income over the lease term to produce a constant periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income and reduction of receivables. Revenue is recognized net of salesvalue-added tax.
B)Contingent Rental Income
The Company records income from actual electricity usage in addition to minimum lease paymentsgenerated of each project as contingent rental income in the period contingent rentalthe income is earned.earned, which is when the electricity is generated. Contingent rent is not part of minimum lease payments.
Operating Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. At September 30, 2021, the ROU was $145,586. The Company recognized no impairment of ROU assets as of September 30, 2021.
Operating leases are included in operating lease right-of-use assets and operating lease liabilities (current and non-current), on the consolidated balance sheets.
Cash
Cash and Equivalents
Cash and equivalents includesinclude cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.date.
Accounts Receivable
As of September 30, 2017, the Company had accounts receivable of $13,162,772 (from the sales of CDQ and a CDQ WHPG systemThe Company’s policy is to Zhongtai). As of December 31, 2016, the Company had accounts receivable of $12,593,340 (from the sales of CDQ and a CDQ WHPG system to Zhongtai).
Interest Receivable on Sales Type Leases
As of September 30, 2017, the interest receivable on sales type leases was $8,049,073, mainly from recognized but not yet collected interest income for the Pucheng and Shenqiu systems. As of December 31, 2016, the interest receivable on sales type leases was $4,621,491.
The Company maintains reservesmaintain an allowance for potential credit losses on receivables.accounts receivable. Management reviews the composition of receivablesaccounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. During the nine months ended
As of September 30, 2017,2021 and December 31, 2020, the Company had gross accounts receivable of $0 and $342,974 of Erdos TCH for electricity sold, respectively. As of September 30, 2021 and December 31, 2020, the Company had bad debt allowance of $0 and $34,297 for net investmentErdos TCH due to the customer not making the payments as scheduled, respectively. As of September 30, 2021, all outstanding accounts receivable balance was collected in full.
Concentration of $61,800.Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions and state-owned banks within the PRC are covered by insurance up to RMB 500,000 (US$76,000) per bank. Any balance over RMB 500,000 (US$76,000) per bank in PRC will not be covered. At September 30, 2021, cash held in the PRC bank of approximately $145,341,795 was not covered by such insurance. The Company has not experienced any losses in such accounts.
Certain other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method over the estimated lives as follows:
| 2 - 5 years | ||
| Office and Other Equipment | 2 - 5 years | |
| Software | 2 - 3 years |
Impairment of Long-lived Assets
In accordance with FASB ASC Topic 360, “Property, Plant, and Equipment,” the Company reviews its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total expected undiscounted future net cash flows isare less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. The total undiscounted future net cash flow (total future payment receivable) is less than net investment in sales-type leases for Erdos Phase II, the 2nd system at December 31, 2016; accordingly, the Company recorded an$0 asset impairment loss of $242,305 for the year ended December 31, 2016. There was no impairment loss for the nine and three months ended September 30, 2017.2021 and 2020.
Notes Payable – Banker’s Acceptances
The Company endorses banker’s acceptances that are issued from a bank to vendors as payment for its obligations. Most of the banker’s acceptances have maturity dates of less than six months following their issuance.
Cost of Sales
Cost of sales consists primarily of the direct material of the power generating system and expenses incurred directly for project construction for sales-type leasing and sales tax and additions for contingent rental income.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Noncontrolling Interests
The Company follows FASB ASC Topic 810, “Consolidation,”740, which established new standards governing theprescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and reporting of noncontrolling interests (“NCIs”)penalties associated with tax positions, accounting for income taxes in partially owned consolidated subsidiariesinterim periods, and income tax disclosures.
Under the loss of control of subsidiaries. Certain provisions of this standard indicate, amongFASB ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other things,positions. Tax positions that NCIs (previously referred tomeet the more-likely-than-not recognition threshold are measured as minority interests) be treatedthe largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as a separate component of equity, notdescribed above is reflected as a liability (as was previously the case), that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to NCIs even when such allocation might result in a deficit balance.
The net income (loss) attributed to NCIs was separately designatedfor unrecognized tax benefits in the accompanying statements of incomebalance sheets along with any associated interest and comprehensive income (loss). Losses attributablepenalties that would be payable to NCIsthe taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in a subsidiary may exceed an NCI’s interestsselling, general and administrative expenses in the subsidiary’s equity. The excess attributablestatement of income. At September 30, 2021 and December 31, 2020, the Company did not take any uncertain positions that would necessitate recording a tax related liability.
Statement of Cash Flows
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to NCIs is attributed to those interests. NCIs shall continue to be attributed their shareassets and liabilities reported on the statement of losses even if that attribution resultscash flows may not necessarily agree with changes in a deficit NCI balance.the corresponding balances on the balance sheet.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debts, the carrying amounts approximate their fair values due to their short maturities. Receivables on sales-type leases are based on interest rates implicit in the lease.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value (“FV”)FV of financial instruments held by the Company. FASB ASC Topic 825, “Financial Instruments,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their FV because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | ||
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | ||
| Level 3 inputs to the valuation methodology are unobservable and significant to FV measurement. |
Effective on January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the FV hierarchy.
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815, “Derivatives and Hedging.”
The following are the considerations with respect to disclosures of FV of long-term debt obligations:
As of September 30, 2017,2021 and December 31, 2020, the Company did not have any long-term debt obligations. As of December 31, 2016, the Company’s long-term debt obligations consisted of the Zhonghong entrusted loan of $47.86 million (Note 12).
FV measurementsobligations; and approximations for certain financial instruments are based on what a reporting entity would likely have to pay to transfer the financial obligation to an entity with a comparable credit rating. The Company’s bank loans and trust loans payable are privately held (i.e., nonpublic) debt; therefore, pricing inputs are not observable. For this reason, the Company classified bank loans and trust loans payable as a Level 3 FV measurement in the valuation hierarchy.
For the Company’s long-term bank loans, and Zhonghong entrusted loans noted above, the Company believes the carrying amounts approximate their FV. Based on the Company’s understanding of the credit markets, the Company’s business is in a sector (energy-saving green) that is supported by the PRC government and the lending bank, the Company believes it could have obtained similar loans on similar terms and interest rates. In addition, in connection with the FV measurement, the Company considered nonperformance risk (including credit risk) relating to the debt obligations, including the following: (i) the Company is considered a low credit risk customer to the lending bank and its creditors; (ii) the Company has a good history of making timely payments and have never defaulted on any loans; and (iii) the Company has a stable and continuous cash inflow from collections from its sales-type lease of energy saving projects.
As of September 30, 2017 and December 31, 2016, the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at FV.
Stock-Based Compensation
The Company accounts for its stock-basedshare-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation—“Compensation – Stock Compensation,” Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.
The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Topic 505, “Equity.” The Company recognizes in its statementSubtopic 505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of operations FVequity instruments to non-employees is measured at the grantfair value of the equity instrument issued or committed to be issued, as this is more reliable than the fair value of the services received. The fair value is measured at the date that the commitment for stock optionsperformance by the counterparty has been reached or the counterparty’s performance is complete.
Effective on January 1, 2020, the Company adopted ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and other equity-based compensation issuedservices from non-employees. An entity should apply the requirements of ASC 718 to employeesnon-employee awards except for specific guidance on inputs to an option pricing model and non-employees.the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The adoption of ASU 2018-07 did not have an impact on the Company’s financial statements.
Basic and Diluted Earnings per Share
The Company presents net income (loss) per share (“EPS”) in accordance with FASB ASC Topic 260, “Earning Per Share.” Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of shares outstanding, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income by the weighted-average number of common shares outstanding as well as common share equivalents outstanding for the period determined using the treasury-stock method for stock options and warrants and the if-converted method for convertible notes. The Company made an accounting policy election to use the if-converted method for convertible securities that are eligible to receive common stock dividends, if declared. Diluted EPS reflect the potential dilution that could occur based on the exercise of stock options or warrants or conversion of convertible securities using the if-converted method.
The following table presents a reconciliation of basic and diluted EPS forFor the nine and three months ended September 30, 20172021 and 2016:2020, the basic and diluted loss per share were the same due to the anti-dilutive features of the warrants and options. For the nine and three months ended September 30, 2021, 30,911 shares purchasable under warrants and options were excluded from the EPS calculation as these were not dilutive due to the exercise price was more than the stock market price. For the nine and three months ended September 30, 2020, 31,311 shares purchasable under warrants and options were excluded from the EPS calculation as these were not dilutive due to the exercise price was more than the stock market price.
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income (loss) | $ | 703,040 | $ | 2,977,791 | $ | (40,892 | ) | $ | 536,839 | |||||||
| Weighted average shares outstanding – basic | 8,310,198 | 8,310,198 | 8,310,198 | 8,310,198 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Options granted | - | - | - | - | ||||||||||||
| Weighted average shares outstanding – diluted | 8,310,198 | 8,310,198 | 8,310,198 | 8,310,198 | ||||||||||||
| Earnings per share – basic | $ | 0.08 | $ | 0.36 | $ | 0.00 | $ | 0.06 | ||||||||
| Earnings per share – diluted | $ | 0.08 | $ | 0.36 | $ | 0.00 | $ | 0.06 | ||||||||
Foreign Currency Translation and Comprehensive Income (Loss)
The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company follows FASB ASC Topic 220, “Comprehensive Income.” Comprehensive income is comprised of net income 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.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. FASB ASC Topic 280 has no effect on the Company’s CFS as substantially all of the Company’s operations are conducted in one industry segment. All of the Company’s assets are located in the PRC.
New Accounting Pronouncements
In FebruaryJune 2016, the FASB issued Accounting Standards Update (“ASU”)ASU No. 2016-02, Leases2016-13, Financial Instruments-Credit Losses (Topic 842). The326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard2022. Early application will have on its CFS.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effectivebe permitted for public businessall entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its CFS.
In October 2016, the FASB issued ASU No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a significant impact on its CFS.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years, beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied using a retrospective transition method to each period presented.2018. The Company does not anticipateis currently evaluating the impact that the adoption of this ASUstandard will have a significant impact on its CFS.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basisbasis. As a smaller reporting company, the standard will be effective for the Company for interim and annual or any interim goodwill impairment testsreporting periods beginning after December 15, 2019. Early2022, with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.permitted. The Company is currently evaluating the impact of adopting this standard on its CFS.consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its consolidated financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future CFS.
3. OTHER RECEIVABLES
Reclassification
In November 2015, the FASB issued ASU No. 2015-17 on the balance sheet classification of deferred taxes, which would require that deferred tax assets and liabilities be classified as non-current in the balance sheet. Current GAAP requires the presentation of deferred tax assets and liabilities as either current or non-current in the balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods. Earlier adoption is permitted. The guidance may be applied either prospectively or retrospectively. The Company adopted this ASU as of December 31, 2016 on a retrospective basis and reclassified current deferred tax liability (net) to the noncurrent deferred tax liability (net) in the consolidated balance sheet as of December 31, 2016. The reclassification had no effect on reported revenues, operating income, or cash flows for the periods presented.
3. RESTRICTED CASH
Restricted cash is held by the banks as collateral to issue bank acceptances and bank loans. The Company endorses bank acceptances to vendors as payment of its obligations. Most of the bank acceptances have maturities of less than six months. As of September 30, 2017 and December 31, 2016, the Company had restricted cash of $0.
4. INVESTMENT IN SALES-TYPE LEASES, NET
Under sales-type leases, Xi’an TCH leases the following systems: (i) BMPG systems to Pucheng Phase I and II (15 and 11 year terms, respectively); (ii) BMPG systems to Shenqiu Phase I (11-year term); and (iii) Shenqiu Phase II (9.5-year term). In addition, as of September 30, 2017, Erdos TCH leased power and steam generating systems from waste heat from metal refining to Erdos (five systems) for a term of twenty years. The components of the net investment in sales-type leases as of September 30, 2017 and December 31, 2016 are as follows:
| 2017 | 2016 | |||||||
| Total future minimum lease payments receivable | $ | 220,451,367 | $ | 217,470,913 | ||||
| Less: executory cost | (66,942,562 | ) | (66,444,519 | ) | ||||
| Less: unearned interest income | (31,208,152 | ) | (35,312,473 | ) | ||||
| Less: realized interest income but not yet received | (8,049,073 | ) | (4,621,490 | ) | ||||
| Less: allowance for net investment receivable | (63,282 | ) | ||||||
| Investment in sales-type leases, net | 114,188,298 | 111,092,431 | ||||||
| Current portion | 13,404,978 | 9,385,453 | ||||||
| Noncurrent portion | $ | 100,783,320 | $ | 101,706,978 | ||||
As of September 30, 2017, the future minimum rentals to be received on non-cancelable sales-type leases by years are as follows:
| 2018 | $ | 35,953,996 | ||
| 2019 | 19,791,446 | |||
| 2020 | 20,656,848 | |||
| 2021 | 20,831,989 | |||
| 2022 | 22,937,544 | |||
| Thereafter | 100,279,544 | |||
| Total | $ | 220,451,367 |
5. PREPAID EXPENSES
Prepaid expenses mainly consisted of prepayment for office rental and decorations, taxes, and consulting fees for the Company’s HYREF fund completed in July 2013. Before the HYREF Fund released the money to Zhonghong, Xi’an TCH paid 2% of the funds raised for Zhonghong, i.e. RMB 9.2 million ($1.5 million) to the Fund Management Company as a consulting fee and it shall pay such 2% on the amount of funds actually contributed as an annual management fee on every 365-day anniversary thereafter until Zhonghong fully repays the loan, and the HYREF Fund no longer has an ownership interest in Zhonghong. The Company had $0.19 million and $0.65 million prepaid consulting expense as of September 30, 2017 and December 31, 2016, respectively. The Company had $33,500 and $32,050 prepaid tax as of September 30, 2017 and December 31, 2016.
6. OTHER RECEIVABLES
As of September 30, 2017,2021, other receivables mainly consisted of (i) advances to third parties of $0.95 million,$7,710, bearing no interest, payable upon demand; (ii) maintenance cost and tax receivable of $1.43 million; and (iii) advancesdemand, ii) advance to employees of $1.52 million,$9,102, iii) advance to suppliers of $2,773 and (iv) others of $862,250 including social insurance receivable of $4,607 and prepayment of $857,500 (see below).
On August 2, 2021, the Company entered a Research and Development Cooperation Agreement with a software development company to design, establish, upgrade and maintenance of Smart Energy Management Cloud Platform for energy storage and remote-site monitoring; upon completion, the Company will provide such platform to its customers at a fee. Total contracted research and development cost is $1,000,000, the Company prepaid $200,000 as of September 30, 2021.
On August 23, 2021, the Company entered a Market Research and Project Development Service Agreement with a consulting company in Xi’an for a service period of 12 months. The consulting company will perform the market research for new energy industry including photovoltaic and energy storage, develop potential new customers and due diligence check, assisting the Company for business cooperation negotiation and relevant agreements preparation. Total contract amount is $1,150,000, and the Company prepaid $650,000 at commencement of the service; the Company will pay $200,000 upon issuance of the research report, and pay the remaining of $300,000 upon completion all the services.
As of December 31, 2020, other receivables mainly consisted of (i) advances to third parties of $7,663, bearing no interest, payable upon demand. As of December 31, 2016, other receivables mainly consisted of andemand, ii) advance to a third party of $0.53 million, bearing no interest, payable upon demand; and advances to employees of $0.02 million, bearing no interest, payable upon demand. $11,011, iii) advance to suppliers of $4,791 and (iv) others of $12,222 including social insurance receivable of $4,579.
4. ASSET SUBJECT TO BUYBACK
7. LONG TERM INVESTMENT
On June 25, 2013, Xi’an TCH with HongyuanHuifu Venture Capital Co. Ltd (“HongyuanHuifu”) jointly established Hongyuan Recycling Energy Investment Management Beijing Co., Ltd (the “Fund Management Company”) with registered capital of RMB 10 million ($1.6 million), to manage a fund that will be used for financing CDQ WHPG projects. Xi’an TCH made an initial capital contribution of RMB 4 million ($0.65 million) and has a 40% ownership interest in the Fund Management Company. Voting rights and dividend rights are allocated between HongyuanHuifu and Xi’an TCH at 80% and 20%, respectively. The Company accounted for this investment using the equity method. The Company recorded $115,763 and $28,432 equity based investment income during the nine and three months ended September 30, 2017. The Company recorded $154,570 and $48,595 equity based investment income during the nine and three months ended September 30, 2016.
On July 18, 2013, the HYREF Fund was established as a limited liability partnership in Beijing. Pursuant to the Partnership Agreement, the HYREF Fund has a general partner, the Fund Management Company, which made an initial capital contribution of RMB 5 million ($0.83 million) to the HYREF Fund. The HYREF Fund has three limited partners: (1) China Orient Asset Management Co., Ltd., which made an initial capital contribution of RMB 280 million ($46.67 million) and is a preferred limited partner, (2) HongyuanHuifu, which made an initial capital contribution of RMB 100 million ($16.67 million) and is an ordinary limited partner and (3) the Company’s wholly-owned subsidiary, Xian TCH, which made an initial capital contribution of RMB 75 million ($10.81 million) and is a secondary limited partner. The term of the HYREF Fund’s partnership is six years from the date of its establishment, July 18, 2013. The current term for (x) the preferred limited partner is four years from the date of its contribution and (y) the ordinary limited partner is four years from the date of its contribution. Unless otherwise approved by the general partner (the Fund Management Company), upon the expiration of their respective terms, each partner shall exit from the partnership automatically. The total size of the HYREF Fund is RMB 460 million ($75.0 million), and the purpose of the HYREF Fund is to invest in Zhonghong for constructing 3 new CDQ WHPG projects. Xi’an TCH owns 16.3% of the HYREF Fund. The Company accounted for this investment using the cost method. The Company netted off the investment of RMB 75 million ($10.81 million) by Xi’an TCH with the entrusted loan payable of the HYREF Fund.
8. CONSTRUCTION IN PROGRESS
Construction in progress was for constructing power generation systems. As of September 30, 20172021 and December 31, 2016,2020, the Company had asset subject to buyback of $0 and $28.92 million, respectively, which was for the Chengli project.
The Chengli project finished construction, and was transferred to the Company’s construction in progress included:fixed assets at a cost of $35.24 million (without impairment loss) and ready to be put into operation as of December 31, 2018. On January 22, 2019, Xi’an Zhonghong completed the transfer of Chengli CDQ WHPG project as the partial repayment for the loan and accrued interest of RMB 188,639,400 ($27.54 million) to HYREF (see Note 8).
| 2017 | 2016 | |||||||
| Xuzhou Huayu | $ | 24,589,694 | $ | 23,525,925 | ||||
| Xuzhou Tian’an | 36,400,424 | 32,471,977 | ||||||
| Boxing County Chengli | 31,874,182 | 30,495,280 | ||||||
| Total | $ | 92,864,300 | $ | 86,493,182 | ||||
On April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement (termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from the buyers other than keeping the CDQ WHPG station. As a result of September 30, 2017,the termination of the buy-back agreement, the Company was committedrecorded a gain of approximately $3.1 million from transferring the CDP WHPG station to pay an additional (1) $12.05 million forHYREF as partial repayment of the Xuzhou Huayu project, (2) $4.18 million forentrusted loan, which is the Xuzhou Tian’an project,difference between the carrying value of the assets and (3) $4.65 million for Boxing County Chengli project. The Boxing County Chengli project has finished construction, but is waiting for government approval before beginning operations.loan and interest payable on the loan.
9.5. TAXES PAYABLE
Taxes payable consisted of the following as of September 30, 20172021 and 2020:
| 2021 | 2020 | |||||||
| Income tax – current | $ | 2,443,461 | $ | 2,746,757 | ||||
| Value-added tax | - | 322,652 | �� | |||||
| Other taxes | 101 | 76,203 | ||||||
| Total – current | 2,443,562 | 3,145,612 | ||||||
| Income tax – noncurrent | $ | 5,174,625 | $ | 5,174,625 | ||||
Income tax payable included $7.61 million ($2.44 million included in current above and $5.17 million noncurrent) from recording the estimated one-time transition tax on post-1986 foreign unremitted earnings under the Tax Cut and Jobs Act signed on December 31, 2016:22, 2017. An election is available for the U.S. shareholders of a foreign company to pay the tax liability in installments over a period of eight years with 8% of net tax liability in the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the eighth year. The Company made such an election.
| 2017 | 2016 | |||||||
| Income | $ | 414,871 | $ | 773,397 | ||||
| VAT | 943,912 | 366,230 | ||||||
| Other | 145,048 | 63,050 | ||||||
| Total | $ | 1,503,831 | $ | 1,202,677 | ||||
10.6. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following as of September 30, 20172021 and December 31, 2016:2020:
| 2017 | 2016 | |||||||
| Employee training, labor union expenditure and social insurance payable | $ | 794,387 | $ | 760,021 | ||||
| Consulting, auditing, and legal expenses | 480,891 | 468,393 | ||||||
| Accrued payroll and welfare | 278,260 | 322,605 | ||||||
| Accrued interest | - | 1,569 | ||||||
| Other | 13,843 | 43,992 | ||||||
| Total | $ | 1,567,381 | $ | 1,596,580 | ||||
| 2021 | 2020 | |||||||
| Education and union fund and social insurance payable | $ | 376,017 | $ | 373,740 | ||||
| Consulting and legal expenses | 41,090 | 31,090 | ||||||
| Accrued payroll and welfare | 256,727 | 255,278 | ||||||
| Other | 55,947 | 66,588 | ||||||
| Total | $ | 729,781 | $ | 726,696 | ||||
11.7. DEFERRED TAX, LIABILITY, NET
Deferred tax assetassets resulted from asset impairment loss which was temporarily non-tax deductible for tax purposes but expensed in accordance with US GAAP; interest income in sales-type leases which was recognized as income for tax purposes but not for book purpose as it did not meet revenue recognition in accordance with US GAAP; accrued employee social insurance that can be deducted for tax purposes in the future, and the difference between tax and accounting basis of cost of fixed assets which was capitalized for tax purposes and expensed as part of cost of systems in accordance with US GAAP. Deferred tax liability arose from the difference between tax and accounting basis of net investment in sales-type leases.
As of September 30, 20172021 and December 31, 2016,2020, deferred tax liabilityassets consisted of the following:
| 2021 | 2020 | |||||||
| Accrued expenses | $ | 70,446 | $ | 70,019 | ||||
| Write-off Erdos TCH net investment in sales-type leases * | 6,352,124 | 6,155,300 | ||||||
| US NOL | 415,851 | 254,035 | ||||||
| PRC NOL | 2,623,801 | 10,849,690 | ||||||
| Total deferred tax assets | 9,462,222 | 17,329,044 | ||||||
| Less: valuation allowance for deferred tax assets | (9,462,222 | ) | (17,329,044 | ) | ||||
| Deferred tax assets, net | $ | - | $ | - | ||||
| * | This represents the tax basis of Erdos TCH investment in sales type leases, which was written off under US GAAP upon modification of lease terms, which made the lease payments contingent upon generation of electricity. |
| 2017 | 2016 | |||||||
| Deferred tax asset — current (accrual of employee social insurance) | $ | 175,576 | $ | 167,980 | ||||
| Deferred tax liability — current (net investment in sales-type leases) | (1,827,573 | ) | (1,586,058 | ) | ||||
| Deferred tax liability, net of current deferred tax asset | $ | (1,651,997 | ) | $ | (1,418,078 | ) | ||
| Deferred tax asset — noncurrent (depreciation of fixed assets) | $ | 17,410,945 | $ | 17,943,843 | ||||
| Deferred tax liability — noncurrent (net investment in sales-type leases) | (25,195,830 | ) | (25,426,744 | ) | ||||
| Deferred tax liability, net of noncurrent deferred tax asset | $ | (7,784,885 | ) | $ | (7,482,901 | ) | ||
| Total Deferred tax liability, noncurrent per ASU 2015-17 | $ | (9,436,882 | ) | $ | 8,900,979 | |||
8. LOAN PAYABLE
12. LOANS PAYABLE
Entrusted Loan Payable (HYREF Loan)
The HYREF Fund (Beijing Hongyuan Recycling Energy Investment Center, LLP)was established in July 2013 with a total fund size of RMB 460 million ($75.077 million) investsinvested in Xi’an Zhonghong for Zhonghong’s three new CDQ WHPG projects. The HYREF Fund invested RMB 3 million ($0.5 million) as an equity investment and RMB 457 million ($74.5 million) as a debt investment in Xi’an Zhonghong; in return for such investments, the HYREF Fund willwas to receive interest from Zhonghong for the HYREF Fund’s debt investment. The RMB 457 million ($74.5 million) was released to Zhonghong through an entrusted bank, which is also the supervising bank for the use of the loan. The loan was deposited in a bank account at the Supervising Bank (the Industrial Bank Xi’an Branch) and is jointly supervised by Zhonghong and the Fund Management Company. Project spending shall be verified by the Fund Management Company to confirm that it is in accordance with the project schedule before the funds are released. All the operating accounts of Zhonghong have been opened with the branches of the Supervising Bank and the Supervising Bank has the right to monitor all bank accounts opened by Zhonghong. The entrusted bank will charge 0.1% of loan amount as service fee and will not take any lending risk. The loan was collateralized by the accounts receivable and the fixed assets of Shenqiu Phase I and II power generation systems,systems; the accounts receivable and fixed assets of Zhonghong’s three CDQ WHPG systems,systems; and a 27 million RMB ($4.39 million) capital contribution made by Xi’an TCH.TCH in Zhonghong. Repayment of the loan (principal and interest) was also jointly and severally guaranteed by Xi’an TCH and the Chairman and CEO of the Company. In the fourth quarter of 2015, three power stations of Erdos TCH were pledged to Industrial Bank as an additional guarantee for the loan lent to Zhonghong’s three CDQ WHPG systems. In 2016, two additional power stations of Erdos TCH and Pucheng Phase I and II systems were pledged to Industrial Bank as an additional guarantee along with Xi’an TCH’s equity in Zhonghong.
The loan agreement provides that Zhonghong shall also maintain a certain capital level in its account with the Supervising Bank to make sure it has sufficient funds to make interest payments when they are due:
The term of this loan iswas for 60 months from July 31, 2013 to July 30, 2018. On August 6, 2016, Zhonghong was to repay principal of RMB 280 million ($42.22 million); on August 6, 2017, Zhonghong shall repay principal of RMB 100 million ($16.27 million) and on July 30, 2018, Zhonghong shall repay the remainder of RMB 77 million ($12.52 million). Thewith an interest rate isof 12.5%. During the term, Zhonghong shall maintain a minimal funding level and capital level in its designated account with the Supervising Bank to make sure it has sufficient funds to make principal payments when they are due. Notwithstanding the requirements, the HYREF Fund and Supervising Bank have verbally notified Zhonghong from the beginning that unlikely they will enforce these requirements for the purpose of the efficient utilization of working capital. As of September 30, 2017, the entrusted loan payable had an outstanding balance of $61.32 million, of which, $11.30 million was from the investment of Xi’an TCH; accordingly, the Company netted the loan payable of $11.30 million with the long-term investment to the HYREF Fund made by Xi’an TCH. For the nine and three months ended September 30, 2017, the Company recorded interest expense of $3.27 million and $1.13 million on this loan, respectively; and capitalized $2.40 million and $0.83 million interest to construction in progress, respectively. For the nine and three months ended September 30, 2016, the Company recorded interest expense of $3.67 million and $1.31 million on this loan, respectively; and capitalized $2.67 million and $0.61 million interest to construction in progress, respectively. The Company had fully paid RMB 50 million ($7.54 million) of the RMB 280 million ($42.22 million), and on August 5, 2016, the Company entered into a supplemental agreement with the lender to extend the due date of the remaining RMB 230 million ($34.68 million) of the original RMB 280 million ($45.54 million) to August 6, 2017. During the nine monthsyear ended September 30,December 31, 2017, the Company negotiated with the lender again forto further extendingextend the remaining loan balance of RMB 230 million ($34.68 million), RMB 100 million ($16.27 million), and RMB 77 million ($12.52 million) (which included investment from Xi’an TCH of RMB 75 million and was netted off with the entrusted loan payable of the HYREF Fund in the balance sheet). The lender hashad tentatively agreed to extend the remaining loan balance for another two years until August 2019 with an adjusted annual interest rate of 9%, subject to the final approval from its headquarters. The relatedheadquarters did not approve the extension documents are currently going through the lender’s internal approval procedure.
Due to the slow progressproposal with an adjusted annual interest rate of the construction of the three CDQ WHPG projects,9%; however, on December 29, 2018, the Company applied for a lower interest rate fromworked out with the lender in January 2017, and the lender tentatively agreed to lower the interest rate to 9% in September 2017 subject to the approval from its headquarters. The Company planned to repay the interest of the first three quarters of 2017 before the end of November 2017.an alternative repayment proposal as described below. As of September 30, 2017,December 31, 2020, the interest payable for this loan was $6.05$10.14 million and the outstanding balance for this loan was $22.20 million including a non-current portion of $0.30 million. As of September 30, 2021, the interest payable for this loan (RMB 77 million ($11.87 million) net of investment from Xian TCH of RMB 75 million ($11.56 million) was $0 and the outstanding balance for this loan (non-current) was $0.31 million.
Repayment of HYREF loan
Bank Loan – Bank
1. Transfer of Xi’anChengli project as partial repayment
On June 26, 2015,December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station as the repayment for the loan agreement with Bank of Xi’an, whereby Bank of Xi’an loaned $6.29 million (RMB 40RMB 188,639,400 ($27.54 million) to HYREF, the transfer of which was completed on January 22, 2019.
Xi’an TCH for one year due June 25, 2016.is a secondary limited partner of HYREF. The monthly interest onfair value of the CDQ WHPG station applied in the transfer was determined by the parties based upon the appraisal report issued by Zhonglian Assets Appraisal Group (Shaanxi) Co., Ltd. as of August 15, 2018. However, per the discussion below, Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai (the “Buyers”) entered into a Buy Back Agreement, also agreed to buy back the Station when conditions under the Buy Back Agreement are met. Due to the Buy Back agreement, the loan was 0.595%. Undernot deemed repaid, and therefore the terms ofCompany recognized Chengli project as assets subject to buyback and kept the loan Xi’an TCH was required to make monthly interest payments and the principal was to be repaid at maturity. The loan was guaranteed by a third party guarantee company and the Chairman and CEO of the Company. The Company paid a third party $149,341 (RMB 950,000)payable remained recognized under ASC 405-20-40-1 as a re-guarantee service fee. As of December 31, 2016, this loan2020. The Buy Back agreement was paidterminated in full.April 2021 (see 2 below for detail).
Bank Loan – Bank of Chongqing
2. Buy Back Agreement
On April 11, 2014,December 29, 2018, Xi’an TCH, Xi’an Zhonghong, HYREF, Guohua Ku, Chonggong Bai and Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”) entered into a Buy Back Agreement.
Pursuant to the Buy Back Agreement, the Buyers jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai (see 3 below), and a CDQ WHPG station in Boxing County which was transferred to HYREF by Xi’an Zhonghong. The buy-back price for the Xi’an Hanneng’s equity was based on the higher of (i) the market price of the equity shares at the time of buy-back; or (ii) the original transfer price of the equity shares plus bank interest. The buy-back price for the Station was based on the higher of (i) the fair value of the Station on the date transferred; or (ii) the loan agreement with Bankbalance at the date of Chongqing -the transfer plus interest accrued through that date. HYREF could request that the Buyers buy back the equity shares of Xi’an Branch, whereby BankHanneng and/or the CDQ WHPG station if one of Chongqing loaned $8.13 million (RMB 50 million)the following conditions is met: (i) HYREF holds the equity shares of Xi’an Hanneng until December 31, 2021; (ii) Xi’an Huaxin New Energy Co., Ltd., is delisted from The National Equities Exchange And Quotations Co., Ltd., a Chinese over-the-counter trading system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the Buyers or its affiliates has a credit problem, including not being able to issue an auditor report or standard auditor report or any control person or executive of the Buyers is involved in crimes and is under prosecution or has other material credit problems, to HYREF’s reasonable belief; (iv) if Xi’an TCH for three years with maturityZhonghong fails to timely make repayment on April 10, 2017. Theprincipal or interest of the loan is 9.225%. Underagreement, its supplemental agreement or extension agreement; (v) the termsBuyers or any party to the Debt Repayment Agreement materially breaches the Debt Repayment Agreement or its related transaction documents, including but not limited to the Share Transfer Agreement, the Pledged Assets Transfer Agreement, the Entrusted Loan Agreement and their guarantee agreements and supplemental agreements. Due to halted trading of the loan,Huaxin stock by NEEQ for not filing its 2018 annual report, on December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to make monthlyHYREF by Chonggong Bai earlier. The total buy back price was RMB 261,727,506 ($37.52 million) including accrued interest paymentsof RMB 14,661,506 ($2.10 million), and to make a principal payment of $0.81 million (RMB 5 million) on the 24th month after receiving the loan and of the remaining $7.32 million (RMB 45 million) on the loan maturity date. The loan was guaranteed by a third party guarantee company and the Chairman and CEO of the Company. The Company paid a third party $155,280 (RMB 950,000) as a re-guarantee service fee. In addition, Xi’an TCH pledged its collection right for Tangshan Rongfeng and Xuzhou Zhongtai projects to Bank of Chongqing after the two projects were completed and put into operation, to ensure the repayment of loan. This loan was paid in full by Xi’an TCH on December 20, 2019.
On April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement (termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from the buyers other than keeping the CDQ WHPG station. The Company recorded a gain of approximately $3.1 million from transferring the CDP WHPG station to HYREF as partial repayment of the entrusted loan resulting from the termination of the buy-back agreement.
3. Transfer of Xuzhou Huayu Project and Shenqiu Phase I & II project to Mr. Bai for partial repayment of HYREF loan
On January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement, pursuant to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million) and Xi’an TCH transferred two Biomass Power Generation Projects in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB 127,066,000 ($18.55 million). Mr. Bai agreed to transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the RMB 247,066,000 ($36.07 million) loan made by Xi’an Zhonghong to HYREF as consideration for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
On February 15, 2019, Xi’an Zhonghong completed the transfer of the Xuzhou Huayu Project and Xi’an TCH completed the transfer of Shenqiu Phase I and II Projects to Mr. Bai, and on January 10, 2019, Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment of Xi’an Zhonghong’s loan to HYREF as consideration for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
Xi’an Hanneng is a holding company and was supposed to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”), so that HYREF will indirectly receive and own such shares of Xi’an Huaxin as the repayment for the loan of Zhonghong. Xi’an Hanneng already owned 29,948,000 shares of Huaxin; however, Xi’an Hanneng was not able to obtain the remaining 17,202,000 shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report.
On December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back price was RMB 261,727,506 ($37.52 million) including accrued interest of RMB 14,661,506 ($2.10 million), and was paid in full by Xi’an TCH on December 20, 2019. On December 20, 2019, Mr. Bai, Xi’an TCH and Xi’an Zhonghong agreed to have Mr. Bai repay the Company in cash for the transfer price of Xuzhou Huayu and Shenqiu in five installment payments. The 1st payment of RMB 50 million ($7.17 million) is due on January 5, 2020, the 2nd payment of RMB 50 million ($7.17 million) was due on February 5, 2020, the 3rd payment of RMB 50 million ($7.17 million) was due on April 10, 2017.
Summary
5, 2020, the 4th payment of RMB 50 million ($7.17 million) is due on June 30, 2020, and the final payment of RMB 47,066,000 ($6.75 million) is due on September 30, 2020. As of September 30, 2017,2021, the future minimumCompany has received the full payment of RMB 247 million ($36.28 million) from Mr. Bai.
On April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement (termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from the buyers other than keeping the CDQ WHPG station. The Company recorded a gain of approximately $3.1 million from transferring the CDP WHPG station to HYREF as partial repayment of all the loans including the entrusted loan resulting from the termination of the buy-back agreement.
4. The lender agreed to be madeextend the repayment of RMB 77.00 million ($11.04 million) to July 8, 2023; of which, RMB 75.00 million ($10.81 million) was Xi’an TCH’s investment into the HYREF fund as a secondary limited partner, and the Company netted off the investment of RMB 75 million ($10.81 million) by years is as follows:Xi’an TCH with the entrusted loan payable of the HYREF Fund.
9. RELATED PARTY TRANSACTIONS
| 2018 | $ | 50,023,354 | ||
| Total | $ | 50,023,354 |
13. REFUNDABLE DEPOSIT FROM CUSTOMERS FOR SYSTEMS LEASING
The refundable deposit was mainly for Pucheng, Shenqiu and Yida systems. As of September 30, 20172021 and December 31, 2016, the balance of refundable deposit from customers for systems leasing was $1,069,777 for Pucheng and Shengqiu systems, and $1,023,497 for Pucheng, Shenqiu and Yida systems, respectively.
14. RELATED PARTY TRANSACTIONS
As of September 30, 2017,2020, the Company had $41,775$28,418 and $28,440, respectively, in advances from the Company’s management, which bear no interest, are unsecured, and are payable upon demand.
During the nine and three months ended September 30, 2017,On February 23, 2021, the Company recognized RMB 20.02 million ($2.94 million) and RMB 6.55 million ($0.98 million)entered into certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), respectively, interest income forpursuant to which the sales-type leaseCompany agreed to sell to the Purchasers, an aggregate of Pucheng BMPG systems from Pucheng Xin Heng Yuan Biomass Power Generation Corporation, whose major stockholder became a stockholderup to 3,320,000 shares of common stock of the Company, through the issuanceat $11.522 per share. One of the purchasers is the Company’s CEO (who is also the Company’s Chairman), who purchased 1,000,000 common stock to this stockholder in consideration for the transfershares of the old systemCompany. In April 2021, the Company’s CEO amended the number of shares that he would purchase from 1,000,000 shares to 940,000 shares. In April 2021 the Company returned to the Company’s CEO the $691,320 in extra proceeds that had been received earlier .
10. NOTE PAYABLE, NET
Promissory Notes in December 2020
On December 4, 2020, the Company for BMPG system transformation. Theentered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company recognized RMB 21.79 million ($3.27 million) interest income for the sales-type lease of Pucheng BMPG systems during the nine months ended September 30, 2016.
During the year ended December 31, 2016, priorsold and issued to the repurchasePurchaser a Promissory Note of $3,150,000. The Purchaser purchased the Note with an original issue discount of $150,000, which was recognized as a debt discount and will be amortized using the interest method over the life of the note. The Note bears interest at 8% per annum and has a term of 24 months. All outstanding principal and accrued interest on the Note will become due and payable on December 3, 2022. The Company’s obligations under the Note may be prepaid at any time, provided that in such circumstance the Company would pay 125% of any amounts outstanding under the Note and being prepaid. Beginning on the date that is six months from the issue date of June 22, 2016,the Note, Purchaser shall have the right to redeem any amount of this Note up to $500,000 per calendar month by providing written notice to the Company. Upon receipt of the redemption notice from the lender, the Company recognized RMB 13.83 million ($2.09 million) interest income forshall pay the sales-type leaseapplicable redemption amount in cash to lender within three trading days of Yida WGPG system from Qitaihe City Boli Yida Coal Selection Co., Ltd., whose major stockholder became a stockholderreceipt of such redemption notice; if the Company throughfails to pay, then the issuance of the Company’s common stock to this stockholder in consideration for the transfer of the WGPG system to the Company in 2014.
15. NONCONTROLLING INTEREST
On July 15, 2013, Xi’an TCH and HYREF Fund jointly established Xi’an Zhonghong New Energy Technology (“Zhonghong”) with registered capital of RMB 30 million ($4.88 million), to manage new projects. Xi’an TCH paid RMB 27 million ($4.37 million) as its contribution of the registered capital to Zhonghong. Xi’an TCH owns 90% of Zhonghong while HYREF Fund owns 10% of Zhonghong as non-controlling interest of Zhonghong.
In addition, the HYREF Fund was 16.3% ownedoutstanding balance will automatically be increased by Xi’an TCH and 1.1% owned by the Fund Management Company, and the Fund Management Company was 40% owned by Xi’an TCH as described in Note 7, which resulted in an additional indirect ownership of Xi’an TCH in Zhonghong of 1.7%; accordingly, the ultimate non-controlling interest (HYREF Fund) in Zhonghong became 8.3%25%. During the nine months ended September 30, 2017 and 2016,2021, the Company had lossesamortized OID of $271,683$56,250 and $227,126 that were attributable to the noncontrollingrecorded $184,769 interest respectively.expense on this Note. During the three months ended September 30, 2017 and 2016,2021, the Company had lossesamortized OID of $93,428$18,750 and $79,921recorded $57,547 interest expense on this Note.
On June 14, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned a new Promissory Note in the original principal amount of $500,000 from the original Promissory Note. The Company and Lender exchanged this Partitioned Note for the delivery of 54,348 shares of the Company’s Common Stock. The Company recorded $2,719 loss on conversion of this note. In addition, the investor also made adjustments of $818,914 to increase the principle of the notes during the second quarter of 2021 as a result of the Company’s failure to pay the redemption amount in cash to lender within three trading days from receipt of the redemption notice, the Company recorded $818,914 principal adjustment as interest expense. The Note has been classified as a current liability in accordance with ASC 470-10-45 Other Presentation Matters – General Due on Demand Loan Arrangements.
During the three months ended September 30, 2021, the Company and Lender partitioned four new Promissory Notes in the original principal amount of $1,500,000 from the original Promissory Note. The Company and Lender exchanged these four Partitioned Note for the delivery of 206,382 shares of the Company’s Common Stock. The Company recorded $58,436 loss on conversion of these notes.
Promissory Notes in April 2021
On April 2, 2021, the Company entered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company sold and issued to the Purchaser a Promissory Note of $5,250,000. The Purchaser purchased the Note with an original issue discount of $250,000, which was recognized as a debt discount and will be amortized using the interest method over the life of the note. The Note bears interest at 8% per annum and has a term of 24 months. All outstanding principal and accrued interest on the Note will become due and payable on April 1, 2023. The Company’s obligations under the Note may be prepaid at any time, provided that in such circumstance the Company would pay 125% of any amounts outstanding under the Note and being prepaid. Beginning on the date that is six months from the issue date of the Note, Purchaser shall have the right to redeem any amount of this Note up to $825,000 per calendar month by providing written notice to the Company. Upon receipt of the redemption notice from the lender, the Company shall pay the applicable redemption amount in cash to lender within three trading days of receipt of such redemption notice; if the Company fails to pay, then the outstanding balance will automatically be increased by 25%. During the nine months ended September 30, 2021, the Company amortized OID of $62,500 and recorded $208,274 interest expense on this Note. During the three months ended September 30, 2021, the Company amortized OID of $31,250 and recorded $108,274 interest expense on this Note. The Note has been classified as a current liability in accordance with ASC 470-10-45 Other Presentation Matters – General Due on Demand Loan Arrangements.
11. SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Shares Issued for Equity Financing in 2021
On February 23, 2021, the Company entered into certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers, an aggregate of up to 3,320,000 shares of common stock of the Company, at $11.522 per share, which is the five-day average closing price immediately prior to signing the Purchase Agreements. One of the purchasers is the Company’s CEO (also is the Company’s Chairman), he purchased 1,000,000 common shares of the Company. On March 11, 2021, the Company received approximately $38.25 million proceeds from the issuance of 3,320,000 shares under the securities purchase agreements, there anywhere no fees paid in connection with this financing. In April 2021, the Company’s CEO amended the number of shares that he would purchase from 1,000,000 shares to 940,000 shares; accordingly, total number of shares sold in this offering became 3,260,000 shares. The Company returned $691,320 extra proceeds that were attributablereceived earlier to noncontrolling interest, respectively.the Company’s CEO in April 2021. The stock certificates for these shares were issued in April 2021.
Warrants
16.
Following is a summary of the activities of warrants that were issued from equity financing (post-reverse stock split) for the nine months ended September 30, 2021
| Number of Warrants | Average Exercise Price (post-reverse stock split price) | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | 30,411 | $ | 14.0 | 3.21 | ||||||||
| Exercisable at January 1, 2021 | 30,411 | $ | 14.0 | 3.21 | ||||||||
| Granted | - | - | - | |||||||||
| Exchanged | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Outstanding at September 30, 2021 | 30,411 | $ | 14.0 | 2.46 | ||||||||
| Exercisable at September 30, 2021 | 30,411 | $ | 14.0 | 2.46 | ||||||||
During the three months ended September 30, 2021, the Company issued 31,250 shares to a consulting company per the agreement entered on October 11, 2019. The fair value of 31,250 shares was $223,438.
12. INCOME TAX
The Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments. Under the Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau continues to treat CREGthe Company’s sales-type leases as operating leases. Accordingly, the Company recorded deferred income taxes.
The Company’s subsidiaries generate all of their income from their PRC operations. Yinghua and Shanghai TCH’sAll of the Company’s Chinese subsidiaries’ effective income tax rate for 20172021 and 2016 was 25%. During 2013, Xi’an TCH was re-approved for high tech enterprise status and enjoyed 15% preferential income tax rate for three years effective January 1, 2013 through December 31, 2015, and is subject to 25% income tax rate in 2017 and 2016 due to the renewal of preferential income tax rate was not approved by the tax authority. Huahong, Zhonghong and Erdos TCH’s effective income tax rate for 2017 and 20162020 was 25%. Yinghua, Shanghai TCH, Xi’an TCH, Huahong, Zhonghong and Erdos TCH file separate income tax returns.
There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s CFS do not present any income tax provisions related to Cayman Islands tax jurisdiction, where Sifang Holding is domiciled.
The US parent company, China Recycling Energy Corporation,CREG is taxed in the US and, as of September 30, 2017,2021, had net operating loss (“NOL”) carry forwards for income taxes of $14.10 million, which$1.98 million; for federal income tax purposes, the NOL arising in tax years beginning after 2017 may be available toonly reduce future years’80% of a taxpayer’s taxable income, as NOLs canand may be carried forward upindefinitely. However, the coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to 20 years fromboth corporate and noncorporate taxpayers by adding a five-year carryback period and temporarily repealing the year the loss is incurred. Our80% limitation for NOLs arising in 2018, 2019 and 2020. The management believes the realization of benefits from these losses may be uncertain due to the US parent company’s continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
As of September 30, 2021, the Company’s PRC subsidiaries had $10.50 million NOL that can be carried forward to offset future taxable income for five years from the year the loss is incurred. The NOL was mostly from Erdos TCH and Zhonghong. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets due to the recurring losses from operations of these entities, accordingly, the Company recorded a 100% deferred tax valuation allowance for PRC NOL.
The following table reconciles the USU.S. statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2021 and 2020, respectively:
| 2021 | 2020 | |||||||
| U.S. statutory rates | 21.0 | % | (21.0 | )% | ||||
| Tax rate difference – current provision | 10.1 | % | 9.8 | % | ||||
| Prior year income tax adjustment in current year | (8.8 | )% | ||||||
| Permanent differences | 16.1 | % | 41.3 | % | ||||
| Change in valuation allowance | (45.2 | )% | (30.1 | )% | ||||
| Tax benefit per financial statements | (6.7 | )% | - | % | ||||
The provision for income tax expense for the nine months ended September 30, 2021 and 2020 consisted of the following:
| 2021 | 2020 | |||||||
| Income tax benefit – current | $ | 87,051 | $ | - | ||||
| Income tax benefit – deferred | - | - | ||||||
| Total income tax benefit | $ | 87,051 | $ | - | ||||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September 30, 20172021 and 2016,2020, respectively:
| Nine Months | Three Months | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| U.S. statutory rates | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||
| Tax rate difference – current provision | (9.3 | )% | (11.1 | )% | (10.7 | )% | (12.2 | )% | ||||||||
| Permanent difference | 0.1 | % | - | 0.0 | % | - | ||||||||||
| Other | (3.6 | )% | 4.6 | % | 14.1 | % | 14.9 | % | ||||||||
| Prior periods income tax adjustment per income tax return filed | - | (1.0 | %) | - | (3.2 | )% | ||||||||||
| Valuation allowance on PRC NOL | 50.9 | % | (80.0 | )% | 107.1 | % | (19.9 | )% | ||||||||
| Valuation allowance on US NOL | 1.1 | % | 7.9 | % | 5.3 | % | 5.9 | % | ||||||||
| Tax (benefit) per financial statements | 73.2 | % | (45.6 | )% | 151.0 | % | 19.5 | % | ||||||||
| 2021 | 2020 | |||||||
| U.S. statutory rates | (21.0 | )% | (21.0 | )% | ||||
| Tax rate difference – current provision | 0.3 | % | (1.9 | )% | ||||
| Permanent differences | 35.7 | % | 9.5 | % | ||||
| Change in valuation allowance | (13.0 | )% | 13.4 | % | ||||
| Tax expense per financial statements | 2.0 | % | - | % | ||||
The provision for income taxestax expense for the nine and three months ended September 30, 20172021 and 20162020 consisted of the following:
| 2021 | 2020 | |||||||
| Income tax expense – current | $ | 10,902 | $ | - | ||||
| Income tax expense– deferred | - | - | ||||||
| Total income tax expense | $ | 10,902 | $ | - | ||||
| Nine Months | Three Months | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Income tax expense – current | $ | 1,049,342 | $ | 1,211,424 | $ | 384,691 | $ | 305,516 | ||||||||
| Income tax expense (benefit) – deferred | 130,260 | (2,073,235 | ) | 12,945 | (194,559 | ) | ||||||||||
| Total income tax expense (benefit) | $ | 1,179,602 | $ | (861,811 | ) | $ | 397,636 | $ | 110,957 | |||||||
17.13. STOCK-BASED COMPENSATION PLAN
Options to Employees and Directors
On June 19, 2015, the stockholders of the Company approved the China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”) at its annual meeting. The total shares of common stockCommon Stock authorized for issuance during the term of the Plan is 12,462,605 (prior to the 10:1 Reverse Stock Split)124,626 (post-reverse stock split). The Plan was effective immediately upon theits adoption by ourthe Board of Directors on April 24, 2015, subject to stockholder approval, and will terminate on the earliest to occur of (i) the 10th anniversary of the Plan’s effective date, or (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares. The stockholders approved the Plan at itstheir annual meeting on June 19, 2015.
On April 27, 2017, the Board approved the grant to the Company’s CFO of an option to purchase 5,000 shares of the Company’s common stock at an exercise price of $1.61 per share, with a term of 10 years. The option vested immediately upon the grant.
The FV of the stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model (“BSOPM”). The BSOPM has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk-free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date. The FV of the option granted to employees is recognized as compensation expense over the vesting period of the stock option award. The FV of the options was calculated using the following assumptions, estimated life of ten years, volatility of 124%, risk free interest rate of 2.30%, and dividend yield of 0%. The FV of the 5,000 stock options was $7,647 at the grant date.
Options to Independent Directors
On March 31, 2015, the Board appointed Mr. Cangsang Huang as a member of the Company’s Board of Directors to fill a vacancy. In connection with the appointment, the Board authorized the Company to provide Mr. Huang with (i) compensation of $2,000 per month and (ii) the grant of an option to purchase 40,000 shares of the Company’s Common Stock, par value $0.001, at an exercise price of $1.02 per share (prior to the 10:1 Reverse Stock Split effective May 25, 2016), which was equal to the closing price per share of the Company’s Common Stock on March 31, 2015. Such options were only valid and exercisable upon stockholder approval. The options to Mr. Huang were not voted upon at the Company’s annual stockholder’s meeting on June 19, 2015 and were cancelled automatically. However, the Company’s Plan adopted by the Board on April 24, 2015 for providing equity awards to employees, directors and consultants was approved at the annual stockholder’s meeting; accordingly, the Compensation Committee of the Board of Directors approved a grant of 40,000 options (prior to the 10:1 Reverse Stock Split) to Mr. Huang at an exercise price of $1.02 per share under the Plan, which vested immediately on the date of grant, which was on October 10, 2015. The options may be exercised within five years of the date of the grant. The FV of the options was calculated using the following assumptions, estimated life of five years, volatility of 82%, risk free interest rate of 1.37%, and dividend yield of 0%. The FV of the 40,000 stock options was $26,528 at the grant date.
The Company recorded $7,647, and $0 compensation expense for stock options to employees during the nine and three months ended September 30, 2017, and $0 for the nine and three months ended September 30, 2016.
The following table summarizes option activity with respect to employees and independent directors for the nine months ended September 30, 2021, and the number of options reflects the 10:1 Reverse Stock Split effective May 25, 2016:April 13, 2020:
| Number of Shares | Average Exercise Price per Share (post-reverse stock split price) | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | 500 | $ | 16.1 | 6.32 | ||||||||
| Exercisable at January 1, 2021 | 500 | $ | 16.1 | 6.32 | ||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding at September 30, 2021 | 500 | $ | 16.1 | 5.57 | ||||||||
| Exercisable at September 30, 2021 | 500 | $ | 16.1 | 5.57 | ||||||||
14. STATUTORY RESERVES
Pursuant to the corporate law of the PRC effective January 1, 2006, the Company is only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus Reserve Fund
The Company’s Chinese subsidiaries are required to transfer 10% of their net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.
The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
Number of Shares | Average Exercise Price per Share | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2016 | 4,000 | $ | 10.2 | 4.77 | ||||||||
| Exercisable at January 1, 2016 | 4,000 | 10.2 | 4.77 | |||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding at December 31, 2016 | 4,000 | 10.2 | 3.77 | |||||||||
| Exercisable at December 31, 2016 | 4,000 | 10.2 | 3.77 | |||||||||
| Granted | 5,000 | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding at September 30, 2017 | 9,000 | 5.4 | 6.66 | |||||||||
| Exercisable at September 30, 2017 | 9,000 | $ | 5.4 | 6.66 | ||||||||
During the nine months ended September 30, 2021, the Company transferred $19,585, which is 10% of Xi’an TCH’s net income to the statutory reverse. During the three months ended September 30, 2021, the Company transferred $3,273, which is 10% of Xi’an TCH’s net income to the statutory reverse. The maximum statutory reserve amount has not been reached for any subsidiary. The table below discloses the statutory reserve amount in the currency type registered for each Chinese subsidiary as of September 30, 2021 and December 31, 2020:
18.
| Name of Chinese Subsidiaries | Registered Capital | Maximum Statutory Reserve Amount | Statutory reserve at September 30, 2021 | Statutory reserve at December 31, 2020 | ||||||||
| Shanghai TCH | $ | 29,800,000 | $ | 14,900,000 | ¥6,564,303 ($1,003,859) | ¥6,564,303 ($1,003,859) | ||||||
| Xi’an TCH | ¥ | 202,000,000 | ¥ | 101,000,000 | ¥73,827,450 ($11,255,899) | ¥73,700,706 ($11,236,314) | ||||||
| Erdos TCH | ¥ | 120,000,000 | ¥ | 60,000,000 | ¥19,035,814 ($2,914,869) | ¥19,035,814 ($2,914,869) | ||||||
| Xi’an Zhonghong | ¥ | 30,000,000 | ¥ | 15,000,000 | Did not accrue yet due to accumulated deficit | Did not accrue yet due to accumulated deficit | ||||||
| Shaanxi Huahong | $ | 2,500,300 | $ | 1,250,150 | Did not accrue yet due to accumulated deficit | Did not accrue yet due to accumulated deficit | ||||||
| Zhongxun | ¥ | 35,000,000 | ¥ | 17,500,000 | Did not accrue yet due to accumulated deficit | Did not accrue yet due to accumulated deficit | ||||||
Common Welfare Fund
The common welfare fund is a voluntary fund to which the Company can transfer 5% to 10% of its net income. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company does not participate in this fund.
15. CONTINGENCIES
China maintains a “closed” capital account, meaning companies, banks, and individuals cannot move money in or out of the country except in accordance with strict rules. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) regulate the flow of foreign exchange in and out of the country. For inward or outward foreign currency transactions, the Company needs to make a timely declaration to the bank with sufficient supporting documents to declare the nature of the business transaction. The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. Remittances in currencies other than RMB may require certain supporting documentation in order to make the remittance.
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. 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.
16. COMMITMENTS
Lease Commitment
On November 20, 2017, Xi’an TCH entered into a lease for its office with a term from December 1, 2017 through November 30, 2020. The monthly rent is RMB 36,536 ($5,600) with quarterly payment in advance. This lease was expired in November 2020. The Company entered a new lease contract for the same location for a period from January 1, 2021 through December 31, 2023 with monthly rent of RMB 36,536 ($5,600), to be paid every half year in advance.
The components of lease costs, lease term and discount rate with respect of the office lease with an initial term of more than 12 months are as follows:
| Nine Months Ended | ||||
| September 30, 2021 | ||||
| Operating lease cost – amortization of ROU | $ | 45,299 | ||
| Operating lease cost – interest expense on lease liability | $ | 5,513 | ||
| Weighted Average Remaining Lease Term - Operating leases | 2.25 years | |||
| Weighted Average Discount Rate - Operating leases | 5 | % | ||
| Nine Months Ended | ||||
| September 30, 2020 | ||||
| Operating lease cost– amortization of ROU | $ | 48,220 | ||
| Operating lease cost – interest expense on lease liability | $ | 814 | ||
| Weighted Average Remaining Lease Term - Operating leases | 0.42 years | |||
| Weighted Average Discount Rate - Operating leases | 3 | % | ||
| Three Months Ended | ||||
| September 30, 2021 | ||||
| Operating lease cost – amortization of ROU | $ | 15,329 | ||
| Operating lease cost – interest expense on lease liability | $ | 1,610 | ||
| Three Months Ended | ||||
| September 30, 2020 | ||||
| Operating lease cost– amortization of ROU | $ | 16,372 | ||
| Operating lease cost – interest expense on lease liability | $ | 160 | ||
The following is a schedule, by years, of maturities of the office lease liabilities as of September 30, 2021:
| Operating Leases | ||||
| For the years ended September 30, 2022, | $ | 67,604 | ||
| For the years ended September 30, 2023 | 67,604 | |||
| Total undiscounted cash flows | 135,208 | |||
| Less: imputed interest | (6,523 | ) | ||
| Present value of lease liabilities | $ | 128,685 | ||
Employment Agreement
On May 8, 2020, the Company entered an employment agreement with Yongjiang Shi, the Company’s sales, purchases and expense transactions are denominated inCFO for a term of 24 months. The monthly salary is RMB and all16,000 ($2,300). The Company will grant the CFO no less than 5,000 shares of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies underCommon Stock annually.
Investment Banking Engagement Agreement
On October 10, 2019, the current law. In China, foreign exchange transactions are required by lawCompany entered an investment banking engagement agreement with an investment banker firm to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in orderengage them as the exclusive lead underwriter for a registered securities offering of up to make the remittance.
$20 million. The Company sells electricityshall pay to the investment banker an equity retainer fee of 15,000 shares (post-reverse stock split) of the restricted Common Stock of the Company (10,000 shares was issued within 10 business days of signing the agreement, and remaining 5,000 shares will be paid upon completion of the offering). The agreement expired in March 2021.
On May 2, 2021, the Company entered an agreement with an investment banker (who will serve as the exclusive placement agent or exclusive lead underwriter of the Company) with the intension to raise approximately $10,000,000 from either a public offering or a private placement. Under the agreement, upon the closing of the financing, the Company will pay Univest Securities, LLC (the “Underwriter” or “Univest”) a discount equal to eight percent (8%) of the gross proceeds raised in the offering, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds of the offering, as well as underwriter warrants to purchase that number of shares of common stock and accompanying Warrants equal to five percent (5%) of the shares of common stock and Warrants sold in the offering, including upon exercise by the Underwriter of its customersover-allotment option (“Underwriter Warrants”). The Underwriter Warrants shall be exercisable at any time, and receives commercial notes (bank acceptance) from themtime to time, in lieuwhole or in part, during the period commencing 180 days from the date of payments for accounts receivable.commencement of sales of the offering, which period shall not extend further than five years from the date of commencement of sales of the offering in compliance with FINRA Rule 5110(g)(8)(A). After an initial period of six months from the agreement entering date, this engagement may be terminated at any time by either party upon 10 days written notice to the other party, effective upon receipt of written notice to that effect by the other party. The Company discounts the commercial notesfiled S-1 with the bank or endorsesSEC on July 28, 2021.
17. SUBSEQUENT EVENTS
The Company follows the commercial notesguidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were issued and determined the Company has the following material subsequent events:
On October 8, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to vendorsthe Agreement, the Company and Lender partitioned a new Promissory Notes in the original principal amount of $250,000 from the original Promissory Note entered on December 4, 2020. The Company and Lender exchanged this Partitioned Note for paymentthe delivery of their own obligations or to get cash from third parties. Most43,782 shares of the commercial notes have a maturity of less than six (6) months. As of September 30, 2017,Company’s Common Stock.
On October 21, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company had outstanding notes receivableand Lender partitioned a new Promissory Notes in the original principal amount of $1,717,669,$250,000 from the original Promissory Note entered on December 4, 2020. The Company and endorsed notes receivableLender exchanged this Partitioned Note for the delivery of 40,270 shares of the Company’s Common Stock.
On October 25, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to vendors of $2.58 million; at December 31, 2016,the Agreement, the Company had outstanding and endorsed notes receivableLender partitioned a new Promissory Notes in the original principal amount of $0.
19. COMMITMENTS
Lease Commitment
On March$500,000 from the original Promissory Note entered on December 4, 2014, Xi’an TCH’s office lease expired2020. The Company and Xi’an TCH renewedLender exchanged this lease for two years; the monthly rental payment is $20,140. The leasePartitioned Note for the office in Xi’an was renewed for another two years starting on March 5, 2016delivery of 72,737 shares of the Company’s Common Stock.
On November 9, 2021, Company entered into an Exchange Agreement with a monthly rental payment of $21,804 but payable quarterly in advance. However,the lender. Pursuant to the Agreement, the Company decided not to lease Xi’an TCH’s office after October 15, 2017. The landlord provided 45 days toand Lender partitioned a new Promissory Notes in the Company for moving without charging rent after October 15, 2017. There was no penalty for not complying withoriginal principal amount of $250,000 from the lease agreement since the Company used to prepay three-month rent in advance.original Promissory Note entered on December 4, 2020. The Company is currently lookingand Lender exchanged this Partitioned Note for the new location fordelivery of 40,983 shares of the office use. For the nine months ended September 30, 2017 and 2016, the rental expense of Xi’an TCH was $188,910 and $183,843, respectively. For the three months ended September 30, 2017 and 2016, the rental expense of Xi’an TCH was $70,497 and $57,459, respectively.Company’s Common Stock.
Construction Commitment
Refer to Note 1 for additional details related to lease commitments with Chengli, Tianyu (and its subsidiaries Xuzhou Tian’an and Xuzhou Huayu), and Zhongtai and Note 8 for commitments on construction in progress.
ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “may”, “will”, “should”, “would”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Company or Company’s management identify forward-looking statements. Such statements reflect the current view of Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the statements in the section “results of operations” below), and any businesses that Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and in our 2016 Form 10-K.
Although the Company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of thisannual report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Foreign Currency Translation and Comprehensive Income (Loss)” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.
OVERVIEW OF BUSINESS BACKGROUND
China Recycling Energy Corporation (the “Company” or “CREG”)The Company was incorporated on May 8, 1980 as Boulder Brewing Company under the laws of the State of Colorado. On September 6, 2001, the Company changed its state of incorporation to the State of Nevada. In 2004, the Company changed its name from Boulder Brewing Company to China Digital Wireless, Inc. and on March 8, 2007, the Company again changed its name from China Digital Wireless, Inc. to its current name, China Recycling Energy Corporation. The Company, through its subsidiaries, sells and leases energy saving systems and equipment to its customers in the People’s Republic of China (“PRC”). Typically, the Company transfers ownership of the waste energy recycling power generating projects to its customers at the end of each sales-type lease and provides financing to its customers for the cost of the projects as described below.
Our Subsidiaries
Our business is primarily conducted through our wholly-owned subsidiaries, Sifang Holdings Co., Ltd. (“Sifang”) and Shanghai Yinghua Financial Leasing Co., Ltd (“Yinghua”); Sifang’s wholly-owned subsidiaries, Huahong New Energy Technology Co., Ltd. (“Huahong”) and Shanghai TCH; Shanghai TCH’s wholly-owned subsidiary, Xi’an TCH Energy Technology Company, Ltd (“Xi’an TCH”), Xi’an TCH’s wholly-owned subsidiaries, Erdos TCH Energy Saving Development Co., Ltd (“Erdos TCH”) and Zhongxun Energy Investment (Beijing) Co., Ltd (“Zhongxun”); and Xi’an TCH’s 90% owned subsidiary, Xi’an Zhonghong New Energy Technology Co., Ltd. (“Zhonghong”). Zhonghong provides energy saving solutions and services, including constructing, selling and leasing energy saving systems and equipment to customers, project investment, investment management, economic information consulting, technical services, financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial leasing transactions. transactions in the Peoples Republic of China (“PRC”).
The Company’s current organizational chartOur business is as follows:
CREG Legal
Structure
primarily conducted through our wholly-owned subsidiaries, Yinghua and Sifang, Sifang’s wholly-owned subsidiaries, Huahong and Shanghai TCH, Shanghai TCH’s wholly-owned subsidiaries, Xi’an TCH, Xi’an TCH’s wholly-owned subsidiary Erdos TCH and its Subsidiaries
Xi’an TCH’s 90% owned and Shanghai TCH’s 10% owned subsidiary Xi’an Zhonghong New Energy Technology Co., Ltd., and Zhongxun. Shanghai TCH was established as a foreign investment enterprise in Shanghai under the laws of the PRC on May 25, 2004, and currently has a registered capital of $29.80 million. Xi’an TCH was incorporated in Xi’an, Shaanxi Province under the laws of the PRC onin November 8, 2007. In February 2009, Huahong was incorporated in Xi’an, Shaanxi province. Erdos TCH was incorporated in April 20092009. Huahong was incorporated in Erdos, Inner Mongolia Autonomous Region. On July 19, 2013, Xi’an TCH formedFebruary 2009. Xi’an Zhonghong New Energy Technology Co., Ltd (“Zhonghong”).Ltd. was incorporated in July 2013. Xi’an TCH owns 90% and Shanghai TCH owns 10% of Zhonghong. Zhonghong which provides energy saving solutions and services, including constructing, selling and leasing energy saving systems and equipment to customers.
As of September 30, 2017, Shanghai TCH, through its subsidiaries, had sales or sales-type leases with the following parties: (i) Erdos (for five recycling waste heat power generating systems); (ii) Pucheng (for two biomass power generation (“BMPG”) systems); and (iii) Shenqiu (for two BMPG systems).
The Fund Management Company and the HYREF Fund
On June 25, 2013, Xi’an TCH and Hongyuan Huifu Venture Capital Co. Ltd (“Hongyuan Huifu”) jointly established Hongyuan Recycling Energy Investment Management Beijing Co., Ltd (the “Fund Management Company”) with registered capital of RMB 10 million ($1.45 million). Xi’an TCH made an initial capital contribution of RMB 4 million ($650,000) and has a 40% ownership interest Zhongxun was incorporated in the Fund Management Company. With respect to the Fund Management Company, voting rights and dividend rights are allocated 80% and 20% between Hongyuan Huifu and Xi’an TCH, respectively.
The Fund Management Company is the general partner of Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF Fund”), a limited liability partnership established July 18, 2013 in Beijing. The Fund Management Company made an initial capital contribution of RMB 5 million ($830,000) to the HYREF Fund. An initial amount of RMB 460 million ($75 million) was fully subscribed by all partners for the HYREF Fund. The HYREF Fund has three limited partners: (1) China Orient Asset Management Co., Ltd., which made an initial capital contribution of RMB 280 million ($46.67 million) to the HYREF FundMarch 2014 and is a preferred limited partner; (2) Hongyuan Huifu, which made an initial capital contribution of RMB 100 million ($16.67 million) to the HYREF Fund and is an ordinary limited partner; and (3) the Company’s wholly-owned subsidiary, Xi’an TCH, which made an initial capital contribution of RMB 75 million ($12.5 million) to the HYREF Fund and is a secondary limited partner. The term of the HYREF Fund’s partnership is six years from the date of its establishment, expiring on July 18, 2019. The term is four years from the date of contribution for the preferred limited partner, and four years from the date of contribution for the ordinary limited partner. The size of the HYREF Fund is RMB 460 million ($75 million). The HYREF Fund was formed for the purpose of investing in Xi’an Zhonghong New Energy Technology Co., Ltd., a 90%wholly owned subsidiary of Xi’an TCH, for the construction of two coke dry quenching (“CDQ”) waste heat power generation (“WHPG”) stations with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”) and one CDQ WHPG station with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”).TCH.
Erdos TCH – Joint Venture
On April 14, 2009, theThe Company formed Erdos TCH as a joint venture (the “JV” or “Erdos TCH”) with Erdos Metallurgy Co., Ltd. (“Erdos”) to recycle waste heat from Erdos’ metal refining plants to generate power and steam to be sold back to Erdos. The JV has a term of 20 years with a total investment for the project estimated at $79 million (RMB 500 million) and an initial investment of $17.55 million (RMB 120 million). Erdos contributed 7% of the total investment for the project, and Xi’an TCH contributed 93%. According to Xi’an TCH and Erdos’ agreement on profit distribution, Xi’an TCH and Erdos will receive 80% and 20%, respectively, of the profit from the JV until Xi’an TCH receives the complete return of its investment. Xi’an TCH and Erdos will then receive 60% and 40%, respectively, of the profit from the JV. On June 15, 2013, Xi’an TCH and Erdos entered into a share transfer agreement, pursuant to which Erdos transferred and sold its 7% ownership interestis in the JVprocess of transforming and expanding into an energy storage integrated solution provider. We plan to Xi’an TCHpursue disciplined and targeted expansion strategies for $1.29 million (RMB 8 million), plus certain accumulated profits as described below. Xi’an TCH paidmarket areas we currently do not serve. We actively seek and explore opportunities to apply energy storage technologies to new industries or segments with high growth potential, including industrial and commercial complexes, large scale photovoltaic (PV) and wind power stations, remote islands without electricity, and cities with multi-energy supplies.
In December 2019, a novel strain of coronavirus (COVID-19) was reported and the $1.29 million in July 2013World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries as a result became the sole stockholder of Erdos TCH. In addition, Xi’an TCH is required to pay Erdos accumulated profits from inception up to June 30, 2013 in accordance with the supplementary agreement entered on August 6, 2013. In August 2013, Xi’an TCH paid 20% of the accumulated profit (calculated under PRC GAAP) of $226,000 to Erdos. Erdos TCH currently has two power generation systems in Phase I with a total of 18 MW power capacity,quarantines, facility closures, and three power generation systems in Phase II with a total of 27 MW power capacity.
With the current economic conditions in China, the government has limitedtravel and reduced over capacity and production in the iron and steel industry, which has resulted in a sharp decrease of Erdos Metallurgy Co., Ltd’s production of ferrosilicon, its revenue and cash flows, and has made it difficult for Erdos to make the monthly minimum lease payment.
After considering the challenging economic conditions facing Erdos, and to maintain the long-term cooperative relationship between the parties, which we believe will continue to produce long-term benefits, on April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement, effective May 1, 2016. Under the supplemental agreement, Erdos TCH cancelled monthly minimum lease payments from Erdos, and agreed to charge Erdos based on actual electricity sold at RMB 0.30 / KWH, which such price will be adjusted annually based on prevailing market conditions.
Shenqiu Yuneng Biomass Power Generation Projects
On May 25, 2011, Xi’an TCH entered into a Letter of Intent with Shenqiu YuNeng Thermal Power Co., Ltd. (“Shenqiu”) to reconstruct and transform a Thermal Power Generation System owned by Shenqiu into a 75T/H BMPG System for $3.57 million (RMB 22.5 million). The project commenced in June 2011 and was completed in the third quarter of 2011. On September 28, 2011, Xi’an TCH entered into a Biomass Power Generation Asset Transfer Agreement with Shenqiu (the “Shenqiu Transfer Agreement”). Pursuant to the Shenqiu Transfer Agreement, Shenqiu sold Xi’an TCH a set of 12 MW BMPG systems (after Xi’an TCH converted the system for BMPG purposes). As consideration for the BMPG systems, Xi’an TCH paid Shenqiu $10.94 million (RMB 70 million) in cash in three installments within six months upon the transfer of ownership of the systems. By the end of 2012, all of the consideration was paid. On September 28, 2011, Xi’an TCH and Shenqiu also entered into a Biomass Power Generation Project Lease Agreement (the “2011 Shenqiu Lease”). Under the 2011 Shenqiu Lease, Xi’an TCH agreed to lease a set of 12 MW BMPG systems to Shenqiu at a monthly rental rate of $286,000 (RMB 1.8 million) for 11 years. Upon expiration of the 2011 Shenqiu Lease, ownership of this system will transfer from Xi’an TCH to Shenqiu at no additional cost. In connection with the 2011 Shenqiu Lease, Shenqiu paid one month’s rent as a security deposit to Xi’an TCH, in addition to providing personal guarantees.
On October 8, 2012, Xi’an TCH entered into a Letter of Intent for technical reformation of Shenqiu Project Phase II with Shenqiu for technical reformation to enlarge the capacity of the Shenqiu Project Phase I (the “Shenqiu Phase II Project”). The technical reformation involved the construction of another 12 MW BMPG system. After the reformation, the generation capacity of the power plant increased to 24 MW. The project commenced on October 25, 2012 and was completed during the first quarter of 2013. The total cost of the project was $11.1 million (RMB 68 million). On March 30, 2013, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”). Under the 2013 Shenqiu Lease, Xi’an TCH agreed to lease the second set of 12 MW BMPG systems to Shenqiu for $239,000 (RMB 1.5 million) per month for 9.5 years. When the 2013 Shenqiu Lease expires, ownership of this system will transfer from Xi’an TCH to Shenqiu at no additional cost.
Pucheng Biomass Power Generation Projects
On September 11, 2013, Xi’an TCH entered into a BMPG Asset Transfer Agreement (the “Pucheng Transfer Agreement”) with Pucheng Xin Heng Yuan Biomass Power Generation Corporation (“Pucheng”), a limited liability company incorporated in China. The Pucheng Transfer Agreement provided for the sale by Pucheng to Xi’an TCH of a set of 12 MW BMPG systems with the completion of system transformation for a purchase price of RMB 100 million ($16.48 million) in the form of 8,766,547 shares of common stock of the Company at $1.87 per share. Also on September 11, 2013, Xi’an TCH also entered into a BMPG Project Lease Agreement with Pucheng (the “Pucheng Lease”). Under the Pucheng Lease, Xi’an TCH leases this same set of 12 MW BMPG system to Pucheng, and combines this lease with the lease for the 12 MW BMPG station of Pucheng Phase I project, under a single lease to Pucheng for RMB 3.8 million ($0.63 million) per month (the “Pucheng Phase II Project”). The term for the consolidated lease is from September 2013 to June 2025. The lease agreement for the 12 MW station from Pucheng Phase I project terminated upon the effective date of the Pucheng Lease. The ownership of two 12 MW BMPG systems will transfer to Pucheng at no additional charge when the Pucheng Lease expires.
Chengli Waste Heat Power Generation Projects
On July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”). The parties entered into a supplement agreement on July 26, 2013. Pursuant to these agreements, Zhonghong agreed to design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli agreed to pay energy saving fees (the “Chengli Project”). Chengli will contract the operation of the system to a third party contractor that is mutually agreed to by Zhonghong. In addition, Chengli will provide the land for the CDQ system and CDQ WHPG system at no cost to Zhonghong. The term of the Agreements is for 20 years. The first 800 million watt hours generated by the Chengli Project will be charged at RMB 0.42 ($0.068) per KWH (excluding tax); thereafter, the energy saving fee will be RMB 0.20 ($0.036) per KWH (excluding tax). The operating time shall be based upon an average 8,000 hours annually. If the operating time is less than 8,000 hours per year due to a reason attributable to Chengli, then time charged shall be 8,000 hours a year, and if it is less than 8,000 hours due to a reason attributable to Zhonghong, then it shall be charged at actual operating hours. The construction of the Chengli Project was completed in the second quarter of 2015 and the project successfully completed commissioning tests in the first quarter of 2017. The Chengli Project is now operational, but will not begin operations until the Company receives the required power generating license, which the Company anticipates receiving in the fourth quarter of 2017. When operations begin, Chengli shall ensure its coking production line works properly and that working hours for the CDQ system are at least 8,000 hours per year, and Zhonghong shall ensure that working hours for the CDQ WHPG system are at least 7,200 hours per year.
On July 22, 2013, Zhonghong entered into an Engineering, Procurement and Construction (“EPC”) General Contractor Agreement for the Boxing County Chengli Gas Supply Co., Ltd. CDQ Power Generation Project (the “Chengli Project”) with Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong, as the owner of the Chengli Project, contracted EPC services for a CDQ system and a 25 MW CDQ WHPG system for Chengli from Huaxin. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary services to complete the Chengli Project and ensure the CDQ system and CDQ WHPG system for Chengli meet the inspection and acceptance requirements and work normally. The Chengli Project is a turn-key project in which Huaxin is responsible for monitoring the quality, safety, duration and cost of the Chengli Project. The total contract price is RMB 200 million ($33.34 million), which includes all materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety costs.
Tianyu Waste Heat Power Generation Project
On July 19, 2013, Zhonghong entered into a Cooperative Agreement (the “Tianyu Agreement”) for Energy Management of CDQ and CDQ WHPG with Jiangsu Tianyu Energy and Chemical Group Co., Ltd (“Tianyu”). Pursuant to the Tianyu Agreement, Zhonghong will design, build, operate and maintain two sets of 25 MW CDQ and CDQ WHPG systems for two subsidiaries of Tianyu – Xuzhou Tian’an Chemical Co., Ltd (“Xuzhou Tian’an”) and Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu”) – to be located at Xuzhou Tian’an and Xuzhou Huayu’s respective locations (the “Tianyu Project”). Upon completion of the Tianyu Project, Zhonghong will charge Tianyu an energy saving fee of RMB 0.534 ($0.087) per KWH (excluding tax). The operating time will be based upon an average 8,000 hours annually for each of Xuzhou Tian’an and Xuzhou Huayu. If the operating time is less than 8,000 hours per year due to a reason attributable to Tianyu, then time charged will be 8,000 hours a year. The construction of the Xuzhou Tian’an Project is anticipated to be completed by the second quarter of 2018. Xuzhou Tian’an will provide the land for the CDQ and CDQ WHPG systems for free. Xuzhou Tian’an also guarantees that it will purchase all of the power generated by the CDQ WHPG systems. The Xuzhou Huayu Project is currently on hold due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues. The local government has acted in its capacity to coordinate the resolution of this issue. The local residents were requested to move from the hygienic buffer zone of the project location with compensatory payments from the government. Xuzhou Huayu was required to stop production and implement technical innovations to mitigate pollution discharge including sewage treatment, dust collection, noise control, and recycling of coal gas. Currently, some local residents have moved. Xuzhou Huayu has completed the implementation of the technical innovations of sewage treatment, dust collection, and noise control, and the Company is waiting for local governmental agencies to approve these technical innovations so that we can resume construction. We expect to complete the construction of Xuzhou Huayu in the second quarter of 2018. Once Huayu obtains the government’s acceptance and approval of the technical innovations, the project will resume.
On July 22, 2013, Xi’an Zhonghong New Energy Technology Co., Ltd. entered into an EPC General Contractor Agreement for the Xuzhou Tianyu Group CDQ Power Generation Project (the “Project”) with Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong as the owner of the Project contracted EPC for the two sets of CDQ and 25 MW CDQ WHPG systems for Tianyu to Huaxin—one for Xuzhou Tian’an and one for Xuzhou Huayu. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary works to complete the Project and ensure the CDQ and CDQ WHPG systems for Tianyu meet the inspection and acceptance requirements and work normally. The Project is a turn-key project and Huaxin is responsible for the quality, safety, duration and cost of the Project. The total contract price is RMB 400 million ($66.67 million) of which RMB 200 million ($33.34 million) is for the Xuzhou Tian’an system and RMB 200 million is for the Xuzhou Huayu system. The price is a cover-all price, which includes but not limited to all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety matters.
Yida Coke Oven Gas Power Generation Project
On June 28, 2014, Xi’an TCH entered into an Asset Transfer Agreement (the “Transfer Agreement”) with Qitaihe City Boli Yida Coal Selection Co., Ltd. (“Yida”), a limited liability company incorporated in China. The Transfer Agreement provided for the sale to Xi’an TCH of a 15 MW coke oven WGPG station, which was converted from a 15 MW coal gangue power generation station from Yida. As consideration for the Transfer Asset, Xi’an TCH paid to Yida RMB 115 million ($18.69 million) in the form of the common stock shares of the Company at the average closing price per share of the Stock for the 10 trading days prior to the closing date of the transaction (the “Shares”). The exchange rate between US Dollar and Chinese RMBlogistics restrictions in connection with the stock issuance wasoutbreak. However, as a result of PRC government’s effort on disease control, the rate equal tooutbreak in China is under the middle rate published by the People’s Bank of China on the closing datecontrol. As of the assets transfer.
On June 28, 2014, Xi’an TCH also entered into a Coke Oven Gas Power Generation Project Lease Agreement (the “Lease Agreement”) with Yida. Under the Lease Agreement, Xi’an TCH leased the Transfer Asset to Yida for RMB 3 million ($0.49 million) per month, and the term of the lease is from June 28, 2014 to June 27, 2029. Yida will also provide an RMB 3 million ($0.49 million) security deposit (without interest) for the lease. Xi’an TCH will transfer the Transfer Asset back to Yida at no cost at the end of the lease term.
On June 22, 2016, Xi’an TCH entered into a Coal Oven Gas Power Generation Project Repurchase Agreement (the “Repurchase Agreement”) with Yida. Under the Repurchase Agreement, Xi’an TCH agreed to transfer to Yida all the project assets for RMB 112,000,000 ($16.89 million) (the “Transfer Price”) with Yida’s retention of ownership of the Shares. Yida agreed to make the following payments: (i) the outstanding monthly leasing fees for April and May 2016 of RMB 6,000,000 ($0.90 million) to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; (ii) a payment of RMB 50,000,000 ($7.54 million) of the Transfer Price to Xi’an TCH within 5 business days from the execution of the Repurchase Agreement; and (iii) a payment of the remaining RMB 62,000,000 ($9.35 million) of the Transfer Price to Xi’an TCH within 15 business days from the execution of the Repurchase Agreement. Under the Repurchase Agreement, ownership of the project assets was transferred from Xi’an TCH to Yida within 3 business days after Xi’an TCH received the full Transfer Price and the outstanding monthly leasing fees. In July 2016, the Company received the full payment of the Transfer Price and title to the system was transferred at that time. The Company recorded a $0.42 million loss from this transaction in 2016.
Zhongtai WHPG Energy Management Cooperative Agreement
On December 6, 2013, Xi’an entered into a CDQ and WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”) with Xuzhou Zhongtai Energy Technology Co., Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu Province, China.
Pursuant to the Zhongtai Agreement, Xi’an TCH will design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG system (the “Project”) and sell the power to Zhongtai, and Xi’an TCH will also build a furnace to generate steam from the waste heat of the smoke pipeline and sell the steam to Zhongtai.
The construction period of the Project is expected to be 18 months from the date when conditions are ready for construction to begin. Zhongtai will start to pay an energy saving fee from the date when the WHPG station passes the required 72-hour test run. The term of payment is for 20 years. For the first 10 years of the term, Zhongtai shall pay an energy saving fee at RMB 0.534 ($0.089) per KWH (including value added tax) for the power generated from the system. For the second 10 years of the term, Zhongtai shall pay an energy saving fee at RMB 0.402 ($0.067) per KWH (including value added tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change of local grid electricity price. Zhongtai shall also pay an energy saving service fee for the steam supplied by Xi’an TCH at RMB 100 ($16.67) per ton (including value added tax). Zhongtai and its parent company will provide guarantees to ensure Zhongtai will fulfill its obligations under the Agreement. Upon the completion of the term, Xi’an TCH will transfer the systems to Zhongtai at RMB 1 ($0.16). Zhongtai shall provide waste heat to the systems for no less than 8,000 hours per year and waste gas volume no less than 150,000 Nm3 per hour with a temperature no less than 950°C. If these requirements are not met, the term of the Zhongtai Agreement will be extended accordingly. If Zhongtai wants to terminate the Zhongtai Agreement early, it shall provide Xi’an TCH a 60 day notice and pay the termination fee and compensation for the damages to Xi’an TCH according to the following formula: (i) if it is less than five years into the term when Zhongtai requests termination, Zhongtai shall pay: Xi’an TCH’s total investment amount plus Xi’an TCH’s annual investment return times five years minus the years in which the system has already operated; or (ii) if it is more than five years into the term when Zhongtai requests the termination, Zhongtai shall pay Xi’an TCH’s total investment amount minus total amortization cost (the amortization period is 10 years).
On March 14, 2016, Xi’an TCH entered into a Xuzhou Zhongtai CDQ and Waste Heat Power Generation System Transfer Agreement (the “Transfer Agreement”) with Zhongtai and Xi’an Huaxin New Energy Co., Ltd., a limited liability company incorporated in China (the “Contractor”).
The Transfer Agreement provides for the sale to Zhongtai of all the assets of the Project under construction from Xi’an TCH. Additionally, Xi’an TCH will transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the Project, which Xi’an TCH had entered into with the Contractor in connection with the Project. As consideration for the transfer of the Project, Zhongtai is to pay to Xi’an TCH an aggregate purchase price of RMB 167,360,000 ($25.75 million and the “Transfer Price”), on the following schedule: (i) RMB 50,000,000 ($7.69 million) of the Transfer Price was paid within 20 business days from the execution of the Transfer Agreement; (ii) RMB 30,000,000 ($4.32 million) of the Transfer Price was paid within 20 business days upon the completion of the construction of the Project but not later than July 30, 2016; and (iii) RMB 87,360,000 ($13.45 million) of the Transfer Price will be paid before July 30, 2017. The temporary ownership of the Project was transferred from Xi’an TCH to Zhongtai after the Xi’an TCH received the first payment of RMB 50,000,000, and the full ownership of the Project is to be officially transferred to Zhongtai upon full payment of the Transfer Price. The Zhongtai Agreement is to be terminated and Xi’an TCH will agree not to pursue any breach of contract liability against the Zhongtai under the Zhongtai Agreement when Zhongtai fully pays the Transfer Price according to the terms of the Transfer Agreement. If the Transfer Price is not fully paid on time pursuant to the Transfer Agreement, the Transfer Agreement automatically terminates and Xi’an TCH retains ownership of the Project, and both parties would continue to possess their respective rights and obligations according to the Zhongtai Agreement and assume the liabilities for breach of the Zhongtai Agreement. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou Taifa”) has guaranteed the payments by Zhongtai. As of September 30, 2017, Xi’an TCH had received the first payment of $7.70 million and the second payment of $4.32 million. The Company recorded a $2.82 million loss from this transaction in 2016. As of this report, date,there are some new Covid-19 cases discovered in a few provinces of China, however, the Company hasnumber of new cases is not yet received the remaining payment of RMB 87,360,000 ($13.45 million)significant due to the tight cash flow of Zhongtai, the Company expects to collect part of the remaining balance during the fourth quarter of 2017.PRC government’s strict control.
Rongfeng CDQ Power Generation Energy Management Cooperative Agreement
On December 12, 2013, Xi’an TCH entered into a CDQ Power Generation Energy Management Cooperative Agreement with Tangshan Rongfeng Iron & Steel Co., Ltd. (the “Rongfeng Agreement”), a limited liability company incorporated in Hebei Province, China.
Pursuant to the Rongfeng Agreement, Xi’an TCH will design, build and maintain a CDQ system and a CDQ WHPG system and sell the power to Rongfeng. The construction period of the Project is expected to be eighteen (18) months after the Agreement takes effect and from the date when conditions are ready for construction to begin.
Rongfeng will pay an energy saving fee from the date when the WHPG station passes the required 72-hour test run. The term of payment is for 20 years. For the first 10 years of the term, Rongfeng shall pay an energy saving fee at RMB 0.582 ($0.095) per KWH (including tax) for the power generated from the system. For the second 10 years of the term, Rongfeng shall pay an energy saving fee at RMB 0.432 ($0.071) per KWH (including tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change of local grid electricity price. Rongfeng and its parent company will provide guarantees to ensure Rongfeng will fulfill its obligations under the Rongfeng Agreement. Upon the completion of the term, Xi’an TCH will transfer the systems to Rongfeng at RMB 1. Rongfeng shall provide waste heat to the systems for no less than 8,000 hours per year with a temperature no less than 950°C. If these requirements are not met, the term of the Agreement will be extended accordingly. If Rongfeng wants to terminate the Agreement early, it shall provide Xi’an TCH a 60 day notice and pay the termination fee and compensation for the damages to Xi’an TCH according to the following formula: 1) if it is less than or equal to five years into the term when Rongfeng requests termination, Rongfeng shall pay: Xi’an TCH’s total investment amount plus Xi’an TCH’s average annual investment return times five years minus the years of which the system has already operated); 2) if it is more than five years into the term when Rongfeng requests the termination, Rongfeng shall pay: Xi’an TCH’s total investment amount minus total amortization cost (the amortization period is 10 years).
On November 16, 2015, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Rongfeng and Xi’an Huaxin New Energy Co., Ltd., a limited liability company incorporated in China (“Xi’an Huaxin”). The Transfer Agreement provided for the sale to Rongfeng of the CDQ Waste Heat Power Generation Project (the “Project”) from Xi’an TCH. Additionally, Xi’an TCH would transfer to Rongfeng the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. As consideration for the transfer of the Project, Rongfeng is to pay to Xi’an TCH an aggregate purchase price of RMB 165,200,000 ($25.45 million) on the following schedule: (i) RMB 65,200,000 ($10.05 million) was paid by Rongfeng to Xi’an TCH within 20 business days after signing the Transfer Agreement, (ii) RMB 50,000,000 ($7.70 million) was paid by Rongfeng to Xi’an TCH within 20 business days after the Project is completed, but no later than March 31, 2016, and (iii) RMB 50,000,000 ($7.70 million) will be paid by Rongfeng to Xi’an TCH no later thannine months ended September 30, 2016. Mr. Cheng Li, the largest stockholder of Rongfeng, has personally guaranteed the payments. The ownership of the Project was conditionally transferred to Rongfeng within 3 business days following the initial payment of RMB 65,200,000 ($10.05 million) by Rongfeng to Xi’an TCH,2021 and the full ownership of the Project will be transferred to Rongfeng after it completes the entire payment pursuant to the terms of the Transfer Agreement. The Company recorded a $3.78 million loss from this transaction in 2015. As of December 31, 2016,2020, the Company had received payment in fulla net income of $25.45 million.
Related Party Transactions
As$1,386,773 and net loss of September 30, 2017,$275,891, respectively. For the Company had $41,775 in advances from the Company’s management, which bear no interest, are unsecured, and are payable upon demand.
On August 27, 2014, the Company entered into a Share Purchase Agreement (the “Agreement”) with Mr. Guohua Ku, a major stockholder and the Company’s Chairman and Chief Executive Officer. Pursuant to the Agreement, the Company issued to Mr. Ku 1,382,908 shares of the Company’s common stock (the “Shares”) on September 5, 2014 (adjusted for the 1:10 reverse stock split). The purchase price per share for the Shares was the average closing price quoted on the NASDAQ Global Market for the common stock of the Company for 15 trading days prior to the effective date of the Agreement, which was $1.37. The Company received payments in two installments of $12 million and $6.91 million on September 5, 2014 and September 12, 2014, respectively, in equivalent of RMB 74.05 million and RMB 42.85 million, respectively, using the middle exchange rate between USD and RMB published by the People’s Bank of China on the effective date of the agreement pursuant to its terms. These shares were recorded using the fair value of $1.49 per share. The Company filed a registration statement registering the Shares for resale on Form S-3 (Reg. No. 333-214834), which was declared effective by the Securities and Exchange Commission on December 20, 2016.
During the nine and three months ended September 30, 2017,2021 and 2020, the Company recognized RMB 20.02had a net loss of $556,574 and $671,280, respectively. The Company has an accumulated deficit of $41.66 million ($2.94 million)as of September 30, 2021. The Company is in the process of transforming and RMB 6.55expanding into an energy storage integrated solution provider as described above.
The historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. However, the Company had $149.52 million ($0.98million), respectively, interest income for sales-type leasecash on hand at September 30, 2021 as a result of Pucheng BMPG systemscollection the full payment from Pucheng Xin Heng Yuan Biomass Power Generation Corporation, whose major stockholder became a stockholder of CREG throughall the projects that were disposed earlier, this satisfies the Company’s estimated liquidity needs 12 months from the issuance of the Company’s common stockfinancial statements. The Company believes that the actions discussed above are probable of occurring and the occurrence, as well as the cash flow discussed, mitigate the substantial doubt raised by its historical operating results.
Management also intends to this stockholderraise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While the Company believes in consideration for the transferviability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the old systemCompany to CREG for BMPG system transformation.
Also during 2016, prior to the repurchase date of June 22, 2016, the Company recognized RMB 13.83 million ($2.09 million) interest income for sales-type lease of Yida WGPG system from Qitaihe City Boli Yida Coal Selection Co., Ltd., whose major stockholder becamecontinue as a stockholder of CREG through the issuance ofgoing concern is dependent upon the Company’s common stockability to this stockholder in consideration for the transferfurther implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of the WGPG system to the Company.a public or private offering, or debt financing including bank loans.
Critical Accounting Policies and EstimatesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements (“CFS”), which were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to assist you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
These accompanying CFS were prepared in accordance with US GAAP and pursuant to the rules and regulations of the SEC for financial statements.
Basis of Consolidation
The CFS include the accounts of CREG and, its subsidiary, Sifang Holdings and Yinghua; Sifang Holdings’ wholly-owned subsidiaries, Huahong and Shanghai TCH; Shanghai TCH’s wholly-owned subsidiary Xi’an TCH; and Xi’an TCH’s subsidiaries, Erdos TCH, Zhonghong, and Zhongxun. Substantially all of the Company’s revenues are derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all of the Company’s consolidated assets and liabilities as of September 30, 2017 and December 31, 2016, respectively.2021. All significant inter-company accounts and transactions were eliminated in consolidation.
Use of Estimates
In preparing the CFS, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues and expenses during the year reported. Actual results may differ from these estimates.
Concentration of Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions within China are not covered by insurance. The Company has not experienced any losses in such accounts.
Certain other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC.
Accounts Receivable
As of September 30, 2017, the Company had accounts receivable of $13,162,772 (from the sales of CDQ and a CDQ WHPG system to Zhongtai). As of December 31, 2016, the Company had accounts receivable of $12,593,340 (from sale of CDQ and a CDQ WHPG system to Zhongtai).
Interest Receivable on Sales Type Leases
As of September 30, 2017, the interest receivable on sales type leases was $8,049,073, mainly representing recognized but not yet collected interest income for the Pucheng and Shenqiu systems. As of December 31, 2016, the interest receivable on sales type leases was $4,621,491.
The Company maintains reserves for potential credit losses on receivables. Management reviews the composition of receivables and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Pucheng and Shenqiu each resumed production in April, 2017 and repayment began in May, 2017. The Shenqiu and Pucheng users have a good record of payment and have promised to repay the due amount gradually after production resumes. Based on an evaluation of the collectability, for the nine months ended September 30, 2017, the Company had bad debt allowance for net investment receivable of $61,800.
Revenue Recognition
Sales-type Leasing and Related Revenue Recognition
On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. (See Operating lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue recognition fall under ASC 842.
The Company constructs and then leases waste energy recycling power generating projects to its customers. The Company typically transfers ownership of the waste energy recycling power generating projects to its customers at the end of eachthe lease. InvestmentPrior to January 1, 2019, the investment in these projects iswas recorded as investment in sales-type leases in accordance with “Accounting for Leases”, codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 840, “Leases,” and its various amendments and interpretations.
The Company manufactures and constructsfinances construction of waste energy recycling power generating projects and finances its customers for the costs of the projects. The sales and cost of sales are recognized at the time of sale or inception of the lease.lease, which is when the control is transferred to the lessee. The Company accounts for the transfer of control as a sales type lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded when collection of payments is probable. This is in accordance with the revenue recognition principle in ASC 606 -Revenue from contracts with customers. The investment in sales-type leases consists of the sum of the total minimum lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and contingent rentals, if any. Unearned interest income is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. While a portion of revenue is recognized at the inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease.lease, which results in interest income and reduction of receivables. Revenue is recognized net of the Value Added Tax.sales tax.
Contingent Rental Income
The Company records the income from actual electricity usage in addition to minimum lease payment of each project as contingent rental income in the period earned. Contingent rent is not part of minimum lease payments.
Foreign Currency Translation and Comprehensive Income (Loss)
The Company’s functional currency is RMB. For financial reporting purposes, RMB figures were translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains and losses from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company uses “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income 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.
RESULTS OF OPERATIONS
Comparison of Three Months EndedResults of Operations for the nine months ended September 30, 20172021 and 20162020
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales, certainsales. Certain columns may not add due to rounding.
| 2017 | 2016 | |||||||||||||||
| % of Sales | % of Sales | |||||||||||||||
| Sales | $ | - | - | % | $ | - | - | % | ||||||||
| Sales of systems | - | - | % | - | - | % | ||||||||||
| Contingent rental income | - | - | % | - | - | % | ||||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Cost of systems and contingent rental income | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | 1,731,336 | - | % | 2,286,948 | - | % | ||||||||||
| Total operating income | 1,731,336 | - | % | 2,286,948 | - | % | ||||||||||
| Total operating expenses | (242,007 | ) | - | % | (299,110 | ) | - | % | ||||||||
| Income from operations | 1,489,329 | - | % | 1,987,838 | - | % | ||||||||||
| Total non-operating expenses, net | (1,226,013 | ) | - | % | (1,419,963 | ) | - | % | ||||||||
| Income before income tax | 263,316 | - | % | 567,875 | - | % | ||||||||||
| Income tax expense | 397,636 | - | % | 110,957 | - | % | ||||||||||
| Less: net loss attributable to noncontrolling interest | (93,428 | ) | - | % | (79,921 | ) | - | % | ||||||||
| Net income attributable to China Recycling Energy Corp | $ | (40,892 | ) | - | % | $ | 536,839 | - | % | |||||||
| 2021 | % of Sales | 2020 | % of Sales | |||||||||||||
| Sales - contingent rental income | $ | - | - | % | $ | - | - | % | ||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | - | - | % | - | - | % | ||||||||||
| Total operating expenses (income) | 764,192 | - | % | (1,181,743 | ) | - | % | |||||||||
| Income (Loss) from operations | (764,192 | ) | - | % | 1,181,743 | - | % | |||||||||
| Total non-operating income (expenses), net | 2,063,914 | - | % | (1,457,634 | ) | - | % | |||||||||
| Income (Loss) before income tax | 1,299,722 | - | % | (275,891 | ) | % | ||||||||||
| Income tax benefit | (87,051 | ) | - | % | - | - | % | |||||||||
| Net Income (loss0 | $ | 1,386,773 | - | % | $ | (275,891 | ) | - | % | |||||||
SALES. SALES. Total sales for the threenine months ended September 30, 20172021 and 20162020 were $0. For the three months ended September 30, 2017 and 2016, the Company had no sales of systems or contingent rental income. For the sales-type leases, sales and COS are recorded at the time of the lease; in addition to sales revenue, our other major source of revenue is interest income from the sales-type leases.
COST OF SALES. Cost of sales (“COS”) for the threenine months ended September 30, 20172021 and 20162020 were $0. We did not have any contingent rental income, or finish any new construction or sale any new system, in the three months ended September 30, 2017.
GROSS PROFIT. Gross profit and gross marginincome for the three months ended September 30, 2017 and 2016 were $0 and 0%, respectively.
INTEREST INCOME ON SALES-TYPE LEASES. Interest income on sales-type leases for the three months ended September 30, 2017 was $1.73 million, a $0.56 million decrease from $2.29 million for the three months ended September 30, 2016. During the three months ended September 30, 2017, interest income was derived from the following nine (9) sales-type leases:
On April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement, effective on May 1, 2016, whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and charges Erdos based on actual electricity sold at RMB 0.30 / KWH. The selling price of each KWH will be determined annually based on prevailing market conditions. During the nine months ended September 30, 2017, Erdos TCH incurred significant decreased electricity usage,2021 and accordingly, the interest income from five power and steam generating systems2020 were $0 with gross margin of Erdos TCH decreased significantly.
In comparison, during the three months ended September 30, 2016, interest income was derived from the following 9 sales-type leases:
0%.
OPERATING EXPENSES.EXPENSES. Operating expenses consisted of general and administrative expenses, bad debt expense reversal totaling $242,007$764,192 for the threenine months ended September 30, 2017,2021, compared to $299,110 general and administrative expensesoperating income $1,181,743 for the comparable periodnine months ended September 30, 2020, an increase of 2016, a decrease of $57,103$1,945,935 or 19%165%. The decreaseincrease in operating expenses was mainly due to decreased payroll expenses of $43,700, entertainment expenses of $11,100, travel expenses of $14,600, and endowment insurance of $8,700, despite the increased bad debt expense reversal by $1,624,520, and increased stock transfer agent fee by $200,960, increased social insurance expense by $35,420, increased amortization expense of $61,800. These decreases in operatingOID on long term note by $29,160, increased payroll expense by $24,400 and increased other G&A expenses were a result of the Company’s cost-saving efforts during a slower business period. by $31,450.
NET NON-OPERATING EXPENSES.INCOME (EXPENSES). Net non-operating expensesincome (expenses) consisted of non-sales-type leaseloss on note conversion, interest income, interest expenses loss on sale of construction in progress and miscellaneous expenses. For the threenine months ended September 30, 2017,2021, net non-operating expenseincome was $1.23 million$2,063,914 compared to net non-operating expense of $1.42 million$1,457,634 for the threenine months ended September 30, 2016.2020. For the threenine months ended September 30, 2017,2021, we had $35,887$302,426 interest income and $1,591gain on termination of buy-back agreement of Chengli project of $3,156,138 (see Note 8), but the amount was offset by $393,555 interest expense on note payable, loss on note conversion of $61,155 and interest expense on failure of note redemption on time of $818,914 and other expenses of $121,026. For the nine months ended September 30, 2020, we had $124,305 interest income, but the amounts were offset by a $1.26 million$1,037,183 interest expense on loans. Forentrusted loan and note payable, $496,853 loss on note conversion and other expenses of $47,903.
INCOME TAX BENEFIT. Income tax benefit was $87,051 for the threenine months ended September 30, 2016, we had a $35,288 interest2021, compared with $0 for the nine months ended September 30, 2020. The consolidated effective income tax rates for the nine months ended September 30, 2021and 2020 were (6.7)% and a $202,782 other0%, respectively.
NET INCOME. Net income for the nine months ended September 30, 2021 was $1,386,773 compared to net loss of $275,891 for the nine months ended September 30, 2020, an increase of income of $1,662,664. This increase in net income was mainly due to gain on termination of buy-back agreement of Chengli project by $3,156,138, but the amounts werewas partly offset by a $1.66 million interest expense.
INCOME TAX EXPENSE. Income taxdecreased bad debt expense was $0.40 millionreversal by $1,624,520 as describe above.
Comparison of Results of Operations for the three months ended September 30, 2017, compared with $0.11 million income tax expense for the comparable period of 2016. The consolidated effective income tax rate for the three months ended September 30, 20172021 and 2016 were 122% and 20%, respectively. The increase in income tax expense in the three months ended September 30, 2017 was mainly due to the valuation allowance for deferred tax asset for the significant losses associated with Xi’an Zhonghong. Income tax rate for all the Chinese subsidiaries was 25% for each of 2017 and 2016. 2020
NET INCOME (LOSS).Net loss for the three months ended September 30, 2017 was $40,892 compared to net income of $0.54 million for the three months ended September 30, 2016, a decrease of $0.57 million. This decrease in net income was mainly due to the decreased interest income on sales-type leases and increased income tax expense in the three months ended September 30, 2017.
Comparison of Nine Months Ended September 30, 2017 and 2016
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales, certainsales. Certain columns may not add due to rounding.
| 2017 | 2016 | |||||||||||||||
| % of Sales | % of Sales | |||||||||||||||
| Sales | $ | - | - | % | $ | - | - | % | ||||||||
| Sales of systems | - | - | % | - | - | % | ||||||||||
| Contingent rental income | - | - | % | - | - | % | ||||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Cost of systems and contingent rental income | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | 6,062,347 | - | % | 10,945,411 | - | % | ||||||||||
| Total operating income | 6,062,347 | - | % | 10,945,411 | - | % | ||||||||||
| Total operating expenses | (581,308 | ) | - | % | (1,153,894 | ) | - | % | ||||||||
| Income from operations | 5,481,039 | - | % | 9,791,517 | - | % | ||||||||||
| Total non-operating expenses, net | (3,870,080 | ) | - | % | (7,902,663 | ) | - | % | ||||||||
| Income before income tax | 1,610,959 | - | % | 1,888,854 | - | % | ||||||||||
| Income tax expense (benefit) | 1,179,602 | - | % | (861,811 | ) | - | % | |||||||||
| Less: net loss attributable to noncontrolling interest | (271,683 | ) | - | % | (227,126 | ) | - | % | ||||||||
| Net income attributable to China Recycling Energy Corp | $ | 703,040 | - | % | $ | 2,977,791 | - | % | ||||||||
| 2021 | % of Sales | 2020 | % of Sales | |||||||||||||
| Sales - contingent rental income | $ | - | - | % | $ | - | - | % | ||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | - | - | % | - | - | % | ||||||||||
| Total operating expenses | 380,040 | - | % | 77,015 | - | % | ||||||||||
| Loss from operations | (380,040 | ) | - | % | (77,015 | ) | - | % | ||||||||
| Total non-operating expenses, net | (165,632 | ) | - | % | (594,265 | ) | - | % | ||||||||
| Loss before income tax | (545,672 | ) | - | % | (671,280 | ) | % | |||||||||
| Income tax expense | 10,902 | - | % | - | - | % | ||||||||||
| Net loss | $ | (556,574 | ) | - | % | $ | (671,280 | ) | - | % | ||||||
SALES. SALES. Total sales for the ninethree months ended September 30, 20172021 and 20162020 were $0. For
COST OF SALES. Cost of sales (“COS”) for the ninethree months ended September 30, 20172021 and 2016, the Company had no sales of systems or contingent rental income. For the sales-type leases, sales and COS are recorded at the time of the lease; in addition to sales revenue, our other major source of revenue is interest income from the sales-type leases.
COST OF SALES. COS for the nine months ended September 30, 2017 and 20162020 were $0. We did not have any contingent rental income, or finish any new construction or sale any new system, in the nine months ended September 30, 2017.
GROSS PROFIT. Gross profitincome for the three months ended September30, 2021 and 2020 were $0 with gross margin for the nine months ended September 30, 2017 and 2016 were $0 andof 0%, respectively..
INTEREST INCOME ON SALES-TYPE LEASES. Interest income on sales-type leases for the nine months ended September 30, 2017 was $6.06 million, a $4.88 million decrease from $10.95 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, interest income was derived from the following nine sales-type leases:
On April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement, effective on May 1, 2016, whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and charges Erdos based on actual electricity sold at RMB 0.30 / KWH. The selling price of each KWH will be determined annually based on prevailing market conditions.
In comparison, during the nine months ended September 30, 2016, interest income was derived from the following 10 sales-type leases:
OPERATING EXPENSES.EXPENSES. Operating expenses consisted of general and administrative expenses and bad debt expense reversal, totaling $581,308$380,040 for the ninethree months ended September 30, 2017,2021, compared to $1.15 million general and administrative expenses$77,015 for the comparable periodthree months ended September 30, 2020, an increase of 2016, a decrease of $572,586$303,025 or 50%393%. The decreaseincrease was mainly due to increased stock transfer agent fee by $223,430, decreased payrollbad debts reversal by $9,479, and increased other G&A expenses of $129,800, entertainment expenses of $37,800, travel expenses of $38,800, and office expenses of $26,500 incurred by Xi’an TCH and Erdos TCH, and decreased professional fee such as accounting, auditing, legal expense and director fee of approximately $392,000 from CREG US parent company, despite the increased bad debt expense of $61,800. These decreases in operating expenses were a result of our disposal of certain power generating systems, which led to decreased employee headcount and associated expenses, as well as our continuous cost-saving efforts during a slower business period. $70,108.
NET NON-OPERATING EXPENSES.INCOME (EXPENSES). Net non-operating expensesincome (expenses) consisted of non-sales-type leaseloss on note conversion, interest income, interest expenses loss on sale of construction in progress and miscellaneous expenses. For the ninethree months ended September 30, 2017,2021, net non-operating expense was $3.87 million$165,632 compared to net non-operating expenseexpenses of $7.90 million$594,265 for the ninethree months ended September 30, 2016.2020. For the ninethree months ended September 30, 2017,2021, we had $106,764$109,269 interest income and $9,389 other income but the amounts wereamount was offset by a $3.99 million$165,854 interest expense on loans.note payable, loss on note conversion of $58,436, and other expenses of $50,790. For the ninethree months ended September 30, 2016,2020, we had a $0.10 million$51,688 interest income and a $0.28 million other income but the amounts wereamount was offset by a $5.04 million$340,155 interest expense a $2.82 million loss from the sale of the Xuzhou Zhongtai construction in progress,on entrusted loan and a $0.42 million loss fromnote payable, and $298,523 loss on the system repurchase from Yida.
note redemption.
INCOME TAX EXPENSE. Income tax expense was $1.18 million$10,902 for the ninethree months ended September 30, 2017, an increase of $2.04 million from $0.86 million income tax benefit2021, compared with $0 for the comparable period of 2016.three months ended September 30, 2020. The consolidated effective income tax (benefit) raterates for the ninethree months ended September 30, 20172021 and 20162020 were 71%2.0% and (46)%0%, respectively. The increase
NET LOSS. Net loss for the three months ended September 30, 2021 was $556,574 compared to net loss of $671,280 for the three months ended September 30, 2020, a decrease of loss of $114,706. This decrease in income tax expensenet loss was mainly due to the valuation allowance for deferred tax asset for the significant losses associated with Xi’an Zhonghong in thedecreased loss on note conversion by $240,087, increased interest income by $57,581, decreased interest expense by $174,301, which was partly offset by increased other expenses by $43,515, and increased G&A expenses by $303,025 as describe above.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of nine months endedEnded September 30, 2017,2021 and the higher income tax benefit from loss from disposal of fixed assets of the Xuzhou Zhongtai and Yida systems in the comparable period of 2016 per PRC tax return purpose.2020
NET INCOME.Net income for the nine months ended September 30, 2017 was $0.70 million compared to net income of $2.98 million for the nine months ended September 30, 2016, a decrease of $2.27 million. This decrease in net income was mainly due to the decreased interest income on sales-type leases and increased income tax expense in the nine months ended September 30, 2017.
Liquidity and Capital Resources
Comparison of the nine months ended September 30, 2017 and 2016
As of September 30, 2017,2021, the Company had cash and equivalents of $48.31$149.52 million, other current assets of $40.45 million,$1,106,842, current liabilities of $61.92$10.70 million, working capital of $26.84$139.93 million, a current ratio of 1.43:14.08:1 and a debt-to-equityliability-to-equity ratio of 0.27:0.12:1.
The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 20172021 and 2016:2020:
| 2017 | 2016 | |||||||
| Cash provided by (used in): | ||||||||
| Operating Activities | $ | (887,898 | ) | $ | 30,432,764 | |||
| Investing Activities | - | 1,101,308 | ||||||
| Financing Activities | (735,478 | ) | (31,463,810 | ) | ||||
| 2021 | 2020 | |||||||
| Cash provided by (used in): | ||||||||
| Operating Activities | $ | (1,583,918 | ) | $ | 55,199,324 | |||
| Investing Activities | - | - | ||||||
| Financing Activities | $ | 42,561,721 | $ | 497,187 | ||||
Net cash used in operating activities was $0.89 million$1,583,918 during the nine months ended September 30, 2017,2021, compared to $30.43$55.20 million cash provided by operating activities infor the comparable period of 2016.nine months ended September 30, 2020. The decrease in net cash inflow for the nine months ended September 30, 2021 was mainly due to our cash collection of sales type leases of Pucheng systems by $13.96 million, and cash collection of accounts receivable by $43.42 million for selling / disposing Huayu, Shenqiu, Zhongtai and Tian’an systems that were occurred in the nine months ended September 30, 2017 was mainly2020.
On August 2, 2021, the Company entered a Research and Development Cooperation Agreement with a software development company to design, establish, upgrade and maintenance of Smart Energy Management Cloud Platform for energy storage and remote-site monitoring; upon completion, the Company will provide such platform to its customers at a fee. Total contracted research and development cost is $1,000,000, the Company prepaid $200,000 as of September 30, 2021.
On August 23, 2021, the Company entered a Market Research and Project Development Service Agreement with a consulting company in Xi’an for a service period of 12 months. The consulting company will perform the market research for new energy industry including photovoltaic and energy storage, develop potential new customers and due to a decrease in cash inflow from construction in progress by $23.01 million as a resultdiligence check, assisting the Company for business cooperation negotiation and relevant agreements preparation. Total contract amount is $1,150,000, and the Company prepaid $650,000 at commencement of the disposalservice; the Company will pay $200,000 upon issuance of the Xuzhou Zhongtai construction in progress inresearch report, and pay the comparable periodremaining of 2016, an increased cash outflow for other receivable by $2.82 million, and a decreased cash inflow from collection of principal on sales type leases by $17.44 million. However,$300,000 upon completion all the decrease in cash inflow was partially offset by a decreased cash outflow on accounts receivable by $10.11 million and an increased cash inflow from delaying interest payable on an entrusted loan by $5.72 million.services.
Net cash provided by (used in) investing activities was $0 and $0, respectively, for the nine months ended September 30, 2017, compared to net2021 and 2020.
Net cash provided by investing activities of $1.10 million in the comparable period of 2016. We had $1.10 million cash inflow from change in restricted cash in the nine months ended September 30, 2016.
Net cash used in financing activities was $0.74 million for the nine months ended September 30, 2017$42,561,721 compared to net cash used in financing activities of $31.46 million$497,187 during the nine months ended September 30, 2021 and 2020, respectively. The cash inflow for the nine months ended September 30, 2016.2021 was the proceeds from a private placement of $37,561,721 and issuance of notes payable of $5,000,000. The cash outflow ininflow for the nine months ended September 30, 2017 came2020 was from the $0.74issuance of Common Stock of $497,187.
On February 23, 2021, the Company entered into certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers, an aggregate of up to 3,320,000 shares of common stock of the Company, at $11.522 per share, which is the five-day average closing price immediately prior to signing the Purchase Agreements. One of the purchasers is the Company’s CEO (also is the Company’s Chairman), he purchased 1,000,000 common shares of the Company. On March 11, 2021, the Company received approximately $38.25 million repayment of bank loans. In comparison, during the nine months ended September 30, 2016, we had $30.47 million in repayments of bank loans and $0.99 million repayment of notes payable.
We believe we have sufficient cash to continue our current business through 2017 based on recurring receipts from existing sales-type leases. As of September 30, 2017, we had five recycling WHPG systemsproceeds from the Erdos projects and four BMPG systems (two for Pucheng and two for Shenqiu), allissuance of which generate cash flow.3,320,000 shares under the securities purchase agreements, there was no any fees paid in connection with this financing. In addition, we have accessApril 2021, the Company’s CEO amended the number of shares that he would purchase from 1,000,000 shares to bank loans940,000 shares; accordingly, total number of shares sold in case of an immediate need for working capital. We believe we have sufficient cash resourcesthis offering became 3,260,000 shares. The Company returned $691,320 extra proceeds that were received earlier to cover our anticipated capital expendituresthe Company’s CEO in 2017. The 9 systems that are currently in operation have minimum monthly lease payments of RMB 7.72 million ($1.14 million).April 2021.
We do not believe inflation has had or will have a significant negative impact on our results of operations in 2017.2021.
Transfers of Cash to and from Our Subsidiaries
The PRC has currency and capital transfer regulations that require us to comply with certain requirements for the movement of capital. The Company is able to transfer cash (US Dollars) to its PRC subsidiaries through: (i) an investment (by increasing the Company’s registered capital in a PRC subsidiary), or (ii) a stockholder loan. Except as described below, theThe Company’s subsidiaries in the PRC have not transferred any earnings or cash to the Company to date. The Company’s business is primarily conducted through its subsidiaries. The Company is a holding company and its material assets consist solely of the ownership interests held in its PRC subsidiaries. The Company relies on dividends paid by its subsidiaries for its working capital and cash needs, including the funds necessary: (i) to pay dividends or cash distributions to its stockholders, (ii) to service any debt obligations and (iii) to pay operating expenses. As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, the Company’s PRC subsidiaries are restricted in that respect, as well as in others respects noted below, in their ability to transfer a portion of their net assets to the Company as a dividend.
With respect to transferring cash from the Company to its subsidiaries, increasing the Company’s registered capital in a PRC subsidiary requires the pre-approvalfiling of the local commerce department, while a stockholder loan requires a filing with the state administration of foreign exchange or its local bureau.
With respect to the payment of dividends, we note the following:
| 1. | PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations (an in-depth description of the PRC regulations is set forth below); |
| 2. | Our PRC subsidiaries are required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; |
| 3. | Such reserves may not be distributed as cash dividends; |
| 4. | Our PRC subsidiaries may also allocate a portion of their after-tax profits to fund their staff welfare and bonus funds; except in the event of a liquidation, these funds may also not be distributed to stockholders; the Company does not participate in a Common Welfare Fund; |
| 5. | The incurrence of debt, specifically the instruments governing such debt, may restrict a subsidiary’s ability to pay stockholder dividends or make other cash distributions; and |
| 6. | The Company is subject to covenants and consent requirements. |
If, for the reasons noted above, our subsidiaries are unable to pay stockholder dividends and/or make other cash payments to the Company when needed, the Company’s ability to conduct operations, make investments, engage in acquisitions, or undertake other activities requiring working capital may be materially and adversely affected. However, our operations and business, including investment and/or acquisitions by our subsidiaries within China, will not be affected as long as the capital is not transferred in or out of the PRC.
PRC Regulations
In accordance with PRC regulations on Enterprises with Foreign Investment and their articles of association, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide statutory reserves, which are appropriated from net profit, as reported in the FIE’s PRC statutory accounts. AnA FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital (based on the FIE’s PRC statutory accounts). The aforementioned reserves may only be used for specific purposes and may not be distributed as cash dividends. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its stockholders, unless approved by the State Administration of Foreign Exchange. After satisfaction of this requirement, the remaining funds may be appropriated at the discretion of the FIE’s board of directors. Our subsidiary, Shanghai TCH, qualifies as ana FIE and is therefore subject to the above-mandated regulations on distributable profits.
Additionally, in accordance with PRC corporate law, a domestic enterprise is required to maintain a surplus reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and may not be distributed as cash dividends. Xi’an TCH, Huahong, Zhonghong and Erdos TCH were established as domestic enterprises; therefore, each is subject to the above-mentioned restrictions on distributable profits.
As a result of PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends, in a general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend or otherwise.
Chart of the Company’s Statutory Reserve
Pursuant to PRC corporate law, effective January 1, 2006, the Company is required to maintain a statutory Pursuant to PRC corporate law, effective January 1, 2006, the Company is required to maintain a statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings. Our restricted and unrestricted retained earnings under US GAAP are set forth below:
| As of | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Unrestricted retained earnings (accumulated deficit) | $ | (41,659,277 | ) | $ | (43,026,465 | ) | ||
| Restricted retained earnings (surplus reserve fund) | 15,174,627 | 15,155,042 | ||||||
| Total retained earnings (accumulated deficit) | $ | (26,484,650 | ) | $ | (27,871,423 | ) | ||
| As At | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Unrestricted retained earnings | $ | 86,177,041 | $ | 85,838,638 | ||||
| Restricted retained earnings (surplus reserve fund) | 14,838,561 | 14,473,924 | ||||||
| Retained earnings (including surplus reserve fund) | $ | 101,015,602 | $ | 100,312,562 | ||||
Off-Balance Sheet ArrangementsOFF-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 stockholders’ 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.
Contractual ObligationsCONTRACTUAL OBLIGATIONS
The Company’s contractual obligations as of September 30, 20172021 are as follows:
| Contractual Obligation | 1 year or less | More than 1 year | See Note (for details) | |||||||||
| Entrusted loan | 50,023,354 | - | 12 | |||||||||
| Total | $ | 50,023,354 | $ | - | ||||||||
| 1 year or | More than | See Note | ||||||||||
| Contractual Obligation | less | 1 year | (for details) | |||||||||
| Notes payable including accrued interest of $221,996, net of unamortized OID of $275,605 | $ | 7,355,319 | $ | - | 10 | |||||||
| Entrusted loan | $ | - | $ | 308,385 | 8 | |||||||
| Total | $ | 7,355,319 | $ | 308,385 | ||||||||
The Company believes that it has a stablesufficient cash inflow each monthin bank of $150 million as of September 30, 2021, and a sufficient channel to commercial institutions to obtain any loans that may be necessary to meet its working capital needs. Historically, we have been able to obtain loans or otherwise achieve our financing objectives due to the Chinese government’s support for energy-saving businesses with stable cash inflows, good credit ratings and history. The Company does not believe it will have difficulties related to the repayment of its outstanding short-term loans.
Commitments
Boxing Chengli Power Generation Projects
On July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”), including a supplement agreement entered by the parties on July 26, 2013.
Pursuant to the agreements, Zhonghong will design, build and maintain a CDQ system and a 25 MW CDQ WHPG system to supply power to Chengli, and Chengli will pay energy saving fees. Chengli will contract the operation of the system to a third party contractor that is mutually agreed to by Zhonghong. In addition, Chengli will provide the land for the CDQ and CDQ WHPG system at no cost to Zhonghong. The term of the Agreements is 20 years. The energy saving fees generated by the Project will be charged at RMB 0.42 ($0.068) per KWH (excluding tax). The operating time shall be based upon an average 8,000 hours annually. If the operating time is less than 8,000 hours due to a reason attributable to Chengli’s, then time charged shall be 8,000 hours a year, and if it is less than 8,000 hours due to a reason attributable to Zhonghong, then it shall be charged at actual operating hours. The construction of the Project was completed in the second quarter of 2015, and the commissioning tests were successfully completed in the first quarter of 2017. The Chengli Project is now operational, but will not begin operations until the Company receives the required power generating license, which the Company anticipates receiving in the fourth quarter of 2017. From the date of the operation, Chengli shall ensure its coking production line works properly and that working hours for the CDQ system are no less than 8,000 hours/year, while Zhonghong shall ensure that working hours for the CDQ WHPG system are no less than 7,200 hours/year.
On July 22, 2013, Xi’an Zhonghong New Energy Technology Co., Ltd. entered into an EPC General Contractor Agreement for the Boxing County Chengli Gas Supply Co., Ltd. CDQ Power Generation Project (the “Project”) with Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong as the owner of the Project contracted EPC for a CDQ and a 25 MW CDQ WHPG system for Chengli from Huaxin. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary works to complete the Project and ensure the CDQ and CDQ WHPG system for Chengli meet the inspection and acceptance requirements and work normally. The project is a turn-key project and Huaxin is responsible for the quality, safety, duration and cost of the Project. The total contract price is RMB 200 million ($28.83 million). The price is a cover-all price which includes but is not limited to all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety matters. As of September 30, 2017, Zhonghong has paid $25.48 million (or $31.87 million if including capitalized interest) for the Chengli project and is committed to pay an additional $4.65 million. The Chengli project had finished construction, but was waiting for government approval before beginning operations.
Xuzhou Tian’an and Xuzhou Huayu CDQ Power Generation Projects
On July 19, 2013, Zhonghong entered into a Cooperative Agreement for Energy Management of CDQ and CDQ WHPG Project (the “Tianyu Project”) with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”).
Pursuant to the Tianyu Agreement, Zhonghong will design, build, operate and maintain two sets of 25 MW CDQ and CDQ WHPG systems for two subsidiaries of Tianyu: one is for and will be located at Xuzhou Tian’an Chemical Co., Ltd and one set is for and will be located at Xuzhou Huayu Coking Co., Ltd. Upon the completion of the Tianyu Project, Zhonghong will charge Tianyu an energy saving service fee of RMB 0.534 ($0.088) per KWH (excluding tax). The operating time shall be based upon an average 8,000 hours annually for each of Tian’an and Huayu. If the operating time for each of Tian’an and Huayu is less than 8,000 hours a year due to the reason attributable to Tianyu, then time charged shall be 8,000 hours a year for each of Tian’an and Huayu. Xuzhou Tian’an and Huayu will provide the land for the CDQ and CDQ WHPG systems for free. Xuzhou Tian’an and Huayu also guarantee that they will purchase all of the power generated by the CDQ WHPG systems.
On July 22, 2013, Xi’an Zhonghong New Energy Technology Co., Ltd. entered into an EPC General Contractor Agreement for the Xuzhou Tianyu Group CDQ Power Generation Project (the “Project”) with Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong as the owner of the Project contracted EPC for the two sets of CDQ and 25 MW CDQ WHPG systems for Tianyu to Huaxin—one for Xuzhou Tian’an and one for Xuzhou Huayu. Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary works to complete the Project and ensure the CDQ and CDQ WHPG systems for Tianyu meet the inspection and acceptance requirements and work normally. The project is a turn-key project and Huaxin is responsible for the quality, safety, duration and cost of the Project. The total contract price is RMB 400 million ($66.67 million) of which RMB 200 million ($28.83 million) is for the Xuzhou Tian’an system and RMB 200 million is for the Xuzhou Huayu system. The price is a cover-all price which includes but is not limited to all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety matters. As of September 30, 2017, Zhonghong had paid $18.08 million (or $24.59 million if including capitalized interest) for the Huayu project and $25.95 million (or $36.40 million if including capitalized interest) for the Tian’an project and is committed to pay an additional $12.05 million for the Huayu project and $4.18 million for the Tian’an project.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in RMB, which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) at the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended as of September 30, 2017,2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be subject to litigation, claims and assessments that arise in the ordinary course of business. Management believes that any liability resulting from such additional matters will not have a material adverse effect on our financial position, results of operations or cash flows. The Company is not a party to any legal proceedings that it believes will have a material adverse effect upon the conduct of its business or its financial position.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K as of and for the year ended December 31, 2016.2020 and the registration statement on Form S-1 (filed no. 333-258232). An investment in our common stock involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described in our most recent Form 10-K.10-K and the registration statement as referenced above. If any of those risks, incorporated by reference in this Form 10-Q, occur, the market price of our shares of common stock could decline and investors could lose all or part of their investment. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information
None.
Nome
ItemITEM 6. ExhibitsEXHIBITS
* Filed herewith
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November | By: | /s/ Guohua Ku |
| Guohua Ku | ||
Chairman of the Board and Chief Executive Officer | ||
| Date: November | By: | /s/ |
| Yongjiang Shi | |
| Chief Financial Officer (Principal Financial | ||
39
EXHIBIT INDEX
* Filed herewith
46