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, 2018~~March 31, 2019

¨	~~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~~3010 LBJ Freeway, Suite 1200 Dallas, TX 75234

(Address of principal executive offices) (zip code)

~~(908) 837-9097~~(972) 888-6009

(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. Yesx ☒ No¨ ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx ☒ 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 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¨ ☐ Nox. ☒.

Securities registered pursuant to Section 12(b) of the Act: None.

As of ~~August 9, 2018,~~May 14, 2019, there were ~~7,586,024~~7,621,024 shares of registrant’s common stock outstanding.

H/CELL ENERGY CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Condensed consolidated balance sheets as of ~~June 30, 2018~~March 31, 2019 (unaudited) and December 31, ~~2017~~2018	3

		Condensed consolidated statements of operations and other comprehensive income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (unaudited)	4

		Condensed consolidated statement of stockholders’ equity for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 (unaudited)	5

		Condensed consolidated statements of cash flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (unaudited)	6

		Notes to condensed consolidated financial statements (unaudited)	~~7-20~~7-21

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~21-26~~22-27

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2627

	ITEM 4.	Controls and Procedures	2627

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2728
	ITEM 1A.	Risk Factors	2728
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2728
	ITEM 3.	Defaults Upon Senior Securities	2728
	ITEM 4.	Mine Safety Disclosures	2728
	ITEM 5.	Other Information	2728
	ITEM 6.	Exhibits	2728

	SIGNATURES		2829

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

H/CELL ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
ASSETS
Current assets
Cash and cash equivalents	$	460,538		$	455,700		$	328,439		$	359,134
Accounts receivable (net retention)		1,321,820			808,050
Accounts receivable								937,897			1,087,381
Prepaid expenses		14,467			14,669			18,772			16,282
Current right-of-use (ROU) asset								92,269			-
Costs and earnings in excess of billings		58,970			51,531			48,052			45,478
Total current assets		1,855,795			1,329,950			1,425,429			1,508,275

Property and equipment, net		403,941			102,573			494,491			476,436
Security deposits and other non-current assets		21,344			8,416			38,992			32,530
Deferred tax asset		44,257			44,257			50,000			50,000
Customer lists, net		93,887			-			78,524			83,645
ROU asset								167,985			-
Other long term asset								30,000			-
Goodwill		1,373,621			-			1,373,621			1,373,621

Total assets	$	3,792,845		$	1,485,196		$	3,659,042		$	3,524,507

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	951,769		$	631,385		$	695,997		$	891,354
Management fees payable – related party		15,000			31,257
Earn out payable		182,056
Earn-out payable								195,132			190,736
Billings in excess of costs and earnings		93,099			87,206			41,881			195,331
Sales and withholding tax payable		59,894			61,239			54,071			59,857
Current equipment notes payable		33,407			-			32,052			38,991
Current capital lease payable		67,289			-
Current operating lease liability								92,269			-
Current finance lease payable								72,510			65,265
Current convertible notes payable – related party, net of discounts								257,659			-
Income tax payable		25,746			98,313			32,259			48,643
Total current liabilities		1,428,260			909,400			1,473,830			1,490,177

Noncurrent liabilities
Capital leases		166,965			-
Line of credit								172,715			28,359
Lease operating liability								167,985			-
Finance leases								306,163			232,876
Equipment notes payable		128,919			-			65,779			121,038
Convertible note payable – related party, net of discount		8,891			-
Convertible notes payable – related party, net of discounts								61,609			29,122
Total noncurrent liabilities		304,775			-			774,251			411,395

Total liabilities		1,733,035			909,400			2,248,081			1,901,572

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
Common stock - $0.0001 par value; 25,000,000 shares authorized; 7,621,024 and 7,586,024 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively								762			758
Additional paid-in capital		2,949,459			1,335,656			2,896,524			2,983,476
Accumulated deficit		(828,768	)		(731,754	)		(1,429,402	)		(1,285,764	)
Accumulated other comprehensive loss		(61,639	)		(28,810	)		(56,923	)		(75,535	)
Total stockholders’ equity		2,059,810		$	575,796			1,410,961			1,622,935

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	3,792,845		$	1,485,196		$	3,659,042		$	3,524,507

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

~~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,

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~~OPERATIONS - AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)

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 March 31,
2019 2018
Revenue
Construction income $ 1,704,273 $ 1,694,535
Related party - 31,789
Total revenue 1,704,273 1,726,324

Cost of goods sold
Direct costs 1,196,438 1,209,413
Direct costs – related party - 31,617
Total cost of goods sold 1,196,438 1,241,030

Gross profit 507,835 485,294

Operating expenses
General and administrative expenses 607,052 555,184
Management fees – related party 19,500 19,500
Total operating expenses 626,552 574,684

Loss from operations (118,717 ) (89,390 )

Other expenses
Interest expense 1,833 3,946
Interest expense – related party 36,095 14,215
Change in fair value earn-out 4,396 -
(Gain) loss on fixed asset disposal (17,403 ) 3,418
Total other expenses 24,921 21,579

Income tax provision - -

Net loss $ (143,638 ) $ (110,969 )

Other comprehensive income (loss), net

Foreign currency translation adjustment 18,612 (10,259 )

Comprehensive loss $ (125,026 ) $ (121,228 )

Loss per share
Basic $ (0.02 ) $ (0.02 )
Diluted $ (0.02 ) $ (0.02 )
Weighted average common shares outstanding
Basic 7,593,413 7,486,024
Diluted 7,593,413 7,486,024

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6 4
H/CELL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019
Common Stock Preferred Stock Accumulated Total
Number
of
Shares Amount Number of
shares Amount Additional
Paid-In
Capital Accumulated Deficit Other Comprehensive Gain (Loss)
Stockholders’ Equity
(Deficit)

Beginning, January 1, 2019 7,586,024 $ 758 - - $ 2,983,476 $ (1,285,764 ) $ (75,535 ) $ 1,622,935

Stock-based compensation expense - - - - 8,562 - - 8,562

Share donation 35,000 4 - - 23,446 - - 23,450

Beneficial conversion feature - - - - 97,500 - - 97,500

Debt extinguishment - - - - (216,460 ) - - (216,460 )

Net income (loss) - - - - - (143,638 ) - (143,638 )

Foreign currency translation adjustment - - - - - - 18,612 18,612

Ending, March 31, 2019 7,621,024 $ 762 - $ - $ 2,896,524 $ (1,429,402 ) $ (56,923 ) $ 1,410,961
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 Three Months Ended March 31,
2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $ (143,638 ) $ (110,969 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization 72,015 33,352
Stock based compensation 8,562 17,148
(Gain) loss on sale of assets (17,403 ) 3,418
Change in fair value contingent consideration 4,396 -
Change in operating assets and liabilities:
Change in operating ROU asset 260,524 -
Share donation 23,450 -
Change in operating ROU liability (260,524 ) -
Accounts and retainage receivable 154,680 (39,654 )
Other long term asset (30,000 ) -
Prepaid expenses and other costs (2,481 ) (4,284 )
Costs in excess of billings (2,258 ) (28,969 )
Income tax payable - 4,066
Accounts payable and accrued expenses (207,426 ) 217,910
Billings in excess of costs (153,792 ) 34,354

Net cash (used in) provided by operating activities (293,894 ) 126,372

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (79,912 ) (68,628 )
Proceeds from disposition of property and equipment 72,638 393
Security deposits (6,415 ) (14,412 )

Net cash (used in) investing activities (13,689 ) (82,647 )

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of convertible debt 147,500 395,000
Proceeds from issuance of notes payable - 61,062
Net proceeds from line of credit 144,356 -
Repayments on long term debt - (351,481 )
Repayments on capital leases (9,985 ) (16,619 )
Repayments on notes payable (8,382 ) (14,113 )

Net cash provided by financing activities 273,489 73,849

Net increase (decrease) in cash and cash equivalents (34,094 ) 117,574

Effect of foreign currency translation on cash 3,399 18,704

Cash and cash equivalents -beginning 359,134 455,700

Cash and cash equivalents - ending $ 328,439 $ 591,978

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 $ 190,000 $ 2,214

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,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (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.,~~Dallas, Texas, is a company whose principal operations consist of designing and installing clean energy systems with a focus on hydrogen ~~energy systems.~~energy. Effective January 31, 2017, the Company acquired The Pride Group (QLD) Pty Ltd, an Australian company (“Pride”) ~~(see Note 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~~some revenue ~~but~~and has begun to bid ~~work and expects to have projects completed in 2018.~~a number of projects. 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)~~11). 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~~clean 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.~~system using hydrogen and fuel cell technology. 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~~electricity 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~~Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or any other interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

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.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.

Accounts 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, 2018~~March 31, 2019 and December 31 ~~2017,~~2018, 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,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)

Goodwill and ~~Identifiable~~Finite-Lived 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,~~acquiree, 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~~five years, on a straight-line basis to their estimated residual values and periodically reviews them for impairment. Total goodwill and identifiable intangible assets comprised ~~39%~~37% and 41% of ~~our~~the Company’s consolidated total assets at ~~June 30, 2018. There were no intangible assets or goodwill at June 30, 2017.~~March 31, 2019 and December 31, 2018, respectively.

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. Goodwill ~~and intangible assets with indefinite useful lives are~~is 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. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
The Company performed its annual impairment test for PVBJ in December of 2018. Based on the results of the qualitative testing, there was no impairment. The PVBJ reporting unit exceeded acquisition projections in 2018 and expects to meet future projections.
As of March 31, 2019, the Company had recorded goodwill in the amount of $1,373,621 related to the PVBJ acquisition. The performance of the Company’s fiscal 2018 impairment analysis did not result in an impairment of the Company’s goodwill.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive 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

The Company translates its foreign subsidiary’s assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are 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~~period. Items included in the financial statements of each entity in the group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).
The functional and reporting currency of the Company is the United States Dollar (“U.S. Dollar”). The financial records of Pride located in Australia, is maintained in the local currency, the Australian Dollar (AUD$) which is also its functional currency.
8
.H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)

For the three months ended March 31, 2019, the Company recorded other comprehensive income of $18,612 in the condensed consolidated financial statements. For the three months ended March 31, 2018, the Company recorded other comprehensive loss from a translation loss of $10,259 in the condensed consolidated financial statements.
Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with ~~Customers”~~Customers (Topic 606)” (“ASU 2014-09”) using the 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,~~ASU 2014-09, 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~~ASU 2014-09 requirements, the Company recognizes revenue from the installation or construction of projects and service or short term 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. A detailed breakdown of the five step process is as follows:
Identify the Contract with a Customer
The Company receives almost all of its contracts from only two sources, referrals or government bids. In a referral, a client that the Company has an ongoing business relationship refers the Company to perform services. In a government bid, the Company applies to perform services for public projects. The contracts have a pattern of being stand-alone contracts.
Identify the Performance Obligations in the Contract
The performance obligation of the Company is to perform a contractually agreed upon task for the customer. If the contract is stated to provide only contractual service, then the service is considered the only performance obligation. If the contractual service includes design and or engineering in addition to the contract, it is considered a single performance obligation.
Determine the Transaction Price
The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:
1. The customer’s written approval of the scope of the change order;
2. Current contract language that indicates clear and enforceable entitlement relating to the change order;
3. Separate documentation for the change order costs that are identifiable and reasonable; or
4. The Company’s favorable experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated
Once the Company receives a contract, a budget of projected costs is generated for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company typically files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.
Allocate the Transaction Price to the Performance Obligations in the Contract
If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.

8 9

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE 30,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)
Recognize Revenue When (or As) the Entity Satisfies a Performance Obligations

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 of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in the 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 customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings in excess of costs and estimated earnings.”

Disaggregated 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 revenues when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is determinable, and collectability is reasonably assured. Revenue is typically recorded once all performance obligations have been satisfied. Sales are recorded net of discounts and returns, which historically have not been material.

For the three months ended March 31, 2019 and 2018, revenues from contracts with customers summarized by Segment Geography and Revenue Stream were as follows:
Three Months Ended
March 31, 2019 March 31, 2018
United States – Service $ 514,955 $ 375,451
Australia – Service 567,121 514,183
United States – Contract 160,000 0
Australia – Contract 462,197 836,690
Total $ 1,704,273 $ 1,726,324
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~~March 31, 2019 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.~~2018.
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.

~~Sales and Use Tax~~
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~~Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“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.

10
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
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 2018, 2017 ~~2016~~ and ~~2015~~2016 income tax returns are still open for examination by the taxing authorities.

Fair Value of Financial Instruments

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.The Company classifies and 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.

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
Balance at December 31, 2018 $ 190,736
Payments -
Adjustments to fair value 4,396
Balance at March 31, 2019 $ 195,132

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 11

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE 30,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (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 diluted loss per share excludes dilutive securities for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ because their inclusion would be anti-dilutive. ~~Potentially dilutive~~Dilutive securities ~~excluded from the computation of basic and diluted net loss per share~~ for the three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017 are~~were as follows:

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
March 31, 2019 March 31, 2018

Options to purchase common stock 968,500 1,050,000
Convertible debt 1,100,000 800,000
Totals 2,068,500 1,850,000

3. RELATED PARTY TRANSACTIONS

The Company’s ~~current~~former office space ~~consists~~during the year ended December 31, 2018 consisted of approximately 800 square feet, which iswas donated to it from one of its executive officers. There iswas no lease agreement and the Company ~~pays~~paid 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~~April 2018, 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~~former director exercised 100,000 options.

In June 2016, the Company entered into a contract with Rezaul Karim, one of its former directors, for the installation of an HC-1 system. The system installation was complete ~~pending any change orders~~ as of ~~June 30, 2018, and~~March 31, 2018. The system installation generated $31,789 ~~and $40,253~~ of revenue ~~for~~during the ~~six~~three months ended ~~June 30, 2018 and 2017, respectively.~~March 31, 2018. 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, is vice president of operations at REH. ~~Costs incurred~~There was $31,617 of costs for ~~REH were $31,617 and $50,345 for the six months ended June 30, 2018 and 2017, respectively. No revenue or costs were incurred in~~ the three months ended ~~June 30,~~March 31, 2018. ~~For the three months ended June 30, 2017, the Company incurred revenue of $24,163 and 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, 2018 and December 31, 2017, the balances due to Turquino Equity LLC, a significant shareholder, amounted to approximately $15,000 and $31,257, respectively. These balances represent expenses for management services. There was $19,500 of management fees expensed for the three months ended ~~June 30,~~March 31, 2019 and 2018 to Turquino Equity LLC (Turquino”), a significant shareholder.
12
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
On January 2, 2018, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $400,000 in 12% Convertible Debentures (“2018 Debentures”).On February 8, 2019, the Company and the holders of the 2018 Debentures entered into amendments (the “Amendments”) to the 2018 Debentures.The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the “2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum from January 2, 2018 through the date of the Amendments, and 10% per annum subsequent to the date of the Amendments, payable monthly in cash, beginning on February 1, 2018 and ~~$39,000~~through the 2020 Maturity Date. The 2018 Debentures are convertible into common stock at a conversion price of $0.50 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 $395,000 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.
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“Thermo”). The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the ~~six months ended June 30,~~Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions.
On February 8, 2019, the Company entered into a securities purchase agreement with two of its directors, pursuant to which the Company sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (“2019 Debentures”). The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and through the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50 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 $97,500 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.
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 March 31, 2019 and December 31, 2018, the balance was fully covered under the $250,000 threshold in the United States. In Australia the balance exceeded the threshold by $34,553 at March 31, 2019 and $133,578 at December 31, 2018. ~~Management fees expensed totaled $45,826~~
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 March 31, 2019, approximately 10% of the Company’s accounts receivable was from one customer and, at December 31, 2018, approximately 20% of the Company’s accounts receivable was due from two unrelated customers, each at 10%.
5. MAJOR CUSTOMERS
During the three months ended ~~June 30, 2017~~March 31, 2019, there was no customers with a concentration of 10% or higher of the Company’s revenue. During the three months ended March 31, 2018, there was one customer with a concentration of 10% or higher of the Company’s revenue at 30%.
13
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
6. UNCOMPLETED CONTRACTS
Costs, estimated earnings and ~~$91,000~~billings on uncompleted contracts are summarized as follows at March 31, 2019 and December 31, 2018:
March 31, 2019 December 31, 2018
Costs incurred on uncompleted contracts $ 931,173 $ 811,173
Estimated earnings 329,198 469,109
Costs and estimated earnings earned on uncompleted contracts 1,260,371 1,280,282
Billings to date 1,259,446 1,265,475
Costs and estimated earnings in excess of billings on uncompleted contracts 925 14,807
Costs and earnings in excess of billings on completed contracts 5,246 (164,660 )
$ 6,171 $ (149,853 )

Costs in excess of billings $ 48,052 $ 45,478
Billings in excess of cost (41,881 ) (195,331 )
$ 6,171 $ (149,853 )
7. LEASES
Operating Leases
For leases with a term of 12 months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, and we recognize lease expense for such leases on a straight-line basis over the lease term.
The Company previously entered into two leases for office space in Woombye and Brisbane, Queensland, Australia, both which expired in April 2018. The Company signed new leases in January 2019 for a Dallas, Texas shared office space, which ends in December 2019, and February 2018 for new office space in Kunda Park, Queensland Australia, which started in May 2018 and expires in May 2023. The Company also renewed the Brisbane office space for one year, starting in May 2018. The Company’s office in Downingtown, Pennsylvania is month to month.
On March 25, 2019 the Company signed a lease for new office space in Brisbane, which has a fixed 3% increase annually expiring in March 2025 which includes a renewal period of three years which management is reasonably certain will be exercised. The Company analyzed this lease and determined that this agreement meets the definition of a lease under ASC 842, as it provides management with the exclusive right to direct the use of and obtain substantially all of the economic benefits from the identified leased asset, which is the office space. Management also analyzed the terms of this arrangement and concluded it should be classified as an operating lease, as none of the criteria were met for finance lease classification. As there was only one identified asset, no allocation of the lease payments was deemed necessary. Management did not incur any initial direct costs associated with this lease. As of the commencement date, which was March 25, 2019, a right to use asset and lease liability of $130,736 was recorded on the condensed consolidated balance sheet based on the present value of payments in the lease agreement. Per review of the lease agreement, there was no variable terms identified and there is no implicit rate stated. Therefore, the Company determined the present value of the future minimum lease payments based on the incremental borrowing rate of the company. The incremental borrowing rate was determined to be 10%, as this is the rate which represents the incremental borrowing rate for the ~~six~~Company, on a collateralized basis, in a similar economic environment with similar payment terms.
The future minimum payments on the office space leases for each of the next seven years and in the aggregate amount to the following:
2019 $ 61,500
2020 82,855
2021 84,021
2022 85,221
2023 57,125
2024 43,732
2025 11,013
$ 425,467
Rent expense for each of the three months ended ~~June 30, 2018.~~March 31, 2019 and 2018 amounted to approximately $23,000 and is included in “General and Administrative” expenses on the related statements of operations.
14
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Finance Leases
Under the new leasing standard, ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”), leases that are more than one year in duration are capitalized and recorded on the balance sheet. Some of the Company’s leases, specifically for automobiles and office space, offer an option to extend the term of such leases.
During the three months March 31, 2019, the Company leased equipment under two finance leases, with a net book value of $468,490, which expire in October 2023 and February 2025. During the three months ended March 31, 2018, the Company leased equipment under four capital leases, with a net book value of $165,609. The obligations are payable in monthly installments ranging from approximately $503 to $1,578 with interest rates from 3.0% to 5.57% per annum. The leases are secured by the related equipment.
At March 31, 2019, the Company had 13 finance leases approximate payments to be made on these finance lease obligations are as follows:
2019 $ 64,040
2020 85,387
2021 77,816
2022 66,445
2023 62,936
Thereafter 59,851
Finance lease obligation 416,475
Less: amounts representing interest 37,802
Current maturities of capital lease obligations 72,510

Finance lease obligations, non-current $ 306,163
8. DEBT
Long-term debt consisted of the following:
Equipment Notes Payable
March 31, 2019 December 31, 2018
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020. $ 16,228 $ 18,707
Note payable with monthly payments of $615.25, including interest at 6.80% per annum through August 2021. $ 16,903 $ 18,383
Note payable with monthly payments of $1,294.50, including interest at 14.72% per annum through March 2023.
$ 48,103 $ 50,072
Note payable with monthly payments of $1,063.45, including interest at 5.76% per annum through April 2021. $ 16,597 $ 18,539
Note payable with monthly payments of $946.84 including interest at 6.14% per annum through December 2024. $ - $ 54,328
Total: $ 97,831 $ 160,029
Total current portion: $ (32,052 ) $ (38,991 )
Total non-current portion: $ 65,779 $ 121,038
15
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)
At March 31, 2019, approximate principal payments to be made on these debt obligations are as follows:
Year ending December 31: Amount
2019 (remaining) $ 32,052
2020 28,478
2021 15,117
2022 12,759
2023 9,425
Thereafter -
$ 97,831
Convertible Note Payable

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 onthrough 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~~$395,000 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 (UNAUDITED)~~
4. ~~SIGNIFICANT CONCENTRATIONS OF CREDIT RISK~~
~~Cash is maintained at~~On February 8, 2019, the Debentures were amended to reduce the interest rate to 10% and reduce the conversion price to $0.50 (the “Revised Debentures”), providing the issuance of an ~~authorized deposit-taking institution (bank) incorporated~~additional 266,667 shares upon conversion. In conjunction with these amendments, the convertible note was re-evaluated in ~~both the United States~~accordance with ASC 470-50 -Debt Modifications 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, 2018, approximately 27% of the Company’s accounts receivable was due from two unrelated customers at 14% and 13%, respectively. At December 31, 2017, approximately 36% of the Company’s accounts receivable was due from three unrelated customers, 14%, 12% and 10%, respectively.
5. ~~MAJOR CUSTOMERS~~
~~There were two customers with a concentration of 10% or higher 16%~~Extinguishments(“ASC 470”), and ~~15%, respectively, for~~it was determined that the ~~three months ended June 30, 2018, and three customers for the six months ended June 30, 2018 at 21%, and two at 11%, respectively. During the three months ended June 30, 2017, two customers had~~change in terms resulted in 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 10% or higher at 35% and 17%, respectively.~~
6. ~~PROPERTY AND EQUIPMENT~~
~~At June 30, 2018 and December 31, 2017, property and equipment were comprised of the following:~~
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, 2018 were $47,945 and $75,519, respectively. Depreciation expense for the three and six months ended June 30, 2017 amounted to $7,529 and $14,559, respectively.
7. ~~UNCOMPLETED CONTRACTS~~
~~Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at June 30, 2018 and December 31, 2017:~~
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. ~~COMMITMENTS~~
The Company previously entered into two operating leases for office space in Woombye and Brisbane, Queensland, Australia, both 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 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 (UNAUDITED)~~
~~For the three and six months ended June 30, 2018, interest expense on the capital leases was approximately $2,912 and $4,982, respectively.~~
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, relatedsubstantial modification to the beneficial conversion ~~feature~~feature. As a result, the carrying value of the ~~note~~Debentures at the time of the transaction, along with the related beneficial conversion feature, were derecognized and the Revised Debentures were recorded at present value, resulting in a loss on debt extinguishment of $216,460 and a change of $53,000 from the old beneficial conversion feature to the new. As the holders of the Debentures are related parties to the Company,ASC 470provides for treatment as a capital contribution, whereby the related extinguishment loss will instead be recorded within the Company’s Additional Paid in Capital balance.
In connection with the Revised Debentures, the Company incurred $2,500 of legal fees and recorded a $160,000 beneficial conversion feature, both of which are recorded as a discount on debt and 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,~~March 31, 2019, the Company incurred interest expense of $36,095, of which $21,301 related to the amortization of the 2018 Debentures debt discount and $1,626 for the 2019 Debentures debt discount. For the three months ended March 31, 2018, the Company incurred interest expense of ~~$18,676,~~$14,215, of which ~~$4,177~~$2,214 related to the amortization of the ~~discount.~~discount for the 2018 Debentures.

14 16

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE 30,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)

~~For the six months ended June 30, 2018 the Company incurred interest expense of $32,891, of which $8,891 related to the amortization of 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 $ -
~~10.~~ 9. CONTRACT BACKLOG

As of March 31, 2019, the Company had a contract backlog approximating $436,239, with anticipated direct costs to complete approximating $329,198. At ~~June 30,~~December 31, 2018, the Company had a contract backlog approximating ~~$715,831~~$583,392, with anticipated direct costs to completion approximating ~~$577,000.~~$452,884.
10. GOODWILL AND OTHER INTANGIBLES
The tables below present a reconciliation of the Company’s goodwill and intangibles:
Goodwill
Balance at December 31, 2018 $ 1,373,621
Adjustments -
Balance at March 31, 2019 $ 1,373,621
Intangibles – customer list
Balance at December 31, 2018 $ 83,645
Amortization 5,121
Balance at March 31, 2019 $ 78,524
The customer list will continue to be amortized at $5,121 a quarter until December 31, 2022. The remaining $1,707 will be amortized in January 2023.

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.
~~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 Incentive Stock Option Plan from December 31, ~~2016~~2018 to ~~June 30, 2018~~March 31, 2019 is as follows:

Shares
Weighted-
Average Exercise Price

Weighted-
Average Remaining Contractual Term

Aggregate Intrinsic
Value
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
Outstanding at December 31, 2018 955,000 0.29 3.40 461,251
Grants 150,000 1.83 4.35 $ 165,477 15,000 1.15 4.81 -
Exercised (100,000 ) 0.01 - (38,475 ) - - - -
Canceled - (1,500 ) 0.05 - (629 )
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
Outstanding at March 31, 2019 968,500 $ 0.28 3.49 $ 460,622
Exercisable at March 31, 2019 531,250 $ 0.28 3.49 $ 258,090

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 weighted average grant date stock price of $0.3958 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 prices of $2.00, $1.50, $1.00 and ~~$1.50,~~$1.15, which were equal to the closing sales price of the Company’s common stock on the dates of grant.
17
H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND 2018 (UNAUDITED)

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. 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, 2018:~~
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,~~March 31, 2019, there was ~~$77,473~~$48,076 of unrecognized compensation expense. ~~At June 30, 2017,~~As of March 31, 2018, there was ~~$94,196~~$93,218 of unrecognized compensation expense.

~~14.~~12. SEGMENT INFORMATION

Our business is organized into two reportable segments: renewable systems integration revenue and non-renewable systems integration revenue. 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, 2018~~March 31, 2019 and ~~2017.~~2018.

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
March 31, 2019 December 31, 2018
Assets by Segment
Renewable systems integration $ 1,640,549 $ 1,540,423
Non-renewable systems integration 2,018,493 1,984,084
$ 3,659,042 $ 3,524,507

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
March 31, 2019 March 31, 2018
Revenue by segment
Renewable systems integration $ 49,514 $ 31,789
Non-renewable system integration 1,654,759 1,694,535
$ 1,704,273 $ 1,726,324

Cost of sales by segment
Renewable systems integration $ 37,785 $ 31,617
Non-renewable system integration 1,158,653 1,209,413
$ 1,196,438 $ 1,241,030

Operating expenses
Renewable Systems integration $ 167,540 $ 161,692
Non-renewable system Integration 459,012 412,992
$ 626,552 $ 574,684
Operating (loss) income by segment
Renewable Systems integration $ (155,811 ) $ (161,520 )
Non-renewable system Integration 37,094 72,130
$ (118,717 ) $ (89,390 )

18

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE 30,~~MARCH 31, 2019 AND 2018 ~~AND 2017~~ (UNAUDITED)

~~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.~~13. INCOME TAX

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 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,~~March 31, 2019 and 2018, ~~and 2017. A~~due to a full 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.~~14. ~~RECENT ACCOUNTING PRONOUNCEMENTS~~NOTE PAYABLE

~~In May 2014, the FASB issued accounting standard update~~On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo Communications Funding, LLC (“~~ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”~~Thermo”). The ~~standard’s core principle is that~~Credit Agreement provides for a ~~company will recognize revenue when it transfers promised goods or services to customers~~revolving line of credit in an amount ~~that reflects~~not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the ~~consideration~~Credit Agreement, PVBJ granted a security interest to ~~which~~Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, the ~~company expects~~Company’s Chief Executive Officer personally guaranteed the repayment of the Credit Agreement under certain conditions. Pursuant to ~~be entitled in exchange for those goods~~the terms of the Credit Agreement, the Company is permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or ~~services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. This may include identifying performance obligations~~85% of Eligible Accounts (as defined in the ~~contract, estimating~~Credit Agreement). Borrowings under the ~~amount~~Credit Agreement may be used for working capital and to refinance certain existing debt of ~~variable consideration~~PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to ~~include~~1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans to H/Cell. The loan commitment shall expire on August 21, 2020. As of March 31, 2019, the Company was in compliance with these covenants. The interest rate applicable to revolving loans under the ~~transaction price~~Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. The Company paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and ~~allocating~~$3,500 will be paid on the ~~transaction price~~first anniversary. The Company will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears. The Company may prepay the Note at any time and terminate the Credit Agreement. In the event that the Company terminates the Credit Agreement, the Company will pay Thermo an early termination fee equal to ~~each separate performance obligation. In July 2015,~~4% of the ~~FASB approved~~pro rata portion, which pro rata portion is determined by multiplying $350,000 by the ~~proposal~~number of months prior to ~~defer~~the second anniversary of the effective date of ~~ASU 2014-09 standard~~the Credit Agreement and then dividing that by ~~one year. Early adoption was permitted~~24. The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in the Company’s financial condition that could have a material adverse effect on the Company. As of March 31, 2019, funds totaling $120,848 were available for borrowing under the Credit Agreement.
15. EQUITY PURCHASE AGREEMENT
On March 12, 2019, the Company entered into an equity purchase agreement (the “Equity Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from the Company up to $450,000 in shares (the “Shares”) of the Company’s common stock, subject to certain limitations and conditions set forth in the Equity Purchase Agreement.
Under the Equity Purchase Agreement, the Investor has the right, at any time, to purchase Shares by delivering the Company a purchase notice, specifying the number of Shares to be purchased. The purchase price for the Shares under the Equity Purchase Agreement will be 60% of the lowest closing price of the Company’s common stock in the five consecutive trading days preceding the Investor’s receipt of the Shares subject to such equity purchase.
In addition, the Investor has an obligation, to the extent it has not already made voluntary purchases, to purchase up to (i) $200,000 in Shares within 15 Trading Days (as defined in the Equity Purchase Agreement) after ~~December 15, 2016,~~the effective date of the Registration Statement (as defined below) and (ii) $450,000 in Shares within 70 Trading Days after the ~~standard became~~ effective ~~for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016,~~date of 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. Registration Statement.
The Company has ~~performed~~the right to reject any purchase notice from the Investor by delivering written notice of such rejection within one trading day after receipt. If the Company rejects any purchase notice, the Investor has no further obligations to purchase Shares under the Equity Purchase Agreement. The Company may terminate the Equity Purchase Agreement at any time by written notice to the Investor in the event of a ~~review~~material breach of the ~~requirements~~Equity Purchase Agreement by the Investor. In addition, the Equity Purchase Agreement will automatically terminate on the earliest of: (i) the date that the Investor has purchased $450,000 of Shares; (ii) 70 Trading Days after the effective date of the ~~new revenue standard and~~Registration Statement; or (iii) the date the Registration Statement 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 had a material impact on the financial statements.no longer effective.

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 did not have a material impact on 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 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. The Company adopted ASU 2016-15 effective January 1, 2018 and it did not have a material impact on its financial statements.
19

H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~JUNE 30,~~MARCH 31, 2019 AND 2018 (UNAUDITED)
The obligation of the Investor to purchase the Shares is subject to several conditions, including, among other thing, (i) that the Company has an effective registration statement with the SEC registering the Shares for resale, and (ii) that the purchase of the Shares shall not cause the Investor to own more than 9.99% of the outstanding shares of common stock. In connection with the Equity Purchase Agreement, the Company agreed to pay $15,000 of fees to the Investor, of which $10,000 was paid on execution of the Equity Purchase Agreement, and the remaining $5,000 will be paid on the first sale of Shares.
Pursuant to the Registration Rights Agreement, the Company is required to register the Shares on a registration statement (the “Registration Statement”) to be filed with the SEC within 15 calendar days after the Company filed its annual report for the fiscal year ended December 31, 2018. The Company timely filed the Registration Statement with the SEC.
No sales have been made pursuant to the Equity Purchase Agreement as of the date of this quarterly report.
Additionally, on March 12, 2019, the Company agreed to donate 35,000 shares of common stock to the manager of the Investor. The Company recorded value of these shares at the market price and is included in general and administrative expenses.
16. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02 and issued subsequent amendments to the initial guidance thereafter. This ASU requires an entity to recognize an ROU asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification of the underlying lease as either finance or operating. Similar modifications have been made to lessor accounting in-line with revenue recognition guidance. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective for the Company on January 1, 2019. Entities are required to adopt ASU 2016-02 using a modified retrospective transition method. Full retrospective transition is prohibited. The guidance permits an entity to apply the standard’s transition provisions at either the beginning of the earliest comparative period presented in the financial statements or the beginning of the period of adoption (i.e., on the effective date). The Company adopted the new standard on its effective date.
The new standard provides several optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient not to separate lease and non-lease components for all of its leases in existence at December 31, 2018, which means all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of the Company’s lease components for balance sheet purposes. For the three months ended March 31, 2019, the Company recognized additional lease liabilities of $261,047 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments for existing leases on its Condensed Consolidated Balance Sheets. See Note 8, “Leases,” above, for additional lease disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test. The amount of the impairment charge to be recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value. The loss to be recognized cannot exceed the amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company has elected to early adopt ASU 2017-04 as of January 1, 2018. The Company has applied the guidance related to ASU 2017-04 during its annual impairment test in the fourth quarter of 2018. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the entity initially adopts the amendments in this update. The Company elected to early adopt this standard in performing their 2018 impairment test.
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H/CELL ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019 AND ~~2017~~2018 (UNAUDITED)

In ~~May 2017,~~June 2018, the FASB issued ASU ~~No. 2017-09,~~2018-07, Compensation –- Stock Compensation ~~(Topic~~(ASC 718): ~~Scope of Modification~~Improvements to Nonemployee Share-Based Payment Accounting (“ASU ~~2017-09”~~2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. Consequently, the accounting for share-based payments to ~~clarify when to account~~nonemployees and employees will be substantially aligned. The new standard will become effective for ~~a change~~the Company beginning January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
In August 2018, the FASB issue ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the ~~terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required if~~Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value ~~vesting conditions,~~measurements by removing, modifying, or ~~classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is~~adding certain disclosures. The new standard will become effective for ~~annual reporting periods beginning after December 15, 2017, including interim reporting periods within each annual reporting period.~~the Company January 1, 2020, with early adoption permitted. The Company ~~adopted ASU 2017-09 effective January 1, 2018 and it did not have a material~~is currently evaluating the impact of this standard on its ~~financial statements.~~
~~Management does not believe there would have been a material effect on the accompanying~~consolidated financial statements ~~had any other recently issued, but not yet effective, accounting standards been adopted in the current period.~~and disclosures.

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

Net income $ 13,955 $ 207,482 $ 151,358
Weighted average common shares outstanding 7,483,980 7,039,357 6,355,468
Dilutive securities
Convertible debt
533,333
- -
Options 801,912 908,734 903,687
Diluted weighted average common shares outstanding 8,819,225 7,948,091 7,259,155
Basic net income per share $ 0.00 $ 0.03 $ 0.02
Diluted net income per share $ 0.00 $ 0.03 $ 0.02
For the six month period ended June 30, 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, and therefore, the effect on diluted income per share would have been anti-dilutive.
~~19.~~17. SUBSEQUENT EVENTS

The Company has evaluated events from ~~June 30, 2018~~March 31, 2019 through the date the financial statements were issued. There were no subsequent events that need disclosure.

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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~~renewable energy as its source for hydrogen production. ~~We believe that~~It functions as a self-sustaining clean energy system using hydrogen and fuel cell technology. Its production of electricity 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. 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~~an energy source produces no carbon dioxide or other greenhouse gases. Unlike fossil fuels, the only ~~emissions~~emission from hydrogen ~~fuel are~~is chemically pure ~~water and oxygen.~~water. 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.~~hydrogen. We believe it is safe and ~~efficient,~~the most abundant and ~~the~~ cleanest energy source on the planet. In addition to offering this self-sustaining clean energy system using hydrogen and fuel cell technology, we offer a number of renewable energy services, such as audits of energy consumption, review of energy/tax credits available, feasibility studies, solar/battery system installation, zoning/permitting analysis, site design/preparation and restoration, system startup, testing, commissioning, maintenance and interconnection applications.

We have succeeded in developing aand installing hydrogen energy ~~system designed to create electricity~~systems that ~~is generated by~~are combined with renewable solar ~~energy.~~energy to produce clean electricity. 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,~~sunlight, the solar ~~modules~~ produce renewable energy that ~~is collected through a solar inverter, which~~ charges a bank of ~~batteries through a battery inverter.~~batteries. 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~~a 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.
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~~The HC-1 system is connected to the residential or commercial property through the inverters.~~ The electricity for the end user 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 the hydrogen gas stored in the tank, which processed through a fuel cell, creates the ~~electricity.~~electricity to charge the batteries. As the system is able to produce its own hydrogen ~~that~~gas, which 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~~the system to the electrical grid in order to generate renewable energy credits, ~~the customer needs to~~we 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.electric utility company. If the customer obtains anauthorization for interconnection ~~agreement,~~to the utility grid, once the HC-1 system is operational, the HC-1 system ~~end user~~owner 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~~kilowatt hours (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.

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On January 31, 2017, we 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 division to focus on the high growth renewable energy market in Asia-Pacific. On February 1, 2018, we acquired PVBJ Inc. (“PVBJ”). Established in 2008, PVBJ 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 covers the U.S. Mid-Atlantic market. PVBJ is also establishing a clean energy division so that it can offer hydrogen energy systems to its existing customer base.
Current Operating Trends

Currently, ~~our employees~~a number of technicians are licensed to install our HC-1 systems in the ~~State~~Mid-Atlantic region of ~~New Jersey.~~the U.S. and Australia. In addition to recently establishing a clean energy division, Pride ~~sells,~~is a highly regarded and established company that 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.market. Pride also provides ~~programs for~~ annual maintenance ~~of its products and systems. The division~~programs which amount to approximately AUD $2 million per annum. Pride currently 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 and licensed security systems integrator for the Queensland Government and has various government contracts in place for installation, maintenance and project services. ~~Pride also works~~
PVBJ is well recognized for the design, installation, maintenance and emergency service of environmental systems both in residential and commercial markets. The subsidiary has a team of technicians that can install and service a variety of HVAC and refrigeration products. PVBJ is certified and licensed in multiple states and has developed an extensive customer base. PVBJ is now expanding into clean energy systems and employs technicians that are familiar with ~~a number~~installing environmental systems requiring electrical, plumbing and gases, which is similar to the installation of ~~general contractors as a subcontractor for security systems integration.~~an HC-1 system.

We intend to aggressively grow our business, both organically and through strategic acquisitions. ~~We intend~~Our goal is to acquire companies with ~~licensed contractors~~the licenses and certifications to operate in various states and ~~regions, which~~countries. This will allow us to expand the ~~territories~~geographic areas 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.~~technicians that can be trained to install our products and services. 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~~electricity from renewable energy sources.
~~These governments have established various incentives and financial mechanisms to accelerate and promote~~ This overall approach is more cost effective than the ~~use~~protracted nature 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~~opening an office, hiring staff and ~~provide us with~~obtaining certifications to operate in a ~~larger customer base to pursue with greater~~specific geographic ~~coverage.~~area. 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.

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Results of Operations

For the three months ended ~~June 30,~~March 31, 2019 and the three months ended March 31, 2018 ~~and 2017~~

Revenue and Cost of Revenue

We had ~~$2,009,825~~$1,704,273 of revenue and ~~$1,253,043~~$1,196,438 for cost of revenue during the three months ended ~~June 30, 2018, respectively.~~ March 31, 2019.
We had ~~$1,930,658~~$1,726,324 of revenue and ~~$1,182,349~~$1,241,030 for cost of revenue during the three months ended ~~June 30, 2017,~~March 31, 2018, of which ~~$24,163~~$31,789 and ~~$34,440,~~$31,617, respectively, was related party. ~~The increase in revenue and cost of revenue was due to the acquisition of PVBJ on February 1, 2018.~~

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
For the Three Months Ended
March 31, 2019 March 31, 2018
Revenue by Segment
Renewable Systems Integration $ 49,514 $ 31,789
Non-renewable Systems Integration 1,654,759 1,694,535
$ 1,704,273 $ 1,726,324
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General and Administrative Expenses

During the three months ended ~~June 30, 2018,~~March 31, 2019, our general and administrative expenses were ~~$707,331. $139,489~~$626,552. $167,540 was related to the Renewable Systems Integration segment, ~~as follows: $41,325~~which included $37,500 of gross payroll, ~~and payroll taxes, $34,747~~$26,773 of ~~legal and~~ accounting fees related to audit and consulting fees, $23,450 for share donation, $19,500 of management ~~disbursements, $17,149~~fees, $12,000 of ~~stock-based~~legal fees, $8,562 of stock based compensation, ~~$7,928~~$8,000 of ~~consulting/~~investment banking fees, $7,265 of dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $6,331 of travel and meals, $5,271 inof amortization, ~~of intangible assets, directors and officers insurance liability of $4,258 and $6,829~~$5,059 of miscellaneous ~~expenses.~~expenses, $3,207 for insurance, $2,869 of payroll taxes and $1,753 of auto lease.
During the three months ended March 31, 2018, our general and administrative expenses were $574,684. $161,692 was related to the Renewable Systems Integration segment, which included $37,500 of gross payroll, $35,263 of accounting fees related to audit and consulting fees, $27,000 of legal fees, $19,500 of management fees, $17,148 of stock based compensation, $6,944 of dues and subscription fees, which pertained to EDGAR fees and OTC Market annual listing fees, $5,202 for insurance, $4,387 of travel, $3,564 of amortization, $3,271 of miscellaneous expenses and $1,913 of payroll taxes.

The ~~non-renewable~~Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended ~~June 30, 2018~~March 31, 2019 of ~~$570,324,~~$459,012, including management and administrative salaries of ~~$241,953~~$228,614 along with ~~$110,614~~$87,810 of other various employee expenses, such as vacation, sick time, office expenses, training and meals. In addition, automobile expenses totaled $17,238, which included lease and auto allowance. Facilities lease maintenance and utilities totaled $24,961. In addition, we incurred $46,689 for various insurance, other miscellaneous fees of $17,680, $13,300 of payroll tax, $13,006 for telecommunications and information technology, $5,247 of computer services and $4,467 of 401(k) expense.
The Non-renewable Systems Integration segment incurred general and administrative expenses during the three months ended March 31, 2018 of $412,992, including management and administrative salaries of $157,841 along with $65,978 of other various employee expenses, such as vacation and sick time. In addition, automobile expenses totaled ~~$68,517,~~$71,452, which included repairs, fuel and auto allowance. ~~Insurance totaled $47,868.~~ Facilities lease totaled ~~$20,997.~~$26,994. We incurred $7,183 of travel and entertainment, business meals, investor relations and promotional expenses. Professional fees of ~~$8,347~~$6,145 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: $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/duesDues and subscription fees were ~~$1,329,~~$1,102, 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~~depreciation of ~~$4,814,~~$27,574, $25,159 for various insurance, other miscellaneous fees of ~~$11,596~~$19,361, $17,154 for telecommunications, $5,156 of 401(k) expense and ~~depreciation~~$4,066 of ~~$7,275.~~tax expense.

~~As a result~~We incurred $24,921 of ~~the foregoing, we had net income of $13,955~~other expenses for the three months ended ~~June 30, 2018, compared to net income~~March 31, 2019, including $36,095 of ~~$207,482~~interest expense – related party, $4,396 change in fair value earn-out and $1,833 of interest expense, offset by $17,403 of gain on fixed asset disposal.
We incurred $21,579 of other expenses for the three months ended ~~June 30, 2017.~~
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~~For the six months ended June 30,~~March 31, 2018, ~~and 2017~~
~~Revenue and Cost~~including $14,215 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. 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, 2018.
For the Six Months Ended
June 30, 2018 June 30, 2017
Revenue by segment
Renewable Systems integration $ 31,789 $ 40,253
Non-renewable system Integration 3,704,360 3,757,250
$ 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: $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 – related party, $3,946 of ~~$6,391 bad debt~~interest expense and $3,418 of ~~$24,019, other miscellaneous fees of $22,216, and depreciation of $14,559.~~loss on fixed asset disposal.

As a result of the foregoing, we had a net loss of ~~$97,014~~$143,638 for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019, compared to a net ~~income~~loss of ~~$151,358~~$110,969 for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018.

Liquidity and Capital Resources

As of ~~June 30, 2018,~~March 31, 2019, we had a working capital deficit of ~~$427,535,~~$48,401, comprised of ~~$460,538~~current assets of $937,897 of accounts receivables, $328,439 of cash and cash equivalents, ~~$1,321,820~~$92,269 of ~~accounts receivables, $58,970~~current right-of-use asset, $48,052 of costs in excess of billings and ~~$14,467~~$18,772 of prepaid ~~expenses, offset by $951,769~~expenses. We had $695,997 of accounts payables, $257,659 of current convertible notes payable – related party net of discount, $195,132 of earn out payable, $92,269 of current lease liability, $72,510 of current finance leases payable, $54,071 of sales and ~~accrued expenses, $93,099~~withholding tax payable, $41,881 of billings in excess of cost, ~~$67,289 of capital leases payable, $59,894 of sales and withholding tax payable, $33,407 of notes payable, $25,746~~$32,259 of income tax payable ~~$182,056~~and $32,052 of ~~earn out~~current notes payable, ~~and $15,000 of management fees-related party,~~ which made up our current liabilities at ~~June 30, 2018. We also had $166,965~~March 31, 2019. Other noncurrent liabilities at March 31, 2019 were $172,715 for line of credit, $167,985 of lease liability, $306,163 of long term ~~capital~~finance leases and ~~$128,919~~$65,779 of ~~long term~~equipment notes payable along with ~~$8,891~~$61,609 of convertible notes payable – related ~~party.~~party net of discount.
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For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we used ~~$115,167~~$293,894 of cash in operating activities, which represented our net loss of ~~$97,014 and $412,271~~$143,638, $260,524 in change in operating ROU asset, $207,425 of changes in accounts payable, ~~and accrued expenses offset by $85,130~~$153,792 of ~~depreciation and amortization, $3,354~~billings in excess of ~~loss~~cost, $30,000 in long term asset change, $17,403 of gain on ~~sale~~the disposal of fixed assets ~~$6,738 in change in fair value contingent consideration, $202~~$2,481 of prepaid expenses ~~$10,559~~and $2,258 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~~$260,524 in change in operating ROU liability, $154,680 of changes in accounts ~~receivables.~~receivables, $72,015 of depreciation and amortization, $23,450 of share donation, $8,562 in stock based compensation and $4,396 change in fair value contingent consideration.
24
We used $13,689 from investing activities from the purchase of fixed assets of $79,912 and $6,415 in security deposits less the disposition of fixed assets for $72,638.
We generated $273,489 from financing activities consisted of the issuance of convertible debt for $147,500, net of related costs, less repayments on notes payable of $8,382, less repayments of $9,985 of repayments on capital leases adding back net proceeds from line of credit of $144,356

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, we ~~used $239,492~~generated $126,372 of cash in operating activities, which represented our net ~~income~~loss of ~~$151,358 $339,043~~$110,969 and $217,910 of changes in accounts payable, ~~$14,559~~offset by $33,352 of depreciation and amortization, ~~$8,099~~$39,654 of changes in accounts receivables, $4,284 of prepaid expenses, ~~$69,843~~$28,969 of costs in excess of billings ~~$88,802~~and $34,354 of billings in excess of cost, $17,148 in stock based compensation, $3,418 loss on sale of assets and ~~$18,456~~$4,066 of ~~stock-based compensation, offset by $929,652 of changes in accounts receivables,~~income tax.

~~For the six months ended June 30, 2018, we~~We used ~~$26,131 in~~$82,647 from investing activities ~~relating to~~from the purchase of fixed assets of ~~$4,663, offset by $386~~$68,628 and security deposits of ~~proceeds from~~$14,412 less the disposition of ~~property and equipment and $30,408 of cash acquired in 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.~~$393.

~~For the six months ended June 30, 2018, we received $120,558 in~~We generated $73,849 from financing activities ~~relating to $395,000 for~~consisted of the issuance of convertible debt ~~and $1,000~~for $395,000, net of ~~proceeds from the exercise of stock options, offset by $197,801 in~~related costs, less repayments on ~~long-term debt, $31,368 in repayments~~notes payable of ~~capital leases, $22,273 in repayments~~$14,113, adding back proceeds of issuance of notes payable for $61,062 less payments on capital leases of $16,619 and ~~$24,000 to payments~~long term debt 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.~~$351,481.

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,~~operations, will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months.

WeOther than a line of credit from Thermo Communications Funding, LLC (“Thermo”) and an equity purchase agreement with the Investor discussed below, we presently do not have any available credit, bank financing or other external sources of liquidity. ~~While we have achieved~~We did not achieve net income from operations ~~as of June 30,~~for the quarter ended March 31, 2019 or the year ended December 31, 2018 and 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.

Credit Facility
On August 21, 2018, PVBJ entered into a loan and security agreement (the “Credit Agreement”) with Thermo. The Credit Agreement provides for a revolving line of credit in an amount not to exceed $350,000, which is evidenced by a promissory note issued by PVBJ to Thermo (the “Note”). Pursuant to the Credit Agreement, PVBJ granted a security interest to Thermo in all of its assets. In addition, pursuant to a limited recourse guaranty, Andrew Hidalgo, our Chief Executive Officer, personally guaranteed the repayment of the Credit Agreement under certain conditions.
Pursuant to the terms of the Credit Agreement, we are permitted to borrow up to $350,000 under the revolving credit line, under a borrowing base equal to the lesser of (i) or 85% of Eligible Accounts (as defined in the Credit Agreement). Borrowings under the Credit Agreement may be used for working capital and to refinance certain existing debt of PVBJ. The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a debt service coverage ratio of not less than 1.15 to 1.0, a fixed charge coverage ratio of not less than 1.15 to 1.0, and maintaining a tangible net worth of at least $150,000, excluding intercompany loans. As of March 31, 2019, we were in compliance with these covenants.
25
The loan commitment shall expire on August 21, 2020. The interest rate applicable to revolving loans under the Credit Agreement is prime plus 5.0%, subject to a minimum interest rate of 9.5%. We paid a loan commitment fee of $7,000, of which $3,500 was paid on closing, and $3,500 will be paid on the first anniversary. We will also pay a monthly monitoring fee during the term of the Credit Agreement of 0.33% of the average outstanding balance, payable monthly in arrears.
We may prepay the Note at any time and terminate the Credit Agreement. In the event that we terminate the Credit Agreement, we will pay Thermo an early termination fee equal to 4% of the pro rata portion, which pro rata portion is determined by multiplying $350,000 by the number of months prior to the second anniversary of the effective date of the Credit Agreement and then dividing that by 24.
The obligations of PVBJ under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, an ERISA reportable event occurs, a change of control and a change in our financial condition that could have a material adverse effect on us.
As of March 31, 2019, we had outstanding borrowings of $149,248 under the Credit Agreement, the interest rate was 9.5%, and funds totaling $120,848 were available for borrowing under the Credit Agreement.
Equity Purchase Agreement
On March 12, 2019, we entered into an equity purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Investor”), pursuant to which the Investor has agreed to purchase from us up to $450,000 in shares (the “Shares”) of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement.
Under the Purchase Agreement, the Investor has the right, at any time, to purchase Shares by delivering us a purchase notice, specifying the number of Shares to be purchased. The purchase price for the Shares under the Purchase Agreement will be 60% of the lowest closing price of our common stock in the five consecutive trading days preceding the Investor’s receipt of the Shares subject to such equity purchase.
In addition, the Investor has an obligation, to the extent it has not already made voluntary purchases, to purchase up to (i) $200,000 in Shares within 15 Trading Days (as defined in the Purchase Agreement) after the effective date of the Registration Statement (as defined below) and (ii) $450,000 in Shares within 70 Trading Days after the effective date of the Registration Statement.
We have the right to reject any purchase notice from the Investor by delivering written notice of such rejection within one trading day after receipt. If we reject any purchase notice, the Investor has no further obligations to purchase Shares under the Purchase Agreement. We may terminate the Purchase Agreement at any time by written notice to the Investor in the event of a material breach of the Purchase Agreement by the Investor. In addition, the Purchase Agreement will automatically terminate on the earliest of: (i) the date that the Investor has purchased $450,000 of Shares; (ii) 70 Trading Days after the effective date of the Registration Statement; or (iii) the date the Registration Statement is no longer effective.
The obligation of the Investor to purchase the Shares is subject to several conditions, including, among other thing, (i) that we have an effective registration statement with the SEC registering the Shares for resale, and (ii) that the purchase of the Shares shall not cause the Investor to own more than 9.99% of the outstanding shares of common stock. In connection with the Purchase Agreement, we agreed to pay $15,000 of fees to the Investor, of which $10,000 was paid on execution of the Purchase Agreement, and the remaining $5,000 will be paid on the first sale of Shares.
Pursuant to the Registration Rights Agreement, we were required to register the Shares on a registration statement (the “Registration Statement”) to be filed with the SEC within 15 calendar days after we filed our annual report for the fiscal year ended December 31, 2018. We timely filed the Registration Statement with the SEC.
Additionally, on March 12, 2019, we agreed to donate 35,000 shares of common stock to the manager of the Investor.
26
2019 Convertible Debenture Financing
On February 8, 2019, we entered into a securities purchase agreement (the “2019 Purchase Agreement”) with two of our directors, pursuant to which we sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (the “2019 Debentures”), convertible into shares of our common stock at a conversion price of $0.50 per share.
The 2019 Debentures, together with any accrued and unpaid interest, become due and payable on February 8, 2021 (the “2021 Maturity Date”). Interest on the 2019 Debentures accrues at the rate of 10% per annum, payable monthly in cash, beginning on March 1, 2019 and on the 2021 Maturity Date. The 2019 Debentures are convertible into common stock at a conversion price of $0.50 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.
2018 Convertible Debenture Financing

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

The 2018 Debentures, together with any accrued and unpaid interest, become due and payable on January 2, 2020 (the ~~“Maturity~~“2020 Maturity Date”). Interest on the 2018 Debentures accrues at the rate of 12% per annum, payable monthly in cash, beginning on February 1, 2018 and on the 2020 Maturity Date. The 2018 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.

25
On February 8, 2019, we entered into amendments (the “Amendments”) with the holders of the 2018 Debentures. Pursuant to the Amendments, the conversion price of the 2018 Debentures was reduced from $0.75 to $0.50, and the interest rate on the 2018 Debentures was reduced from 12% to 10%.

Critical Accounting Policies

Please refer to Note 2 in the accompanying financial statements.

Recent Accounting Pronouncements

Please refer to Note 1718 in the accompanying financial ~~statements~~statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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, 2018,~~March 31, 2019, as a result of the material 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 and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified 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 in the 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.

There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~June 30, 2018~~March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26 27

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

~~None,~~On February 8, 2019, we entered into a securities purchase agreement with two of our directors, pursuant to which we sold an aggregate principal amount of $150,000 in 10% Convertible Debentures (“Debentures”), convertible into shares of our common stock at a conversion price of $0.50 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. We intend to use the net proceeds for working capital and general corporate purposes.
The issuance of the Debentures was exempt from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(a)(2) of the Securities Act.
On March 12, 2019, we donated 35,000 shares of our common stock to the manager of the investor in connection with the equity purchase agreement we entered into with the investor. The issuance of the shares 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 The following materials from H/Cell Energy Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2018,~~March 31, 2019, formatted in XBRL (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 28

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 10, 2018~~May 15, 2019 By: /s/ ANDREW HIDALGO
Andrew Hidalgo

Chief Executive Officer (Principal Executive
Officer)

Date: ~~August 10, 2018~~May 15, 2019 By: /s/ MATTHEW HIDALGO
Matthew Hidalgo

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

28 29

	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 March 31,
	2019			2018
Revenue
Construction income	$	1,704,273		$	1,694,535
Related party		-			31,789
Total revenue		1,704,273			1,726,324

Cost of goods sold
Direct costs		1,196,438			1,209,413
Direct costs – related party		-			31,617
Total cost of goods sold		1,196,438			1,241,030

Gross profit		507,835			485,294

Operating expenses
General and administrative expenses		607,052			555,184
Management fees – related party		19,500			19,500
Total operating expenses		626,552			574,684

Loss from operations		(118,717	)		(89,390	)

Other expenses
Interest expense		1,833			3,946
Interest expense – related party		36,095			14,215
Change in fair value earn-out		4,396			-
(Gain) loss on fixed asset disposal		(17,403	)		3,418
Total other expenses		24,921			21,579

Income tax provision		-			-

Net loss	$	(143,638	)	$	(110,969	)

Other comprehensive income (loss), net

Foreign currency translation adjustment		18,612			(10,259	)

Comprehensive loss	$	(125,026	)	$	(121,228	)

Loss per share
Basic	$	(0.02	)	$	(0.02	)
Diluted	$	(0.02	)	$	(0.02	)
Weighted average common shares outstanding
Basic		7,593,413			7,486,024
Diluted		7,593,413			7,486,024

	1.	The customer’s written approval of the scope of the change order;
	2.	Current contract language that indicates clear and enforceable entitlement relating to the change order;
	3.	Separate documentation for the change order costs that are identifiable and reasonable; or
	4.	The Company’s favorable experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated

	Three Months Ended
	March 31, 2019		March 31, 2018
United States – Service	$	514,955	$	375,451
Australia – Service		567,121		514,183
United States – Contract		160,000		0
Australia – Contract		462,197		836,690
Total	$	1,704,273	$	1,726,324

	●	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

Balance at December 31, 2018	$	190,736
Payments		-
Adjustments to fair value		4,396
Balance at March 31, 2019	$	195,132

	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

	March 31, 2019			December 31, 2018
Costs incurred on uncompleted contracts	$	931,173		$	811,173
Estimated earnings		329,198			469,109
Costs and estimated earnings earned on uncompleted contracts		1,260,371			1,280,282
Billings to date		1,259,446			1,265,475
Costs and estimated earnings in excess of billings on uncompleted contracts		925			14,807
Costs and earnings in excess of billings on completed contracts		5,246			(164,660	)
	$	6,171		$	(149,853	)

Costs in excess of billings	$	48,052		$	45,478
Billings in excess of cost		(41,881	)		(195,331	)
	$	6,171		$	(149,853	)

2019	$	61,500
2020		82,855
2021		84,021
2022		85,221
2023		57,125
2024		43,732
2025		11,013
	$	425,467

2019	$	64,040
2020		85,387
2021		77,816
2022		66,445
2023		62,936
Thereafter		59,851

Finance lease obligation		416,475
Less: amounts representing interest		37,802
Current maturities of capital lease obligations		72,510

Finance lease obligations, non-current	$	306,163

	March 31, 2019			December 31, 2018
Note payable with monthly payments of $716, including interest at 6.50% per annum through November 2020.	$	16,228		$	18,707
Note payable with monthly payments of $615.25, including interest at 6.80% per annum through August 2021.	$	16,903		$	18,383
Note payable with monthly payments of $1,294.50, including interest at 14.72% per annum through March 2023.	$	48,103		$	50,072
Note payable with monthly payments of $1,063.45, including interest at 5.76% per annum through April 2021.	$	16,597		$	18,539
Note payable with monthly payments of $946.84 including interest at 6.14% per annum through December 2024.	$	-		$	54,328
Total:	$	97,831		$	160,029
Total current portion:	$	(32,052	)	$	(38,991	)
Total non-current portion:	$	65,779		$	121,038

Year ending December 31:	Amount
2019 (remaining)	$	32,052
2020		28,478
2021		15,117
2022		12,759
2023		9,425
Thereafter		-
	$	97,831

	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

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

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			$	-

Balance at December 31, 2018	$	1,373,621
Adjustments		-
Balance at March 31, 2019	$	1,373,621

Balance at December 31, 2018	$	83,645
Amortization		5,121
Balance at March 31, 2019	$	78,524

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

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			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
Outstanding at December 31, 2018												955,000			0.29		3.40		461,251
Grants		150,000			1.83		4.35	$	165,477			15,000			1.15		4.81		-
Exercised		(100,000	)		0.01		-		(38,475	)		-			-		-		-
Canceled		-										(1,500	)		0.05		-		(629	)
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
Outstanding at March 31, 2019												968,500		$	0.28		3.49	$	460,622
Exercisable at March 31, 2019												531,250		$	0.28		3.49	$	258,090

	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

	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.