NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements
and related notes have been prepared in accordance with generally accepted accounting principles in the United Stated of America (“US
GAAP”) and have been consistently applied. The accompanying consolidated financial statements include the financial statements of
the Company and its majority-owned and controlled subsidiaries. All significant inter-company transactions and balances have been eliminated
upon consolidation. Use of Estimates
The preparation of the consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed
in the consolidated financial statements and the accompanying notes. Such estimates include, but are not limited to, allowances for doubtful
accounts, inventory valuation, useful lives of property, plant and equipment, intangible assets, and income taxes related to realization
of deferred tax assets and uncertain tax position. Actual results could differ from those estimates.
Foreign Currency Translation
The financial records of the Company’s subsidiaries
in People’s Republic of China (“PRC”) are maintained in their local currencies which are Chinese Yuan (“CNY”
or “RMB”). Monetary assets and liabilities denominated in currencies other than their local currencies are translated into
local currencies at the rates of exchange in effect at the consolidated balance sheet dates. Transactions denominated in currencies other
than their local currencies during the year are converted into local currencies at the applicable rates of exchange prevailing when the
transactions occur. Transaction gains and losses are recorded in other income/(expense), net in the consolidated statements of income
and comprehensive income.
The Company maintained its financial record using
the United States dollar (“US dollar”) as the functional currency, while the subsidiaries of the Company in Hong Kong and
mainland China maintained their financial records using RMB as the functional currencies. The reporting currency of the Company is US
dollar. When translating local financial reports of the Company’s subsidiaries into US dollar, assets and liabilities are translated
at the exchange rates at the consolidated balance sheet date, equity accounts are translated at historical exchange rates and revenue,
expenses, gains and losses are translated at the average rate for the period. Translation adjustments are reported as cumulative translation
adjustments and are shown as a separate component of other comprehensive income in the consolidated statements of income and comprehensive
income.
The relevant exchange rates are listed below:
| | |
June 30, | | |
June 30, | | |
December 31, | |
| | |
2024 | | |
2023 | | |
2023 | |
| | |
| | |
| | |
| |
| Period Ended RMB: USD exchange rate | |
| 7.2672 | | |
| 7.2513 | | |
| 7.0999 | |
| Period Average RMB: USD exchange rate | |
| 7.2150 | | |
| 6.9283 | | |
| 7.0809 | |
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of
cash and deposits with financial institutions which are unrestricted as to withdrawal and use. Cash equivalents consist of highly liquid
investments that are readily convertible to cash generally with original maturities of three months or less when purchased.
Restricted Cash
The Company had bank acceptance notes outstanding
with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. Those notes are generally
short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset.
In November 2016, the FASB issued Accounting Standards
Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described
as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period
total amounts presented in the statement of cash flows. The Company adopted the new standard effective January 1, 2018, using the retrospective
transition method. As of June 30, 2024, and December 31, 2023, restricted
cash was $3,252 and $1,062, respectively.
Accounts Receivable, net
Accounts receivables are recognized and carried
at the original invoiced amount less an estimated allowance for uncollectible accounts. The Company usually determines the adequacy of
reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision
for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based
on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections.
Based on management of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding
at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against
accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income.
Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood
of collection is not probable.
Inventories
Inventories are stated at the lower of cost or
net realizable value. Cost is principally determined using the weighted-average method. The Company records adjustments to inventory for
excess quantities, obsolescence or impairment when appropriate to reflect inventory at net realizable value. These adjustments are based
upon a combination of factors including current sales volume, market conditions, lower cost or market analysis and the expected realizable
value of the inventory.
Advances to Suppliers
Advances to suppliers refer to advances for purchase
of materials or services, which are applied against accounts payable when the materials or services are received.
The Company reviews a supplier’s credit
history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting
in an impairment of their ability to deliver goods or provide services, the Company would write off such an amount in the period when
it is considered impaired. As of June 30, 2024 and December 31, 2023, the Company had no write-offs for advances to suppliers.
Advances from Customers
Advances from customers refer to advances received
from customers, which are applied against accounts receivable when products are sold.
Property, Plant and Equipment, net
Property, plant, and equipment are recorded at
cost less accumulated depreciation. Depreciation commences upon placing the asset in use and is recognized on a straight-line basis over
the estimated useful lives of the assets with 5% of residual value, as follows:
| |
|
Useful lives |
| Buildings |
|
10 years |
| Machinery and equipment |
|
3-10 years |
| Transportation vehicles |
|
4 years |
| Office furniture and equipment |
|
5-10 years |
| Electronic equipment |
|
2-5 years |
Expenditures for maintenance and repairs, which
do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments
which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired
or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of income and other
comprehensive income in other income or expenses. Intangible Assets
Intangible assets consist of patents and a trademark.
Intangible assets are amortized using the straight-line method with the following estimated useful lives:
| | | Useful lives | | Patents | | 10 years | | Trademark | | 10 years |
Leases/Right of use assets
Effective January 1, 2018, the Company adopted
the new lease accounting standard using a modified retrospective transition method which allowed the Company not to recast comparative
periods presented in its consolidated financial statements. In addition, the Company elected the package of practical expedients, which
allowed the Company to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as
operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight
to determine the lease term for its leases at transition. The Company combines the lease and non-lease components in determining the ROU
assets and related lease obligation. Adoption of this standard resulted in the recording of operating lease ROU assets and corresponding
operating lease liabilities as disclosed in financial statements. ROU assets and related lease obligations are recognized at commencement
date based on the present value of remaining lease payments over the lease term.
Impairment of Long-lived Assets
The Company’s management reviews the carrying
values of long-lived assets whenever events and circumstances, such as a significant decline in the asset’s market value, obsolescence
or physical damage affecting the asset, significant adverse changes in the assets use, deterioration in the expected level of the assets
performance, cash flows for maintaining the asset are higher than forecast, indicate that the net book value of an asset may not be recovered
through expected future cash flows from its use and eventual disposition. If the estimated cash flows from the use of the asset and its
eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair
value.
There was no impairment charge recognized for
long-lived assets for the periods ended June 30, 2024 and December 31, 2023.
Fair Value Measurement
Fair Value Measurements and Disclosures requires
disclosure of the fair value of financial instruments held by the Company. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level
fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable
inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. |
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
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Level 3 inputs to the valuation methodology use one or more unobservable inputs which are significant to the fair value measurement. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
For the Company’s financial instruments,
including cash and cash equivalents, restricted cash, accounts receivable, other receivables, accounts payable, other current liabilities,
and bank loans, the carrying amounts approximate their fair values due to their short maturities as of June 30, 2024 and December 31,
2023.
Value-added Tax (“VAT”)
Sales revenue represents the invoiced value of
goods, net of VAT. All of the Company’s products that are sold in the PRC are subject to a VAT on the gross sales price. The
Company is subject to a VAT rate of 17% before May 1, 2018, 16% on and after May 1, 2018, and a new VAT rate of 13% effective on April
1, 2019. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring
its finished products.
Revenue Recognition
The Company generates its revenues mainly from
sales of electrical products, such as electrical converters and inverters, to third-party customers, who are mainly distributors and retailers.
The Company follows Financial Accounting Standards Board (FASB) ASC 606 and accounting standards updates (“ASU”) 2014-09 for
revenue recognition. On January 1, 2018, the Company has early adopted ASU 2014-09, which is a comprehensive new revenue recognition model
that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects
the consideration expected to be received in exchange for those goods or services. The Company considers revenue realized or realizable
and earned when all the five following criteria are met: (1) identify the contract with a customer, (2) identify the performance obligations
in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract,
and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company considers customer purchase orders,
which in some cases are governed by master sales agreements, to be the contracts with a customer. As part of its consideration of the
contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the
Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In the principal
versus agent consideration, since no another party is involved in transactions, the Company is a principal.
In determining the transaction price, the Company
evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.
The Company analyzed historical refund claims for defective products, and since no warranty, discount or return policy are documented
in the sales agreements, the Company concluded that they have been immaterial.
Revenues are reported net of all value added taxes.
As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18
to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product
based on their relative standalone selling price.
Revenue is recognized when control of the product
is transferred to the customer (i.e., when the Company’s performance obligation is satisfied at a point in time), which typically
occurs at delivery. For international sales, the Company sells its products primarily under the free onboard (“FOB”) shipping
point term. For sales under the FOB shipping point term, the Company recognizes revenues when products are delivered from Company to the
designated shipping point. Prices are determined based on negotiations with the Company’s customers and are not subject to adjustment.
Rental income
Rental income is from subleasing part of the leased
assets under operating leases, and it is recognized in the statements of comprehensive income on a straight-line basis over the term of
the lease. Government Grant
Government grants are compensation for expenses
already incurred or for the purpose of giving immediate financial support to the Company. The government evaluates the Company’s
eligibility for the grants on a consistent basis, and then makes the payment. Therefore, there are no restrictions on the grants.
Government grants are recognized when received
and all the conditions for their receipt have been met. The grants received were $36,036 and $109,472 for the six months ended June 30,
2024 and 2023, respectively, which were included in other income on Income Statement.
Research and Development Costs
Research and development activities are directed
toward the development of new products as well as improvements in existing processes. These costs, which primarily include salaries, contract
services and supplies, are expensed as incurred.
Shipping and Handling Costs
Shipping and handling costs are expensed when
incurred and are included in selling and marketing expenses. Shipping and handling costs were $70,051 and $92,087 for the six months ended
June 30, 2024 and 2023, respectively.
Advertising Costs
Advertising costs are expensed as incurred in
accordance with ASC 720-35, “Selling and Marketing Expenses-Advertising Costs”. Advertising costs were $66,621 and $26,114
for the six months ended June 30, 2024 and 2023, respectively.
Income Taxes
The Company accounts for income taxes using the
asset and liability method whereby it calculates deferred tax assets or liabilities for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and credits
by applying enacted tax rates applicable to the years in which those temporary differences are expected to be reversed or settled. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all
the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing
authorities. The components of the deferred tax assets and liabilities are individually classified as non-current amounts.
The Company records uncertain tax positions in
accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that
the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the
more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely
to be realized upon ultimate settlement with the related tax authority.
To the extent applicable, the Company records
interest and penalties as other expense. All the tax returns of the Company’s PRC subsidiaries remain subject to examination by
PRC tax authorities for five years from the date of filing. The fiscal year for tax purposes in PRC is December 31.
The Company and its subsidiaries are not subject
to U.S. tax laws and local state tax laws. The Company’s income and that of its related entities must be computed in accordance
with Chinese and foreign tax laws, as applicable, and all of which may be changed in a manner that could adversely affect the amount of
distributions to shareholders. There can be no assurance that the Income Tax Laws of PRC will not be changed in a manner that adversely
affects shareholders. Any such change could increase the amount of tax payable by the Company, reducing the amount available to pay dividends
to the holders of the Company’s ordinary shares. Earnings Per Share
Earnings (loss) per share is calculated in accordance
with ASC 260 Earnings per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to shareholders
of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share are computed
in accordance with the treasury stock method and based on the weighted average number of ordinary shares and dilutive ordinary share equivalents.
Dilutive ordinary share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.
There were no dilutive ordinary share equivalents outstanding during the six months ended June 30, 2024 and 2023.
The Company did not use the two-class method to
compute net income per ordinary share, because it did not have other issued securities other than ordinary shares. Class A and Class B
shares are both ordinary shares, and per Article 6 in Memorandum and Articles of Association (amended and restated), they have the same
rights, preferences, privileges, and restrictions, except for voting and conversion rights.
Comprehensive income/(loss)
Comprehensive income/(loss) is defined as the
changes in shareholders’ equity during a period arising from transactions and other events and circumstances excluding transactions
resulting from investments by shareholders and distributions to shareholders. Comprehensive income or loss is reported in the consolidated
statements of comprehensive income/(loss). Accumulated other comprehensive income/(loss), as presented on the accompanying consolidated
balance sheets, consists of accumulated foreign currency translation adjustments.
Certain Risks and Concentration
Exchange Rate Risks
The Company operates in PRC, which may give rise
to significant foreign currency risks mainly from fluctuations and the degree of volatility of foreign exchange rates between the USD
and the RMB.
Currency Convertibility Risks
Substantially all the Company’s operating
activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place
either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions
requires submitting a payment application form together with other information such as suppliers’ invoices, shipping documents and
signed contracts.
Concentration of Credit Risks
Financial instruments that potentially subject
the Company to concentration of credit risks consist primarily of cash and cash equivalents, restricted cash, notes receivable. The Company
places its cash and cash equivalents, restricted cash, and note receivable in good credit quality financial institutions in Hong Kong
and PRC. Concentration of credit risks with respect to accounts receivables is linked to the concentration of revenue. To manage credit
risk, the Company performs ongoing credit evaluations of customers’ financial condition.
Interest Rate Risks
The Company is subject to interest rate risk.
The Company has bank interest bearing loans charged at variable interest rates. And although some bank interest bearing loans are charged
at fixed interest rates within the reporting period, the Company is still subject to the risk of adverse changes in the interest rates
charged by the banks when these loans are refinanced.
Risks and Uncertainties
The operations of the Company are located in the
PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic,
and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected
by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations
and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note1,
this may not be indicative of future results. Liquidity Risks
Our primary sources of liquidity consist of existing
cash balances, cash flows from our operating activities and availability under our revolving credit facility. Our ability to generate
sufficient cash flows from our operating activities is primarily dependent on our sales of converters and power generating products to
our customers at margins sufficient to cover fixed and variable expenses.
As of June 30, 2024, and December 31, 2023, we
had cash and cash equivalents of $1,103,939 and $5,878,434, respectively. We believe that our current cash, cash to be generated from
our operations and access to loans from our related parties will be sufficient to meet our working capital needs for at least the
next twelve months. Although we do not have any amounts committed to be provided by our related parties, due to their relatively small
amounts, we do not believe our working capital needs will be negatively impacted without such funds provided by related parties. We
are also not dependent upon this offering to meet our liquidity needs for the next twelve months. However, we plan to expand our business
to implement our growth strategies in our existing market and strengthen our position in the marketplace. To do so, we will need more
capital through equity financing to increase our production and meet market demands.
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