NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019 AND 2018
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Recycling Energy Corporation (the “Company” or “CREG”) is incorporated in Nevada state. The Company, through
its subsidiaries, provides energy saving solutions and services, including selling and leasing energy saving systems and equipment
to customers, and project investment in the Peoples Republic of China (“PRC”).
The
Company’s organizational chart as of December 31, 2019 is as follows:
Erdos
TCH – Joint Venture
On
April 14, 2009, the Company formed a joint venture (the “JV”) with Erdos Metallurgy Co., Ltd. (“Erdos”)
to recycle waste heat from Erdos’ metal refining plants to generate power and steam to be sold back to Erdos. The name of
the JV was Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd. (“Erdos TCH”) with a term of 20 years. Total
investment for the project was estimated at $79 million (RMB 500 million) with an initial investment of $17.55 million (RMB 120
million). Erdos contributed 7% of the total investment of the project, and Xi’an TCH Energy Technology Co., Ltd. (“Xi’an
TCH”) contributed 93%. 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. 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 started to charge
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. Since May 2019, Erdos TCH has ceased its operations
due to renovations and furnace safety upgrades of Erdos, and the Company expects the resumption of operations in July 2020. During
this period, Erdos will compensate Erdos TCH RMB 1 million ($145,460) per month, until operations resume.
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 there have not been any operations since then nor has any registered capital contribution been 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 87,666 shares (post-reverse stock split) of common stock of the Company at
$187.0 per share (post-reverse stock price). 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.
On
September 29, 2019, Xi’an TCH entered into a Termination Agreement of the Lease Agreement of the Biomass Power Generation
Project (the “Termination Agreement”) with Pucheng.
Pucheng
failed to pay fees it owed to Xi’an TCH for leasing two biomass power generation systems from Xi’an TCH, due to its
long suspension of production resulting from the significant reduction of raw material supplies for its biomass power generation
operation in Pucheng County, which caused the biomass power generation project to no longer be suitable. Pursuant to the Termination
Agreement, the parties agreed that: (i) Pucheng shall pay outstanding lease fees of RMB 97.6 million ($14 million) owed as of
December 31, 2018 to Xi’an TCH before January 15, 2020; (ii) Xi’an TCH will waive the lease fees owed after January
1, 2019; (iii) Xi’an TCH will not return RMB 3.8 million ($542,857) in cash deposits paid by Pucheng; (iv) Xi’an TCH
will transfer the Project to Pucheng at no additional cost after receiving RMB 97.6 million ($14 million) from Pucheng, and the
original lease agreement between the parties will be formally terminated; and (v) if Pucheng fails to pay off RMB 97.6 million
($14 million) to Xi’an TCH before January 15, 2020, Xi’an TCH will still hold ownership of the Project and the original
lease agreement shall still be valid. The Company recorded an additional $2.67 million bad debt expense for Pucheng during the
year ended December 31, 2019. Xi’an TCH received RMB 97.6 million ($14 million) in full on January 14, 2020 and the ownership
of the system was transferred.
Shenqiu
Yuneng Biomass Power Generation Projects
On
September 28, 2011, Xi’an TCH and Shenqiu 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 of $286,000
(RMB 1,800,000) for 11 years.
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.
As
repayment for a loan made by Xi’an Zhonghong to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”)
on January 10, 2019 (see further discussion in Note 10); on January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong
Bai (or “Mr. Bai”), a resident of China, entered into a Projects Transfer Agreement (the “Agreement”),
pursuant to which Xi’an TCH transferred two BMGP in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for
RMB 127,066,000 ($18.55 million). As consideration for the transfer of the Shenqiu Phase I and II Projects to Mr. Bai (Note 10),
Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng Enterprises Management Consulting Co.
Ltd. (“Xi’an Hanneng”) to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”)
as repayment for a loan made by Xi’an Zhonghong to HYREF on January 10, 2019. The transfer of the projects was completed
on February 15, 2019. The Company recorded $208,359 loss from the transfer during the year ended December 31, 2019. Xi’an
Hanneng was expected to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd for the repayment of Shenqiu system and
Huayu system. However, Xi’an Hanneng was not able to obtain all the Huaxin shares due to halted trading of Huaxin stock
by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr. Bai and all the related parties therefore agreed to have
Mr. Bai instead paying in cash for the transfer price of Shenqiu (see Note 10 for detail).
The
Fund Management Company
On
June 25, 2013, Xi’an TCH and Hongyuan Huifu Venture Capital Co. Ltd. (“Hongyuan Huifu”) 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 held 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) Hongyuan Huifu, which made an initial
capital contribution of RMB 100 million ($16.67 million) to the HYREF Fund and is an ordinary limited partner; and (3) the Company’s
wholly-owned subsidiary, Xi’an TCH, which made an initial capital contribution of RMB 75 million ($12.5 million) to the
HYREF Fund and is a secondary limited partner. In addition, Xi’an TCH and Hongyuan Huifu 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. However, the HYREF Fund’s partnership will not terminate until the HYREF loan is fully repaid and the buy-back period
is over pursuant to the Buy-back Agreement entered on December 29, 2018 (see Note 10). 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 to invest 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”) Waste Heat Power Generation (“WHPG”) stations with Jiangsu Tianyu Energy and Chemical Group Co.,
Ltd. (“Tianyu”) and one CDQ WHPG station with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”).
On
December 29, 2018, Xi’an TCH entered into a Share Transfer Agreement with Hongyuan Huifu, pursuant to which Xi’an
TCH transferred its 40% ownership in the Fund Management Company to Hongyuan Huifu for RMB 3,453,867 ($0.53 million). The transfer
was completed January 22, 2019. The Company recorded approximately $46,500 loss from the sale of a 40% equity interest in Fund
Management Company. 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 transferred its 10% ownership in Xi’an Zhonghong to Shanghai TCH for RMB 3 million ($0.44 million).
The transfer was completed on January 22, 2019. The Company owns 100% of Xi’an Zhonghong after the transaction.
On
July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power
Generation Project) with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”). The parties entered into a supplement
agreement on July 26, 2013. Pursuant to these agreements, Zhonghong will design, build and maintain a 25 MW CDQ system and a CDQ
WHPG system to supply power to Chengli, and Chengli will pay energy saving fees (the “Chengli Project”).
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station as the repayment
for the loan of RMB 188,639,400 ($27.54 million) to HYREF. Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai
also agreed to buy back the CDQ WHPG Station when conditions under the Buy Back Agreement are met (see Note 10). The transfer
of the Station was completed January 22, 2019, the Company recorded $624,133 loss from this transfer. Since the original terms
of Buy Back Agreement are still valid, the Buy Back possibility is uncertain; therefore, the assets of Chengli CDQ WHPG station,
and the corresponding loan principal and interest, cannot be derecognized due to the existence of Buy Back clauses (see Note 6
for detail).
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 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 2020. The Xuzhou Huayu Project has been on hold
due to a conflict between Xuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues.
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the
“Agreement”), pursuant to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located
in Xuzhou City for Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million).
Mr. Bai agreed that as consideration for the transfer of the Xuzhou Huayu Project to him (Note 10), he would transfer all the
equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan made by Xi’an Zhonghong
to HYREF. The transfer of the project was completed on February 15, 2019. The Company recorded $397,033 loss from this transfer
during the year ended December 31, 2019. On January 10, 2019, Mr. Chonggong Bai transferred all the equity shares of his
wholly owned company, Xi’an Hanneng, to HYREF as repayment for the loan. Xi’an Hanneng was expected to own 47,150,000
shares of Xi’an Huaxin New Energy Co., Ltd for the repayment of Huayu system and Shenqiu system. As of September 30, 2019,
Xi’an Hanneng already owned 29,948,000 shares of Huaxin, but was not able to obtain the remaining 17,202,000 shares due
to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report. On December 20, 2019, Mr. Bai and all the related
parties agreed to have Mr. Bai instead pay in cash for the transfer price of Huayu (see Note 10 for detail).
On
January 10, 2020, Zhonghong, Tianyu and Huaxin signed a transfer agreement to transfer all assets under construction and related
rights and interests of Xuzhou Tian’an Project to Tianyu for RMB 170 million including VAT ($24.37 million) in three installment
payments. The 1st installment payment of RMB 50 million ($7.17 million) to be paid within 20 working days after the contract is
signed. The 2nd installment payment of RMB 50 million ($7.17 million) is to be paid within 20 working days after completion of
the project construction but no later than July 31, 2020. The final installment payment of RMB 70 million ($10.03 million) is
to be paid before December 31, 2020. On March 11, 2020, the Company received the 1st installment payment.
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 was to design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG
system and sell the power to Zhongtai, and Xi’an TCH is also to 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 was expected to be 18 months from the date when conditions are ready for construction to begin.
Zhongtai is to 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 obligations under the EPC Contract to Zhongtai. As consideration for the transfer of
the Project, Zhongtai agreed to pay to Xi’an TCH RMB 167,360,000 ($25.77 million) including (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 was 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. As of December 31, 2019, the Company
had gross receivable from Zhongtai for $10.03 million (with bad debt allowance of $5.73 million). In January 2020, Zhongtai paid
RMB 10 million ($1.43 million); in March 2020, Zhongtai paid RMB 20 million ($2.87 million). Zhongtai is committed to pay in full
the remaining balance of RMB 40 million ($5.73 million) no later than the end of 2020.
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 nor has any capital contribution been made as of the date of this
report.
Formation
of Yinghua
On
February 11, 2015, the Company incorporated a 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 nor has any capital contribution been made as of the date of this report.
Other
Events
On
September 9, 2019, the Company entered into a letter of intent to acquire a controlling interest in Xi’an Yineng Zhihui
Technology Co., Ltd. (“YNZH”), a next generation energy storage solution provider in China. YNZH is a leading comprehensive
high-tech intelligent energy service company integrated with energy efficiency improvement and storage management in China. The
energy efficiency management is to fully use big data cloud computing technology, effectively adopt the combination of the mature
international and domestic clean energy technologies to make the customers’ energy management more efficient, more economical,
more secure and more scientific. The terms of this proposed transaction are currently being negotiated.
On
April 13, 2020, the Company filed a certificate of change (“Certificate of Change”) with the Secretary of State of
the State of Nevada, pursuant to which, on April 13, 2020, the Company effected a reverse stock split of its common stock, $0.001
per share at a rate of 1-for-10, accompanied by a corresponding decrease in the Company’s issued and outstanding shares
of common stock (the “Reverse Stock Split”). The consolidated financial statements as of December 31, 2019 and 2018,
and for the years ended December 31, 2019 and 2018 were retroactively restated to reflect this reverse stock split.
In
December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared
the outbreak to constitute a “Public Health Emergency of International Concern.” This pandemic, which continues to
spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries
as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. Therefore,
the Company expects this matter to negatively impact its operating results even though China is opening up most of the cities
and industries as of this report date. However, the related financial impact cannot be reasonably estimated at this time.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements (“CFS”) were prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”).
The
CFS include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances
were eliminated in consolidation.
Basis
of Consolidation
The
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, 1) Erdos TCH Energy Saving
Development Co., Ltd (“Erdos TCH”), 100% owned by Xi’an TCH (See note 1), 2) Zhonghong, 90% owned by Xi’an
TCH and 10% owned by Shanghai TCH, and 3) Zhongxun, 100% owned by Xi’an TCH. Substantially all the Company’s revenues
are derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all the Company’s consolidated
assets and liabilities as of December 31, 2019. All significant inter-company accounts and transactions were eliminated in consolidation.
Uses
and Sources of Liquidity
For
the years ended December 31, 2019 and 2018, the Company had a net loss of $8.77 million and $66.00 million, respectively. The
Company has an accumulated deficit of $46.45 million as of December 31, 2019. The Company is in the process of transforming and
expanding into an energy storage integrated solution provider. The Company plans to pursue disciplined and targeted expansion
strategies for market areas the Company currently does not serve. The Company actively seeks and explores opportunities to apply
energy storage technologies to new industries or segments with high growth potential, including industrial and commercial complexes,
large scale photovoltaic (PV) and wind power stations, remote islands without electricity, and smart energy cities with
multi-energy supplies.
The historical operating results indicate
substantial doubt exists related to the Company’s ability to continue as a going concern. However, the Company had $16.22
million cash on hand at December 31, 2019 and has collected RMB 327.60 million ($46.96 million) in 2020 up to this report date,
this also satisfies the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. The
Company believes that the actions discussed above are probable of occurring and the occurrence, as well as the cash flow discussed,
mitigate the substantial doubt raised by its historical operating results.
Management
also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While
the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds
on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going
concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and
its ability to raise additional funds by way of a public or private offering, or debt financing including bank loans.
Use
of Estimates
In
preparing these CFS in accordance with US GAAP, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities in the balance sheets as well as revenues and expenses during the period reported. Actual results may differ
from these estimates. On an on-going basis, management evaluates their estimates, including those related to allowances for
bad debt and inventory obsolescence, impairment loss on fixed assets and construction in progress, income taxes, and contingencies
and litigation. Management bases their estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other resources.
Revenue
Recognition
|
A)
|
Sales-type
Leasing and Related Revenue Recognition
|
On January 1, 2019, the Company adopted
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using
the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application.
Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while
prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic
840. (See Operating lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue
recognition fall under ASC 842. During 2019 and 2018, the Company did not sell any new power generating projects.
The
Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically
transfers legal ownership of the waste energy recycling power generating projects to its customers at the end of the lease.
Prior to January 1, 2019, the investment in these projects was recorded as investment in sales-type leases in accordance with
ASC Topic 840, “Leases,” and its various amendments and interpretations.
The Company finances construction of
waste energy recycling power generating projects. The sales and cost of sales are recognized at the inception of the lease,
which is when the control is transferred to the lessee. The Company accounts for the transfer of control as a sales type
lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded when collection of
payments is probable. This is in accordance with the revenue recognition principle in ASC 606 - Revenue from contracts with
customers. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less unearned
interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as
the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value
of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and
contingent rentals, if any. Unearned interest 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.
|
B)
|
Contingent
Rental Income
|
The
Company records income from actual electricity generated of each project in the period the income is earned, which is when the
electricity is generated. Contingent rent is not part of minimum lease payments.
Operating Leases
On January 1, 2019, the Company adopted
Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date
of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented
under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with its historical
accounting under Topic 840. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record
a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A
modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available.
The
Company elected the package of practical expedients permitted under the transition guidance, which allowed it to carry forward
its historical lease classification, its assessment on whether a contract was or contains a lease, and its initial direct costs
for any leases that existed prior to January 1, 2019. The Company also elected to combine its lease and non-lease components and
to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in
the consolidated statements of income on a straight-line basis over the lease term.
The
company leased an office in Xi’an, China as the Company’s headquarter; upon adoption, the Company recognized total
Right of Use Asset (“ROU”) of $116,917, with corresponding liabilities of $116,917 on the consolidated balance sheets.
The ROU assets include adjustments for prepayments and accrued lease payments. The adoption did not impact its beginning retained
earnings, or its prior year consolidated statements of income and statements of cash flows. At December 31, 2019, the ROU was
$54,078.
Under
Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement
date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only
payments that are fixed and determinable at the time of commencement. As most of its leases do not provide an implicit rate, it
uses its incremental borrowing rate based on the information available at commencement date in determining the present value of
lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit
rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives
received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that
it will exercise such options.
Operating
leases are included in operating lease right-of-use assets and operating lease liabilities (current and non-current), on the consolidated
balance sheets.
Cash
Cash
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
The Company’s accounts receivable
arise from sale of systems and sale of electricity of Erdos. The Company does not expect to collect receivables more than one
year from the time of sale.
The
Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
As
of December 31, 2019, the Company had gross accounts receivable of $48.06 million; of which, $35.42 million was for transferring
the ownership of Huayu and Shenqiu Phase I and II systems to Mr. Bai; $10.03 million was from the sales of CDQ and a CDQ WHPG
system to Zhongtai, and $2.61 million accounts receivable of Erdos TCH for electricity sold. 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, 2019, the Company had bad debt allowance of $5,733,781 for Zhongtai and $261,430
for Erdos TCH due to not making the payments as scheduled. As of December 31, 2018, the Company had bad debt allowance of $3,496,911
for Zhongtai due to not making the payments as scheduled.
|
|
2019
|
|
|
2018
|
|
Xuzhou Zhongtai Project
|
|
|
10,034,116
|
|
|
|
11,656,371
|
|
Bai Chonggong (for Shenqiu and Huayu projects)
|
|
|
35,415,556
|
|
|
|
—
|
|
Receivable of electricity sales of Erdos
|
|
|
2,614,299
|
|
|
|
3,595,791
|
|
Total accounts receivable
|
|
|
48,063,971
|
|
|
|
15,252,162
|
|
Bad debt allowance
|
|
|
(5,995,210
|
)
|
|
|
(3,496,911
|
)
|
Accounts receivable, net
|
|
|
42,068,761
|
|
|
|
11,755,251
|
|
Interest
Receivable on Sales Type Leases
As of December 31, 2019, the interest
receivable on sales type leases was $5,245,244, mainly from recognized but not yet collected interest income for the Pucheng systems.
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. From 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 because collectability is not probable.
Investment
in sales-type leases, net
As
of December 31, 2019 and 2018, the Company had net investment in sales-type leases of $8,287,560 and $24,962,056, respectively.
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, 2019, the Company had bad debt allowance for net
investment receivable on sales-type leases of $24,416,441 for the Pucheng system. 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 $22,071,360 for the Pucheng
systems) due to lessees’ tight working capital and continuous delay in making the payment. Xi’an TCH received RMB
97.6 million ($14 million) in full for Pucheng system on January 14, 2020 and the ownership of the system was transferred.
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 of construction in progress of Xuzhou Tian’an of $876,660 for the year ended December
31, 2019, which is the difference between the book value and disposal price of the asset. The Company recorded asset impairment
of $28,429,789 for three projects (see below) for the year ended December 31, 2018.
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 the fair value (“FV”) of the project. The Company compared the carrying value and FV of the Huayu project,
and recorded asset impairment of $6,528,120 for the project for the year ended December 31, 2018.
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement 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 FV of the system. The Company compared the carrying
value and FV of the Chengli system, and recorded asset impairment of $8,124,968 for the system for the year ended December 31,
2018.
As
of December 31, 2018, the progress of the Xuzhou Tian’an project is slow due to strict environmental protection policies.
The Company estimated the FV of the Xuzhou Tian’an project to be around RMB 172,250,000 ($25.58 million) at December 31,
2018. The Company compared the carrying value and FV of the Tian’an Project, and recorded asset impairment of $13,776,701
for the project for the year ended December 31, 2018. The Company further recorded asset impairment of construction in progress
of Xuzhou Tian’an of $876,660 for the year ended December 31, 2019.
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 FASB 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 FASB 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 21%.
The
Tax Cuts and Jobs Act of 2017 (the “Act”) 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, 2019, the Company calculated its best estimate of the impact of the GILTI in
its income tax provision in accordance with the Act and guidance available as of the date of this filing.
To
the extent that portions of our 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, we may be able to claim foreign tax credits to offset our U.S. income tax liabilities.
Any remaining liabilities are accrued in our consolidated statements of comprehensive income and estimated tax payments are made
when required by U.S. law.
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. There is no NCI for the year ended December 31, 2019 (see Note 15 for detail
of purchase of the NCI in 2019).
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 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 FASB ASC 480, “Distinguishing
Liabilities from Equity,” and ASC 815, “Derivatives and Hedging.”
As
of December 31, 2019 and 2018, 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.
For
the years ended December 31, 2019 and 2018, the basic and diluted loss per share were the same due to outstanding options and
warrants being anti-dilutive as a result of the Company’s net loss. For the year ended December 31, 2019, 406,764 shares
(post-reverse stock split) purchasable under warrants and options were excluded from the EPS calculation, as their effects were
anti-dilutive. For the year ended December 31, 2018, 213,304 shares (post-reverse stock split) purchasable under warrants and
options were excluded from the EPS calculation, as their effects were anti-dilutive.
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.
Reclassification
Certain
prior period balance sheet accounts were reclassified for the purpose of consistency with the current year’s presentation.
New
Accounting Pronouncements
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, 2022. 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.
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 FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3
instruments in the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures.
The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements
or disclosures.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting
for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance
to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply
certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective
basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company
is evaluating the impact this update will have on its financial statements.
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.
INVESTMENT IN SALES-TYPE LEASES, NET
Under
sales-type leases, in 2019 and 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) BMPG systems to Shenqiu Phase
II (9.5-year term). On February 15, 2019, Xi’an TCH transferred the Shenqiu Phase I and II Projects to Mr. Bai for RMB 127,066,000
($18.55 million). The components of the net investment in sales-type leases as of December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Total future minimum lease payments receivable
|
|
$
|
56,477,739
|
|
|
$
|
88,661,266
|
|
Less: executory cost
|
|
|
(3,623,100
|
)
|
|
|
(5,687,704
|
)
|
Less: unearned interest
|
|
|
(14,905,393
|
)
|
|
|
(19,398,707
|
)
|
Less: realized interest income but not yet received
|
|
|
(5,245,244
|
)
|
|
|
(9,336,141
|
)
|
Less: allowance for net investment receivable
|
|
|
(24,416,442
|
)
|
|
|
(29,276,658
|
)
|
Investment in sales-type leases, net
|
|
|
8,287,560
|
|
|
|
24,962,056
|
|
Current portion
|
|
|
-
|
|
|
|
-
|
|
Noncurrent portion
|
|
$
|
8,287,560
|
|
|
$
|
24,962,056
|
|
As
of December 31, 2019, the gross future minimum rentals not including bad debt allowances to be received on non-cancelable sales-type
leases by years were as follows:
2020
|
|
$
|
27,063,444
|
|
2021
|
|
|
6,536,510
|
|
2022
|
|
|
6,536,510
|
|
2023
|
|
|
6,536,510
|
|
2024
|
|
|
6,536,510
|
|
Thereafter
|
|
|
3,268,255
|
|
Total
|
|
$
|
56,477,739
|
|
4.
OTHER RECEIVABLES
As
of December 31, 2019, other receivables mainly consisted of (i) advances to third parties of $7,167, bearing no interest, payable
upon demand, and (i) tax and maintenance cost receivable of $1,001,527 for Xi’an TCH. 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 (ii) tax and maintenance
cost receivable of $1,528,368 for Xi’an TCH. Tax receivable is VAT receivable from customers and payable to City government
on collection.
5.
LONG TERM INVESTMENT
On
June 25, 2013, Xi’an TCH with Hongyuan Huifu Venture Capital Co. Ltd (“Hongyuan Huifu”) 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 had a 40% ownership interest in the Fund Management Company.
Voting rights and dividend rights are allocated between Hongyuan Huifu and Xi’an TCH at 80% and 20%, respectively. The Company
accounted for this investment using the equity method. The Company recorded $0 and $469 equity-based investment income during
the years ended December 31, 2019 and 2018, respectively. 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 RMB 3,453,867 ($0.53 million). The transfer was completed on January 22, 2019. The Company had $46,461 loss
from the sale of a 40% equity interest in Fund Management Company during the year ended December 31, 2019.
On
July 18, 2013, the HYREF Fund was established as a limited liability partnership in Beijing. Pursuant to the Partnership Agreement,
the HYREF Fund had 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) Hongyuan Huifu,
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 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. However,
the HYREF Fund’s partnership will not terminate until the HYREF loan is fully repaid and the buy-back period is over pursuant
to the Buy-Back Agreement entered on December 29, 2018 (see Note 10). 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.
6.
PROPERTY AND EQUIPMENT AND CONSTRUCTION IN PROGRESS
Property
and Equipment
As
of December 31, 2019 and 2018, the Company had net property and equipment (after impairment loss of $8.12 million recorded in
2018) of approximately $27.04 million and $27.50 million, respectively, which was for the Chengli project.
The
Chengli project finished construction, and was transferred to the Company’s fixed assets at a cost of $35.24 million (without
impairment loss) and ready to be put into operation as of December 31, 2018. On January 22, 2019, Xi’an Zhonghong completed
the transfer of Chengli CDQ WHPG project as the partial repayment for the loan of RMB 188,639,400 ($27.54 million) to HYREF (see
Note 10). However, because the loan was not deemed repaid due to the buyback right (See Note 10 for detail), the Company kept
the Chengli project in its books as fixed assets for accounting purposes as of December 31, 2019.
Construction
in Progress
Construction in progress was for constructing
power generation systems. The Xuzhou Huayu project was sold in February 2019 for RMB 120,000,000 ($17.52 million). The Company
recorded impairment allowance of RMB 43,199,340 ($6.29 million) for 2018 and as of December 31, 2018 on Xuzhou Huayu. In 2018,
the progress of the Xuzhou Tian’an project was slow due to strict environmental protection policies. The Company estimated
the FV of the Xuzhou Tian’an project to be RMB 172,250,000.00 ($25.58 million) at December 31, 2018. The Company compared
the carrying value and FV of the Tian’an Project, and recorded asset impairment of $13,512,592 for the project for the year
ended December 31, 2018. The Company recorded additional RMB 6,047,602 ($876,660) asset impairment for Tian’an Project in
2019, which is the difference between the sale price and the carrying value as of December 31, 2019. As of December 31, 2019 and
2018, the Company’s construction in progress included:
|
|
2019
|
|
|
2018
|
|
Xuzhou Huayu
|
|
$
|
-
|
|
|
$
|
23,778,899
|
|
Xuzhou Tian’an
|
|
|
37,759,277
|
|
|
|
38,380,969
|
|
Less: assets impairment allowance
|
|
|
(13,935,075
|
)
|
|
|
(19,577,691
|
)
|
Total
|
|
$
|
23,824,202
|
|
|
$
|
42,582,177
|
|
As
of December 31, 2019, the Company was committed to pay an additional $3.98 million for the Xuzhou Tian’an project. The construction
of the Xuzhou Tian’an Project is anticipated to be completed by the second quarter of 2020.
On
January 10, 2020, Zhonghong, Tianyu and Huaxin signed a transfer agreement to transfer all assets under construction and related
rights and interests of Xuzhou Tian’an Project to Tianyu for RMB 170 million including VAT ($24.37 million) three installment
payments. The 1st installment payment of RMB 50 million ($7.17 million) to be paid within 20 working days after the contract is
signed. The 2nd installment payment of RMB 50 million ($7.17 million) is to be paid within 20 working days after completion of
the project construction but no later than July 31, 2020. The final installment payment of RMB 70 million ($10.03 million) is
to be paid before December 31, 2020. On March 11, 2020, the Company received the 1st installment payment.
7.
TAXES PAYABLE
Taxes
payable consisted of the following as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Income tax – current
|
|
$
|
2,118,432
|
|
|
$
|
1,718,051
|
|
Value-added tax
|
|
|
1,708,298
|
|
|
|
1,666,695
|
|
Other taxes
|
|
|
260,912
|
|
|
|
251,813
|
|
Total – current
|
|
|
4,087,642
|
|
|
|
3,636,559
|
|
Income tax – noncurrent
|
|
$
|
5,782,625
|
|
|
$
|
6,390,625
|
|
Income
tax payable included $7.61 million ($1.83 million included in current above and $5.78 million noncurrent) from recording the estimated
one-time transition tax on post-1986 foreign unremitted earnings under the Tax Cut and Jobs Act signed on December 22, 2017. An
election is available for the U.S. shareholders of a foreign company to pay the tax liability in installments over a period of
eight years with 8% of net tax liability in the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the
eighth year. The Company made such an election.
8.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Employee training, labor union expenditure and social insurance payable
|
|
$
|
843,807
|
|
|
$
|
844,997
|
|
Consulting, auditing, and legal expenses
|
|
|
40,602
|
|
|
|
488,052
|
|
Accrued payroll and welfare
|
|
|
254,882
|
|
|
|
261,152
|
|
Other
|
|
|
45,460
|
|
|
|
23,796
|
|
Total
|
|
$
|
1,184,751
|
|
|
$
|
1,617,997
|
|
9.
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, 2019 and 2018, deferred tax liability consisted of the following:
|
|
2019
|
|
|
2018
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
189,050
|
|
|
$
|
186,779
|
|
Interest income in sales-type leases on cash basis
|
|
|
853,265
|
|
|
|
658,307
|
|
Depreciation of fixed assets
|
|
|
2,938,605
|
|
|
|
6,176,064
|
|
Assets impairment loss
|
|
|
7,537,556
|
|
|
|
15,003,497
|
|
Capitalized interest on CIP
|
|
|
-
|
|
|
|
2,531,120
|
|
US NOL
|
|
|
3,246,655
|
|
|
|
3,114,083
|
|
PRC NOL
|
|
|
10,424,558
|
|
|
|
1,617,861
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
(6,685,021
|
)
|
|
|
(10,974,998
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
18,504,668
|
|
|
|
18,312,713
|
|
Less: valuation allowance for deferred tax assets
|
|
|
(18,504,668
|
)
|
|
|
(21,353,059
|
)
|
Non-current deferred tax liabilities, net
|
|
$
|
-
|
|
|
$
|
(3,040,346
|
)
|
10.
LOANS PAYABLE
Entrusted
Loan Payable (HYREF Loan)
The
HYREF Fund (Beijing Hongyuan Recycling Energy Investment Center, LLP) was established in July 2013 with a total fund size of RMB
460 million ($77 million) invested 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) original loan balance 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 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 ($4.39 million) capital contribution made by Xi’an TCH in Zhonghong. Repayment of the loan (principal and interest)
was also jointly and severally guaranteed by Xi’an TCH and the Chairman and CEO of the Company. In the fourth quarter of
2015, three power stations of Erdos TCH were pledged to Industrial Bank as an additional guarantee for the loan 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
term of this loan was 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), of which the Company paid RMB 50 million ($7.54 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. 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 had 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, on December 29, 2018, the Company worked out with the lender an
alternative repayment proposal as described below. As of December 31, 2019, the interest payable for this loan was $8.20 million
and the outstanding balance for this loan was $20.77 million. 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. For the year ended December 31, 2019, the Company recorded interest expense of $1.72 million
on this loan.
Repayment
of HYREF loan
|
1.
|
Transfer
of Chengli project as partial repayment
|
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station
Fixed Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station as the repayment
for the loan of 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. Due to the Buy Back
agreement, the loan was not deemed repaid, the Company kept the Chengli project in its books as fixed assets as of December 31,
2019.
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 was 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., 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.
Due
to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report, on December 19, 2019, Xi’an TCH, Xi’an
Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding capital equity of Xi’an
Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back price was RMB 261,727,506 ($37.52 million)
including accrued interest of RMB 14,661,506 ($2.10 million), and was paid in full by Xi’an TCH.
|
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 transferred 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 owed RMB 3,453,867 ($502,400) to Hongyuan Huifu, and
Xi’an TCH owed 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 RMB 3 million ($430,034), and was recorded as long term payable
in the Company’s balance sheet. On January 22, 2019, Hongyuan Huifu completed the transfer of its 10% ownership in Xi’an
Zhonghong to Shanghai TCH, Xi’an Zhongong then became a 100% subsidiary of Shanghai TCH. The Company did not record
any gain or loss for this purchase as the controlling interest did not change (see Note 15).
|
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 entered into a Projects Transfer Agreement, pursuant
to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking
Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB 120,000,000 ($17.52 million) and Xi’an TCH 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, to HYREF
as repayment for the RMB 247,066,000 ($36.07 million) loan made by Xi’an Zhonghong to HYREF as consideration for the transfer
of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
On
February 15, 2019, Xi’an Zhonghong completed the transfer of the Xuzhou Huayu Project and Xi’an TCH completed the
transfer of Shenqiu Phase I and II Projects to Mr. Bai, and on January 10, 2019, Mr. Bai transferred all the equity shares of
his wholly owned company, Xi’an Hanneng, to HYREF as repayment of Xi’an Zhonghong’s loan to HYREF as consideration
for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
Xi’an
Hanneng is a holding company and was supposed to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”),
so that HYREF will indirectly receive and own such shares of Xi’an Huaxin as the repayment for the loan of Zhonghong. Xi’an
Hanneng already owned 29,948,000 shares of Huaxin; however, Xi’an Hanneng was not able to obtain the remaining 17,202,000
shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report.
On
December 20, 2019, Mr. Bai, Xi’an TCH and Xi’an Zhonghong agreed to have Mr. Bai repay the Company in cash for the
transfer price of Xuzhou Huayu and Shenqiu in five installment payments. The 1st payment of RMB 50 million ($7.17 million)
is due on January 5, 2020, the 2nd payment of RMB 50 million ($7.17 million) was due on February 5, 2020, the 3rd
payment of RMB 50 million ($7.17 million) was due on April 5, 2020, the 4th payment of RMB 50 million ($7.17
million) was due on June 30, 2020, and the final payment of RMB 47,066,000 ($6.75 million) was due on September 30, 2020. As of
this report date, the Company has already received RMB 150 million ($21.51 million).
|
6.
|
The
lender agreed to extend the repayment of RMB 77.00 million ($11.04 million) to July 8,
2023; of which, RMB 75.00 million ($10.81 million) was Xi’an TCH’s investment
into the HYREF fund as a secondary limited partner (Note 5), and 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.
|
A
reconciliation of repayment of HYREF loan (entrusted loan) by three Projects at December 31, 2019 was as follows:
Transfer price for Chengli Project
|
|
$
|
27,040,423
|
|
|
Entrusted loan payable at December 31, 2019, net with Xi’an TCH investment
in entrusted loan
|
|
$
|
20,766,903
|
|
Transfer price for Xuzhou Huayu Project
|
|
|
17,201,342
|
|
|
Interest payable on entrusted loan at December 31, 2019
|
|
|
8,200,044
|
|
Transfer price for Shenqiu Phase
I and II Projects
|
|
|
18,214,214
|
|
|
Add back: Xi’an TCH investment in entrusted loan
|
|
|
10,750,839
|
|
|
|
|
|
|
|
Less: interest accrued from September 20, 2018 to December 31, 2019 (cut-off date for interest
calculation for repayment was September 20, 2018)
|
|
|
(1,639,835
|
)
|
|
|
|
|
|
|
Less: portion of loan with repayment due date extended to year 2023
|
|
|
(11,037,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: interest & penalty repaid by Xi’an TCH
|
|
|
8,592,080
|
|
|
|
|
|
|
|
Add back: loan principle repaid by Xi’an TCH
|
|
|
26,823,476
|
|
|
|
$
|
62,455,979
|
|
|
|
|
$
|
62,455,979
|
|
11.
REFUNDABLE DEPOSITS FROM CUSTOMERS FOR SYSTEMS LEASING
As
of December 31, 2019 and 2018, the balance of refundable deposits from customers for systems leasing was $544,709 (for Pucheng
systems) and $1,034,503 (for Pucheng and Shenqiu systems), respectively.
12.
RELATED PARTY TRANSACTIONS
On December 29, 2018, our Chairman of the Board
and CEO, Guohua Ku, entered into a Buy-Back Agreement with the following parties: Xi’an TCH, Xi’an Zhonghong, HYREF,
Chonggong Bai and Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”). Pursuant
to the terms of the Buy Back Agreement, Mr. Ku, together with Xi’an TCH, Xi’an Zhonghong, and Chonggong Bai, as Buyers,
jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by
Chonggong Bai, and a CDQ WHPG station in Boxing County which was transferred to HYREF by Xi’an Zhonghong. (See Notes 5 and
10). Pursuant to the terms of the Buy-Back agreement, 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., 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.
As
of December 31,2019 and 2018, the Company had $41,174 and $41,168, respectively, in advances from the Company’s management,
which bear no interest, are unsecured, and are payable upon demand.
13.
NOTE PAYABLES, NET
Convertible
Note in July 2018
On
July 11, 2018, the Company entered into a Securities Purchase Agreement with a Purchaser (Iliad Research and Trading, L.P), 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 (in the
event the Market Capitalization falls below the Minimum Market Capitalization (MMC) at any time, then in such event the Lender
Conversion Price for all Lender Conversions occurring after the first date of such occurrence shall equal the lower of the Lender
Conversion Price and the Market Price as of any applicable date of Conversion. MMC is defined as $8 million). 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.
During the first quarter of 2019, the
Company amortized OID of $38,151 and loan issuing cost of $15,260, and recorded $10,446 interest expense for this convertible
note. From January 16, 2019 through March 6, 2019, the investors converted the convertible note with principal of $1,070,000 and
accrued interest of $51,018 into 1,851,946 common shares (pre-reverse stock split) at conversion prices from $0.86 to $1.42, and
the Company recorded $893,958 interest expense due to change in the conversion price, which was the difference between the market
price and the conversion rate as of the conversion date, which was mutually agreed by the lender and borrower.
Convertible
Notes / Promissory Notes in January and February 2019
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 of $1,050,000. The Purchaser purchased
the Note with an original issue discount of $50,000. The Note bears interest at 8%. 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 as discussed in the July 2018 Note above. The conversion feature did not require
bifurcation and derivative accounting as the conversion price was greater than the market price of the Company common shares,
there was no beneficial conversion feature to recognize.
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 of $1,050,000. The Purchaser purchased the Note with an original issue discount of $50,000. The Note bears interest at 8%.
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 as discussed above in the July 2018 Note.
The conversion feature did not require bifurcation and derivative accounting and as the conversion price was greater than the
market value of the Company common shares, there was no beneficial conversion feature to recognize.
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 notes (the “Original Notes”) with two new promissory notes (the “Exchange
Notes”). Upon execution of the agreement, the notes holder surrendered the Convertible Notes to the Company and the Company
issued to the holder the Exchange Notes. Upon surrender, the two Convertible Notes were cancelled and the remaining amount owed
to Holder hereafter be evidenced solely by the Exchange Notes ($1,173,480 and $ 1,165,379 for the January and February 2019 notes,
respectively). 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 8% 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 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. The exchange of the Convertible Notes with Promissory Notes
did not cause substantially different terms, and did not meet the conditions described in ASC 405-20-40-1, and therefore was accounted
for as a modification and not an extinguishment; accordingly, the Company did not recognize any gain or loss for the exchange
of the notes under ASC 470-50-40-8.
During
the year ended December 31, 2019, the Company amortized OID of $43,750 and recorded $368,362 interest expense (including $106,680
and $105,944 in exchange fees, respectively) for these two notes.
As
a result of default in the redemption request by the lender made on August 1, 2019, the Company and the lender entered into a
forbearance agreement in which the lender agreed not to enforce its rights under the agreement and agreed not to make any Redemptions
pursuant to the Section 4 of the Note before October 1, 2019. Under the term of the forbearance agreement, in the event Lender
delivers after October 1, 2019 a Redemption Notice to Borrower and the Redemption Amount set forth therein is not paid in cash
to Lender within three Trading Days, then the applicable Redemption Amount shall be increased by 25% (the “First Adjustment,”
and such increase to the Redemption Amount, the “First Adjusted Redemption Amount”). In the event the First Adjusted
Redemption Amount is not paid within three Trading Days after the date of First Adjustment, then the First Adjusted Redemption
Amount shall be increased in accordance with the following formula: $0.50 divided by the lowest Closing Trade Price of the Common
Stock during the 20 Trading Days prior to the date of the Second Adjustment and the resulting quotient multiplied by the First
Adjusted Redemption Amount (the “Second Adjustment,” and such increase to the First Adjusted Redemption Amount, the
“Second Adjusted Redemption Amount”), provided, however, that such formula shall only be applied if the resulting
quotient is greater than one and such formula shall in no event be used to reduce the First Adjusted Redemption Amount.
On
September 19, 2019, the Company entered into an Exchange Agreement with Iliad Research and Trading, L.P (“Lender”).
Pursuant to the Agreement, the Company and Lender agreed to partition a new Promissory Note in the original principal amount of
$202,000 (the “Partitioned Note”) from a Promissory Note (the “Note”) issued by the Company on April 14,
2019, which was exchanged from a Convertible Note originally issued by Company on January 31, 2019, whereupon the outstanding
balance of the Note was reduced by an amount equal to the initial outstanding balance of the Partitioned Note. The Company and
Lender further agreed to settle the Partitioned Note by the issuance of 40,400 shares (post-reverse stock split) of the Company’s
Common Stock. The Company recorded $24,240 gain on this partitioned note settlement, which was the difference between the market
price and the conversion price.
On
October 16, 2019, the Company entered into two Exchange Agreements with Iliad Research and Trading, L.P. Pursuant to the Agreements,
the Company and Lender agreed to partition two new Promissory Notes in the original principal amounts of $125,000 and $200,000
from a Promissory Note issued by the Company on April 14, 2019. The Company and Lender agreed to settle the Partitioned Notes
by the issuance of 25,000 shares and 40,000 shares (post-reverse stock split) of the Company’s Common Stock. The Company
recorded gain on conversion of $22,500 and $36,000, respectively.
On
November 11, 2019, the Company entered into an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Agreement,
the Company and Lender agreed to partition a new Promissory Note in the original principal amount of $150,000 from a Promissory
Note issued by the Company on April 14, 2019. The Company and Lender agreed to settle the Partitioned Note by the issuance of
30,000 shares (post-reverse stock split) of the Company’s Common Stock. The Company recorded $45,000 gain on conversion
of this portion of note.
On December 16, 2019, the Company entered
into an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and Lender agreed to partition
a new Promissory Note in the original principal amount of $120,000 from a Promissory Note issued by the Company on April 14, 2019.
The Company and Lender agreed to exchange the Partitioned Note for the delivery of 40,000 shares (post-reverse stock split) of
the Company’s Common Stock. The Company recorded $4,000 gain on conversion of this portion of note. On the same date, the
Company and the lender amended the September 11, 2019 forbearance agreement to increase the adjustment ratio described above from
$0.50 to $0.30 (pre-reverse stock split price).
The outstanding balance of the Note shall
be reduced by an amount equal to the total outstanding balance of the Partitioned Note. The investor made adjustments of $305,626
to increase the principle of the notes during the year ended December 31, 2019 under the term of the September 11th
forbearance agreement and the amendment to forbearance agreement dated on December 16, 2019.
14.
SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Registered
Director Offering and Private Placement in October 2018
On
October 29, 2018, CREG entered into Securities Purchase Agreements with certain purchasers (the “Purchasers”), pursuant
to which the Company offered to the Purchasers, in a registered direct offering, 1,985,082 shares (pre-reverse stock split) of
the Company’s common stock. The Shares were 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 also issued 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 are exercisable on the date of issuance at an 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 was the
Company’s exclusive placement agent in connection with the offerings under the Purchase Agreement and received a fee of
7% of the gross proceeds ($208,433) received by the Company from the offerings and warrants to purchase the Company’s Common
Stock in an amount of 7% of the Company’s Shares sold to the Purchasers in the offerings, or 138,956 shares (pre-reverse
stock split) of Common Stock, on substantially the same terms as the Warrants, with an 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 FV 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 FV of the warrants issued to
investors at grant date was $2,499,238, and the FV of the warrants issued to the placement agent at grant date was $161,027.
Private
Placement in February 2019
On
February 13, 2019, CREG 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 sold to
the Purchaser in a private placement 1,600,000 shares (pre-reverse stock split) of the Company’s common stock, par value
$0.001 per share, at $10.13 per share, for $1,620,800. The Company was required to 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
was completed pursuant to the exemption from registration provided by Regulation S promulgated under the Securities Act of 1933,
as amended. The Company filed the registration statement on May 24, 2019, and was declared effective on June 4, 2019.
Registered
Direct Offering and Private Placement in April 2019
On
April 15, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers
(the “Purchasers”), pursuant to which the Company offered to the Purchasers, in a registered direct offering, 2,359,272
shares (pre-reverse stock split) of common stock. The Shares were sold to the Purchasers at a negotiated purchase price of $0.80
per share, for gross proceeds to the Company of $1,887,417, before deducting $200,000 in placement agent fees and other estimated
offering expenses payable by the Company.
In
a concurrent private placement, the Company also issued 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 (pre-reverse stock
split). The Warrants are exercisable beginning on the six month anniversary of the date of issuance at an exercise price of $0.9365
per share, and expire on the five and one-half year anniversary of the date of issuance.
H.C.
Wainwright & Co., LLC acted as the Company’s exclusive placement agent in connection with the offerings under the Purchase
Agreement and received cash fee of 7% of the gross proceeds received by the Company from the offerings (or $132,119), up to $75,000
for certain expenses, $10,000 for clearing expenses and warrants to purchase the Company’s 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 have an initial exercise price of $1.00 per share, are 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 expire on April 15, 2024.
The
warrants issued in this private placement were 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 FV 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 100%, risk-free interest rate of 2.41% and dividend yield of 0%. The FV of the warrants issued to
investors at grant date was $855,246, and the FV of the warrants issued to the placement agent at grant date was $75,901.
On
November 22, 2019, the Company entered into an Exchange Agreement (the “First Exchange Agreement”) with certain investors
who had been party to that certain Securities Purchase Agreement dated October 29, 2018. Pursuant to the First Exchange Agreement,
the Company and the October Investors agreed to exchange the outstanding warrant issued by the Company to the October Investors
pursuant to the October Securities Purchase Agreement into shares of common stock of the Company, with an exchange ratio of 1
share of October Warrant Stock for 0.5 shares of common stock, according to the terms and conditions of the First Exchange Agreement.
On
November 22, 2019, the Company entered into a Second Exchange Agreement (the “Second Exchange Agreement”) with certain
investors who had been party to that certain Securities Purchase Agreement dated April 15, 2019 by and among the Company and such
investors. Pursuant to the Second Exchange Agreement, the Company and the April Investors agreed to exchange the outstanding warrant
issued by the Company to the April Investors pursuant to the April Securities Purchase Agreement into shares of common stock of
the Company, with an exchange ratio of 1 share of April Warrant Stock for 0.6 shares of common stock, according to the terms and
conditions of the Second Exchange Agreement.
The Company let the warrant holders exercised
the 375,454 warrants (post-reverse stock split) into 205,421 common shares (post-reverse stock split) of the Company at a cashless
exercise method. The fair value of these shares was the additional cost to the Company for the issuance of the shares under securities
purchase agreements previously entered (described above). However, since the warrants were initially equity classified as they
met the qualifications for equity classification under ASC 815-40, accordingly, the modification upon exercise of these warrants
had no impact to the Company’s financial statements.
Following
is a summary of the warrant activity (post-reverse stock split) for the year ended December 31, 2019 and 2018:
|
|
Number of
Warrants
|
|
|
Average
Exercise
Price
(post-reverse stock split price)
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
Granted
|
|
|
212,404
|
|
|
$
|
14.1
|
|
|
|
5.47
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
212,404
|
|
|
$
|
14.1
|
|
|
|
5.29
|
|
Exercisable at December 31, 2018
|
|
|
212,404
|
|
|
$
|
14.1
|
|
|
|
5.29
|
|
Granted
|
|
|
193,460
|
|
|
$
|
9.5
|
|
|
|
5.25
|
|
Exchanged
|
|
|
(375,454
|
)
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
4.21
|
|
Exercisable at December 31, 2019
|
|
|
30,411
|
|
|
$
|
14.0
|
|
|
|
4.21
|
|
Shares
Issued for Stock Compensation
On
October 10, 2019, the Company entered an investment banking engagement agreement with an investment banker firm to engage them
as the exclusive lead underwriter for a registered securities offering. The Company shall pay to the investment banker an equity
retainer fee of 15,000 shares (post-reverse stock split) of the restricted common stock of the Company (10,000 shares will be
paid within 10 business days of signing the agreement, and remaining 5,000 shares will be paid upon completion of the offering).
At closing of the offering, the Company will pay a 7% of the gross offering proceeds and warrants to purchase that number of shares
of common stock or units of securities as shall equal 7% of the securities issued and sold by the Company at each closing of the
offering.
On
October 11, 2019, the Company entered a consulting agreement with a consulting company (whose managing director is also the Company’s
SEC counsel) to advise the Company on an acquisition project. The service term is six months or closing of the Company’s
acquisition. Within three business days after signing of this agreement, the Company agreed to issue 31,250 (post-reverse stock
split) shares of the Company’s unregistered and restricted common stock; with three business days after the investment made
by institutional investors introduce by the consulting company, the Company agreed to issue 31,250 shares (post-reverse stock
split) of the Company’s unregistered and restricted common stock.
In
October 2019, the Company issued 31,250 shares (post-reverse stock split) of its restricted common stock and 10,000 shares (post-reverse
stock split) of its restricted common stock, respectively, for consulting services and investment banking services described above.
The fair value of these shares was $148,625.
15.
NONCONTROLLING INTEREST AND LONG TERM PAYABLE
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%.
On
December 29, 2018, Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF transferred its 10%
ownership in Xi’an Zhonghong to Shanghai TCH (a wholly owned subsidiary of the Company) for RMB 3 million ($0.44 million),
and Shanghai TCH record the purchase price as long term payable as of December 31, 2019. On January 22, 2019, HYREF completed
the transfer of its 10% ownership in Xi’an Zhonghong to Shanghai TCH, Xi’an Zhongong then became a 100% subsidiary
of Shanghai TCH. The net asset of 10% NCI of Xi’an Zhonghong was $3.54 million. The Company did not record any gain or loss
for this purchase as the controlling interest did not change.
16.
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 2019 and 2018 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, CREG is taxed in the US and, as of December 31, 2019, had net operating loss (“NOL”) carry forwards
for income taxes of $15.46 million; for federal income tax purposes, the NOL arising in tax years beginning after 2017 may only
reduce 80% of a taxpayer’s taxable income, and may be carried forward indefinitely. The management believes the realization
of benefits from these losses may be uncertain due to the US parent company’s continuing operating losses. Accordingly,
a 100% deferred tax asset valuation allowance was provided.
As
of December 31, 2019, the Company’s PRC subsidiaries had $41.70 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,
2019 and 2018, respectively:
|
|
2019
|
|
|
2018
|
|
U.S. statutory rates
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Tax rate difference – current provision
|
|
|
(3.4
|
)%
|
|
|
(4.0
|
)%
|
Reversal of temporary difference due to disposal of Shenqiu
|
|
|
(18.8
|
)%
|
|
|
-
|
%
|
Permanent differences
|
|
|
2.0
|
%
|
|
|
-
|
%
|
Other
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
Valuation allowance on PRC NOL
|
|
|
14.3
|
%
|
|
|
28.9
|
%
|
Valuation allowance on US NOL
|
|
|
1.3
|
%
|
|
|
0.2
|
%
|
Tax (benefit) per financial statements
|
|
|
(25.6
|
)%
|
|
|
4.0
|
%
|
The
provision for income tax expense for the years ended December 31, 2019 and 2018 consisted of the following:
|
|
2019
|
|
|
2018
|
|
Income
tax expense (benefit) – current
|
|
$
|
-
|
|
|
$
|
1,604,473
|
|
Income
tax benefit – deferred
|
|
|
(3,024,807
|
)
|
|
|
1,022,985
|
|
Total
income tax expense (benefit)
|
|
$
|
(3,024,807
|
)
|
|
$
|
2,627,428
|
|
17.
STOCK-BASED COMPENSATION PLAN
Options
to Employees and Directors
On
June 19, 2015, the stockholders of the Company approved the China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”)
at its annual meeting. The total shares of common stock authorized for issuance during the term of the Plan is 124,626 (post-reverse
stock split). The Plan was effective immediately upon its 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.
The
following table summarizes option activity with respect to employees and independent directors, and the number of options reflects
the Reverse Stock Split effective April 13, 2020:
|
|
Number of
Shares
|
|
|
Average
Exercise Price
per Share (post-reverse stock split price)
|
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
900
|
|
|
$
|
54.0
|
|
|
|
5.41
|
|
Exercisable at December 31, 2018
|
|
|
900
|
|
|
$
|
54.0
|
|
|
|
5.41
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
900
|
|
|
$
|
54.0
|
|
|
|
4.41
|
|
Exercisable at December 31, 2019
|
|
|
900
|
|
|
$
|
54.0
|
|
|
|
4.41
|
|
18.
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, 2019 and 2018:
Name of Chinese Subsidiaries
|
|
Registered
Capital
|
|
|
Maximum
Statutory
Reserve
Amount
|
|
|
Statutory reserve at
December 31,
2019 and 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.
19.
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 months.
20.
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. This lease was terminated in 2019.
For
the years ended December 31, 2019 and 2018, the rental expense of the Company was $86,874 (including Beijing office rent of $19,674)
and $83,394 (including Beijing office rent of $16,194), respectively.
The
Company adopted ASC 842 on CFS on January 1, 2019. The components of lease costs, lease term and discount rate with respect of
the office lease with an initial term of more than 12 months are as follows:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Operating lease cost
|
|
$
|
66,262
|
|
Weighted Average Remaining Lease Term - Operating leases
|
|
|
0.92
years
|
|
Weighted Average Discount Rate - Operating leases
|
|
|
3
|
%
|
The
following is a schedule, by years, of maturities of the office lease liabilities as of December 31, 2019:
|
|
Operating Leases
|
|
2020
|
|
$
|
57,610
|
|
Total undiscounted cash flows
|
|
|
57,610
|
|
Less: imputed interest
|
|
|
(855
|
)
|
Present value of lease liabilities
|
|
$
|
56,755
|
|
Construction
Commitment
Refer
to Note 1 for additional details related to lease commitments with Xuzhou Tian’an, Note 6 for commitments on construction
in progress.
Employment Agreement
On May 8, 2020, the Company entered an employment agreement with
the Company’s CFO for a term of 24 months. The monthly salary is RMB 16,000 ($2,300). The Company will grant the CFO no
less than 5,000 shares of the Company’s common stock annually.
21.
SUBSEQUENT EVENTS
The
Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events
through the date the financial statements were issued and determined the Company has the following material subsequent
events:
On
January 3, 2020, Company entered into an Exchange Agreement with Iliad Research and Trading, L.P., as Lender. Pursuant to the Agreement, the
Company and Lender agreed to partition a new Promissory Note in the original principal amount of $150,000 from a Promissory Note
issued by the Company on April 14, 2019, which was exchanged from a Convertible Note originally issued by Company on January 31,
2019 and then the outstanding balance of the Note shall be reduced by an amount equal to the initial outstanding balance of the
Partitioned Note. The Company and Lender further agreed to exchange the Partitioned Note for the delivery of 50,000 shares (post-reverse
stock split) of the Company’s Common Stock.
On
January 13, 2020, the Company entered into an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Agreement,
the Company and Lender agreed to partition a new Promissory Note in the original principal amount of $135,000 from a Promissory
Note issued by the Company on April 14, 2019, which was exchanged from a Convertible Note originally issued by Company on January
31, 2019 and then the outstanding balance of the Note shall be reduced by an amount equal to the initial outstanding balance of
the Partitioned Note. The Company and Lender further agreed to exchange the Partitioned Note for the delivery of 45,000 shares
(post-reverse stock split) of the Company’s Common Stock.
On
March 6, 2020, the Company entered into an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Agreement,
the Company and the Lender agreed to partition a new Promissory Note in the original principal amount of $145,000 from a Convertible
Promissory Note dated January 31, 2019 which was exchanged for a new Promissory Note on April 14, 2019. The Company and the Lender
agreed to exchange the Partitioned Note for 48,333 shares (post-reverse stock split) of common stock of the Company, and then
the amount of the outstanding balance of the Promissory Note will be reduced by an amount equal to the Partitioned Note. The shares
of common stock were issued without any restrictions.
On
March 16, 2020, the Company’s Board of Director agreed to issue 3,333 shares of the Company’s common stock (post-reverse
stock split) to the Company’s law firm. The shares are earned in full and non-refundable as of March 9, 2020. The FV of
these shares are $11,000 on March 9, 2020.
On April 30, 2020, the Company entered
into an Exchange Agreement with Iliad Research and Trading, L.P. Pursuant to the Agreement, the Company and the Lender agreed to
partition a new Promissory Note in the original principal amount of $150,000 from a Convertible Promissory Note dated January 31,
2019 which was exchanged for a new Promissory Note in the original principal amount of $1,173,480 on April 14, 2019. The Company
and the Lender agreed to exchange the Partitioned Note for 50,000 shares of common stock of the Company, and then the amount of
the outstanding balance of the Promissory Note will be reduced by an amount equal to the Partitioned Note. The shares of common
stock were issued without any restrictions.