UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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~~

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, ~~2017~~2018

☐ ~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 000-55802

H/CELL ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

47-4823945

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

97 River Road, Flemington, NJ 08822

(Address of principal executive offices) (zip code)

(908) 837-9097

(Registrant’s telephone number, including area code)

Indicate by check mark whether the 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 preceding 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 ☐x No ☒~~(NOTE: Company has not been subject to the filing requirements for the past 90 days)~~¨

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 ☒x No ☐¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	¨	Accelerated filer	☐¨
Non-accelerated filer	~~☐ (Do~~¨(Do not check if a smaller reporting company)		Smaller reporting company	☒x
			Emerging growth company	☒x

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 Section 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 ☒.x.

As of August ~~11, 2017,~~9, 2018, there were ~~7,041,579~~7,586,024 shares of registrant’s common stock outstanding.

H/CELL ENERGY CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements	3

		Condensed consolidated balance sheets as of June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017	3

		Condensed consolidated statements of operations for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	4

		Condensed consolidated statement of stockholders’ equity for the six months ended June 30, ~~2017~~2018 (unaudited)	5

		Condensed consolidated statements of cash flows for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	6

		Notes to condensed consolidated financial statements (unaudited)	77-20

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1621-26

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2226

	ITEM 4.	Controls and Procedures	2326

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2427
	ITEM 1A.	Risk Factors	2427
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2427
	ITEM 3.	Defaults Upon Senior Securities	2427
	ITEM 4.	Mine Safety Disclosures	2427
	ITEM 5.	Other Information	2427
	ITEM 6.	Exhibits	2427

	SIGNATURES		2528

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

H/CELL ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2018 December 31, 2017
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 460,538 $ 455,700
Accounts receivable (net retention) 1,321,820 808,050
Prepaid expenses 14,467 14,669
Costs and earnings in excess of billings 58,970 51,531
Total current assets 1,855,795 1,329,950

Property and equipment, net 403,941 102,573
Security deposits and other non-current assets 21,344 8,416
Deferred tax asset 44,257 44,257
Customer lists, net 93,887 -
Goodwill 1,373,621 -

Total assets $ 3,792,845 $ 1,485,196

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses $ 951,769 $ 631,385
Management fees payable – related party 15,000 31,257
Earn out payable 182,056
Billings in excess of costs and earnings 93,099 87,206
Sales and withholding tax payable 59,894 61,239
Current equipment notes payable 33,407 -
Current capital lease payable 67,289 -
Income tax payable 25,746 98,313
Total current liabilities 1,428,260 909,400

Noncurrent liabilities
Capital leases 166,965 -
Equipment notes payable 128,919 -
Convertible note payable – related party, net of discount 8,891 -
Total noncurrent liabilities 304,775 -

Total liabilities 1,733,035 909,400

Commitments and contingencies

Stockholders’ equity
Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding - -
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,586,024 and 7,041,579 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively 758 704
Additional paid-in capital 2,949,459 1,335,656
Accumulated deficit (828,768 ) (731,754 )
Accumulated other comprehensive loss (61,639 ) (28,810 )
Total stockholders’ equity 2,059,810 $ 575,796

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 3,792,845 $ 1,485,196
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENT OF OPERATIONS – OTHER COMPREHENSIVE INCOME

June 30, 2017 December 31, 2016
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 293,769 $ 537,867
Accounts receivable (net retention) 1,634,929 650,886
Prepaid expenses 7,043 14,168
Costs and earnings in excess of billings 27,166 91,904
Total current assets 1,962,907 1,294,825

Property and equipment, net 102,076 99,816
Security deposits and other non-current assets 8,599 8,497

Total assets $ 2,073,582 $ 1,403,138

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses $ 1,062,732 $ 661,237
Management fees payable – related party 46,000 52,000
Billings in excess of costs and earnings 168,919 83,538
Sales tax payable 114,422 114,085
Total current liabilities 1,392,073 910,860

Commitments and contingencies

Stockholders’ equity
Common Stock - $0.0001 par value; 25,000,000 shares authorized;
7,041,579 and 3,131,579 shares issued and outstanding
as of June 30, 2017 and December 31, 2016, respectively 704 313
Preferred Stock - $0.0001 par value; 5,000,000 shares authorized;
0 shares issued and outstanding - -
Additional paid-in capital 1,302,487 1,283,422
Accumulated deficit (589,293 ) (740,651 )
Accumulated other comprehensive loss (32,389 ) (50,806 )
Total stockholders’ equity 681,509 492,278

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 2,073,582 $ 1,403,138
For the Three Months Ended June 30,
For the Six Months Ended
June 30,

2018 2017 2018 2017

Revenue
Construction income $ 2,009,825 $ 1,906,495 $ 3,704,360 $ 3,757,250
Related party - 24,163 31,789 40,253
Total revenue 2,009,825 1,930,658 3,736,149 3,797,503

Cost of goods sold
Direct costs 1,253,043 1,147,909 2,462,456 2,561,729
Direct costs – related party - 34,440 31,617 50,345
Total cost of goods sold 1,253,043 1,182,349 2,494,073 2,612,074

Gross profit 756,782 748,309 1,242,076 1,185,429

Operating expenses
General and administrative expenses 687,831 498,124 1,243,015 945,369
Management fees – related party 19,500 45,000 39,000 91,000
Total operating expenses 707,331 543,124 1,282,015 1,036,369

Income (loss) from operations 49,451 205,185 (39,939 ) 149,060
Income tax provision (benefit) - - - -

Income (loss) before other income and expense $ 49,451 $ 205,185 $ (39,939 ) $ 149,060

Other income (loss) (6,738 ) 2,297 (6,738 ) 2,298

Other expenses
Interest expense 10,146 - 14,092 -
Interest expense – related party 18,676 - 32,891 -
Loss on fixed asset disposal (64 ) - 3,354 -
Total other expenses 28,758 - 50,337 -

Net income (loss) $ 13,955 $ 207,482 $ (97,014 ) $ 151,358

Other comprehensive income (loss), net

Foreign currency translation adjustment (22,570 ) 7,048 (32,829 ) 18,417

Comprehensive income (loss) $ (8,615 ) $ 214,530 $ (129,843 ) $ 169,775

Earnings (loss) per share
Basic $ 0.00 $ 0.03 $ (0.01 ) $ 0.02
Diluted $ 0.00 $ 0.03 $ (0.01 ) $ 0.02
Weighted average common shares outstanding
Basic 7,483,980 7,039,357 7,450,235 6,355,468
Diluted 8,819,225 7,948,091 7,450,235 7,259,155

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
H/CELL ENERGY CORPORATION
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
Common Stock Preferred Stock Accumulated
Number
of
Shares Amount Number
of
shares Amount Additional
Paid-In
Capital Accumulated
Income
(Deficit) Other
Comprehensive
Income (Loss) Total
Stockholders’ Equity
Beginning, January 1, 2018 7,041,579 $ 704 - $ - $ 1,335,656 $ (731,754 ) $ (28,810 ) $ 575,796

Issuance of common stock in February 2018, PVBJ Acquisition 444,445 44 - - 1,183,516 - - 1,183,560

Issuance of common stock April 2018, Stock Options 100,000 10 - - 990 - - 1,000

Stock-based compensation expense - - - - 34,297 - - 34,297

Beneficial conversion feature - - - - 395,000 - - 395,000

Net loss - - - - - (97,014 ) (32,829 ) (123,105 )

Ending, June 30, 2018 7,586,024 $ 758 - $ - $ 2,949,459 $ (828,768 ) $ (61,639 ) $ 2,059,810
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30,
2018 2017

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ (97,014 ) $ 151,358
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 85,130 14,559
Stock-based compensation 34,297 18,456
Loss on sale of assets 3,354
Change in fair value contingent consideration 6,738
Change in operating assets and liabilities:
Accounts and retainage receivable (541,335 ) (929,652 )
Prepaid expenses and other costs (202 ) 8,099
Costs in excess of billings (10,559 ) 69,843
Security deposits (14,144 )
Accounts payable and accrued expenses 412,271 339,043
Billings in excess of costs 5,893 88,802

Net cash used in operating activities (115,167 ) (239,492 )

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (4,663 ) (19,889 )
Cash acquired in business acquisition 30,408
Proceeds from disposition of property and equipment 386 2,298

Net cash used in investing activities (26,131 ) (17,591 )

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of convertible debt 395,000 -
Payments of related party interest (24,000 ) -
Repayments on capital leases (31,368 ) -
Repayments on notes payable (22,273 ) -
Repayments on long-term debt (197,801 ) -
Proceeds related to stock option exercises 1,000 1,000

Net cash provided by financing activities 120,558 1,000

Net decrease in cash and cash equivalents (31,522 ) (256,803 )

Effect of foreign currency translation on cash (26,684 ) 11,985

Cash and cash equivalents, beginning of period 455,700 537,867

Cash and cash equivalents, end of period $ 460,538 $ 293,769

Supplemental disclosure of non-cash investing and financing activities

Common stock issued for acquisition of business $ 1,177,779 -
Fair value of net assets acquired in business combination $ 2,056,344 -
Beneficial conversion feature $ 8,891 -
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3 6

H/CELL ENERGY CORPORATION
~~CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS – OTHER COMPREHENSIVE INCOME~~
For the Three Months Ended June 30,
For the Six Months Ended
June 30,

2017 2016 2017 2016

Revenue
Construction income $ 1,906,495 $ 1,531,479 $ 3,757,250 $ 2,747,483
Related party 24,163 1,500 40,253 1,500

Total revenue 1,930,658 1,532,979 3,797,503 2,748,983

Cost of goods sold
Direct costs 1,147,909 990,723 2,561,729 1,904,985
Direct costs – related party 34,440 1,500 50,345 1,500

Total cost of goods sold 1,182,349 992,223 2,612,074 1,906,485

Gross profit 748,309 540,756 1,185,429 842,498

Operating expenses
Research and development - - - 2,000
General and administrative expenses 498,124 527,778 945,369 1,442,177
Management fees – related party 45,000 38,000 91,000 77,000

Total operating expenses 543,124 565,778 1,036,369 1,521,177

Income (Loss) from operations
205,185

(25,022
) 149,060
678,679

Other income 2,297 7,767 2,298 7,671

Net income (loss) $ 207,482 $ (17,255 ) $ 151,358 $ (671,008 )

Other comprehensive income (loss), net

Change in foreign currency translation adjustment 7,048 43,108 18,417 54,376

Comprehensive income (loss) $ 214,530 $ 25,853 $ 169,775 $ (616,632 )

Earnings (Loss) per share
Basic $ 0.03 $ (0.01 ) $ 0.02 $ (0.26 )
Diluted $ 0.03 $ (0.01 ) $ 0.02 $ (0.26 )
Weighted average common shares outstanding
Basic 7,039,357 2,709,357 6,355,468 2,571,387
Diluted 7,948,091 2,709,357 7,259,155 2,571,387
~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~
~~H/CELL ENERGY CORPORATION~~
~~STATEMENT OF STOCKHOLDERS’ EQUITY~~
~~FOR THE SIX MONTHS ENDED JUNE 30, 2017~~
Common Stock Preferred Stock
Accumulated
Number of
Shares Amount Number of
shares Amount Additional
Paid-In
Capital Accumulated Income (Deficit) Other Comprehensive Income (Loss) Total
Stockholders’ Equity
Beginning, January 1, 2017 3,313,579 $ 313 - $ - $ 1,283,422 $ (740,651 ) $ (50,806 ) $ 492,278

Issuance of common stock in January 2017, Pride Acquisition 3,800,000 380 - - (380 ) - - -

Common stock issued for services 10,000 1 - - 4,999 - - 5,000

Stock-based compensation expense - - - - 13,456 - - 13,456

Proceeds from stock option exercise 100,000 10 - - 990 - - 1,000

Net income - - - - - 151,358 18,417 169,775

Ending, June 30, 2017 7,041,579 $ 704 - $ - $ 1,302,487 $ (589,293 ) $ (32,389 ) $ 681,509
~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~
5
~~H/CELL ENERGY CORPORATION~~
~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS~~
For the Six Months Ended June 30,
2017 2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 151,358 $ (671,008 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 14,559 7,514
Stock-based compensation 18,456 387,450
Change in operating assets and liabilities:
Accounts and retainage receivable (929,652 ) 564,016
Prepaid expenses and other costs 8,099 768
Costs in excess of billings 69,843 52,902
Accounts payable and accrued expenses 339,043 (230,175 )
Billings in excess of costs 88,802 (50,957 )

Net cash provided by (used in) provided by operating activities (239,492 ) 60,510

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (19,889 ) (551 )
Proceeds from disposition of property and equipment 2,298 7,671

Net cash provided by (used in) investing activities (17,591 ) 7,120

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of common stock, net - 450,000
Proceeds related to stock option exercises 1,000 -
Repayment to stockholders - (1,829 )

Net cash provided by financing activities 1,000 448,171

Net Increase (decrease) in cash and cash equivalents (256,803 ) 515,801

Effect of foreign currency translation on cash 11,985 35,620

Cash and cash equivalents, beginning of period 537,867 141,332

Cash and cash equivalents, end of period $ 293,769 $ 692,753
~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~
6
~~H/CELL ENERGY CORPORATION~~
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~AND 2016 (UNADUITED)~~(UNAUDITED)

1. ORGANIZATION AND LINE OF BUSINESS

H/Cell Energy Corporation (the “Company”) was incorporated in the state of Nevada on August 17, 2015. The Company, based in Flemington, N.J., is a company whose principal operations consist of designing and installing hydrogen energy systems. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”) (see Note ~~10)~~11). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy systems division to focus on the high growth renewable energy market in Asia-Pacific. The new clean energy division has not generated any revenue but has begun to bid work and expects to have projects completed in 2018. On February 1, 2018, the Company acquired PVBJ Inc. (“PVBJ”) for 444,445 shares of the Company’s common stock with a fair value of $1,177,779 and $221,800 in earn-out liability (see Note 12). Established in 2008, PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. PVBJ is now expanding into renewable energy systems.

The Company has developed a hydrogen energy system for residential and commercial use designed to create electricity. This unique system uses renewable energy as its source for hydrogen production. It functions as a self-sustaining clean energy system. It can be configured as an off grid solution for all electricity needs or it can be connected to the grid to generate energy credits. Its production of hydrogen is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and cover the six months ended June 30, 2017. These condensed consolidated financial statements should be read in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December 31, 2016. Results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2017. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise..

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Accounts ~~and Retainage~~ Receivable

Accounts receivable are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. Accounts are written off as uncollectible after collection efforts have failed. In addition, the Company does not generally charge interest on past-due accounts or require collateral. At June 30, ~~2017~~2018 and ~~2016,~~December 31 2017, there was no allowance for doubtful accounts required.

Property and Equipment, and Depreciation

Property and equipment are stated at cost. Depreciation is generally provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the lease or the estimated useful life of the improvement.

Repairs and maintenance that do not improve or extend the lives of the property and equipment are charged to expense as incurred.
7
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~AND 2016 (UNADUITED)~~(UNAUDITED)
Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of the aggregate of the following (1) consideration transferred, (2) the fair value of any non-controlling interest in the acquire, and (3) if the business combination is achieved in stages, the acquisition-date fair value of our previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Identifiable intangible assets consist primarily of customer lists and relationships, non-compete agreements and technology based intangibles and other contractual agreements. The Company amortizes finite lived identifiable intangible assets over the shorter of their stated or statutory duration or their estimated useful lives, generally ranging from 3 to 15 years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total identifiable intangible assets comprised 39% of our consolidated total assets at June 30, 2018. There were no intangible assets or goodwill at June 30, 2017.
The Company uses the acquisition method of accounting for all business combinations and does not amortize goodwill or intangible assets with indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are tested for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). ~~Other comprehensive income (loss) refers to revenue, expenses, gains and losses that are recorded as an element of stockholder’s equity but are excluded from net income (loss).~~ The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.

Advertising Costs
Advertising costs are charged to expense during the period in which they are incurred. Advertising expense for the three months ended June 30, 2018 and 2017 was $1,068 and $524, respectively. For the six months ended June 30, 2018 and 2017, advertising expense was $2,240 and $2,146, respectively.
Foreign Currency Translation

~~Assets,~~The Company translates its foreign subsidiary’s assets and liabilities ~~revenue and expenses~~ denominated in ~~non-U.S.~~foreign currencies ~~are translated~~into U.S. dollars at ~~the rate~~current rates of exchange ~~prevailing on the date~~as of the balance ~~sheet. Gains (losses) on translation of~~sheet date and income and expense items at the ~~financial statements~~average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are ~~from the Company’s operations where the functional currency is not the U.S. dollar. Translation gains (losses) are reflected as a component of~~recorded in accumulated other comprehensive income. The Company records gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location’s functional currency in net income (loss) for each period. ~~Gains (losses) on foreign currency transactions are included in the statements of operations.~~
Revenue Recognition

~~Revenues and related costs on construction contracts are recognized~~On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) using the ~~“percentage~~modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Under Topic 606 requirements, the Company recognizes revenue from the installation or construction of projects over time using the cost-based input method. The Company accounts for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. The Company considers the start of a project to be when the above criteria have been met and the Company either has written authorization from the customer to proceed or an executed contract.
8
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)
The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e. design, engineering, procurement of material, etc.) should not be recognized as the client does not have control of the good/service provided. When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion ~~method”~~ of ~~accounting~~specific tasks inherent in ~~accordance with~~ the ~~Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-35, Accounting~~fulfillment of its performance obligation(s). The schedules for ~~Performance~~such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of ~~Construction-Type~~operations can and ~~Certain Production Type Contracts. Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion~~usually does differ from amounts that can be billed or invoiced to the ~~costs incurred as a percentage of total estimated costs for the entirety of~~customer at any point during the contract. ~~Costs include direct material, direct labor, subcontract labor~~Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and ~~any allocable indirect costs. All un-allocable indirect costs and corporate general and administrative costs are charged~~unbilled receivables to the ~~periods as incurred.~~
~~Revenues and expenses related to service and maintenance contracts are booked when costs are incurred and billed when the job is complete.~~
~~Revisions in cost and profit estimates during the course of~~customer under the contract are reflected as a current asset in the ~~accounting period~~Company’s balance sheet under the captions “Costs and estimated earnings in excess of billings” and “Unbilled accounts receivable.” Amounts by which cumulative billings to the ~~facts, which require~~customer under a contract as of a given date exceed cumulative contract revenue recognized on the ~~revision, become known. Provisions for estimated losses on uncompleted contracts~~contract are ~~made~~reflected as a current liability in the ~~period~~Company’s balance sheet under the caption “Billings in ~~which such losses are determined. Changes in job performance, job conditions,~~excess of costs and estimated ~~profitability, including those arising~~earnings.”
Revenue from service or short term contracts is recognized currently as the work is performed. Time and materials are accordingly charged to the customer at completion of the job. The Company recognizes service or short term contract ~~penalty provisions,~~revenues when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is determinable, and ~~final contract settlements may result in revisions to costs~~collectability is reasonably assured. Revenue is typically recorded once all performance obligations have been satisfied. Sales are recorded net of discounts and ~~income and are recognized in the period in~~returns, which ~~the revisions are determined.~~historically have not been material.

Cash and Cash Equivalents

Cash and cash equivalents includes cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less. The Company had no cash equivalents as of June 30, 2018 or December 31 2017. At times during the three and six months ended June 30, 2018 and 2017, balances exceeded the FDIC insurance limit of $250,000.

~~Research and Development Costs~~
~~Research and development costs are expensed as incurred. These costs consist primarily of consulting fees, salaries and direct payroll related costs.~~
Stock-Based Compensation

The Company recognizes expense for its stock-based compensation based on the fair value of the awards at the time they are granted. We estimate the value of stock option awards on the date of grant using the Black-Scholes model. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates. The forfeiture rate is estimated using historical option cancellation information, adjusted for anticipated changes in expected exercise and employment termination behavior. Our outstanding awards do not contain market or performance ~~conditions~~conditions.
Sales and ~~all options were granted for past services.~~
~~H/CELL ENERGY CORPORATION~~Use Tax
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~JUNE 30, 2017 AND 2016 (UNADUITED)~~The Company collects sales tax in various jurisdictions. Upon collection from customers, it records the amount as a payable to the related jurisdiction. On a periodic basis, it files a sales tax return with the jurisdictions and remits the amount indicated on the return.
Income Taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to FASB ASC 740,Income Taxes(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the financial statements as appropriate. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense.

9
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)
The Company recognizes and measures its unrecognized tax benefits in accordance with ASC 740. Under that guidance, management assesses the likelihood that tax positions will be sustained upon examination based on the facts, circumstances and information, including the technical merits of those positions, available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.

The Company did not identify any material uncertain tax positions. The Company did not recognize any interest or penalties for unrecognized tax benefits.

The federal income tax returns of the Company are subject to examination by the IRS, generally for the three years after they are filed. The Company’s 2017, 2016 and 2015 ~~return is~~income tax returns are still open for examination by the taxing authorities.

~~There was no provision for income taxes for the three or six months ended June 30, 2017.~~
Fair Value of Financial Instruments

~~The~~Except for the Company’s earn-out liability, the carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
~~Operating Loss~~The Company classifies and ~~Tax Credit Carryforwards~~discloses assets and liabilities carried at fair value in one of the following three categories:

● Level 1—quoted prices in active markets for identical assets and liabilities;
● Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and
● Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
~~At June~~
The table below presents a reconciliation of the fair value of the Company’s contingent earn-out obligations that use significant unobservable inputs (Level 3).
Balance at December 31, 2017 $ -
Earn-out liability from acquisition of PVBJ Inc. 175,318
Payments -
Adjustments to fair value 6,738
Balance at June 30, 2018 $ 182,056
The Company values earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent earn-out obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
10
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~the Company has loss carryforwards totaling approximately $137,000 that may be offset against future taxable income. The carryforward expires in 2036.~~(UNAUDITED)
Net Income (Loss) Per Common Share

The Company computes basic net income (loss) per share by dividing net income (loss) per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of ~~basic and~~ diluted loss per share excludes dilutive securities for the six months ended June 30, 2018 and 2017 because their inclusion would be anti-dilutive. ~~Potentially-dilutive~~Potentially dilutive securities excluded from the computation of basic and diluted net loss per share for the three ~~and six~~ months ended June 30, 2018 and 2017 are as follows:

9
June 30, 2018 June 30, 2017

Convertible debt 533,333 -
Options to purchase common stock 900,000 1,000,000
Totals 1,433,333 1,000,000
~~H/CELL ENERGY CORPORATION~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~JUNE 30, 2017 AND 2016 (UNADUITED)~~
~~June 30, 2017~~
~~Options to purchase common stock~~ ~~1,000,000~~
~~Totals~~ ~~1,000,000~~

3. RELATED PARTY TRANSACTIONS

The Company’s current office space consists of approximately 800 square feet, which is donated to it from one of its executive officers. There is no lease agreement and the Company pays no rent.

Effective February 4, 2016, the Company sold 526,316 shares of common stock to Reza Enterprises, Inc., an entity beneficially owned by Rezaul Karim. In connection with, and as a condition of closing, the Company agreed to appoint Rezaul Karim to its board of directors. Rezaul Karim resigned from the board of directors effective April 1, 2017. On April 1, 2017, the Company entered into a consulting agreement with Rezaul Karim for a period of one year. As such his function will be to promote our products and services. In each of April 2017 and 2018, Rezaul Karim exercised 100,000 options.

In June 2016, the Company entered into a contract with Rezaul Karim, ~~then~~ one of its former directors, for the installation of an HC-1 system. The system installation was ~~approximately 90%~~ complete pending any change orders as of June 30, ~~2017~~2018, and generated $31,789 and $40,253 of revenue for the six months ended June 30, ~~2017.~~2018 and 2017, respectively. The Company subcontracted the installation of the system to Renewable Energy Holdings LLC (“REH”), a company owned by Mike Strizki, one of the Company’s executive officers. James Strizki, one of the Company’s executive officers, ~~and former director,~~ is vice president of operations at REH. Costs incurred ~~were $50,345~~ for REH were $31,617 and $50,345 for the six months ended June 30, ~~2017.~~
~~On April 1,~~2018 and 2017, respectively. No revenue or costs were incurred in the three months ended June 30, 2018. For the three months ended June 30, 2017, the Company ~~entered into a consulting agreement with Rezaul Karim for a period~~incurred revenue of ~~one year. As such his function will be to promote our products~~$24,163 and ~~services. In April 2017, Rezaul Karim exercised 100,000 options.~~direct costs of $34,440.

The Company has entered into agreements to indemnify its directors and executive officers, in addition to the indemnification provided for in the Company’s articles of incorporation and bylaws. These agreements, among other things, provide for indemnification of the Company’s directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provided services at the Company’s request. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

At June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the balances due to Turquino Equity LLC, a significant shareholder, amounted to approximately ~~$46,000~~$15,000 and ~~$52,000, respectively, which are included in accounts payable on the balance sheet.~~$31,257, respectively. These balances represent expenses for management services. ~~For~~There was $19,500 of management fees expensed for the three months ended June 30, 2018 and $39,000 for the six months ended June 30, 2018. Management fees expensed totaled $45,826 for the three months ended June 30, 2017 and ~~2016, management fees expensed totaled approximately $45,000 and $38,000 respectively. For~~$91,000 for the six months ended June 30, 2018.
On January 2, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“Debentures”), convertible into shares of the Company’s common stock at a conversion price of $0.75 per share. The Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “Maturity Date”). Interest on the Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and on the Maturity Date. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $397,500 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid.
11
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~and 2016, management fees expensed totaled approximately $91,000 and $77,000, respectively.~~(UNAUDITED)

4. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

Cash is maintained at an authorized deposit-taking institution (bank) incorporated in both the United States and Australia and is insured by the U.S. Federal Deposit Insurance Corporation and Australian Securities & Investments Commission up to $250,000 and approximately $186,000 USD in total, respectively. At June 30, 2018, the balances exceeded the insured limits by $206,986 and $270,986, respectively.

Credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions, but does not generally require collateral. In addition, at June 30, ~~2017,~~2018, approximately ~~60%~~27% of the Company’s accounts receivable was due from two unrelated customers at 14% and 13%, respectively. At December 31, 2017, approximately 36% ~~and 24%, respectively; and, at June 30, 2016, approximately 25%~~of the Company’s accounts receivable was due from ~~two~~three unrelated customers, ~~13%~~14%, 12% and ~~12%~~10%, respectively.
10
~~H/CELL ENERGY CORPORATION~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~JUNE 30, 2017 AND 2016 (UNADUITED)~~

5. MAJOR CUSTOMERS

There were two customers with a concentration of 10% or higher ~~27%~~16%, and ~~22%~~15%, respectively, for the three months ended June 30, ~~2017,~~2018, and ~~35% and 17%, respectively,~~three customers for the six months ended June 30, ~~2017.~~2018 at 21%, and two at 11%, respectively. During the three ~~and six~~ months ended June 30, ~~2016, there was one customer with~~2017, two customers had a concentration of 10% or higher at 27%, and 22%, respectively; and for the six months ended June 30, 2017, two customers had a concentration of ~~the Company’s revenue,~~ 10% or higher at 35% and ~~18%~~17%, respectively.

6. PROPERTY AND EQUIPMENT

At June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, property and equipment were comprised of the following:

June 30, 2017 December 31, 2016
Furniture and fixtures (5 to 7 years) $ 6,736 $ 6,320
Machinery and equipment (5 to 7 years) 35,284 34,480
Computer and software (3 to 5 years) 84,310 79,098
Auto and truck (5 to 7 years) 238,447 227,456
Leasehold improvements (life of lease) 39,891 37,425
404,668 384,779
Less accumulated depreciation 305,592 284,963
$ 102,076 $ 99,816

June 30, 2018 December 31, 2017
Furniture and fixtures (5 to 7 years) $ 12,962 $ 6,857
Machinery and equipment (5 to 7 years) 36,453 35,919
Computer and software (3 to 5 years) 117,260 94,761
Auto and truck (5 to 7 years) 803,965 250,044
Leasehold improvements (life of lease) 39,934 40,608
1,010,574 428,189
Less accumulated depreciation 606,633 325,616
$ 403,941 $ 102,573

Depreciation expense for the three and six months ended June 30, ~~2017~~2018 were $47,945 and ~~2016 were $7,529 and $4,182~~$75,519, respectively. Depreciation expense for the three and six months ended June 30, 2017 ~~and 2016~~ amounted to ~~$14,559~~$7,529 and ~~$7,514,~~$14,559, respectively.

7. UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

June 30, 2017 December 31, 2016
Costs incurred on uncompleted contracts $ 2,253,444 $ 2,193,406
Estimated earnings 1,051,706 629,086
Costs and estimated earnings on uncompleted contracts 3,305,150 2,822,492
Billings to date 3,252,542 2,558,700
Costs and estimated earnings in excess of billings on uncompleted contracts 52,608 263,792
Costs and earnings in excess of billings on completed contracts 194,361 255,426
$ (141,753 ) $ 8,366

Costs in excess of billings $ 27,166 $ 91,904
Billings in excess of cost (168,919 ) (83,538 )
$ (141,753 ) $ 8,366

June 30, 2018 December 31, 2017
Costs incurred on uncompleted contracts $ 2,695,441 $ 2,485,787
Estimated earnings 577,393 779,598
Costs and estimated earnings on uncompleted contracts 3,272,834 3,265,385
Billings to date 3,816,397 3,553,817
Costs and estimated earnings in excess of billings on uncompleted contracts (543,563 ) (288,432 )
Costs and earnings in excess of billings on completed contracts (509,434 ) (252,757 )
$ (34,129 ) $ (35,675 )

Costs in excess of billings $ 58,970 $ 51,531
Billings in excess of cost (93,099 ) (87,206 )
$ (34,129 ) $ (35,675 )
12
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)

8. ~~LEASES~~COMMITMENTS

The Company previously entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both ~~expiring~~which expired in April 2018. The Company signed a new lease in February of 2018 for new office space in Kunda Park Queensland Australia, starting in May 2018 and expiring in May 2021. The Company also renewed the Brisbane office space for one year starting in May 2018. The Company’s office in Downingtown, Pennsylvania was renewed in January of 2018 for a one-year period. The future minimum payments on the leases for each of the next ~~two~~three and one-half years and in the aggregate amount to the following:
2018 $ 49,776
2019 54,050
2020 39,639
2021 13,213
$ 156,678
Rent expense for the three months ended June 30, 2018 and 2017 amounted to approximately $20,000 and $23,000 respectively and is included in “General and Administrative” expenses on the related statements of operations. Rent for the six months ended June 30, 2018 and 2017 totaled $47,347 and $44,724, respectively.
During the three and six months June 30, 2018, the Company had vehicles leased under four capital leases, with a net book value of $159,226, which expire in June 2023. During the three and six months ended June 30, 2017, the Company had no capital leases. The obligations are payable in monthly installments ranging from approximately $615 to $2,630 with interest rates from 5.57% to 7.20% per annum. The leases are secured by the related equipment.
At June 30, 2018, approximate payments to be made on these capital lease obligations are as follows:
2018 $ 39,105
2019 78,209
2020 75,578
2021 44,178
2022 7,512
Thereafter 4,382

Capital lease obligation 248,963
Less amounts representing interest 14,709
Current portion 67,289

Net $ 166,965
13
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~AND 2016 (UNADUITED)~~(UNAUDITED)

Year ending December 31,
2017 $ 38,883
2018 68,005
$ 106,888
For the three and six months ended June 30, 2018, interest expense on the capital leases was approximately $2,912 and $4,982, respectively.

~~Rent expense~~
9. DEBT
Long-term debt consisted of the following:
Equipment Notes Payable
June 30, 2018 December 31, 2017
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. $ 22,642 $ -
Note payable with monthly payments of $984, including interest at 14.70% per annum through March 2023. $ 57,479 $ -
Note payable with monthly payments of $787, including interest At 5.76% per annum through April 2021. $ 24,810
Note payable with monthly payments of $947 including interest at 6.14% per annum through December 2024. $ 57,395 $ -
Total non-current portion: $ 162,326 $ -
Total current portion: $ (33,407 ) $ -
Total: $ 128,919 $ -
Aggregate annual principal payments in the fiscal years subsequent to December 31 2017, are as follows:
Year ending December 31: Amount
2018 (remaining) $ 20,453
2019 40,905
2020 40,189
2021 26,014
2022 22,864
Thereafter 37,743
Notes payable obligation 188,169
Less amounts representing interest (25,843 )

$ 162,326
Convertible Note Payable
On January 2, 2018, the Company entered into an agreement with two related parties, who are directors of the Company and issued a 12.0% interest bearing convertible debenture for $400,000 due on January 2, 2020, with conversion features commencing immediately following the date of the note. Payments of interest only were due monthly beginning January 2018. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of the Company’s common stock. In connection with this convertible note payable, the Company recorded a $397,500 discount on debt, related to the beneficial conversion feature of the note to be amortized over the life of the note using the effective interest method, or until the note is converted or repaid. The Company incurred $5,000 of legal fees for preparation of the financing documents, which has been reflected as an additional debt discount.
For the three months ended June 30, 2018, the Company incurred interest expense of $18,676, of which $4,177 related to the amortization of the discount.
14
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~and 2016 was approximately $22,000. Rent expense for each of~~(UNAUDITED)
For the six months ended June 30, ~~2017 and 2016 amounted~~2018 the Company incurred interest expense of $32,891, of which $8,891 related to ~~approximately $45,000 and is included in “General and Administrative” expenses on~~ the ~~related statements~~amortization of ~~operations.~~the discount.
Convertible notes payable consisted of the following:
June 30, 2018 December 31, 2017
Note payable of $397,500, less debt discount of $388,609 including interest at 12% per annum through January 2020. $ 8,891 $ -

9.10. CONTRACT BACKLOG

~~As of~~At June 30, ~~2017,~~2018, the Company had a contract backlog approximating ~~$819,000,~~$715,831 with anticipated direct costs to completion approximating ~~$626,600. At June 30, 2016, the Company had a contract backlog approximating $1,557,500 with anticipated direct costs to completion approximating $1,298,000.~~$577,000.

~~10.~~11. ACQUISITION UNDER COMMON CONTROL

On January 31, 2017 (the “Closing Date”), the Company entered into a share exchange agreement (the “Exchange Agreement”) by and among the Company, The Pride Group (QLD) Pty Ltd., an Australian corporation (“Pride”), Turquino Equity LLC (“Turquino”) and Stephen Paul Mullane and Marie Louise Mullane as Trustees of the Mullane Family Trust (the “Mullane Trust” and together with Turquino, the “Pride Shareholders”). Andrew Hidalgo and Matthew Hidalgo, the Company’s Chief Executive Officer and Chief Financial Officer, respectively, are each a managing partner of Turquino.

Pursuant to the Exchange Agreement, the Company acquired all of the issued and outstanding capital stock of Pride from the Pride Shareholders in exchange for an aggregate of 3,800,000 shares of the Company’s common stock (the “Acquisition Shares”). As a result, the combination of the Company and Pride pursuant to the Exchange Agreement is considered a business combination of companies under common control and will be accounted for in a manner similar to a pooling-of-interests. The accompanying financial statements have been retrospectively restated as a result of an acquisition of another company under common control with the Company, which was completed in January 2017.

~~11.~~12. BUSINESS ACQUISITION
On February 1, 2018 (the “Closing Date”), the Company entered into a stock purchase agreement (the “Purchase Agreement”) by and among the Company, PVBJ and Benis Holdings LLC, the sole shareholder of PVBJ (“Benis Holdings”).
Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding capital stock of PVBJ from Benis Holdings for an aggregate amount equal to (i) $221,800 (the “Cash Purchase Price”) and (ii) 444,445 shares of the Company’s common stock, par value $.0001 per share having a fair value of $1,177,779 (the “Acquisition Shares”). Pursuant to the Purchase Agreement, the Acquisition Shares were issued at closing, and the Cash Purchase Price will be paid to Benis Holdings from positive earnings before taxes of PVBJ, with Benis Holdings to receive 50% of annual earnings before taxes of PVBJ until such time as Benis Holdings has received the full Cash Purchase Price.
In connection with the acquisition of PVBJ, the Company entered into an employment agreement (the “Employment Agreement”) with Paul V. Benis, Jr. to serve as an Executive Vice President of the Company for a period of three years. Pursuant to the Employment Agreement, Mr. Benis shall receive an annual salary of $150,000 and have oversight of the business operations of PVBJ.
The preliminary estimated consideration transferred in the acquisition was as follows:
Upfront consideration $ 1,177,779
Liabilities assumed 878,565
Total $ 2,056,343
The estimated fair values of working capital balances, property and equipment, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets and liabilities, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.
15
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents $ 30,408
Accounts receivable 277,338
Property and equipment, net 272,554
Customer list 102,422
Goodwill 1,373,621
Total assets acquired 2,056,344
Accounts payable (112,590 )
Debt assumed (590,657 )
Earn out liability (175,318 )
Total liabilities assumed (878,565 )
Total net assets acquired $ 1,177,779
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
A summary of preliminary estimated identifiable intangible assets acquired, preliminary estimated useful lives and amortization method is as follows:
Useful Life in Amount Years Amortization Method
Customer List $ 102,422 5 Straight Line
Total $ 102,422
The results of PVBJ’s operations are included in the condensed consolidated statements of operations beginning February 1, 2018. PVBJ’s income for three and five month period ended June 30, 2018 totaled $104,791 and $23,001, respectively. The pre-tax income includes estimated acquired intangible asset amortization of $5,121 for the three month period ended June 30, 2018 and $8,535 for the five month period ended June 30, 2018.
For the three and six month period ended June 30, 2018, acquisition related costs for the Company totaled $15,000, and are included in general and administration expenses. The Company may incur additional acquisition related costs during 2018.
Pro forma results for H/Cell, Inc. giving effect to the PVBJ Inc. acquisition
The following pro forma financial information presents the combined results of operations of PVBJ Inc. and the Company for the three and six month periods ended June 30, 2018 and 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.
Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2017.
16
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)

Three Months Ended
June 30, 2018

Three Months Ended
June 30, 2017

Revenues $ 2,009,825 $ 2,425,707
Net income 24,887 198,027
Net income per share:
Basic 0.01 0.03
Diluted 0.01 0.03

Six Months Ended
June 30, 2018

Six Months Ended
June 30, 2017

Revenues $ 3,945,280 $ 4,844,882
Net income (loss) (68,975 ) 219,723
Net income (loss) per share:
Basic 0.00 0.04
Diluted 0.00 0.03
13. STOCK OPTIONS AWARDS AND GRANTS

A summary of the stock option activity and related information for the 2016 Plan from ~~August 17, 2015 (date of inception)~~December 31, 2016 to June 30, ~~2017~~2018 is as follows:

Shares Weighted-
Average
Exercise Price Weighted-
Average
Remaining
Contractual Term Aggregate
Intrinsic Value
Outstanding at December 31, 2015 -
Grants 1,000,000 $ 0.01 5.00 $ 387,450
Exercised -
Canceled -
Outstanding at December 31, 2016 1,000,000 $ 0.01 4.19 $ 387,450
Grants 100,000 2.00 3.25 107,653
Exercised (100,000 ) 0.01 - (38,745 )
Canceled -
Outstanding at June 30, 2017 1,000,000 $ 1.00 3.35 456,358
Exercisable at June 30, 2017 1,000,000 $ 1.00 3.35 $ 456,358
~~H/CELL ENERGY CORPORATION~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~JUNE 30, 2017 AND 2016 (UNADUITED)~~
Shares
Weighted-
Average Exercise Price

Weighted-
Average Remaining Contractual Term

Aggregate Intrinsic
Value

Outstanding at December 31, 2016 1,000,000 $ 0.01 3.19 $ 387,450
Grants 150,000 1.83 4.35 $ 165,477
Exercised (100,000 ) 0.01 - (38,475 )
Canceled -
Outstanding at December 31, 2017 1,050,000 $ 0.27 3.35 514,182
Grants -
Exercised (100,000 ) $ 0.01 - (38,475 )
Canceled -
Outstanding at June 30, 2018 950,000 $ 0.30 3.07 $ 475,707
Exercisable at June 30, 2018 100,000 $ 1.01 3.37 $ 100,000

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s ~~estimated market~~weighted average grant date stock price of $0.3958 ~~as of March 31, 2016,~~per share, which would have been received by the option holders had those option holders exercised their options as of that date. It also includes options granted at exercise ~~price~~prices of $2.00 and $1.50, which iswere equal to the closing sales price of the ~~Corporation’s~~Company’s common stock on the ~~date~~dates of grant.

Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value.

The Company accounts for the expected life of options based on the contractual life of options for ~~non-employees and for non-statutory options granted to employees.~~non-employees. For incentive options granted to employees, the Company accounts for the expected life in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options. The fair value of stock-based payment awards was estimated using the Black-Scholes pricing model.

17
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 (UNAUDITED)
The following table presents information related to stock options at June 30, ~~2017:~~2018:

Options Outstanding Options Exercisable
Weighted
Average Exercisable
Exercise Number of Remaining Life Number of
Price Options In Years Options
$ 0.01 1,000,000 3.35 1,000,000
Options Outstanding Options Exercisable
Weighted
Average Exercisable
Exercise Number of Remaining Life Number of
Price Options In Years Options
$ 0.30 950,000 3.07 100,000

As of June 30, 2018, there was $77,473 of unrecognized compensation expense. At June 30, 2017, there was no$94,196 of unrecognized compensation expense.

~~12.~~14. SEGMENT INFORMATION

Our business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. Asset information by operating segment is not presented below since our chief operating decision maker (“CODM”) does not review this information by segment. Our CODM is our chief executive officer. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements. The following represents selected information for the Company’s reportable segments at June 30, 2018 and December 31, 2017, and also for the three and six months ended June 30, ~~2017~~2018 and ~~2016.~~2017.

June 30, 2018 December 31, 2017
Assets by Segment
Renewable Systems Integration $ 1,546,343 $ 27,589
Non-renewable Systems Integration 2,246,502 1,457,607
$ 3,792,845 $ 1,485,196
For the Three Months Ended For the Six Months Ended
June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Revenue by segment
Renewable Systems integration $ - $ 24,163 $ 31,789 $ 40,253
Non-renewable system Integration 2,009,825 1,906,495 3,704,360 3,757,250
$ 2,009,825 $ 1,930,658 $ 3,736,149 $ 3,797,503

Cost of sales by segment
Renewable Systems integration $ - $ 34,440 $ 31,617 $ 50,345
Non-renewable system Integration 1,253,043 1,147,909 2,462,456 2,561,729
$ 1,253,043 $ 1,182,349 $ 2,494,073 $ 2,612,074

Operating expenses
Renewable Systems integration $ 139,489 $ 102,169 $ 298,699 $ 148,604
Non-renewable system Integration 567,842 440,955 983,316 887,765
$ 707,331 $ 543,124 $ 1,282,015 $ 1,036,369
Operating (loss) income by segment
Renewable Systems integration $ (137,007 ) $ (112,446 ) $ (298,527 ) $ (158,696 )
Non-renewable system Integration 186,458 317,631 258,588 307,756
$ 49,451 $ 205,185 $ (39,939 ) $ 149,060

For the Three Months Ended
For the Six Months Ended
June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016
Revenue by segment
Renewable Systems integration $ 24,163 $ 1,500 $ 40,253 $ 1,500
Non-renewable system Integration 1,906,495 1,531,479 3,757,250 2,747,483
$ 1,930,658 $ 1,532,979 $ 3,797,503 $ 2,748,983

Cost of sales by segment
Renewable Systems integration $ 34,440 $ 1,500 $ 50,345 $ 1,500
Non-renewable system Integration 1,147,909 990,723 2,561,729 1,904,985
$ 1,182,349 $ 992,223 $ 2,612,074 $ 1,906,485

Operating expenses
Renewable Systems integration $ 102,169 $ 60,122 $ 148,604 $ 491,127
Non-renewable system Integration 440,955 505,656 887,765 1,030,050
$ 543,124 $ 565,778 $ 1,036,369 $ 1,521,177
Operating (loss) income by segment
Renewable Systems integration $ (112,446 ) $ (60,122 ) $ (158,696 ) $ (491,127 )
Non-renewable system Integration 317,631 35,100 307,756 (187,552 )
$ 205,185 $ (25,022 ) $ 149,060 $ (678,679 )
18

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~AND 2016 (UNADUITED)~~(UNAUDITED)

~~13.~~15. 401(k) PLANS
Substantially all of the Company’s employees may elect to defer a portion of their annual compensation in the Company-sponsored 401(k) tax-deferred savings plans. The Company makes matching contributions in these plans. The amount charged to expense for these plans was $5,372 for the three months ended June 30, 2018 and $10,528 for the six months ended June 30, 2018. There was no expense for the three or six months ended June 30, 2017.
16. INCOME TAX
For the three and six months ended June 30, 2018 and 2017, the Company did not record any income tax expense or benefit. No tax benefit has been recorded in relation to the pre-tax loss for the three and six months ended June 30, 2018 and 2017. A valuation allowance of $25,746 is listed on the balance sheet at June 30, 2018 to offset any deferred tax asset related to net operating loss carry forwards attributable to the losses.
17. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ~~Accounting Standards Update~~accounting standard update (“ASU”) No. 2014-09, “Revenue from Contracts with ~~Customers”~~Customers (Topic 606)~~. This~~ ” (“ASU provides guidance for revenue recognition and affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry specific guidance.2014-09”). The standard’s core principle is ~~the recognition of~~that a company will recognize revenue when ~~a company~~it transfers promised goods or services to customers in an amount that reflects the consideration to which ~~we expect~~the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under ~~the current~~previous guidance. ~~These~~This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In ~~August~~July 2015, the FASB ~~issued ASU 2015-14, “Revenue from Contracts with Customers” (Topic 606): Deferral of~~approved the ~~Effective Date, which deferred~~proposal to defer the effective date of ASU 2014-09 ~~to fiscal years~~standard by one year. Early adoption was permitted after December 15, 2016, and the standard became effective for public entities for annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. Early adoption is permitted for fiscal years beginning after December 15, 2016. We have begun a limited evaluation of the provisions of ASU 2014-09 and the impact, if any, it may have on our financial position and results of operations.
In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods ~~within those annual periods. We do~~therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU No. 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU No. 2016-10), narrow-scope improvements and practical expedients (ASU No. 2016-12) and technical corrections and improvements to ASU 2014-09 (ASU No. 2016-20) in its new revenue standard. The Company has performed a review of the requirements of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company reviewed customer contracts, applied the five-step model of the new standard to its contracts, and compared the results to its current accounting practices. The Company has drafted disclosures required by the new standard and the adoption has not ~~believe the accounting standards currently adopted have~~had a material ~~effect~~impact on the ~~accompanying condensed consolidated~~ financial statements.

During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 isdid not ~~expected to~~ have a material impact on ~~our~~the Company’s financial position, results of operations or cash flows.

During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2016-02 is not expected to have a material impact on ~~our~~the Company’s financial position, results of operations or cash flows due to an insignificant number of leases that the Company has entered into.

In August 2016, FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years beginning after December 15, 2017. ~~Early adoption is permitted.~~ The Company ~~does~~adopted ASU 2016-15 effective January 1, 2018 and it did not ~~expect the adoption of ASU No. 2016-15 to~~ have a material impact on its financial statements.
19
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND 2017 ~~AND 2016 (UNADUITED)~~ (UNAUDITED)

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period. The Company ~~does~~adopted ASU 2017-09 effective January 1, 2018 and it did not ~~expect the adoption of this guidance to~~ have a material impact on ~~the~~its financial statements.

Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.

~~14.~~18. NET INCOME PER SHARE

The following table sets forth the information needed to compute basic and diluted earnings per share:

Three months ended
June 30, 2017 Six months ended
June 30, 2017 Three months ended
June 30, 2018 Three months ended
June 30, 2017
Six months ended
June 30, 2017

Net income $ 207,482 $ 151,358 $ 13,955 $ 207,482 $ 151,358
Weighted average common shares outstanding 7,039,357 6,355,468 7,483,980 7,039,357 6,355,468
Dilutive securities
Convertible debt
533,333
- -
Options 908,734 903,687 801,912 908,734 903,687
Diluted weighted average common shares outstanding 7,948,091 7,259,155 8,819,225 7,948,091 7,259,155
Basic net income per share $ 0.03 $ 0.02 $ 0.00 $ 0.03 $ 0.02
Diluted net income per share $ 0.03 $ 0.02 $ 0.00 $ 0.03 $ 0.02

For the ~~three and~~ six month ~~periods~~period ended June 30, ~~2016,~~2018, there is no calculation as there was a net loss and certain potential shares of common stock would have been excluded from the calculation of diluted income per share, ~~because of a net loss,~~ and therefore, the effect on diluted income per share would have been anti-dilutive.

~~15.~~19. SUBSEQUENT EVENTS

~~On July 14, 2017, an aggregate of 50,000 non-statutory options were granted to two employees with such options vesting 25% on each of the first~~The Company has evaluated events from June 30, 2018 through ~~fourth anniversary of issuance, expiring five years from~~ the date ~~of issuance an having an exercise price of $1.50, which is equal to~~ the ~~closing sales price of the Company’s common stock on the date of grant.~~financial statements were issued. There were no subsequent events that need disclosure.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Business Overview

We were formed in August 2015 to expand upon the successful implementation of a hydrogen energy system used to completely power a residence or commercial property with clean energy so that it can run independent of the utility grid and also provide energy to the utility grid for monetary credits. This unique system uses renewal energy as its source for hydrogen production. We believe that it is a revolutionary green-energy concept that is safe, renewable, self-sustaining and cost effective. On January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”). Founded in 1997, Pride is a provider of security systems integration for a variety of customers in the government and commercial sector and has launched a new clean energy systems division to focus on the high growth renewable energy market in Asia-Pacific.

Pride Energy Systems is Pride’s clean energy division, which sells, designs, installs and maintains a variety of technology services in the clean energy market, including audits of energy consumption, review of energy and tax credits available, feasibility studies, solar/battery energy system design, zoning and permitting analysis, site design/preparation and restoration, system startup, testing and commissioning and maintenance. The division has just begun to bid for clean energy systems and is focused on the residential, commercial and government sectors. The division is able to utilize the many contacts established in the security systems division.

On February 1, 2018, we acquired PVBJ Inc. (“PVBJ”). Established in 2008, PVBJ, doing business as Temperature Service Company, is a regionally recognized company that specializes in HVAC and refrigeration for commercial and residential customers. The services offered include design, installation, repair, maintenance and emergency services for environmental systems. PVBJ has a highly trained technical team that is experienced in all aspects of environmental systems. PVBJ works directly with end users and through general contractors. PVBJ covers the Pennsylvania, New Jersey, Maryland and Delaware markets.
There are great benefits to hydrogen energy. The use of hydrogen as a fuel produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the only emissions from hydrogen fuel are chemically pure water and oxygen. Hydrogen can be extracted from water using renewable energy from the sun and unlike batteries, hydrogen energy can be stored indefinitely. There is no drilling, fracking or mining required to produce hydrogen energy. We believe it is safe and efficient, and the cleanest energy source on the planet.

We have succeeded in developing a hydrogen energy system designed to create electricity that is generated by renewable solar energy. We call the hydrogen energy system the HC-1. The HC-1 system functions as a self-sustaining renewable energy system. It can be configured as an off grid solution for all your electricity needs or it can be connected to the grid to generate energy credits. Its production of hydrogen is truly eco-friendly, as it is not produced by the use of fossil fuels. It is a system comprised of solar modules, inverters, batteries, a hydrogen generator, a fuel cell and a hydrogen storage tank.

When there is solar power, the solar modules produce renewable energy that is collected through a solar inverter, which charges a bank of batteries through a battery inverter. After the batteries are fully charged, the excess electricity is then combined with water through a hydrogen generator that extracts the hydrogen from the water in a gasified state, which is safely transferred to the hydrogen tank and stored for later use. If the tank is full, excess electricity is sent from the batteries through the battery inverter to the utility grid, which results in energy credits for the system owner.

21
The HC-1 system is connected to the residential or commercial property through the inverters. The electricity is always provided by the charged batteries. If there is no solar power to charge the batteries, the system keeps the batteries fully charged by using hydrogen stored in the tank, which processed through a fuel cell, creates the electricity. As the system is able to produce hydrogen, that keeps the hydrogen tank full, it provides a continuous supply of clean energy and sustainability that is independent from the grid.
Each HC-1 system is custom designed to accommodate the electrical loads for an end user. The system is completely scalable. If the customer is connected to the electric grid, energy production that is converted to hydrogen in excess of the amount stored in the hydrogen tank is transferred to the local electric company, creating energy credits.

If a customer wishes to connect our system to the electrical grid in order to generate renewable energy credits, the customer needs to obtain interconnection agreements from the applicable local primary electricity utility. In our experience, there has not been any cost involved in obtaining an interconnection agreement, but as the requirements are determined on a local basis, it may be possible that some nominal costs are involved in connection with the process. If the customer obtains an interconnection agreement, once the HC-1 system is operational, the HC-1 system end user can eliminate their electric bill and, if in a permissible state, can begin generating energy credits. In certain states, an end user receives one energy credit for each 1,000 kWh produced through renewal energy. The customer sells these credits to a broker who in turn sells the credits to a utility company so that the utility company can demonstrate their compliance with the regulatory obligations to reduce greenhouse gas emissions. The price per credit can vary depending on supply and demand. Many other states that may not offer an energy credit program, do offer other cash incentives for renewable energy systems.

Current Operating Trends

Currently, our employees are licensed to install our HC-1 systems in the State of New Jersey. Pride sells, designs, installs and maintains a variety of technology products in the security systems market, including commercial alarm systems, access control, video surveillance, CCTV (closed circuit television)/MATV (master antenna television) systems, biometric technology, audio/visual systems, nurse call systems and public announcement systems. Pride also provides programs for annual maintenance of its products and systems. The division generates approximately half of its revenue from government contracts and the other half from the commercial sector. Pride has recurring annual maintenance revenue of close to AUD $2 million. Pride is a certified security systems integrator for the Queensland Government and has various government contracts in place for installation, maintenance and project services. Pride also works with a number of general contractors as a subcontractor for security systems integration.

We intend to aggressively grow our business, both organically and through strategic acquisitions. We intend to acquire companies with licensed contractors in various states and regions, which will allow us to expand the territories in which we can install our systems. These acquired companies will also provide us with a consistent revenue stream, a customer base for marketing our HC-1 systems and technicians. Initially, we intend to focus on states or countries whose government supports a regulatory standard requiring its utility companies to increase their production of energy from renewable energy sources.

These governments have established various incentives and financial mechanisms to accelerate and promote the use of renewable energy sources. Currently, many states comply with regulatory standards including New Jersey, Massachusetts, Pennsylvania, Maryland, Ohio, Delaware, North Carolina, Virginia, Kentucky, West Virginia, Michigan, Indiana, Illinois as well as the District of Columbia. In addition, countries such as the United Kingdom, Australia, Italy, Poland, Sweden, Belgium and Chile have adopted regulatory standards. The list is expanding each year.

We are also searching for suitable acquisition targets that will complement our services, create revenue production, allow us to expand our sales and technical staff and provide us with a larger customer base to pursue with greater geographic coverage. As of the date of this quarterly report, we have no written agreements or understandings to acquire any companies and no assurances can be given that we will identify or successfully acquire any other companies.

22
Results of Operations

For the three months ended June 30, ~~2017~~2018 and ~~2016~~2017

Revenue and Cost of Revenue

We had $2,009,825 of revenue and $1,253,043 for cost of revenue during the three months ended June 30, 2018, respectively. We had $1,930,658 of revenue and $1,182,349 for cost of revenue during the three months ended June 30, 2017, ~~respectively,~~ of which $24,163 and $34,440, respectively, was related party. ~~We had $1,532,979 of revenue and $992,223 for cost of revenue for the three months ended June 30, 2016, of which $1,500 was related party for both~~The increase in revenue and cost of ~~revenue. The~~ revenue ~~breakdown by segment is as follows:~~was due to the acquisition of PVBJ on February 1, 2018.
For the Three Months Ended
June 30, 2017 June 30, 2016
Revenue by segment
Renewable Systems integration $ 24,163 $ 1,500
Non-renewable system Integration 1,906,495 1,531,479
$ 1,930,658 $ 1,532,979
For the Three Months Ended
June 30, 2018 June 30, 2017
Revenue by segment
Renewable Systems integration $ - $ 24,163
Non-renewable system Integration 2,009,825 1,906,495
$ 2,009,825 $ 1,930,658

General and Administrative Expenses
During the three months ended June 30, 2018, our general and administrative expenses were $707,331. $139,489 was related to the Renewable Systems Integration segment as follows: $41,325 of gross payroll and payroll taxes, $34,747 of legal and accounting fees, $19,500 of management disbursements, $17,149 of stock-based compensation, $7,928 of consulting/dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $5,271 in amortization of intangible assets, directors and officers insurance liability of $4,258 and $6,829 of miscellaneous expenses.
The non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended June 30, 2018 of $570,324, including management and administrative salaries of $241,953 along with $110,614 of other various employee expenses, such as vacation and sick time. In addition, automobile expenses totaled $68,517, which included repairs, fuel and auto allowance. Insurance totaled $47,868. Facilities lease totaled $20,997. Professional fees of $8,347 consisted of legal and accounting fees incurred for tax and human resources advice. We also incurred telecommunications charges of $12,211 and computer expenses of $4,706. In addition, we incurred other miscellaneous fees of $15,041 and depreciation of $40,070.

During the three months ended June 30, 2017, our general and administrative expenses were $543,124. $102,169 was related to the Renewable Systems Integration ~~segment, including corporate expenses:~~segment: $12,000 of legal fees, $8,852 of consulting/dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $13,457 of stock-based compensation, $2,786 of travel, $60,119 of accounting fees related to audit, consulting and Pride acquisition costs, directors and officers insurance liability of $2,601 and $2,355 of miscellaneous expenses.

The non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended June 30, 2017 of $438,658, including management and administrative salaries of $147,735 along with $114,654 of other various employee expenses, such as vacation and sick time, and management fees of $45,089. In addition, automobile expenses totaled $49,130, which included repairs, fuel and auto allowance. Facilities lease for the Pride offices totaled $21,830. Professional fees of $2,776 consisted of legal and accounting fees incurred for tax and human resources advice. Consulting/dues and subscription fees were $1,329, which pertained to miscellaneous business subscriptions and renewals. Insurances of $11,250, computer expenses of $7,048, a safety audit of $5,166, telecommunications of $7,305, and utilities of $2,496 were also expensed. We incurred $1,461 of travel and entertainment. In addition, we incurred interest expense of $4,814, other miscellaneous fees of $11,596 and depreciation of $7,275.

During the three months ended June 30, 2016, expenses for our general and administrative expenses were $565,778. $60,122 was related to the Renewable Systems Integration segment, including corporate expenses. Professional fees of $42,350 consisted of legal fees incurred in connection with capital raising activities and accounting fees. We incurred $9,098 of travel and entertainment related to a renewables industry convention along with $4,258 of advertising/promotional, $3,321 of dues and subscriptions relating to EDGAR fees. In addition, we incurred $945 of miscellaneous expenses and depreciation of $150.
The non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended June 30, 2016 was $497,889, including management and administrative salaries of $176,857, $152,144 of other various employee expenses, such as vacation and sick time, and management fees of $38,835. Automobile expenses totaled $51,072, which included repairs, fuel, lease and auto allowance. Facilities lease for the Pride offices totaled $22,273. In addition, we incurred $14,013 for telecommunications, $4,224 of depreciation and $46,238 of miscellaneous expenses.
As a result of the foregoing, we had net income of $13,955 for the three months ended June 30, 2018, compared to net income of $207,482 for the three months ended June 30, ~~2017, compared to a net loss of $17,255 for the three months ended June 30, 2016.~~2017.

23
For the six months ended June 30, ~~2017~~2018 and ~~2016~~2017

Revenue and Cost of Revenue

For the six months ended June 30, 2018, we had $3,736,149 of revenue and $2,494,073 of cost of revenue, of which $31,789 and $31,617, respectively, was related party. For the six months ended June 30, 2017, we had $3,797,503 of revenue and $2,612,074 of cost of revenue, of which $40,253 and $50,345, respectively, was related party. ~~For~~The six months ended 2017 had more revenue and costs due to Pride having two significant jobs over $1,000,000 that were substantially billed and completed during that time. It is atypical for Pride to have two significant jobs ongoing at the same time; Pride did not have during the six months ended June 30, ~~2016, we had $2,748,983 of revenue and $1,906,485 for cost of revenue, of which $1,500 was related party for both revenue and cost of revenue. The revenue breakdown by segment is as follows:~~2018.

For the Six Months Ended For the Six Months Ended
June 30, 2017 June 30, 2016 June 30, 2018 June 30, 2017
Revenue by segment
Renewable Systems integration $ 40,253 $ 1,500 $ 31,789 $ 40,253
Non-renewable system Integration 3,757,250 2,747,483 3,704,360 3,757,250
$ 3,797,503 $ 2,748,983 $ 3,736,149 $ 3,797,503
General and Administrative Expenses
During the six months ended June 30, 2018, our general and administrative expenses were $1,282,015. $301,181 was related to the Renewable Systems Integration segment, consisting of: $80,738 of gross payroll and payroll tax, $57,960 of accounting fees related to audit, consulting and acquisition costs, $39,050 of legal fees, $39,000 of management disbursements, $34,297 of stock-based compensation, $14,872 of consulting/dues and subscription fees, which pertained to EDGAR fees, OTC Market annual listing fees, and transfer agent fees, directors and officers insurance liability of $9,460, $8,835 of amortization of intangible assets, $5,526 of travel and $8,961 of miscellaneous expenses.
The non-renewable Systems Integration segment incurred general and administrative expenses during the six months ended June 30, 2018 of $983,316, including management and administrative salaries of $388,544 along with $200,093 of other various employee expenses, such as vacation and sick time and workcover. In addition, automobile expenses totaled $153,702, which included repairs, fuel and auto allowance. Facilities lease totaled $57,612. In addition various business and health insurances totaled $74,282, $25,029 of depreciation, $34,325 of computer and telecommunications, $13,464 of professional fees for legal and accounting services, $10,585 of 401K contributions, $10,256 of travel and meals and $15,424 of miscellaneous costs.

During the six months ended June 30, 2017, our general and administrative expenses were $1,036,369. $148,604 was related to the Renewable Systems Integration ~~segment, including corporate expenses:~~segment: $31,500 of legal fees, $16,526 of consulting/dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $18,457 of stock-based compensation, $6,583 of travel, $68,006 of accounting fees related to audit, consulting and Pride acquisition costs, directors and officers insurance liability of $2,601 and $4,932 of miscellaneous expenses.

The non-renewable Systems Integration segment incurred general and administrative expenses during the six months ended June 30, 2017 of $885,467, including management and administrative salaries of $314,306 along with $214,435 of other various employee expenses, such as vacation and sick time, and management fees of $90,899. In addition, automobile expenses totaled $90,565, which included repairs, fuel and auto allowance. Facilities lease for the Pride offices totaled $44,724. Professional fees of $5,860 consisted of legal and accounting fees incurred for tax and human resources advice. Consulting/dues and subscription fees were $2,726, which pertained to miscellaneous business subscriptions and renewals. Insurances of $15,086, computer expenses of $12,938, safety expenses including an audit of $6,230, telecommunications of $14,520, and utilities of $6,342 were also expensed. We incurred $1,948 of travel and entertainment. In addition, we incurred interest expense of $6,391 bad debt expense of $24,019, other miscellaneous fees of $22,216, and depreciation of $14,559.

During the six months ended June 30, 2016 expenses for our general and administrative expenses were $1,521,177. $491,127 was related to the Renewable Systems Integration segment, including corporate expenses. Professional fees of $82,539 consisted of legal fees incurred in connection with capital raising activities and accounting fees. We incurred $10,305 of travel and entertainment related to a renewables industry convention along with $4,258 of advertising/promotional, $3,321 of dues and subscriptions relating to EDGAR fees, and $2,000 in research and development. In addition, we incurred $387,450 of stock-based compensation, $955 of miscellaneous expenses and depreciation of $300.
The non-renewable Systems Integration segment incurred general and administrative expenses during the six months ended June 30, 2016 of $1,022,379, including management and administrative salaries of $339,666, $333,821 of other various employee expenses, such as vacation and sick time, and management fees of $76,710. Automobile expenses totaled $105,291, which included repairs, fuel, lease and auto allowance. Facilities lease for the Pride offices totaled $44,803. In addition, we incurred $29,525 for telecommunications, $10,655 of legal and accounting fees, $7,514 of depreciation and $82,064 of miscellaneous expenses.
As a result of the foregoing, we had a net loss of $97,014 for the six months ended June 30, 2018 compared to net income of $151,358 for the six months ended June 30, ~~2017 compared to a net loss of $671,008 for the six months ended June 30, 2016.~~2017.

Liquidity and Capital Resources

As of June 30, ~~2017,~~2018, we had working capital of ~~$570,834,~~$427,535, comprised of ~~$293,769~~$460,538 of cash and cash equivalents, ~~$1,634,929~~$1,321,820 of accounts receivables, ~~$7,043 of prepaid expenses and $27,166~~$58,970 of costs in excess of billings and $14,467 of prepaid expenses, offset by ~~$1,108,732~~$951,769 of accounts payables and accrued expenses, ~~$168,919~~$93,099 of billings in excess of cost, ~~and $114,422~~$67,289 of capital leases payable, $59,894 of sales and withholding tax payable, $33,407 of notes payable, $25,746 of income tax payable, $182,056 of earn out payable and $15,000 of management fees-related party, which made up current liabilities at June 30, ~~2017.~~2018. We also had $166,965 of long term capital leases and $128,919 of long term notes payable along with $8,891 of convertible notes payable – related party.
24
For the six months ended June 30, 2018, we used $115,167 of cash in operating activities, which represented our net loss of $97,014 and $412,271 of changes in accounts payable and accrued expenses offset by $85,130 of depreciation and amortization, $3,354 of loss on sale of assets, $6,738 in change in fair value contingent consideration, $202 of prepaid expenses, $10,559 of costs in excess of billings, $5,893 of billings in excess of cost and $34,297 of stock-based compensation, $14,144 of security deposits offset by $541,335 of changes in accounts receivables.

For the six months ended June 30, 2017, we used $239,492 of cash in operating activities, which represented our net income of $151,358 $339,043 of changes in accounts payable, $14,559 of depreciation and amortization, $8,099 of prepaid expenses, $69,843 of costs in excess of billings, $88,802 of billings in excess of cost and $18,456 of stock-based compensation, offset by $929,652 of changes in accounts receivables,

For the six months ended June 30, ~~2016, operating~~2018, we used $26,131 in investing activities ~~provided us with $60,510~~relating to the purchase of fixed assets of $4,663, offset by $386 of proceeds from the disposition of property and equipment and $30,408 of cash ~~which represented our net loss of $671,008, $564,016 of changes~~acquired in accounts receivables, $387,450 of stock-based compensation, $52,902 of costs in excess of billings, $7,514 of depreciation and amortization, and $768 of prepaid expenses, offset by our net loss of $671,008, $230,175 of changes in accounts payable, and $50,957 of billings not in excess of cost.
business acquisition. For the six months ended June 30, 2017, we used $17,591 in investing activities relating to the purchase of fixed assets of $19,889, offset by $2,298 of proceeds from the disposition of property and equipment.
For the six months ended June 30, ~~2016,~~2018, we received ~~$7,120 of cash from investing~~$120,558 in financing activities relating to ~~$7,671 pf~~$395,000 for the issuance of convertible debt and $1,000 of proceeds from the ~~disposition~~exercise of ~~property and equipment~~stock options, offset by ~~the purchase~~$197,801 in repayments on long-term debt, $31,368 in repayments of ~~fixed assets~~capital leases, $22,273 in repayments of ~~$551.~~
notes payable and $24,000 to payments of related party interest. For the six months ended June 30, 2017, we received $1,000 from financing activities, which represented proceeds from the exercise of stock options. For the six months ended June 30, 2016, we received $448,171 from financing activities, which represented $450,000 of proceeds from the sale of our common stock, offset by $1,829 of repayment to stockholders.

In the future we expect to incur expenses related to compliance for being a public company and travel related to visiting potential customer sites. We expect that our general and administrative expenses will increase as we expand our business development, add infrastructure and incur additional costs related to being a public company, including incremental audit fees, investor relations programs and increased professional services.

Our future capital requirements will depend on a number of factors, including the progress of our sales and marketing of our services, the timing and outcome of potential acquisitions, the costs involved in operating as a public reporting company, the status of competitive services, the availability of financing and our success in developing markets for our services. When we enter into contacts with customers, they will be required to make payments in tranches, including a payment after a contract is executed but prior to commencement of the project. We believe our existing cash, together with revenue generated by future projects under tranche payment plans, will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months.

We presently do not have any available credit, bank financing or other external sources of liquidity. While we have achieved net income from operations as of June 30, ~~2017,~~2018, our operations historically have not been a source of liquidity and we cannot be assured they will be in the near future. We may need to obtain additional capital in order to expand operations and fund our activities. Future financing may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds if required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may be required to delay, reduce the scope of or eliminate our marketing and business development services.

~~February 2016 Private Placement~~2018 Convertible Debenture Financing

~~Effective February 4, 2016,~~On January 2, 2018, we entered into a securities purchase agreement (the “Purchase Agreement”) with two of our directors, pursuant to which we sold ~~526,316~~an aggregate principal amount of $400,000 in 12% Convertible Debentures (“Debentures”), convertible into shares of our common stock ~~to one accredited investor for gross proceeds~~at a conversion price of ~~$200,000.~~$0.75 per share.

~~June 2016 Private Placement~~The Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “Maturity Date”). Interest on the Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and on the Maturity Date. The Debentures are convertible into common stock at a conversion price of $0.75 per share at the discretion of the holder, with special provisions applying to any holder whose conversion would result in the holder beneficially owning more than 4.99% of our common stock.

~~Effective June 16, 2016, we sold 500,000 shares of common stock to 52 accredited investors for gross proceeds of $250,000.~~
25

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires usPlease refer to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
~~We believe the following critical accounting policies affect our more significant judgments and estimates used~~Note 2 in the ~~preparation of our consolidated~~accompanying financial statements.
~~Cash and Cash Equivalents~~
~~Cash and cash equivalents includes cash in bank and money market funds as well as other highly liquid investments with an original maturity of three months or less.~~
~~Revenue Recognition~~
Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined.
Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amounts were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, any unbilled receivables at period end will be billed subsequently. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.
~~Research and Development Costs~~
~~Research and development costs are expensed as incurred. These costs consist primarily of consulting fees, salaries and direct payroll related costs.~~
~~Stock-Based Compensation~~
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.
~~As of June 30, 2017, we had 1,000,000 options outstanding to purchase shares of common stock, none of which were vested.~~

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU provides guidance for revenue recognition and affects any entity that either enters into contracts with customersPlease refer to ~~transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements~~Note 17 in Topic 605, “Revenue Recognition,” and most industry specific guidance. The standard’s core principle is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal years beginning after December 15, 2016. We have begun a limited evaluation of the provisions of ASU 2014-09 and the impact, if any, it may have on our financial position and results of operations. As of June 30, 2017 management has deemed the impact as immaterial.
In March 2016, FASB issued ASU No. 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We do not believe the accounting standards currently adopted will have a material effect on our financial statements.
During January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position, results of operations or cash flows.
During February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). The standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2016-02 is not expected to have a material impact on our financial position, results of operations or cash flows due to an insignificant number of leases that we have entered into.
In August 2016, FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU No. 2016-15 to have a material impact on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period. The Company does not expect the adoption of this guidance to have a material impact on the financial statements.
~~Management does not believe there would have been a material effect on~~ the accompanying financial statements ~~had any other recently issued, but not yet effective, accounting standards been adopted in the current period.~~

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”
22

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, ~~2017,~~2018, as a result of the material ~~weakness~~weaknesses described below, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer,~~chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material ~~weakness,~~weaknesses, which ~~relates~~relate to internal control over financial reporting, that ~~was~~were identified ~~is:~~are:

a) Due to our small size, we did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; and
b) We lacked sufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements.

We intend to create written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements ~~during~~in the ~~2017 fiscal year.~~future.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

Changes in internal control over financial reporting.

We have created a segregation of duties consistent with control objectives utilizing an outside consultant for financial statement preparation along with providing technical advice and to address non-routine or complex accounting matters. In addition, as a result of our acquisition of Pride in January 2017, we have incorporated accounting personnel and technical accounting expertise within the accounting function, including accounting personnel with experience in U.S. public reporting requirements.
~~Except as described above, there~~There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

23 26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are currently not a party to any material legal proceedings or claims.

Item 1A. Risk Factors

Not required under Regulation S-K for “smaller reporting companies.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~In April 2017, we issued 100,000 shares of our common stock to a former director upon the exercise of stock options at an exercise price of $0.01 per share.~~None,
~~The issuance of our common stock was exempt from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(a)(2) of the Securities Act.~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.01 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 ~~INS~~ The following materials from H/Cell Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL ~~Instance Document~~(Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.
27
~~101 SCH~~ ~~XBRL Taxonomy Extension Schema Document~~

~~101 CAL~~ ~~XBRL Taxonomy Calculation Linkbase Document~~
~~101 LAB~~ ~~XBRL Taxonomy Labels Linkbase Document~~
~~101 PRE~~ ~~XBRL Taxonomy Presentation Linkbase Document~~
~~101 DEF~~ ~~XBRL Taxonomy Extension Definition Linkbase Document~~
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.

H/CELL ENERGY CORPORATION

Date: August ~~14, 2017~~10, 2018 By: /s/ ANDREW HIDALGO
Andrew Hidalgo

Chief Executive Officer (Principal Executive
Officer)

Date: August ~~14, 2017~~10, 2018 By: /s/ MATTHEW HIDALGO
Matthew Hidalgo

Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
28

	June 30, 2018			December 31, 2017
	(Unaudited)			(Audited)
ASSETS
Current assets
Cash and cash equivalents	$	460,538		$	455,700
Accounts receivable (net retention)		1,321,820			808,050
Prepaid expenses		14,467			14,669
Costs and earnings in excess of billings		58,970			51,531
Total current assets		1,855,795			1,329,950

Property and equipment, net		403,941			102,573
Security deposits and other non-current assets		21,344			8,416
Deferred tax asset		44,257			44,257
Customer lists, net		93,887			-
Goodwill		1,373,621			-

Total assets	$	3,792,845		$	1,485,196

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	951,769		$	631,385
Management fees payable – related party		15,000			31,257
Earn out payable		182,056
Billings in excess of costs and earnings		93,099			87,206
Sales and withholding tax payable		59,894			61,239
Current equipment notes payable		33,407			-
Current capital lease payable		67,289			-
Income tax payable		25,746			98,313
Total current liabilities		1,428,260			909,400

Noncurrent liabilities
Capital leases		166,965			-
Equipment notes payable		128,919			-
Convertible note payable – related party, net of discount		8,891			-
Total noncurrent liabilities		304,775			-

Total liabilities		1,733,035			909,400

Commitments and contingencies

Stockholders’ equity
Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding		-			-
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,586,024 and 7,041,579 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively		758			704
Additional paid-in capital		2,949,459			1,335,656
Accumulated deficit		(828,768	)		(731,754	)
Accumulated other comprehensive loss		(61,639	)		(28,810	)
Total stockholders’ equity		2,059,810		$	575,796

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	3,792,845		$	1,485,196

	June 30, 2017			December 31, 2016
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	293,769		$	537,867
Accounts receivable (net retention)		1,634,929			650,886
Prepaid expenses		7,043			14,168
Costs and earnings in excess of billings		27,166			91,904
Total current assets		1,962,907			1,294,825

Property and equipment, net		102,076			99,816
Security deposits and other non-current assets		8,599			8,497

Total assets	$	2,073,582		$	1,403,138

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	1,062,732		$	661,237
Management fees payable – related party		46,000			52,000
Billings in excess of costs and earnings		168,919			83,538
Sales tax payable		114,422			114,085
Total current liabilities		1,392,073			910,860

Commitments and contingencies

Stockholders’ equity
Common Stock - $0.0001 par value; 25,000,000 shares authorized; 7,041,579 and 3,131,579 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		704			313
Preferred Stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding		-			-
Additional paid-in capital		1,302,487			1,283,422
Accumulated deficit		(589,293	)		(740,651	)
Accumulated other comprehensive loss		(32,389	)		(50,806	)
Total stockholders’ equity		681,509			492,278

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	2,073,582		$	1,403,138

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2018			2017		2018			2017

Revenue
Construction income	$	2,009,825		$	1,906,495	$	3,704,360		$	3,757,250
Related party		-			24,163		31,789			40,253
Total revenue		2,009,825			1,930,658		3,736,149			3,797,503

Cost of goods sold
Direct costs		1,253,043			1,147,909		2,462,456			2,561,729
Direct costs – related party		-			34,440		31,617			50,345
Total cost of goods sold		1,253,043			1,182,349		2,494,073			2,612,074

Gross profit		756,782			748,309		1,242,076			1,185,429

Operating expenses
General and administrative expenses		687,831			498,124		1,243,015			945,369
Management fees – related party		19,500			45,000		39,000			91,000
Total operating expenses		707,331			543,124		1,282,015			1,036,369

Income (loss) from operations		49,451			205,185		(39,939	)		149,060
Income tax provision (benefit)		-			-		-			-

Income (loss) before other income and expense	$	49,451		$	205,185	$	(39,939	)	$	149,060

Other income (loss)		(6,738	)		2,297		(6,738	)		2,298

Other expenses
Interest expense		10,146			-		14,092			-
Interest expense – related party		18,676			-		32,891			-
Loss on fixed asset disposal		(64	)		-		3,354			-
Total other expenses		28,758			-		50,337			-

Net income (loss)	$	13,955		$	207,482	$	(97,014	)	$	151,358

Other comprehensive income (loss), net

Foreign currency translation adjustment		(22,570	)		7,048		(32,829	)		18,417

Comprehensive income (loss)	$	(8,615	)	$	214,530	$	(129,843	)	$	169,775

Earnings (loss) per share
Basic	$	0.00		$	0.03	$	(0.01	)	$	0.02
Diluted	$	0.00		$	0.03	$	(0.01	)	$	0.02
Weighted average common shares outstanding
Basic		7,483,980			7,039,357		7,450,235			6,355,468
Diluted		8,819,225			7,948,091		7,450,235			7,259,155

	Common Stock				Preferred Stock									Accumulated
	Number of Shares		Amount		Number of shares		Amount		Additional Paid-In Capital		Accumulated Income (Deficit)			Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Beginning, January 1, 2018		7,041,579	$	704		-	$	-	$	1,335,656	$	(731,754	)	$	(28,810	)	$	575,796

Issuance of common stock in February 2018, PVBJ Acquisition		444,445		44		-		-		1,183,516		-			-			1,183,560

Issuance of common stock April 2018, Stock Options		100,000		10		-		-		990		-			-			1,000

Stock-based compensation expense		-		-		-		-		34,297		-			-			34,297

Beneficial conversion feature		-		-		-		-		395,000		-			-			395,000

Net loss		-		-		-		-		-		(97,014	)		(32,829	)		(123,105	)

Ending, June 30, 2018		7,586,024	$	758		-	$	-	$	2,949,459	$	(828,768	)	$	(61,639	)	$	2,059,810

	For the Six Months Ended June 30,
	2018			2017

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)	$	(97,014	)	$	151,358
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		85,130			14,559
Stock-based compensation		34,297			18,456
Loss on sale of assets		3,354
Change in fair value contingent consideration		6,738
Change in operating assets and liabilities:
Accounts and retainage receivable		(541,335	)		(929,652	)
Prepaid expenses and other costs		(202	)		8,099
Costs in excess of billings		(10,559	)		69,843
Security deposits		(14,144	)
Accounts payable and accrued expenses		412,271			339,043
Billings in excess of costs		5,893			88,802

Net cash used in operating activities		(115,167	)		(239,492	)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets		(4,663	)		(19,889	)
Cash acquired in business acquisition		30,408
Proceeds from disposition of property and equipment		386			2,298

Net cash used in investing activities		(26,131	)		(17,591	)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of convertible debt		395,000			-
Payments of related party interest		(24,000	)		-
Repayments on capital leases		(31,368	)		-
Repayments on notes payable		(22,273	)		-
Repayments on long-term debt		(197,801	)		-
Proceeds related to stock option exercises		1,000			1,000

Net cash provided by financing activities		120,558			1,000

Net decrease in cash and cash equivalents		(31,522	)		(256,803	)

Effect of foreign currency translation on cash		(26,684	)		11,985

Cash and cash equivalents, beginning of period		455,700			537,867

Cash and cash equivalents, end of period	$	460,538		$	293,769

Supplemental disclosure of non-cash investing and financing activities

Common stock issued for acquisition of business	$	1,177,779			-
Fair value of net assets acquired in business combination	$	2,056,344			-
Beneficial conversion feature	$	8,891			-

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2017		2016			2017		2016

Revenue
Construction income	$	1,906,495	$	1,531,479		$	3,757,250	$	2,747,483
Related party		24,163		1,500			40,253		1,500

Total revenue		1,930,658		1,532,979			3,797,503		2,748,983

Cost of goods sold
Direct costs		1,147,909		990,723			2,561,729		1,904,985
Direct costs – related party		34,440		1,500			50,345		1,500

Total cost of goods sold		1,182,349		992,223			2,612,074		1,906,485

Gross profit		748,309		540,756			1,185,429		842,498

Operating expenses
Research and development		-		-			-		2,000
General and administrative expenses		498,124		527,778			945,369		1,442,177
Management fees – related party		45,000		38,000			91,000		77,000

Total operating expenses		543,124		565,778			1,036,369		1,521,177

Income (Loss) from operations		205,185		(25,022	)		149,060		678,679

Other income		2,297		7,767			2,298		7,671

Net income (loss)	$	207,482	$	(17,255	)	$	151,358	$	(671,008	)

Other comprehensive income (loss), net

Change in foreign currency translation adjustment		7,048		43,108			18,417		54,376

Comprehensive income (loss)	$	214,530	$	25,853		$	169,775	$	(616,632	)


Earnings (Loss) per share
Basic	$	0.03	$	(0.01	)	$	0.02	$	(0.26	)
Diluted	$	0.03	$	(0.01	)	$	0.02	$	(0.26	)
Weighted average common shares outstanding
Basic		7,039,357		2,709,357			6,355,468		2,571,387
Diluted		7,948,091		2,709,357			7,259,155		2,571,387

	●	Level 1—quoted prices in active markets for identical assets and liabilities;

	●	Level 2—observable market based inputs or unobservable inputs that are corroborated by market data; and

	●	Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Balance at December 31, 2017	$	-
Earn-out liability from acquisition of PVBJ Inc.		175,318
Payments		-
Adjustments to fair value		6,738
Balance at June 30, 2018	$	182,056

	June 30, 2018		June 30, 2017

Convertible debt		533,333		-
Options to purchase common stock		900,000		1,000,000
Totals		1,433,333		1,000,000

	~~June 30, 2017~~

~~Options to purchase common stock~~		~~1,000,000~~
~~Totals~~		~~1,000,000~~

	June 30, 2017		December 31, 2016
Furniture and fixtures (5 to 7 years)	$	6,736	$	6,320
Machinery and equipment (5 to 7 years)		35,284		34,480
Computer and software (3 to 5 years)		84,310		79,098
Auto and truck (5 to 7 years)		238,447		227,456
Leasehold improvements (life of lease)		39,891		37,425
		404,668		384,779
Less accumulated depreciation		305,592		284,963
	$	102,076	$	99,816

	June 30, 2017			December 31, 2016
Costs incurred on uncompleted contracts	$	2,253,444		$	2,193,406
Estimated earnings		1,051,706			629,086
Costs and estimated earnings on uncompleted contracts		3,305,150			2,822,492
Billings to date		3,252,542			2,558,700
Costs and estimated earnings in excess of billings on uncompleted contracts		52,608			263,792
Costs and earnings in excess of billings on completed contracts		194,361			255,426
	$	(141,753	)	$	8,366

Costs in excess of billings	$	27,166		$	91,904
Billings in excess of cost		(168,919	)		(83,538	)
	$	(141,753	)	$	8,366

2018	$	39,105
2019		78,209
2020		75,578
2021		44,178
2022		7,512
Thereafter		4,382

Capital lease obligation		248,963
Less amounts representing interest		14,709
Current portion		67,289

Net	$	166,965

	June 30, 2018			December 31, 2017
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020.	$	22,642		$	-
Note payable with monthly payments of $984, including interest at 14.70% per annum through March 2023.	$	57,479		$	-
Note payable with monthly payments of $787, including interest At 5.76% per annum through April 2021.	$	24,810
Note payable with monthly payments of $947 including interest at 6.14% per annum through December 2024.	$	57,395		$	-
Total non-current portion:	$	162,326		$	-
Total current portion:	$	(33,407	)	$	-
Total:	$	128,919		$	-

Year ending December 31:	Amount
2018 (remaining)	$	20,453
2019		40,905
2020		40,189
2021		26,014
2022		22,864
Thereafter		37,743
Notes payable obligation		188,169
Less amounts representing interest		(25,843	)

	$	162,326

		June 30, 2018				December 31, 2017
Note payable of $397,500, less debt discount of $388,609 including interest at 12% per annum through January 2020.		$	8,891			$	-

Upfront consideration	$	1,177,779
Liabilities assumed		878,565
Total	$	2,056,343

Cash and cash equivalents	$	30,408
Accounts receivable		277,338
Property and equipment, net		272,554
Customer list		102,422
Goodwill		1,373,621
Total assets acquired		2,056,344
Accounts payable		(112,590	)
Debt assumed		(590,657	)
Earn out liability		(175,318	)
Total liabilities assumed		(878,565	)
Total net assets acquired	$	1,177,779

Useful Life in	Amount		Years		Amortization Method
Customer List	$	102,422		5	Straight Line
Total	$	102,422

	Three Months Ended June 30, 2018		Three Months Ended June 30, 2017
Revenues	$	2,009,825	$	2,425,707
Net income		24,887		198,027
Net income per share:
Basic		0.01		0.03
Diluted		0.01		0.03

	Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
Revenues	$	3,945,280		$	4,844,882
Net income (loss)		(68,975	)		219,723
Net income (loss) per share:
Basic		0.00			0.04
Diluted		0.00			0.03

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2015		-
Grants		1,000,000		$	0.01		5.00	$	387,450
Exercised		-
Canceled		-
Outstanding at December 31, 2016		1,000,000		$	0.01		4.19	$	387,450
Grants		100,000			2.00		3.25		107,653
Exercised		(100,000	)		0.01		-		(38,745	)
Canceled		-
Outstanding at June 30, 2017		1,000,000		$	1.00		3.35		456,358
Exercisable at June 30, 2017		1,000,000		$	1.00		3.35	$	456,358

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2016		1,000,000		$	0.01		3.19	$	387,450
Grants		150,000			1.83		4.35	$	165,477
Exercised		(100,000	)		0.01		-		(38,475	)
Canceled		-
Outstanding at December 31, 2017		1,050,000		$	0.27		3.35		514,182
Grants		-
Exercised		(100,000	)	$	0.01		-		(38,475	)
Canceled		-
Outstanding at June 30, 2018		950,000		$	0.30		3.07	$	475,707
Exercisable at June 30, 2018		100,000		$	1.01		3.37	$	100,000

	June 30, 2018		December 31, 2017
Assets by Segment
Renewable Systems Integration	$	1,546,343	$	27,589
Non-renewable Systems Integration		2,246,502		1,457,607
	$	3,792,845	$	1,485,196

	For the Three Months Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Revenue by segment
Renewable Systems integration	$	-		$	24,163		$	31,789		$	40,253
Non-renewable system Integration		2,009,825			1,906,495			3,704,360			3,757,250
	$	2,009,825		$	1,930,658		$	3,736,149		$	3,797,503

Cost of sales by segment
Renewable Systems integration	$	-		$	34,440		$	31,617		$	50,345
Non-renewable system Integration		1,253,043			1,147,909			2,462,456			2,561,729
	$	1,253,043		$	1,182,349		$	2,494,073		$	2,612,074

Operating expenses
Renewable Systems integration	$	139,489		$	102,169		$	298,699		$	148,604
Non-renewable system Integration		567,842			440,955			983,316			887,765
	$	707,331		$	543,124		$	1,282,015		$	1,036,369
Operating (loss) income by segment
Renewable Systems integration	$	(137,007	)	$	(112,446	)	$	(298,527	)	$	(158,696	)
Non-renewable system Integration		186,458			317,631			258,588			307,756
	$	49,451		$	205,185		$	(39,939	)	$	149,060

	For the Three Months Ended
	June 30, 2017		June 30, 2016
Revenue by segment
Renewable Systems integration	$	24,163	$	1,500
Non-renewable system Integration		1,906,495		1,531,479
	$	1,930,658	$	1,532,979

	a)	Due to our small size, we did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; and
	b)	We lacked sufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements.

31.01		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 ~~INS~~		The following materials from H/Cell Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL ~~Instance Document~~(Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.


~~101 CAL~~		~~XBRL Taxonomy Calculation Linkbase Document~~

~~101 LAB~~		~~XBRL Taxonomy Labels Linkbase Document~~

~~101 PRE~~		~~XBRL Taxonomy Presentation Linkbase Document~~

~~101 DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~

	H/CELL ENERGY CORPORATION

Date: August ~~14, 2017~~10, 2018	By:	/s/ ANDREW HIDALGO
		Andrew Hidalgo
		Chief Executive Officer (Principal Executive Officer)

Date: August ~~14, 2017~~10, 2018	By:	/s/ MATTHEW HIDALGO
		Matthew Hidalgo
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)