NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2018 AND DECEMBER 31, 2017
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Recycling Energy Corporation (the “Company” or “CREG”) was incorporated on May 8, 1980 as Boulder Brewing
Company under the laws of the State of Colorado. On September 6, 2001, the Company changed its state of incorporation to the Nevada.
In 2004, the Company changed its name from Boulder Brewing Company to China Digital Wireless, Inc. and on March 8, 2007, again
changed its name from China Digital Wireless, Inc. to its current name, China Recycling Energy Corporation. The Company, through
its subsidiaries, provides energy saving solutions and services, including selling and leasing energy saving systems and equipment
to customers, project investment, investment management, economic information consulting, technical services, financial leasing,
purchase of financial leasing assets, disposal and repair of financial leasing assets, and consulting and ensuring of financial
leasing transactions in the Peoples Republic of China (“PRC”).
Erdos
TCH – Joint Venture
On
April 14, 2009, the Company formed a joint venture (the “JV”) with Erdos Metallurgy Co., Ltd. (“Erdos”)
to recycle waste heat from Erdos’ metal refining plants to generate power and steam to be sold back to Erdos. The name of
the JV was Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd. (“Erdos TCH”) with a term of 20 years. Total
investment for the project was estimated at $79 million (RMB 500 million) with an initial investment of $17.55 million (RMB 120
million). Erdos contributed 7% of the total investment of the project, and Xi’an TCH Energy Technology Co., Ltd. (“Xi’an
TCH”) contributed 93%. According to the parties’ agreement on profit distribution, Xi’an TCH and Erdos will
receive 80% and 20%, respectively, of the profit from the JV until Xi’an TCH receives a complete return of its investment.
Xi’an TCH and Erdos will then receive 60% and 40%, respectively, of the profit from the JV. On June 15, 2013, Xi’an
TCH and Erdos entered into a share transfer agreement, pursuant to which Erdos sold its 7% ownership interest in the JV to Xi’an
TCH for $1.29 million (RMB 8 million), plus certain accumulated profits as described below. Xi’an TCH paid the $1.29 million
in July 2013 and, as a result, became the sole stockholder of the JV. In addition, Xi’an TCH paid Erdos accumulated profits
from inception up to June 30, 2013 in accordance with a supplementary agreement entered into on August 6, 2013. In August 2013,
Xi’an TCH paid 20% of the accumulated profit (calculated under PRC GAAP) of $226,000 to Erdos. Erdos TCH currently has two
power generation systems in Phase I with a total of 18 MW power capacity, and three power generation systems in Phase II with
a total of 27 MW power capacity. On April 28, 2016, Erdos TCH and Erdos entered into a supplemental agreement, effective May 1,
2016, whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and now charges Erdos based on actual electricity
sold at RMB 0.30 / KWH. The selling price of each KWH is determined annually based on prevailing market conditions. The Company
evaluated the modified terms for payments based on actual electricity sold as minimum lease payments as defined in ASC 840-10-25-4,
since lease payments that depend on a factor directly related to the future use of the leased property are contingent rentals
and, accordingly, are excluded from minimum lease payments in their entirety. The Company wrote off the net investment receivables
of these leases at the lease modification date.
In addition, Erdos TCH has 30% ownership in DaTangShiDai (BinZhou) Energy Savings Technology Co., Ltd.
(“BinZhou Energy Savings”), 30% ownership in DaTangShiDai DaTong Recycling Energy Technology Co., Ltd. (“DaTong
Recycling Energy”), and 40% ownership in DaTang ShiDai TianYu XuZhou Recycling Energy Technology Co, Ltd. (“TianYu
XuZhou Recycling Energy”). These companies were incorporated in 2012 but had no any operations since then nor any registered
capital contribution was made.
Pucheng
Biomass Power Generation Projects
On
June 29, 2010, Xi’an TCH entered into a Biomass Power Generation (“BMPG”) Project Lease Agreement with Pucheng
XinHengYuan Biomass Power Generation Co., Ltd. (“Pucheng”), a limited liability company incorporated in China. Under
this lease agreement, Xi’an TCH leased a set of 12 MW BMPG systems to Pucheng at a minimum of $279,400 (RMB 1,900,000) per
month for 15 years (“Pucheng Phase I”).
On
September 11, 2013, Xi’an TCH entered into a BMPG Asset Transfer Agreement (the “Pucheng Transfer Agreement”)
with Pucheng. The Pucheng Transfer Agreement provided for the sale by Pucheng to Xi’an TCH of a set of 12 MW BMPG systems
with completion of system transformation for RMB 100 million ($16.48 million) in the form of 8,766,547 shares of common stock
of the Company at $1.87 per share. These shares were issued to Pucheng on October 29, 2013. Also on September 11, 2013, Xi’an
TCH entered into a BMPG Project Lease Agreement with Pucheng (the “Pucheng Lease”). Under the Pucheng Lease, Xi’an
TCH leases this same set of 12 MW BMPG systems to Pucheng, and combined this lease with the lease for the 12 MW BMPG station of
Pucheng Phase I project, under a single lease to Pucheng for RMB 3.8 million ($0.63 million) per month (the “Pucheng Phase
II Project”). The term for the combined lease is from September 2013 to June 2025. The lease agreement for the 12 MW station
from the Pucheng Phase I project terminated upon the effective date of the Pucheng Lease. The ownership of the two 12 MW BMPG
systems will transfer to Pucheng at no additional charge when the Pucheng Lease expires.
Shenqiu
Yuneng Biomass Power Generation Projects
On
May 25, 2011, Xi’an TCH entered into a Letter of Intent with Shenqiu YuNeng Thermal Power Co., Ltd. (“Shenqiu”)
to reconstruct and transform a Thermal Power Generation System owned by Shenqiu into a 75T/H BMPG System for $3.57 million (RMB
22.5 million). The project commenced in June 2011 and was completed in the third quarter of 2011. On September 28, 2011, Xi’an
TCH entered into a BMPG Asset Transfer Agreement with Shenqiu (the “Shenqiu Transfer Agreement”). Pursuant to the
Shenqiu Transfer Agreement, Shenqiu sold Xi’an TCH a set of 12 MW BMPG systems (after Xi’an TCH converted the system
for BMPG purposes). As consideration for the BMPG systems, Xi’an TCH agreed to pay Shenqiu $10,937,500 (RMB 70 million)
in cash in three installments within six months, upon the transfer of ownership of the systems. By the end of 2012, all the consideration
was paid. On September 28, 2011, Xi’an TCH and Shenqiu also entered into a BMPG Project Lease Agreement (the “2011
Shenqiu Lease”). Under the 2011 Shenqiu Lease, Xi’an TCH agreed to lease a set of 12 MW BMPG systems to Shenqiu at
a monthly rental rate of $286,000 (RMB 1,800,000) for 11 years. Upon expiration of the 2011 Shenqiu Lease, ownership of this system
will transfer from Xi’an TCH to Shenqiu at no additional cost. In connection with the 2011 Shenqiu Lease, Shenqiu paid one
month’s rent as a security deposit to Xi’an TCH, in addition to providing personal guarantees.
On
October 8, 2012, Xi’an TCH entered into a Letter of Intent for technical reformation of Shenqiu Project Phase II with Shenqiu
for technical reformation to enlarge the capacity of the Shenqiu Project Phase I (the “Shenqiu Phase II Project”).
The technical reformation involved the construction of another 12 MW BMPG system. After the reformation, the generation capacity
of the power plant increased to 24 MW. The project commenced on October 25, 2012 and was completed during the first quarter of
2013. The total cost of the project was $11.1 million (RMB 68 million). On March 30, 2013, Xi’an TCH and Shenqiu entered
into a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”). Under the 2013 Shenqiu Lease, Xi’an TCH agreed
to lease the second set of 12 MW BMPG systems to Shenqiu for $239,000 (RMB 1.5 million) per month for 9.5 years. When the 2013
Shenqiu Lease expires, ownership of this system will transfer from Xi’an TCH to Shenqiu at no additional cost.
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai, a resident of China, entered into a Projects Transfer
Agreement (the “Agreement”), pursuant to which Xi’an TCH will transfer two Biomass Power Generation Projects
in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB 127,066,000 ($18.55 million). Mr. Bai agreed to
transfer all the equity shares of his wholly owned company, Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an
Hanneng”) to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”) as repayment for the loan
made by Xi’an Zhonghong to HYREE as consideration for the transfer of the Shenqiu Phase I and II Projects (See Note 12).
The transfer was completed on February 15, 2019.
The
Fund Management Company
On
June 25, 2013, Xi’an TCH and HongyuanHuifu Venture Capital Co. Ltd. (“HongyuanHuifu”) jointly established Beijing
Hongyuan Recycling Energy Investment Management Company Ltd. (the “Fund Management Company”) with registered capital
of RMB 10 million ($1.45 million). Xi’an TCH made an initial capital contribution of RMB 4 million ($650,000) and has a
40% ownership interest in the Fund Management Company. With respect to the Fund Management Company, voting rights and dividend
rights are allocated 80% and 20% between HongyuanHuifu and Xi’an TCH, respectively.
The Fund Management Company is the general
partner of Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF Fund”), a limited liability partnership
established on July 18, 2013 in Beijing. The Fund Management Company made an initial capital contribution of RMB 5 million ($830,000)
to the HYREF Fund. RMB 460 million ($77 million) was fully subscribed by all partners for the HYREF Fund. The HYREF Fund has three
limited partners: (1) China Orient Asset Management Co., Ltd., which made an initial capital contribution of RMB 280 million ($46.67
million) to the HYREF Fund and is a preferred limited partner; (2) HongyuanHuifu, which made an initial capital contribution of
RMB 100 million ($16.67 million) to the HYREF Fund and is an ordinary limited partner; and (3) the Company’s wholly-owned
subsidiary, Xi’an TCH, which made an initial capital contribution of RMB 75 million ($12.5 million) to the HYREF Fund and
is a secondary limited partner. In addition, Xi’an TCH and HongyuanHuifu formed Beijing Hongyuan Recycling Energy Investment
Management Company Ltd. to manage this Fund, which also subscribed in the amount of RMB 5 million ($830,000) from the Fund. The
term of the HYREF Fund’s partnership is six years from the date of its establishment, expiring July 18, 2019. The term is
four years from the date of contribution for the preferred limited partner, and four years from the date of contribution for the
ordinary limited partner. The total size of the HYREF Fund is RMB 460 million ($77 million). The HYREF Fund was formed for the
purpose of investing in Xi’an Zhonghong New Energy Technology Co., Ltd., a then 90% owned subsidiary of Xi’an TCH,
for the construction of two coke dry quenching (“CDQ”) WHPG stations with Jiangsu Tianyu Energy and Chemical Group
Co., Ltd. (“Tianyu”) and one CDQ WHPG station with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”).
On
December 29, 2018, Xi’an TCH entered into a Share Transfer Agreement with Hongyuan Huifu, pursuant to which Xi’an
TCH agreed to transfer its 40% ownership in the Fund Management Company to Hongyuan Huifu for consideration of RMB 3,453,867.31
($0.53 million). The transfer was completed on January 22, 2019.
The Company does not have any ownership in the Fund Management
Company after this transaction.
Chengli
Waste Heat Power Generation Projects
On
July 19, 2013, Xi’an TCH formed a new company, “Xi’an Zhonghong New Energy Technology Co., Ltd.” (“Zhonghong”),
with registered capital of RMB 30 million ($4.85 million). Xi’an TCH paid RMB 27 million ($4.37 million) and owns 90% of
Zhonghong. Zhonghong is engaged to provide energy saving solution and services, including constructing, selling and leasing energy
saving systems and equipment to customers. On December 29, 2018, Shanghai TCH entered into a Share Transfer Agreement with HYREF,
pursuant to which HYREF agreed to transfer its 10% ownership in Xi’an Zhonghong to Shanghai TCH for consideration of RMB
3 million ($0.44 million). The transfer was completed on January 22, 2019.
The Company owns 100% of Xi’an Zhonghong
after the transaction.
On
July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project with Boxing County Chengli Gas Supply
Co., Ltd. (“Chengli”). The parties entered into a supplement agreement on July 26, 2013. Pursuant to these agreements,
Zhonghong will design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli will
pay energy saving fees (the “Chengli Project”). Chengli will contract the operation of the system to a third-party
contractor, as mutually agreed upon by Zhonghong. In addition, Chengli will provide the land for the CDQ WHPG systems at no cost
to Zhonghong. The term of the Agreements is 20 years. The watt hours generated by the Chengli Project will be charged at RMB 0.42
($0.068) per kilowatt hour (excluding tax). The operating time shall be based upon an average 8,000 hours annually. If the operating
time is less than 8,000 hours per year due to a reason attributable to Chengli, then time charged shall be 8,000 hours a year,
and if it is less than 8,000 hours due to a reason attributable to Zhonghong, then it shall be charged at actual operating hours.
The construction of the Chengli Project was completed in the second quarter of 2015 and the project successfully completed commissioning
tests in the first quarter of 2017. The Chengli Project is now operational, however, due to intensifying environmental protection,
the local environmental authorities required the project owner constructing CDQ sewage treatment to complete supporting works,
which were completed and passed through acceptance inspection during the quarter ended September 30, 2018. However, the owner
of Chengli Project changed from Chengli to Shandong Boxing Shengli Technology Company Ltd. (“Shengli”). This change
resulted from transfer of the equity ownership of Chengli to Shengli (a private company). Chengli, as a state-owned enterprise
that is 100% owned by the local Power Supply Bureau, is not allowed to carry out the tertiary industry, and Shengli, the new owner,
is not entitled to the high on-grid prices, and thus demanded a renegotiation of the settlement terms for the project. At present,
the Company is negotiating with the new project owner on the lease term, settlement method and settlement price, but no agreement
has been reached.
On
July 22, 2013, Zhonghong entered into an Engineering, Procurement and Construction (“EPC”) General Contractor Agreement
for the Boxing County Chengli Gas Supply Co., Ltd. CDQ Power Generation Project (the “Chengli Project”) with Xi’an
Huaxin New Energy Co., Ltd. (“Huaxin”). Zhonghong, as the owner of the Chengli Project, contracted EPC services for
a CDQ system and a 25 MW CDQ WHPG system for Chengli to Huaxin. Huaxin shall provide construction, equipment procurement, transportation,
installation and adjustment, test run, construction engineering management and other necessary services to complete the Huaxin
Project and ensure the CDQ and CDQ WHPG systems for Chengli meet the inspection and acceptance requirements and work normally.
The Chengli Project is a turn-key project in which Huaxin is responsible for monitoring the quality, safety, duration and cost
of the Chengli Project. The total contract price is RMB 200 million ($33.34 million), which includes all the materials, equipment,
labor, transportation, electricity, water, waste disposal, machinery and safety costs.
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, the “HYREF”, Guohua Ku, and Mr. Chonggong Bai entered into
a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong will transfer Chengli CDQ WHPG station
as the repayment of loan at RMB 188,639,400 ($27.54 million) to HYREF. Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong
Bai also agreed to buy back the CDQ WHPG Station when conditions under the Buy Back Agreement are met (see Note 12). The transfer
was completed on January 22, 2019.
Tianyu
Waste Heat Power Generation Project
On
July 19, 2013, Zhonghong entered into a Cooperative Agreement (the “Tianyu Agreement”) for Energy Management of CDQ
and CDQ WHPG Projects with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”). Pursuant to the Tianyu Agreement,
Zhonghong will design, build, operate and maintain two sets of 25 MW CDQ systems and CDQ WHPG systems for two subsidiaries of
Tianyu – Xuzhou Tian’an Chemical Co., Ltd. (“Xuzhou Tian’an”) and Xuzhou Huayu Coking Co., Ltd.
(“Xuzhou Huayu”) – to be located at Xuzhou Tian’an and Xuzhou Huayu’s respective locations (the
“Tianyu Project”). Upon completion of the Tianyu Project, Zhonghong will charge Tianyu an energy saving fee of RMB
0.534 ($0.087) per kilowatt hour (excluding tax). The operating time will be based upon an average 8,000 hours annually for each
of Xuzhou Tian’an and Xuzhou Huayu. If the operating time is less than 8,000 hours per year due to a reason attributable
to Tianyu, then time charged will be 8,000 hours a year. Because of overcapacity and pollution of the iron and steel and related
industries, the Chinese government has imposed production limitations for the energy-intensive enterprises with heavy pollution,
including Xuzhou Tian’an. Xuzhou Tian’an has slowed the construction process for its dry quenching production line
which caused the delay of our project. The term of the Tianyu Agreement is 20 years. The construction of the Xuzhou Tian’an
Project is anticipated to be completed by the second quarter of 2019. Xuzhou Tian’an will provide the land for the CDQ and
CDQ WHPG systems for free. Xuzhou Tian’an has also guaranteed that it will purchase all the power generated by the CDQ WHPG
systems. The Xuzhou Huayu Project is currently on hold due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents
on certain pollution-related issues. The local government has acted in its capacity to coordinate the resolution of this issue.
The local residents were requested to move from the hygienic buffer zone of the project location, with compensatory payments from
the government. Xuzhou Huayu was required to stop production and implement technical innovations to mitigate pollution discharge
including sewage treatment, dust collection, noise control, and recycling of coal gas. Currently, some local residents have moved.
Xuzhou Huayu has completed the implementation of the technical innovations of sewage treatment, dust collection, and noise control,
and the Company is waiting for local governmental agencies to approve these technical innovations. Due to the stricter administration
of environmental protection policies and recent increase of environmental protections for the coking industry in Xuzhou, all local
coking, as well as steel iron enterprises, are facing similar situations of suspended production while rectifying technologies
and procedures. The Company expects to receive governmental acceptance and approval and to resume construction in the second quarter
of 2019.
On
July 22, 2013, Zhonghong entered into an EPC General Contractor Agreement for the Tianyu Project with Xi’an Huaxin New Energy
Co., Ltd. (“Huaxin”). Zhonghong, as the owner of the Tianyu Project, contracted EPC services for two CDQ systems and
two 25 MW CDQ WHPG systems for Tianyu to Huaxin. Huaxin will provide construction, equipment procurement, transportation, installation
and adjustment, test run, construction engineering management and other necessary services to complete the Tianyu Project and
ensure the CDQ and CDQ WHPG systems for Tianyu meet the inspection and acceptance requirements and work normally. The Tianyu Project
is a turn-key project in which Huaxin is responsible for monitoring the quality, safety, duration and cost of the project. The
total contract price is RMB 400 million ($66.68 million), which includes all the materials, equipment, labor, transportation,
electricity, water, waste disposal, machinery and safety costs.
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai, entered into a Projects Transfer Agreement (the
“Agreement”), pursuant to which Xi’an Zhonghong will transfer a CDQ WHPG station (under construction) located
in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million).
Mr. Bai agreed to transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the
loan made by Xi’an Zhonghong to HYREF as consideration for the transfer of the Xuzhou Huayu Project (see Note 12). The transfer
was completed on February 15, 2019.
Zhongtai
Waste Heat Power Generation Energy Management Cooperative Agreement
On
December 6, 2013, Xi’an TCH entered into a CDQ and WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”)
with Xuzhou Zhongtai Energy Technology Co., Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu
Province, China.
Pursuant
to the Zhongtai Agreement, Xi’an TCH will design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG
system and sell the power to Zhongtai, and Xi’an TCH will also build a furnace to generate steam from the smoke pipeline’s
waste heat and sell the steam to Zhongtai.
The
construction period of the Project is expected to be 18 months from the date when conditions are ready for construction to begin.
Zhongtai will start to pay an energy saving service fee from the date when the WHPG station passes the required 72-hour test run.
The payment term is 20 years. For the first 10 years, Zhongtai shall pay an energy saving fee at RMB 0.534 ($0.089) per kilowatt
hour (KWH) (including value added tax) for the power generated from the system. For the second 10 years, Zhongtai shall pay an
energy saving fee at RMB 0.402 ($0.067) per KWH (including value added tax). During the term of the contract the energy saving
fee shall be adjusted at the same percentage as the change of local grid electricity price. Zhongtai shall also pay an energy
saving fee for the steam supplied by Xi’an TCH at RMB 100 ($16.67) per ton (including value added tax). Zhongtai and its
parent company will provide guarantees to ensure Zhongtai will fulfill its obligations under the Agreement. Upon the completion
of the term, Xi’an TCH will transfer the systems to Zhongtai for RMB 1 ($0.16). Zhongtai shall provide waste heat to the
systems for no less than 8,000 hours per year and waste gas volume no less than 150,000 Normal Meter Cubed (Nm3) per hour, with
a temperature no less than 950°C. If these requirements are not met, the term of the Agreement will be extended accordingly.
If Zhongtai wants to terminate the Zhongtai Agreement early, it shall provide Xi’an TCH with a 60 day notice and pay the
termination fee and compensation for the damages to Xi’an TCH according to the following formula: (1) if it is less than
five years into the term when Zhongtai requests termination, Zhongtai shall pay: Xi’an TCH’s total investment amount
plus Xi’an TCH’s annual investment return times five years minus the years in which the system has already operated;
or 2) if it is more than five years into the term when Zhongtai requests the termination, Zhongtai shall pay: Xi’an TCH’s
total investment amount minus total amortization cost (the amortization period is 10 years).
In March 2016, Xi’an TCH entered
into a Transfer Agreement of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin (the “Transfer Agreement”).
Under the Transfer Agreement, Xi’an TCH agreed to transfer to Zhongtai all of the assets associated with the CDQ Waste Heat
Power Generation Project (the “Project”), which is under construction pursuant to the Zhongtai Agreement. Additionally,
Xi’an TCH agreed to transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the
CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project.
Xi’an Huaxin will continue to construct and complete the Project and Xi’an TCH agreed to transfer all its rights and
obligation under the EPC Contract to Zhongtai. As consideration for the transfer of the Project, Zhongtai agreed to pay to Xi’an
TCH an aggregate transfer price of RMB 167,360,000 ($25.77 million) including payments of: (i) RMB 152,360,000 ($23.46 million)
for the construction of the Project; and (ii) RMB 15,000,000 ($2.31 million) as payment for partial loan interest accrued during
the construction period. Those amounts have been, or will be, paid by Zhongtai to Xi’an TCH according to the following schedule:
(a) RMB 50,000,000 ($7.70 million) was to be paid within 20 business days after the Transfer Agreement was signed; (b) RMB 30,000,000
($4.32 million) was to be paid within 20 business days after the Project is completed, but no later than July 30, 2016; and (c)
RMB 87,360,000 ($13.45 million) was to be paid no later than July 30, 2017. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou
Taifa”) guaranteed the payments from Zhongtai to Xi’an TCH. The ownership of the Project was conditionally transferred
to Zhongtai following the initial payment of RMB 50,000,000 ($7.70 million) by Zhongtai to Xi’an TCH and the full ownership
of the Project will be officially transferred to Zhongtai after it completes all payments pursuant to the Transfer Agreement. The
Company recorded a $2.82 million loss from this transaction in 2016. In 2016, Xi’an TCH had received the first payment of
$7.70 million and the second payment of $4.32 million. However, the Company received a repayment commitment letter from Zhongtai
on February 23, 2018, in which Zhongtai committed to pay the remaining payment of RMB 87,360,000 ($13.45 million) no later than
the end of July 2018; in July 2018, Zhongtai and the Company reached a further oral agreement to extend the repayment term of RMB
87,360,000 ($13.45 million) by another two to three months. In August 2018, the Company received $1,070,000 from Zhongtai; as of
December 31, 2018, the Company had receivable from Zhongtai for $11.66 million (with bad debt allowance of $3.50 million). Zhongtai
provided an acknowledgement letter to the Company stating they expect to repay the remaining balance of $11.66 million by the end
of 2019 once they resume normal production.
Formation
of Zhongxun
On March 24, 2014, Xi’an TCH incorporated
a subsidiary, Zhongxun Energy Investment (Beijing) Co., Ltd. (“Zhongxun”) with registered capital of $5,695,502 (RMB
35,000,000), which must be contributed before October 1, 2028. Zhongxun is 100% owned by Xi’an TCH and will be mainly engaged
in project investment, investment management, economic information consulting, and technical services. Zhongxun has not yet commenced
operations as of the date of this report.
Formation
of Yinghua
On February 11, 2015, the Company incorporated
a subsidiary, Shanghai Yinghua Financial Leasing Co., Ltd. (“Yinghua”) with registered capital of $30,000,000, to be
paid within 10 years from the date the business license is issued. Yinghua is 100% owned by the Company and will be mainly engaged
in financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring
of financial leasing transactions, and related factoring business. Yinghua has not yet commenced operations as of the date of this
report.
Formation of ShengYa Energy
On July 1, 2016, Xi’an Zhonghong
incorporated a subsidiary, Xi’an ShengYa Energy Co., Ltd. (“ShengYa Energy”) with registered capital of $29.42
million (RMB 200,000,000), ShengYa Energy has not yet commenced operations nor has any capital contribution been made as of the
date of this report.
Summary
of Sales-Type Lease at December 31, 2018
As
of December 31, 2018, Xi’an TCH leases the following systems: (i) BMPG systems to Pucheng Phase I and II (15 and 11-year
terms, respectively); (ii) BMPG systems to Shenqiu Phase I (11-year term); and (iii) Shenqiu Phase II (9.5-year term). Shenqiu
Phase I and Phase II was transferred to Mr. Chonggong Bai on February 15, 2019 (see Note 12).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
financial statements included herein were prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted
pursuant to such rules and regulations.
Basis
of Consolidation
The
consolidated financial statements (“CFS”) include the accounts of CREG and its subsidiaries, Shanghai Yinghua Financial
Leasing Co., Ltd. (“Yinghua”) and Sifang Holdings, Sifang Holdings’ wholly owned subsidiaries, Huahong New Energy
Technology Co., Ltd. (“Huahong”) and Shanghai TCH Energy Tech Co., Ltd. (“Shanghai TCH”), Shanghai TCH’s
wholly-owned subsidiary, Xi’an TCH Energy Tech Co., Ltd. (“Xi’an TCH”) and Xi’an TCH’s subsidiaries,
Erdos TCH Energy Saving Development Co., Ltd (“Erdos TCH”), 100% owned by Xi’an TCH (See note 1), Zhonghong,
90% owned by Xi’an TCH, and Zhongxun, 100% owned by Xi’an TCH. Substantially all the Company’s revenues are
derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all the Company’s consolidated
assets and liabilities as of December 31, 2018 and 2017, respectively. All significant inter-company accounts and transactions
were eliminated in consolidation.
Use
of Estimates
In
preparing these CFS in accordance with US GAAP, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities in the balance sheets as well as revenues and expenses during the period reported. Actual results may differ
from these estimates.
Revenue
Recognition
Sales-type
Leasing and Related Revenue Recognition
The
Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically transfers
ownership of the waste energy recycling power generating projects to its customers at the end of the lease. The investment in
these projects is recorded as investment in sales-type leases in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 840
, “Lease
s
,”
and its various amendments
and interpretations. The Company finances construction of waste energy recycling power generating projects. The sales and cost
of sales are recognized at the inception of the lease. The investment in sales-type leases consists of the sum of the minimum
lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments are part of the lease
agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used
to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of
executory costs and contingent rentals, if any. Unearned interest is amortized to income over the lease term to produce a constant
periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow
from the sales-type lease occurs over the course of the lease, which results in interest income and reduction of receivables.
Revenue is recognized net of sales tax.
Contingent
Rental Income
The
Company records income from actual electricity usage in addition to minimum lease payments of each project as contingent rental
income in the period contingent rental income is earned. Contingent rent is not part of minimum lease payments.
Cash
and Equivalents
Cash
and equivalents include cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase date of such investments.
Accounts
Receivable
As
of December 31, 2018, the Company had accounts receivable of $15,252,162 (from the sales of CDQ and a CDQ WHPG system to
Zhongtai, and accounts receivable of Erdos TCH for electricity sold). As of December 31, 2017, the Company had accounts
receivable of $15,858,804 (from the sales of CDQ and a CDQ WHPG system to Zhongtai, and accounts receivable of Erdos TCH for
electricity sold). As of December 31, 2018, the Company had bad debt allowance of $3,496,911 for Zhongtai due to not making
the payment as scheduled.
Interest
Receivable on Sales Type Leases
As
of December 31, 2018, the interest receivable on sales type leases was $9,336,140, mainly from recognized but not yet collected
interest income for the Pucheng and Shenqiu systems. As of December 31, 2017, the interest receivable on sales type leases was
$9,619,278. As of April 1, 2018, the Company stopped accruing interest receivable on the Pucheng lease as the Pucheng lease
was at least one year overdue in its payments.
The
Company maintains reserves for potential credit losses on receivables. Management reviews the composition of receivables and analyzes
historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. As of December 31, 2018, the Company had bad debt allowance for net investment
receivable of $29,276,658 ($7,274,872 for the Shenqiu systems and $22,001,786 for the Pucheng systems) due to lessees’ tight
working capital and continuous delay in making the payment. As of December 31, 2017, the Company had bad debt allowance for net
investment receivable of $1,802,822 for the Pucheng and Shenqiu systems.
Concentration
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions within China
are not covered by insurance. The Company has not experienced any losses in such accounts.
Certain
other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables.
The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews
of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The
operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition and results of operations
may be influenced by the political, economic and legal environments in the PRC.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the straight-line method over the estimated lives as follows:
Building
|
|
|
20
years
|
|
Vehicles
|
|
|
2
- 5 years
|
|
Office
and Other Equipment
|
|
|
2
- 5 years
|
|
Software
|
|
|
2
- 3 years
|
|
Impairment
of Long-lived Assets
In
accordance with FASB ASC Topic 360,
“Property, Plant, and Equipment
,” the Company reviews its long-lived
assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying
amounts of the assets may not be fully recoverable. If the total expected undiscounted future net cash flows are less than the
carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.
The Company recorded asset impairment loss of $28,429,789 for three projects for the year ended December 31, 2018, as described
below.
On January 4, 2019, Xi’an Zhonghong,
Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement for Xi’an Zhonghong to transfer the Xuzhou
Huayu Project to Mr. Bai for RMB 120,000,000 ($17.52 million), which transfer price was considered as the fair value of the project.
The Company compared the carrying value and fair value of the Huayu project, and recorded asset impairment loss of $6,528,120
for the project.
On December 29, 2018, Xi’an Zhonghong,
Xi’an TCH, the “HYREF”, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer
Agreement for Xi’an Zhonghong to transfer Chengli CDQ WHPG station as the repayment of a loan for RMB 188,639,400 ($27.54
million) to HYREF. The transfer price was considered the fair value of the system. The Company compared the carrying value and
fair value of the Chengli system, and recorded asset impairment loss of $8,124,968 for the system.
As of December 31, 2018, the progress of
the Xuzhou Tian’an project is slow due to strict environmental protection policies, and management intends to transfer the
project. The Company anticipated the transfer price to be around RMB 172,250,000.00 ($25.15 million), and believed it to be the
fair market value of the project. The Company compared the carrying value and fair value of the Xian’an project, and recorded
asset impairment loss of $13,776,701 for the project.
Notes
Payable – Banker’s Acceptances
The
Company endorses banker’s acceptances that are issued from a bank to vendors as payment for its obligations. Most of the
banker’s acceptances have maturity dates of less than six months following their issuance.
Cost
of Sales
Cost
of sales consists primarily of the direct material of the power generating system and expenses incurred directly for project construction
for sales-type leasing and sales tax and additions for contingent rental income.
Income
Taxes
Income
taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
The
Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income
tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under
the provisions of ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination
by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount
of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as
a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.
CREG
is subject to U.S. corporate income taxes on its taxable income at a rate of up to 21% for taxable years beginning after December 31,
2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years. On December 22, 2017, the Tax Cut and
Jobs Act (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that significantly
changed the federal income tax laws. The provisions of the Tax Act that may have significant impact on the Company, including
the permanent reduction of the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January
1, 2018, one-time transition tax on post-1986 foreign unremitted earnings, provision for Global Intangible Low Tax Income (“GILTI”),
deduction for Foreign Derived Intangible Income (“FDII”), repeal of the corporate alternative minimum tax, limitation
of various business deductions, and modification of the maximum deduction of net operating loss with no carryback but indefinite
carryforward provision. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017.
Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment.
To
the extent that portions of its U.S. taxable income, such as Subpart F income or GILTI, are determined to be from sources outside
of the U.S., subject to certain limitations, the Company may be able to claim foreign tax credits to offset its U.S. income tax
liabilities. Any remaining liabilities are accrued in the Company’s consolidated statements of comprehensive income and
estimated tax payments are made when required by U.S. law.
The
Act also created new taxes on certain foreign-sourced earnings such as global intangible low-taxed income (“GILTI”)
under IRC Section 951A, which is effective for the Company for tax years beginning after January 1, 2018. For the year ended December
31, 2018, the Company has calculated its best estimate of the impact of the GILTI in its income tax provision in accordance with
its understanding of the Act and guidance available as of the date of this filing.
Noncontrolling
Interests
The
Company follows FASB ASC Topic 810,
“Consolidation,”
which established new standards governing the
accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred
to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case), that
increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather
than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated
to NCIs even when such allocation might result in a deficit balance.
The
net income (loss) attributed to NCIs was separately designated in the accompanying statements of income and comprehensive income
(loss). Losses attributable to NCIs in a subsidiary may exceed an NCI’s interests in the subsidiary’s equity. The
excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even
if that attribution results in a deficit NCI balance.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230,
“Statement of Cash Flows,”
cash flows from the Company’s
operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on
the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, other
receivables, accounts payable, accrued liabilities and short-term debts, the carrying amounts approximate their fair values due
to their short maturities. Receivables on sales-type leases are based on interest rates implicit in the lease.
FASB
ASC Topic 820,
“Fair Value Measurements and Disclosures,”
requires disclosure of the fair value (“FV”)
of financial instruments held by the Company. FASB ASC Topic 825,
“Financial Instruments,”
defines
FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements
for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each
qualify as financial instruments and are a reasonable estimate of their FV because of the short period of time between the origination
of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to FV measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480,
“Distinguishing
Liabilities from Equity,”
and ASC 815,
“Derivatives and Hedging.”
As
of December 31, 2018 and December 31, 2017, the Company did not have any long-term debt obligations; and the Company did not identify
any assets or liabilities that are required to be presented on the balance sheet at FV.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718
“Compensation—Stock
Compensation,”
and FASB ASC Topic 505, “
Equity.”
The Company recognizes in its statement
of operations FV at the grant date for stock options and other equity-based compensation issued to employees and non-employees.
Basic
and Diluted Earnings per Share
The
Company presents net income (loss) per share (“EPS”) in accordance with FASB ASC Topic 260,
“Earning
Per Share.”
Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common
stockholders by the weighted average number of shares outstanding, without consideration for common stock equivalents. Diluted
EPS is computed by dividing the net income by the weighted-average number of common shares outstanding as well as common share
equivalents outstanding for the period determined using the treasury-stock method for stock options and warrants and the if-converted
method for convertible notes. The Company made an accounting policy election to use the if-converted method for convertible securities
that are eligible to receive common stock dividends, if declared. Diluted EPS reflect the potential dilution that could occur
based on the exercise of stock options or warrants or conversion of convertible securities using the if-converted method.
The
following table presents a reconciliation of basic and diluted EPS for the year ended December 31, 2018 and 2017:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(65,996,898
|
)
|
|
$
|
(7,342,551
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
8,658,267
|
|
|
|
8,310,198
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
47,628
|
|
|
|
-
|
|
Options granted
|
|
|
-
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – diluted
|
|
|
8,705,895
|
|
|
|
8,310,353
|
|
Loss per share – basic
|
|
$
|
(7.62
|
)
|
|
$
|
(0.88
|
)
|
Loss per share – diluted *
|
|
$
|
(7.62
|
)
|
|
$
|
(0.88
|
)
|
*
The basic and diluted loss per share are the same due to antidilutive options and warrants resulting from the Company’s
net loss.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated
into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated
at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange
prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains
and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange
rate for the conversion of RMB to USD after the balance sheet date.
The
Company follows FASB ASC Topic 220,
“Comprehensive Income.”
Comprehensive income is comprised of
net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders.
Segment
Reporting
FASB
ASC Topic 280,
“Segment Reporting,”
requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s management organizes segments within the
company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management disaggregates a company. FASB ASC Topic 280 has
no effect on the Company’s CFS as substantially all of the Company’s operations are conducted in one industry segment.
All of the Company’s assets are located in the PRC.
New
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in
ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to
recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative
and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption
permitted. The Company is currently evaluating the effect this standard will have on its CFS.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement
of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the
impact that the standard will have on its CFS and related disclosures.
In
January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which
a reporting unit’s carrying value exceeds its FV, not to exceed the carrying amount of goodwill. The guidance should be
adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company is currently evaluating the impact of adopting this standard on its CFS.
In
June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring
goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific
guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all
share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations
by issuing share-based payment awards. The new guidance is effective for SEC filers for fiscal years, and interim reporting periods
within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early adoption
is permitted. The Company is evaluating the effects of the adoption of this guidance and currently believes that it will impact
the accounting of the share-based awards granted to non-employees.
In
August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal
change to our financial reporting will be the inclusion of the annual disclosure requirement of changes in stockholders’
equity in Rule 3-04 of Regulation S-X to interim periods. We will adopt this new rule beginning with its financial reporting for
the quarter ending March 31, 2019. Upon adoption, the Company will include its Consolidated Statements of Stockholders’
Equity with each quarterly filing on Form 10-Q.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future CFS.
3.
NOTES RECEIVABLE – BANK ACCEPTANCE
As
of December 31, 2018 and 2017, the Company had outstanding notes receivable on-hand of $0 and $979,462, respectively, representing
the commercial notes (also called bank acceptances) that were issued by customers to Erdos TCH and were honored by the applicable
bank. Erdos TCH may hold a bank acceptance until the maturity for the full payment, have the bank acceptance cashed out from the
bank at a discount at an earlier date, or transfer the bank acceptance to its vendors in lieu of payment.
4.
INVESTMENT IN SALES-TYPE LEASES, NET
Under
sales-type leases, Xi’an TCH leases the following systems: (i) BMPG systems to Pucheng Phase I and II (15 and 11 year terms,
respectively); (ii) BMPG systems to Shenqiu Phase I (11-year term); and (iii) BMPG systems to Shenqiu Phase II (9.5-year term).
The components of the net investment in sales-type leases as of December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Total future minimum lease payments receivable
|
|
$
|
88,661,266
|
|
|
$
|
99,155,214
|
|
Less: executory cost
|
|
|
(5,687,704
|
)
|
|
|
(6,360,901
|
)
|
Less: unearned interest
|
|
|
(19,398,707
|
)
|
|
|
(23,730,094
|
)
|
Less: realized interest income but not yet received
|
|
|
(9,336,141
|
)
|
|
|
(9,619,278
|
)
|
Less: allowance for net investment receivable
|
|
|
(29,276,658
|
)
|
|
|
(1,802,822
|
)
|
Investment in sales-type leases, net
|
|
|
24,962,056
|
|
|
|
57,642,119
|
|
Current portion
|
|
|
-
|
|
|
|
11,531,745
|
|
Noncurrent portion
|
|
$
|
24,962,056
|
|
|
$
|
46,110,374
|
|
As
of December 31, 2018, the future minimum rentals to be received on non-cancelable sales-type leases by year are as follows:
2019
|
|
$
|
36,251,311
|
|
2020
|
|
|
12,414,034
|
|
2021
|
|
|
12,414,034
|
|
2022
|
|
|
10,971,558
|
|
2023
|
|
|
6,644,132
|
|
Thereafter
|
|
|
9,966,197
|
|
Total
|
|
$
|
88,661,266
|
|
5.
PREPAID EXPENSES
Prepaid
expenses mainly consisted of prepayment for office rental and decorations, taxes, and consulting fees for the Company’s
HYREF fund completed in July 2013. Before the HYREF Fund released the money to Zhonghong, Xi’an TCH paid 2% of the funds
raised for Zhonghong, i.e. RMB 8.2 million ($1.2 million) to the Fund Management Company as a consulting fee, and shall pay such
2% on the amount of funds actually contributed as an annual management fee on every 365-day anniversary thereafter until Zhonghong
fully repays the loan and the HYREF Fund no longer has an ownership interest in Zhonghong. The Company had $0.71 million
prepaid consulting expenses as of December 31, 2017, respectively. The Company had $32,395 and $34,026 prepaid taxes
as of December 31, 2018 and 2017, respectively.
6.
OTHER RECEIVABLES
As
of December 31, 2018, other receivables mainly consisted of (i) advances to third parties of $7,285, bearing no interest, payable
upon demand, and tax and maintenance cost receivable of 1,528,368 for Xi’an TCH. As of December 31, 2017, other receivables
mainly consisted of an advance to a third party of $7,652, bearing no interest, payable upon demand, and tax and maintenance cost
receivable of 1,155,670 for Xi’an TCH.
7.
LONG TERM INVESTMENT
On
June 25, 2013, Xi’an TCH with HongyuanHuifu Venture Capital Co. Ltd (“HongyuanHuifu”) jointly established Beijing
Hongyuan Recycling Energy Investment Management Company Ltd. (the “Fund Management Company”) with registered capital
of RMB 10 million ($1.6 million), to manage a fund that will be used for financing CDQ WHPG projects. Xi’an TCH made an
initial capital contribution of RMB 4 million ($0.65 million) and has a 40% ownership interest in the Fund Management Company.
Voting rights and dividend rights are allocated between HongyuanHuifu and Xi’an TCH at 80% and 20%, respectively. The Company
accounted for this investment using the equity method. The Company recorded $469 and $(176,481) equity-based investment income
(loss) during the years ended December 31, 2018 and 2017, respectively.
On
July 18, 2013, the HYREF Fund was established as a limited liability partnership in Beijing. Pursuant to the Partnership Agreement,
the HYREF Fund has a general partner, the Fund Management Company, which made an initial capital contribution of RMB 5 million
($0.83 million) to the HYREF Fund. The HYREF Fund has three limited partners: (1) China Orient Asset Management Co., Ltd., which
made an initial capital contribution of RMB 280 million ($46.67 million) and is a preferred limited partner, (2) HongyuanHuifu,
which made an initial capital contribution of RMB 100 million ($16.67 million) and is an ordinary limited partner and (3) the
Company’s wholly-owned subsidiary, Xian TCH, which made an initial capital contribution of RMB 75 million ($10.81 million)
and is a secondary limited partner. The term of the HYREF Fund’s partnership is six years from the date of its establishment,
July 18, 2013. The current term for (x) the preferred limited partner is four years from the date of its contribution and (y)
the ordinary limited partner is four years from the date of its contribution. Unless otherwise approved by the general partner
(the Fund Management Company), upon the expiration of their respective terms, each partner shall exit from the partnership automatically.
The total size of the HYREF Fund is RMB 460 million ($77 million), and the purpose of the HYREF Fund is to invest in Zhonghong
for constructing 3 new CDQ WHPG projects. Xi’an TCH owns 16.3% of the HYREF Fund. The Company accounted for this investment
using the cost method. The Company netted off the investment of RMB 75 million ($10.81 million) by Xi’an TCH with the entrusted
loan payable of the HYREF Fund.
On December 29, 2018, Xi’an TCH entered
into a Share Transfer Agreement with Hongyuan Huifu, pursuant to which Xi’an TCH agreed to transfer its 40% ownership in
the Fund Management Company to Hongyuan Huifu for consideration of RMB 3,453,867.31 ($0.53 million). The transfer was completed
on January 22, 2019. The Company had approximately $79,000 loss from the sale of a 40% equity interest in Fund Management Company.
8.
CONSTRUCTION IN PROGRESS
Construction
in progress was for constructing power generation systems. As of December 31, 2018 and 2017, the Company’s construction
in progress included:
|
|
2018
|
|
|
2017
|
|
Xuzhou Huayu
|
|
$
|
23,778,899
|
|
|
$
|
24,976,178
|
|
Xuzhou Tian’an
|
|
|
38,380,969
|
|
|
|
37,814,637
|
|
Boxing County Chengli
|
|
|
-
|
|
|
|
32,375,158
|
|
Less: assets impairment allowance
|
|
|
(19,577,691
|
)
|
|
|
-
|
|
Total
|
|
$
|
42,582,177
|
|
|
$
|
95,165,973
|
|
As
of December 31, 2018, the Company was committed to pay an additional $11.66 million for the Xuzhou Huayu project; however, on
February 15, 2019, Zhonghong transferred Xuzhou Huayu Project to Mr. Bai for RMB 120,000,000 ($17.52 million). Mr. Bai agreed
to transfer all the equity shares of his wholly owned company, Xi’an Hanneng, to the “HYREF” as repayment for
the loan made by Xi’an Zhonghong to HYREE as consideration for the transfer of the Xuzhou Huayu Project (see Note 12).
As
of December 31, 2018, the Company was committed to pay an additional $4.04 million for the Xuzhou Tian’an project.
The
Chengli project finished construction, and was transferred to the Company’s fixed assets at a cost of $35.24 million and
ready to be put into operation as of December 31, 2018; the owner of the Chengli Project changed from Chengli to Shandong Boxing
Shengli Technology Company Ltd. (“Shengli”) in 2018. On January 22, 2019, Xi’an Zhonghong, transferred Chengli
CDQ WHPG station as the repayment of loan at RMB 188,639,400 ($27.54 million) to HYREF (see Note 12).
9.
TAXES PAYABLE
Taxes
payable consisted of the following as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Income – current
|
|
$
|
1,718,051
|
|
|
$
|
1,097,768
|
|
VAT
|
|
|
1,666,695
|
|
|
|
1,145,363
|
|
Other
|
|
|
251,813
|
|
|
|
180,649
|
|
Total – current
|
|
|
3,636,559
|
|
|
|
2,423,780
|
|
Income – noncurrent
|
|
$
|
6,390,625
|
|
|
$
|
6,998,625
|
|
Income
tax payable was approximately $8.11 million at December 31, 2018, including $1.21 million current and $6.39 million noncurrent
was from recording the estimated one-time transition tax on post-1986 foreign unremitted earnings under the Tax Cut and Jobs Act
signed on December 22, 2017. An election is available for the U.S. shareholders of a foreign company to pay the tax liability
in installments over a period of eight years with 8% of net tax liability in the first five years, 15% in the sixth year, 20%
in the seventh year, and 25% in the eighth year. The Company made such election.
10.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Employee training, labor union expenditure and social insurance payable
|
|
$
|
844,997
|
|
|
$
|
852,316
|
|
Consulting, auditing, and legal expenses
|
|
|
488,052
|
|
|
|
480,057
|
|
Accrued payroll and welfare
|
|
|
261,152
|
|
|
|
261,793
|
|
Other
|
|
|
23,796
|
|
|
|
24,150
|
|
Total
|
|
$
|
1,617,997
|
|
|
$
|
1,618,316
|
|
11.
DEFERRED TAX LIABILITY, NET
Deferred
tax assets resulted from asset impairment loss which was temporarily non-tax deductible for tax purposes but expensed in accordance
with US GAAP, interest income in sales-type leases which was recognized as income for tax purposes but not for book purpose as
it did not meet revenue recognition in accordance with US GAAP, accrued employee social insurance that can be deducted for tax
purposes in the future, and the difference between tax and accounting basis of cost of fixed assets which was capitalized for
tax purposes and expensed as part of cost of systems in accordance with US GAAP. Deferred tax liability arose from the difference
between tax and accounting basis of net investment in sales-type leases.
As
of December 31, 2018 and 2017, deferred tax liability consisted of the following:
|
|
2018
|
|
|
2017
|
|
Deferred tax asset — current (accrual of employee social insurance)
|
|
$
|
186,779
|
|
|
$
|
189,617
|
|
Deferred tax liability — current (net investment in sales-type leases)
|
|
|
(1,639,057
|
)
|
|
|
(1,520,537
|
)
|
Deferred tax liability, net of current deferred tax asset
|
|
$
|
(1,452,278
|
)
|
|
$
|
(1,330,920
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset — noncurrent (depreciation of fixed assets)
|
|
$
|
6,176,064
|
|
|
$
|
7,675,645
|
|
Deferred tax asset — noncurrent (asset impairment loss)
|
|
|
15,003,497
|
|
|
|
450,706
|
|
Deferred tax asset — noncurrent (capitalized interest on CIP)
|
|
|
2,531,120
|
|
|
|
2,574,749
|
|
Deferred tax asset---noncurrent (interest income in sales-type leases)
|
|
|
658,307
|
|
|
|
-
|
|
Deferred tax asset---noncurrent (US NOL)
|
|
|
3,114,083
|
|
|
|
14,321,617
|
|
Deferred tax asset---noncurrent (PRC NOL)
|
|
|
1,617,861
|
|
|
|
-
|
|
Less: valuation allowance on deferred tax assets
|
|
|
(21,353,059
|
)
|
|
|
(14,321,617
|
)
|
Deferred tax assets --- noncurrent, net
|
|
|
7,747,873
|
|
|
|
10,701,100
|
|
Deferred tax liability — noncurrent (net investment in sales-type leases)
|
|
|
(9,335,941
|
)
|
|
|
(11,527,594
|
)
|
Deferred tax liability, net of noncurrent deferred tax assets
|
|
$
|
(1,588,068
|
)
|
|
$
|
(826,494
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred tax liability, noncurrent per ASU 2015-17
|
|
$
|
(3,040,346
|
)
|
|
$
|
(2,157,414
|
)
|
12.
LOANS PAYABLE
Entrusted
Loan Payable (HYREF Loan)
The
HYREF (Beijing Hongyuan Recycling Energy Investment Center, LLP) established in July 2013 with a total fund size of RMB 460 million
($77 million) invests in Xi’an Zhonghong for Zhonghong’s three new CDQ WHPG projects. The HYREF Fund invested RMB
3 million ($0.5 million) as an equity investment and RMB 457 million ($74.5 million) as a debt investment in Xi’an Zhonghong;
in return for such investments, the HYREF Fund will receive interest from Zhonghong for the HYREF Fund’s debt investment.
The RMB 457 million ($74.5 million) was released to Zhonghong through an entrusted bank, which is also the supervising bank for
the use of the loan. The loan was deposited in a bank account at the Supervising Bank (the Industrial Bank Xi’an Branch)
and is jointly supervised by Zhonghong and the Fund Management Company. Project spending shall be verified by the Fund Management
Company to confirm that it is in accordance with the project schedule before the funds are released. All the operating accounts
of Zhonghong have been opened with the branches of the Supervising Bank, and the Supervising Bank has the right to monitor all
bank accounts opened by Zhonghong. The entrusted bank will charge 0.1% of the loan amount as a service fee and will not take any
lending risk. The loan was collateralized by the accounts receivable and the fixed assets of Shenqiu Phase I and II power generation
systems; the accounts receivable and fixed assets of Zhonghong’s three CDQ WHPG systems; and a 27 million RMB capital contribution
made by Xi’an TCH. Repayment of the loan (principal and interest) was also jointly and severally guaranteed by Xi’an
TCH and the Chairman and CEO of the Company. In the fourth quarter of 2015, three power stations of Erdos TCH were pledged to
Industrial Bank as an additional guarantee for the loan lent to Zhonghong’s three CDQ WHPG systems. In 2016, two additional
power stations of Erdos TCH and Pucheng Phase I and II systems were pledged to Industrial Bank as an additional guarantee along
with Xi’an TCH’s equity in Zhonghong.
The
loan agreement provides that Zhonghong shall also maintain a certain capital level in its account with the Supervising Bank to
make sure it has sufficient funds to make interest payments when they are due:
|
●
|
During
the first three years from the first release of the loan, the balance in its account shall be no less than RMB 7.14 million ($1.19
million) on the 20th day of the second month of each quarter and no less than RMB 14.28 million ($2.38 million) on the 14th day
of the last month of each quarter;
|
|
●
|
During
the fourth year from the first release of the loan, the balance in its account shall be no less than RMB 1.92 million ($0.32 million)
on the 20th day of the second month of each quarter and no less than RMB 3.85 million ($0.64 million) on the 14th day of the last
month of each quarter; and
|
|
●
|
During
the fifth year from the first release of the loan, the balance in its account shall be no less than RMB 96,300 ($16,050) on the
20th day of the second month of each quarter and no less than RMB 192,500 ($32,080) on the 14th day of the last month of each
quarter.
|
The
term of this loan is for 60 months from July 31, 2013 to July 30, 2018. On August 6, 2016, Zhonghong was required to repay principal
of RMB 280 million ($42.22 million); on August 6, 2017, Zhonghong was initially supposed to repay principal of RMB 100 million
($16.27 million) and on July 30, 2018, Zhonghong was initially supposed to repay the remainder of RMB 77 million ($12.52 million).
The interest rate is 12.5%. During the term, Zhonghong shall maintain a minimal funding level and capital level in its designated
account with the Supervising Bank to make sure it has sufficient funds to make principal payments when they are due. Notwithstanding
the requirements, the HYREF Fund and Supervising Bank verbally notified Zhonghong from the beginning that it was unlikely that
they would enforce these requirements for the purpose of the efficient utilization of working capital. As of December 31, 2018,
the entrusted loan payable had an outstanding balance of $59.29 million, of which, $10.92 million was from the investment of Xi’an
TCH; accordingly, the Company netted the loan payable of $10.92 million with the long-term investment to the HYREF Fund made by
Xi’an TCH. For the year ended December 31, 2018, the Company recorded interest expense of $5.19 million on this loan and
$2.43 million penalty interest on past due loan, and capitalized $2.38 million interest to construction in progress. The Company
had paid RMB 50 million ($7.54 million) of the RMB 280 million ($42.22 million), and on August 5, 2016, the Company entered
into a supplemental agreement with the lender to extend the due date of the remaining RMB 230 million ($34.68 million) of the
original RMB 280 million ($45.54 million) to August 6, 2017. During the year ended December 31, 2017, the Company negotiated with
the lender again to further extend the remaining loan balance of RMB 230 million ($34.68 million), RMB 100 million ($16.27 million),
and RMB 77 million ($12.52 million) (which included investment from Xi’an TCH of RMB 75 million and was netted off with
the entrusted loan payable of the HYREF Fund in the balance sheet). The lender has tentatively agreed to extend the remaining
loan balance until August 2019 with an adjusted annual interest rate of 9%, subject to the final approval from its headquarters.
The headquarters did not approve the extension proposal with an adjusted annual interest rate of 9%; however, the Company worked
out with the lender on an alternative repayment proposal on December 29, 2018 as described below. As of December 31, 2018, the
interest payable for this loan was $17.47 million.
As
of December 31, 2018, the future minimum repayment of all the loans including the entrusted loan to be made annually is as follows:
2019
|
|
$
|
48,373,936
|
|
Total
|
|
$
|
48,373,936
|
|
Repayment
of HYREF loan
|
1.
|
Transfer
of Chengli project as partial repayment
|
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, the HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong will transfer Chengli CDQ WHPG station as the repayment
of loan at RMB 188,639,400 ($27.54 million) to HYREF. Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai also
agreed to buy back the Chengli CDQ WHPG Station when conditions under the Buy Back Agreement are met.
On
January 22, 2019, Xi’an Zhonghong, completed the transfer of Chengli CDQ WHPG station to HYREF as the repayment of a loan
for RMB 188,639,400 ($27.54 million) owed to HYREF. Xi’an TCH is a secondary limited partner of HYREF. The consideration
of the CDQ WHPG station is determined by the parties based upon the appraisal report issued by Zhonglian Assets Appraisal Group
(Shaanxi) Co., Ltd. as of August 15, 2018.
On
December 29, 2018, Xi’an TCH, Xi’an Zhonghong, HYREF, Guohua Ku, Chonggong Bai and Xi’an Hanneng Enterprises
Management Consulting Co. Ltd. (“Xi’an Hanneng”) entered into a Buy Back Agreement.
Pursuant
to the Buy Back Agreement, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai (the “Buyers”)
jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF
by Chonggong Bai (see 5 below), and a CDQ WHPG station in Boxing County which was transferred to HYREF by Xi’an
Zhonghong. The buy-back price for the Xi’an Hanneng’s equity will be the higher of (i) the market price of the
equity shares at the time of buy-back; or (ii) the original transfer price of the equity shares plus bank interest. HYREF may
request that the Buyers buy back the equity shares of Xi’an Hanneng and/or the CDQ WHPG station if one of the following
conditions is met: (i) HYREF holds the equity shares of Xi’an Hanneng until December 31, 2021; (ii) Xi’an Huaxin
New Energy Co., Ltd., a subsidiary of Xi’an Hanneng is delisted from The National Equities Exchange And Quotations Co.,
Ltd., a Chinese over-the-counter trading system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the
Buyers or its affiliates has a credit problem, including not being able to issue an auditor report or standard auditor report
or any control person or executive of the Buyers is involved in crimes and is under prosecution or has other material credit
problems, to HYREF’s reasonable belief; (iv) if Xi’an Zhonghong fails to timely make repayment on principal or
interest of the loan agreement, its supplemental agreement or extension agreement; (v) the Buyers or any party to the Debt
Repayment Agreement materially breaches the Debt Repayment Agreement or its related transaction documents, including but not
limited to the Share Transfer Agreement, the Pledged Assets Transfer Agreement, the Entrusted Loan Agreement and their
guarantee agreements and supplemental agreements.
|
3.
|
Xi’an
TCH transferred 40% ownership in the Fund Management Company to Hongyuan Huifu for partial payment of financial advisory fee
|
On
December 29, 2018, Xi’an TCH entered into a Share Transfer Agreement with Hongyuan Huifu Venture Capital Co. Ltd (“Hongyuan
Huifu”), pursuant to which Xi’an TCH agreed to transfer its 40% ownership in Hongyuan Recycling Energy Investment
Management Beijing Co., Ltd. (the “Fund Management Company”) to Hongyuan Huifu for consideration of RMB 3,453,867
($504,000) (the “Fund Management Company Transfer Price”). On January 22, 2019, Xi’an TCH completed the 40%
ownership transfer transaction.
On
December 29, 2018, Xi’an TCH, Hongyuan Huifu and Fund Management Company entered into a supplemental agreement to the Share
Transfer Agreement. Xi’an TCH owes the Fund Management Company RMB 18,306,667 ($2,672,000) in financial advisory fees, and
the parties agreed that the Fund Management Company Transfer Price could be used to off-set the outstanding financial advisory
fees. Upon the completion of this transaction, the Fund Management Company will owe RMB 3,453,867 to Hongyuan Huifu, and Xi’an
TCH will owe RMB 14,852,800 ($2,168,000) to the Fund Management Company.
|
4.
|
HYREF
Fund transferred 10% ownership in Xi’an Zhonghong to Shanghai TCH
|
On
December 29, 2018, Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF agreed to transfer
its 10% ownership in Xi’an Zhonghong to Shanghai TCH for consideration of RMB 3 million ($437,956). On January 22, 2019,
Hongyuan Huifu completed the transfer of its 10% ownership in Xi’an Zhonghong o Shanghai TCH.
|
5.
|
Transfer
of Xuzhou Huayu Project and Shenqiu Phase I & II project to Mr. Bai for partial repayment of HYREF loan
|
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai, a resident of China, entered into a Projects Transfer
Agreement, pursuant to which Xi’an Zhonghong will transfer a CDQ WHPG station (under construction) located in Xuzhou City
for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million) and Xi’an
TCH will transfer two Biomass Power Generation Projects in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai
for RMB 127,066,000 ($18.55 million). Mr. Bai agreed to transfer all the equity shares of his wholly owned company, Xi’an
Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”) to the HYREF as repayment for the RMB 247,066,000
($36.07 million) loan made by Xi’an Zhonghong to HYREF as consideration for the transfer of the Xuzhou Huayu Project and
Shenqiu Phase I and II Projects.
On
February 15, 2019, Xi’an Zhonghong completed the transfer of Xuzhou Huayu Project to Mr. Chonggong Bai for RMB 120,000,000
(US$17.52 million) and Xi’an TCH completed the transfer of Shenqiu Phase I and II Projects to Mr. Bai for RMB 127,066,000
($18.55 million). Mr. Bai agreed to transfer all the equity shares of his wholly owned company, Xi’an Hanneng to HYREF as
repayment by Xi’an Zhonghong for the RMB 247,066,000 ($36.07 million) loan to HYREE as consideration for the transfer of
the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
13.
REFUNDABLE DEPOSITS FROM CUSTOMERS FOR SYSTEMS LEASING
As
of December 31, 2018 and 2017, the balance of refundable deposits from customers for systems leasing for Pucheng and Shenqiu was
$1,034,503 and $1,086,591, respectively.
14.
RELATED PARTY TRANSACTIONS
As
of December 31, 2018 and 2017, the Company had $41,168 and $43,623, respectively, in advances from the Company’s management,
which bear no interest, are unsecured, and are payable upon demand.
15.
CONVERTIBLE NOTE PAYABLE, NET
On
July 11, 2018, the Company entered into a Securities Purchase Agreement with a Purchaser, pursuant to which the Company sold and
issued to the Purchaser a Convertible Promissory Note of $1,070,000. The Purchaser purchased the Note with an original issue discount
(“OID”) of $50,000, and the Company paid to the Purchaser $20,000 for fees and costs incurred by Purchaser in connection
with the consummation of the Purchase Agreement.
The Note bears interest at 8%. All outstanding
principal and accrued interest on the Note will become due and payable on July 11, 2020, subject to a potential one-year extension
during which interest would not accrue. The Company’s obligations under the Note may be prepaid at any time, provided that
in such circumstance the Company would pay 125% of any amounts outstanding under the Note and being prepaid. Amounts outstanding
under the Note may be converted at any time, at the Lender’s option, into shares of the Company’s common stock at a
conversion price of $3.00 per share, subject to certain adjustments. During the term of the Note, the Company shall not, without
the prior written consent of the Purchaser, enter into or effect certain fundamental business transactions. The Purchaser has the
option to redeem the Note at any time after the six month anniversary of the date when the purchase price is delivered to the Company
(“Purchase Price Date”) in the amounts of up to 50% of the amount outstanding during the nine month period after Purchase
Price Date or any percentage of the amount outstanding under the Note at any time after the nine month anniversary of Purchase
Price Date, with such redemption amounts paid in cash or shares of the Company’s common stock, or a combination thereof,
at the Company’s election.
As
of December 31, 2018, the Company had $1,031,849 convertible note payable, net of unamortized OID and unamortized debt issuing
cost; and the Company had $40,572 accrued interest on this convertible note. During the year ended December 31, 2018, the Company
amortized OID of $11,849 and loan issuing cost of $4,740.
16.
SHARES ISSUED FOR EQUITY FINANCING
On
October 29, 2018, China Recycling Energy Corporation entered into Securities Purchase Agreements with certain purchasers, pursuant
to which the Company will offer to the Purchasers, in a registered direct offering, an aggregate of 1,985,082 shares of the Company’s
common stock. The Shares will be sold to the Purchasers at $1.375 per share, for gross proceeds to the Company of approximately
$2.75 million, before deducting fees to the placement agent and other estimated offering expenses payable by the Company.
In
a concurrent private placement, the Company is also issuing to the each of the Purchasers a warrant (“Investor Warrants”)
to purchase one (1) share of the Company’s Common Stock for each Share purchased under the Purchase Agreement, pursuant
to that certain Common Stock Purchase Warrant, by and between the Company and each Purchaser, for a purchase price of $0.125 per
Warrant and gross proceeds to the Company of approximately $250,000, before deducting fees to the placement agent and
other estimated offering expenses payable by the Company. The Warrants will be exercisable on the date of issuance
at an initial exercise price of $1.3725 per share and will expire on the five and a half year anniversary of the date of issuance.
H.C.
Wainwright & Co., LLC is acting as the Company’s exclusive placement agent in connection with the offerings under the
Purchase Agreement and will receive a fee equal to 7.0% of the gross proceeds received by the Company from the offerings,
up to $75,000 for certain expenses and warrants to purchase the Company’s Common Stock in an amount equal to 7% of the Company’s
Shares sold to the Purchasers in the offerings, or 138,956 shares of Common Stock, on substantially the same terms as the Warrants,
with an initial exercise price of $1.875 per share and expiration date of October 29, 2023 (the “Placement Agent Warrants”).
The
warrants issued in this private placement are classified as equity instruments. The Company accounted for the warrants issued
in the private placement based on the fair value method under ASC Topic 505, and the fair value of the warrants was calculated
using the Black-Scholes model under the following assumptions: estimated life of 5.5 years for Investor Warrants and 5 years for
Placement Agent Warrants, volatility of 98%, risk-free interest rate of 2.91% and dividend yield of 0%. The fair value of the
warrants issued to investors at grant date was $2,499,238, and the fair value of the warrants issued to the placement agent at
grant date was $161,027.
Following
is a summary of the warrant activity for the year ended December 31, 2018:
|
|
Number of
Warrants
|
|
|
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
Granted
|
|
|
2,124,038
|
|
|
$
|
1.41
|
|
|
|
5.47
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
2,124,038
|
|
|
$
|
1.41
|
|
|
|
5.29
|
|
Exercisable at December 31, 2018
|
|
|
2,124,038
|
|
|
$
|
1.41
|
|
|
|
5.29
|
|
17.
NONCONTROLLING INTEREST
On
July 15, 2013, Xi’an TCH and HYREF Fund jointly established Xi’an Zhonghong New Energy Technology (“Zhonghong”)
with registered capital of RMB 30 million ($4.88 million), to manage new projects. Xi’an TCH paid RMB 27 million ($4.37
million) as its contribution of the registered capital to Zhonghong. Xi’an TCH owns 90% of Zhonghong while HYREF Fund owns
10% of Zhonghong as a non-controlling interest of Zhonghong.
In
addition, the HYREF Fund was 16.3% owned by Xi’an TCH and 1.1% owned by the Fund Management Company, and the Fund Management
Company was 40% owned by Xi’an TCH as described in Note 7, which resulted in an additional indirect ownership of Xi’an
TCH in Zhonghong of 1.7%; accordingly, the ultimate non-controlling interest (HYREF Fund) in Zhonghong became 8.3%. During the
years ended December 31, 2018, the Company had losses of $3,203,657 and $327,147 that were attributable to the noncontrolling
interest, respectively.
On December 29, 2018, Shanghai TCH entered
into a Share Transfer Agreement with HYREF, pursuant to which HYREF agreed to transfer its 10% ownership in Xi’an Zhonghong
to Shanghai TCH for RMB 3 million ($437,956). On January 22, 2019, HYREF completed the transfer of its 10% ownership in Xi’an
Zhonghong to Shanghai TCH. The Company had approximately $3.98 million loss from the purchase of a 10% equity interest in Xi’an
Zhonghong.
18.
INCOME TAX
The
Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which
are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments.
Under Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau
continues to treat CREG sales-type leases as operating leases. Accordingly, the Company recorded deferred income taxes.
The
Company’s subsidiaries generate all of their income from their PRC operations. All of the Company’s Chinese subsidiaries’
effective income tax rate for 2018 and 2017 was 25%. Yinghua, Shanghai TCH, Xi’an TCH, Huahong, Zhonghong and Erdos TCH
file separate income tax returns.
There
is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s CFS do not present any income
tax provisions related to Cayman Islands tax jurisdiction, where Sifang Holding is domiciled.
The
US parent company, China Recycling Energy Corporation, is taxed in the US and, as of December 31, 2018, had net operating loss
(“NOL”) carry forwards for income taxes of $14.83 million, which may be available to reduce future years’ taxable
income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Our management believes the realization
of benefits from these losses may be uncertain due to the US parent company’s continuing operating losses. Accordingly,
a 100% deferred tax asset valuation allowance was provided.
As
of December 31, 2018, the Company’s PRC subsidiaries had $6.47 million NOL that can be carried forward to offset future
taxable income for five years from the year the loss is incurred. The NOL was mostly from Zhonghong, Zhonghong has not yet generated
any sales yet; accordingly, the Company recorded a 100% deferred tax valuation allowance for PRC NOL.
The
following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31,
2018 and 2017, respectively:
|
|
2018
|
|
|
2017
|
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
34.0
|
%
|
Tax rate difference – current provision
|
|
|
(4.0
|
)%
|
|
|
(13.5
|
)%
|
Other
|
|
|
(0.1
|
)%
|
|
|
-
|
%
|
Tax rate change for future deferred tax items
|
|
|
-
|
%
|
|
|
30.6
|
%
|
Prior periods income tax adjustment per income tax return filed
|
|
|
-
|
%
|
|
|
(4.2
|
)%
|
Section 965 one-time transition tax
|
|
|
-
|
%
|
|
|
2,046.7
|
%
|
Permanent differences
|
|
|
-
|
%
|
|
|
1.0
|
%
|
Valuation allowance on PRC NOL
|
|
|
28.9
|
%
|
|
|
63.2
|
%
|
Valuation allowance on US NOL
|
|
|
0.2
|
%
|
|
|
16.3
|
%
|
Tax per financial statements
|
|
|
4.0
|
%
|
|
|
2,174.1
|
%
|
The
provision for income taxes expense for the years ended December 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
Income tax expense – current
|
|
$
|
1,604,473
|
|
|
$
|
9,101,026
|
|
Income tax expense (benefit) – deferred
|
|
|
1,022,985
|
|
|
|
(1,061,548
|
)
|
Total income tax expense
|
|
$
|
2,627,428
|
|
|
$
|
8,039,476
|
|
On
December 22, 2017, the Tax Cut and Jobs Act (“Tax Act”) was signed into law in the United States. The Tax Act introduced
a broad range of tax reform measures that significantly change the federal income tax laws. The provisions of the Tax Act that
may have significant impact on the Company include the permanent reduction of the corporate income tax rate from 35% to 21% effective
for tax years including or commencing on January 1, 2018, a one-time transition tax on post-1986 foreign unremitted earnings,
the provision for Global Intangible Low Tax Income (“GILTI”), the deduction for Foreign Derived Intangible Income
(“FDII”), the repeal of corporate alternative minimum tax, the limitation of various business deductions, and the
modification of the maximum deduction of net operating loss with no carryback but indefinite carryforward provision. Many provisions
in the Tax Act are generally effective in tax years beginning after December 31, 2017.
In
2017 the Company reflected the provisional income tax effects of the Tax Act under Accounting Standards Codification Topic 740,
Income Taxes, and had approximately $7.61 million tax expense from recording the estimated one-time transition tax on post-1986
foreign unremitted earnings.
19.
STOCK-BASED COMPENSATION PLAN
Options
to Employees
On
June 19, 2015, the stockholders of the Company approved the China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”)
at its annual meeting. The total shares of common stock authorized for issuance during the term of the Plan is 12,462,605 (prior
to the 10:1 Reverse Stock Split). The Plan was effective immediately upon the adoption by the Board of Directors on April 24,
2015, subject to stockholder approval, and will terminate on the earliest to occur of (i) the 10th anniversary of the Plan’s
effective date, or (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested
shares. The stockholders approved the Plan at their annual meeting on June 19, 2015.
On
April 27, 2017, the Board approved the grant to the Company’s CFO of an option to purchase 5,000 shares of the Company’s
common stock at $1.61 per share, with a term of 10 years. The option vested immediately upon the grant.
The
FV of the stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model (“BSOPM”).
The BSOPM has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The
risk-free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining
on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical
volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as
no options have been exercised in the Plan to date. The FV of the option granted to employees is recognized as compensation expense
over the vesting period of the stock option award. The FV of the options was calculated using the following assumptions: estimated
life of ten years, volatility of 124%, risk free interest rate of 2.30%, and dividend yield of 0%. The FV of the 5,000 stock options
was $7,647 at the grant date.
The
Company recorded $0 and $7,647 compensation expense for stock options to employees during years ended December 31, 2018 and 2017,
respectively.
Options
to Independent Directors
On
March 31, 2015, the Board appointed Mr. Cangsang Huang as a member of the Company’s Board of Directors to fill a vacancy.
In connection with the appointment, the Board authorized the Company to provide Mr. Huang with (i) compensation of $2,000 per
month and (ii) an option to purchase 40,000 shares of the Company’s Common Stock, par value $0.001, at an exercise price
of $1.02 per share (prior to the 10:1 Reverse Stock Split effective May 25, 2016), which was equal to the closing price per share
of the Company’s Common Stock on March 31, 2015. Such options were only valid and exercisable upon stockholder approval.
The options to Mr. Huang were not voted upon at the Company’s annual stockholder’s meeting on June 19, 2015 and were
cancelled automatically. However, the Company’s Plan adopted by the Board on April 24, 2015 for providing equity awards
to employees, directors and consultants was approved at the annual stockholder’s meeting; accordingly, the Compensation
Committee of the Board of Directors approved a grant of 40,000 options (prior to the 10:1 Reverse Stock Split) to Mr. Huang at
an exercise price of $1.02 per share under the Plan, which vested immediately on the date of grant, which was on October 10, 2015.
The options may be exercised within five years of the date of the grant. The FV of the options was calculated using the following
assumptions, estimated life of five years, volatility of 82%, risk free interest rate of 1.37%, and dividend yield of 0%. The
FV of the 40,000 stock options was $26,528 at the grant date.
The
following table summarizes option activity with respect to employees and independent directors, and the number of options reflects
the 10:1 Reverse Stock Split effective May 25, 2016:
|
|
Number of
Shares
|
|
|
Average
Exercise Price
per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
4,000
|
|
|
$
|
10.2
|
|
|
|
3.77
|
|
Exercisable at January 1, 2017
|
|
|
4,000
|
|
|
|
10.2
|
|
|
|
3.77
|
|
Granted
|
|
|
5,000
|
|
|
|
1.6
|
|
|
|
10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
9,000
|
|
|
|
5.4
|
|
|
|
6.41
|
|
Exercisable at December 31, 2017
|
|
|
9,000
|
|
|
|
5.4
|
|
|
|
6.41
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
9,000
|
|
|
$
|
5.4
|
|
|
|
5.41
|
|
Exercisable at December 31, 2018
|
|
|
9,000
|
|
|
$
|
5.4
|
|
|
|
5.41
|
|
20.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective January 1, 2006, the Company is only required to maintain one statutory reserve by appropriating
from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company’s Chinese subsidiaries are required to transfer 10% of their net income, as determined under PRC accounting rules
and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses,
if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders
in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered capital.
The
maximum statutory reserve amount has not been reached for any subsidiary. The table below discloses the statutory reserve amount
in the currency type registered for each Chinese subsidiary as of December 31, 2018.
Name of Chinese
Subsidiaries
|
|
Registered Capital
|
|
|
Maximum Statutory
Reserve Amount
|
|
|
Statutory reserve at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Shanghai TCH
|
|
$
|
29,800,000
|
|
|
$
|
14,900,000
|
|
|
¥ 6,564,303 ($1,003,859)
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an TCH
|
|
¥
|
202,000,000
|
|
|
¥
|
101,000,000
|
|
|
¥ 69,359,820 ($10,606,984)
|
|
|
|
|
|
|
|
|
|
|
|
Erdos TCH
|
|
¥
|
120,000,000
|
|
|
¥
|
60,000,000
|
|
|
¥ 19,035,814 ($2,914,869)
|
|
|
|
|
|
|
|
|
|
|
|
Xi’an Zhonghong
|
|
¥
|
30,000,000
|
|
|
¥
|
15,000,000
|
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
Shaanxi Huahong
|
|
$
|
2,500,300
|
|
|
$
|
1,250,150
|
|
|
Did not accrue yet due to accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
Zhongxun
|
|
¥
|
35,000,000
|
|
|
¥
|
17,500,000
|
|
|
Did not accrue yet due to accumulated deficit
|
Common
Welfare Fund
The
common welfare fund is a voluntary fund to which the Company can transfer 5% to 10% of its net income. This fund can only be utilized
on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company does not participate
in this fund.
21.
CONTINGENCIES
China
maintains a “closed” capital account, meaning companies, banks, and individuals cannot move money in or out of the
country except in accordance with strict rules. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange
(SAFE) regulate the flow of foreign exchange in and out of the country. For inward or outward foreign currency transactions, the
Company needs to make a timely declaration to the bank with sufficient supporting documents to declare the nature of the business
transaction. The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s
assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current
law. Remittances in currencies other than RMB may require certain supporting documentation in order to make the remittance.
The
Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company sells electricity to its customers and receives commercial notes (bank acceptance) from them in lieu of payments for accounts
receivable. The Company discounts the commercial notes with the bank or endorses the commercial notes to vendors for payment of
their own obligations or to get cash from third parties. Most of the commercial notes have a maturity of less than six (6) months.
22.
COMMITMENTS
Lease
Commitment
On
November 20, 2017, Xi’an TCH entered into a lease for its office with a term from December 1, 2017 through November 30,
2020. The monthly rent is RMB 36,536 ($5,600) with quarterly payment in advance.
On
August 2, 2018, the Company entered into a lease for its office use in Beijing with a term from August 4, 2018 through August
3, 2020. The monthly rent is RMB 22,000 ($3,205) with quarterly payment in advance.
At
December 31, 2018, the future annual rental payment is as follows:
December 31, 2019
|
|
$
|
107,095
|
|
November 30, 2020
|
|
|
85,194
|
|
For
the years ended December 31, 2018 and 2017, the rental expense of the Company was $83,394 and $197,143, respectively.
Construction
Commitment
Refer
to Note 1 for additional details related to lease commitments with Tianyu (and its subsidiaries Xuzhou Tian’an and Xuzhou
Huayu), Note 8 for commitments on construction in progress.
23.
SUBSEQUENT EVENTS
Convertible Notes / Promissory Notes
On January 31, 2019, the Company entered into
a Securities Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (the “Purchaser”),
pursuant to which the Company sold and issued to the Purchaser a Convertible Promissory Note (the “Note”) in the amount
of $1,050,000. The Purchaser purchased the Note with an original issue discount of $50,000. The Note was sold to the Purchaser
pursuant to an exemption from registration under Regulation D, promulgated under the Securities Act of 1933, as amended. The Note
bears interest at the rate of 8% per annum. All outstanding principal and accrued interest on the Note will become due and payable
on January 30, 2021, subject to a potential one-year extension period during which interest would not accrue. The Company’s
obligations under the Note may be prepaid at any time, provided that in such circumstance the Company would pay 125% of any amounts
outstanding under the Note and being prepaid. Amounts outstanding under the Note may be converted at any time, at the Lender’s
option, into shares of the Company’s common stock at a conversion price of $3.00 per share, subject to certain adjustments.
On February 27, 2019, the Company entered into
a Securities Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (the “Purchaser”),
pursuant to which the Company sold and issued to the Purchaser a Convertible Promissory Note (the “Note”) in the amount
of $1,050,000. The Purchaser purchased the Note with an original issue discount of $50,000. The Note was sold to the Purchaser
pursuant to an exemption from registration under Regulation D, promulgated under the Securities Act of 1933, as amended. The Note
bears interest at 8% per annum. All outstanding principal and accrued interest on the Note will become due and payable on February
26, 2021, subject to a potential one-year extension period during which interest would not accrue. The Company’s obligations
under the Note may be prepaid at any time, provided that in such circumstance the Company would pay 125% of any amounts outstanding
under the Note and being prepaid. Amounts outstanding under the Note may be converted at any time, at the Lender’s option,
into shares of the Company’s common stock at a conversion price of $3.00 per share, subject to certain adjustments.
Pursuant to an Exchange Agreement dated April
14, 2019 (the “Exchange Agreement”), the Company and Iliad Research and Trading, L.P. agreed to exchange the above
two Original Notes with two new promissory notes (the “Exchange Notes”). All outstanding principal and accrued interest
on the Exchange Notes will become due and payable on January 31, 2021 and February 27, 2021, respectively. The Exchange Notes bore
interest at the rate of 8% per annum and did not grant conversion options to the Purchaser. The Company’s obligations under
the Exchange Notes could be prepaid at any time, provided that in such circumstance the Company would have paid 125% of any amounts
outstanding under the Exchange Notes. Beginning on the date that is six (6) months from the issue date of the respective Original
Notes (the “Issue Dates”) and at any time thereafter until the Exchange Notes are paid in full, Purchaser shall have
the right to redeem up to $750,000 of the outstanding balance during months six to eight following the respective Issue Date and
any amount thereafter.
Private Placement in February 2019
On February 13, 2019, China Recycling
Energy Corporation entered into a Securities Purchase Agreement (the “Agreement”) with Great Essential Investment,
Ltd. a company incorporated in the British Virgin Islands (the “Purchaser”), pursuant to which the Company agreed to
sell to the Purchaser in a private placement 1,600,000 shares (the “Shares”) of the Company’s common stock, par
value $0.001 per share (the “
Common Stock
”), at $1.013 per share for $1,620,800 (the “Private Placement”).
The Company shall file a registration statement for the registration of the Shares for their resale by the Purchaser within 100
days from the effective date of this Agreement. The Private Placement will be completed pursuant to the exemption from registration
provided by Regulation S promulgated under the Securities Act of 1933, as amended.
Registered Direct Offering in April 2019
On April 15, 2019, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers, pursuant to which the
Company will offer to the Purchasers, in a registered direct offering, an aggregate of 2,359,272 shares of common
stock. The Shares will be sold to the Purchasers at a negotiated purchase price of $0.80 per share, for aggregate
gross proceeds to the Company of $1,887,417, before deducting placement agent fees and other estimated offering expenses
payable by the Company.
In a concurrent private placement, the
Company is also issuing to the each of the Purchasers a warrant to purchase 0.75 of a share of the Company’s Common Stock
for each share purchased under the Purchase Agreement, or 1,769,454 warrants in the aggregate. The Warrants will be exercisable
beginning on the six month anniversary of the date of issuance at an initial exercise price of $0.9365 per share and will expire
on the five and one-half year anniversary of the date of issuance.
H.C. Wainwright & Co., LLC is acting as the Company’s exclusive placement agent in connection with
the offerings under the Purchase Agreement and will receive an aggregate cash fee equal to 7.0% of the gross proceeds received
by the Company from the offerings, an aggregate of up to $75,000 for certain expenses, $10,000 for clearing expenses and warrants
to purchase our Common Stock in an amount equal to 7% of our Shares sold to the Purchasers in the offerings, or 165,149 shares
of Common Stock , on substantially the same terms as the Warrants, except that the Placement Agent Warrants shall have an initial
exercise price of $1.00 per share, shall be exercisable commencing on the later of (i) six months of the issuance date or (ii)
the date on which the Company increases the number of its authorized shares, and shall expire on April 15, 2024.