clwt_20f

EURO TECH HOLDINGS COMPANY LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Reports of Independent Registered Public Accounting Firm	F-2 to F-3
Consolidated Balance Sheets as of December 31, 2020 and 2019	F-4
Consolidated Statements of Operations and Comprehensive Income / (Loss) for the years ended December 31, 2020, 2019 and 2018	F-5 to F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018	F-7
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018	F-8
Notes to the Consolidated Financial Statements	F-9 to F-43

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Euro Tech Holdings Company Limited

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Euro Tech Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income / (loss), shareholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2020 and 2019, and the results of its consolidated operations and its consolidated cash flows for each of the three years ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition

As described further in Note 2 to the consolidated financial statements, revenues derived from long-term contracts in the engineering segments are recognized as the performance obligations are satisfied over time. The Group uses output method to recognize revenue. The Group’s contracts may include variable consideration related to contract modifications through change orders or claims, and management must also estimate the variable consideration the Group expects to receive in order to estimate the total contract revenue. We identified revenue recognized over time to be a critical audit matter.

F-2

Report of Independent Registered Public Accounting Firm (Cont’d)

To the Board of Directors and Shareholders of

Euro Tech Holdings Company Limited

Critical Audit Matter (Cont’d)

Revenue Recognition (Cont’d)

The principal considerations for our determination that revenue recognized over time is a critical audit matter is that auditing management’s estimate of the progress toward completion of its projects was complex and subjective. In addition, auditing the Group’s measurement of variable consideration is also complex and highly judgmental and can have a material effect on the amount of revenue recognized.

Our audit procedures related to revenue recognized over time included the following, among others.

●

We obtained an understanding and evaluated the design on the operating effectiveness of the Group’s processes and controls related to contract revenue recognition;

●

We tested the estimated variable consideration by evaluating the appropriate application of the most likely amount method, and tracing amounts to supporting documentation;

●

We evaluating management’s ability to reasonably estimate costs by performing a comparison of the actual costs to prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the estimated costs;

●

We evaluate management’s methodologies and the consistency of management’s methodologies over the life of the contracts;

●

We tested the original estimated costs and profit margins on engineering projects that were commenced and completed during the year ended December 31, 2020, by obtaining the original estimates, compare to the actual costs and profit margin for the completed contracts and investigate significant changes; and

●

We tested the estimated costs to complete engineering projects that were not completed during the year ended December 31, 2020 by comparing the estimated cost to complete at December 31, 2020 to actual cost incurred subsequent to December 31, 2020.

/s/ Union Power HK CPA Limited

We have served as the Company’s auditor since 2018.

Hong Kong, the People’s Republic of China

May 13, 2021

F-3

EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

	December 31,
	2020	2019
	US$’000	US$’000
Assets
Current assets:
Cash and cash equivalents	3,519	5,991
Restricted cash	1,672	658
Accounts receivable, net	3,199	3,586
Prepayments and other current assets	1,514	748
Contract assets	202	441
Inventories	342	586

Total current assets	10,448	12,010


Property, plant and equipment, net	259	700
Investments in affiliates	8,084	7,720
Goodwill	1,071	1,071
Deferred tax assets	-	87
Operating lease right-of-use assets	233	406
Long-term investment	-	148
Restricted cash	-	71

Total non-current assets	9,647	10,203

Total assets	20,095	22,213


Liabilities and shareholders’ equity
Current liabilities:
Bank borrowings	361	565
Accounts payable	2,394	3,914
Contract liabilities	1,063	869
Other payables and accrued expenses	1,593	1,142
Current portion of long-term operating lease obligations	118	170
Income tax payable	4	-

Total current liabilities	5,533	6,660

Deferred tax liabilities	5	-
Long-term operating lease obligations, net of current maturities	94	216

Total non-current liabilities	99	216
Total liabilities	5,632	6,876

Commitments and contingencies (Note 21)

Shareholders’ equity:
Ordinary share, 20,000,000 shares authorized as of December 31, 2020 and 2019, respectively 3,260,559 no par value shares issued as of December 31, 2020 and 2019, respectively	123	123
Additional paid-in capital	9,615	9,561
Treasury stock, 167,700 shares at cost as of December 31, 2020 and 2019, respectively	(786)	(786)
PRC statutory reserves	316	316
Accumulated other comprehensive income	851	899
Retained earnings	3,816	4,346

Total shareholders’ equity attributable to Euro Tech Holdings Company Limited	13,935	14,459
Non-controlling interests	528	878

Total shareholders’ equity	14,463	15,337


Total liabilities and shareholders’ equity	20,095	22,213

The accompanying notes form an integral part of these consolidated financial statements.

F-4

EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Revenues
Trading and manufacturing	9,476	11,877	13,770
Engineering	3,881	5,522	6,334

Total revenues	13,357	17,399	20,104

Cost of revenues
Trading and manufacturing	(7,048)	(9,285)	(11,136)
Engineering	(2,624)	(3,697)	(5,269)

Total cost of revenues	(9,672)	(12,982)	(16,405)

Gross profit	3,685	4,417	3,699

Finance costs	(12)	(4)	(7)
Selling and administrative expenses	(5,374)	(4,853)	(4,751)

Operating loss	(1,701)	(440)	(1,059)
Interest income	28	83	35
Other income / (losses), net	307	52	58
Gain / (loss) on disposal of property, plant and equipment	1,429	(5)	3
Equity in income / (loss) of affiliates	435	137	(932)
Net gain on disposal of affiliate	-	-	1,522

Net income / (loss) before income taxes	498	(173)	(373)

Income taxes (expense) / credit	(96)	(37)	312

Net income / (loss)	402	(210)	(61)

Net loss attributable to non-controlling interests	367	64	149

Net income / (loss) attributable to Euro Tech Holdings Company Limited’s shareholders	769	(146)	88

Other comprehensive income / (loss)
Net income / (loss)	402	(210)	(61)
Foreign exchange translation adjustments	(31)	(8)	(58)

Comprehensive income / (loss)	371	(218)	(119)
Comprehensive loss attributable to non-controlling interests	350	78	182

Comprehensive income / (loss) attributable to the Company	721	(140)	63

The accompanying notes form an integral part of these consolidated financial statements.

F-5

EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS) (CONT’D)

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Net income / (loss) per ordinary share attributable to Euro Tech Holdings Company Limited’s shareholders
- Basic	$US0.25	$US(0.06)	$US0.04

- Diluted	$US0.25	$US(0.06)	$US0.04

Weighted average number of ordinary shares outstanding
- Basic	3,092,859	2,301,993	2,061,909

- Diluted	3,092,859	2,301,993	2,061,909

The accompanying notes form an integral part of these consolidated financial statements.

F-6

EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Cash flows from operating activities:
Net income / (loss)	769	(146)	88
Adjustments to reconcile net income / (loss) to net cash (used in) / provided by operating activities:
Depreciation	49	69	60
(Gain) / loss on disposal of property, plant and equipment	(1,429)	5	(3)
Stock-based compensation expense	54	10	-
Net gain on disposal of affiliate	-	-	(1,522)
Non-controlling interests in (loss) of subsidiaries	(367)	(64)	(149)
Equity in (profit) / loss of affiliates	(435)	(137)	932
Deferred tax expenses	92	37	34
Changes in non-current assets and liabilities:
Long-term operating lease liabilities	(122)	216	-
Operating lease right-of-use assets	173	(406)	-
Decrease / (increase) in current assets:
Accounts receivable, net	387	1,503	(1,281)
Prepayments and other current assets	(766)	(201)	119
Contract assets	239	458	(705)
Inventories	244	(185)	95
Increase / (decrease) in current liabilities:
Accounts payable	(1,520)	(986)	1,220
Other payables and accrued expenses	451	(108)	249
Contract liabilities	194	(501)	(350)
Income tax payable	4	-	-
Current portion of long-term operating lease obligations	(52)	170	-
Taxes payable	-	-	(132)

Net cash used in operating activities	(2,035)	(266)	(1,345)

Cash flows from investing activities:
Purchase of property, plant and equipment	(11)	(21)	(85)
Proceeds from sale of property, plant and equipment	1,835	-	3
Dividend received from affiliates	71	-	276
Proceeds from sale of affiliate	-	-	4,889
Proceeds from sale of long-term investment	148	-	-
Purchase of long-term investment	-	(148)	-

Net cash provided by / (used in) investing activities	2,043	(169)	5,083

Cash flows from financing activities:
Dividend paid	(1,299)	-	(1,443)
Proceeds from bank borrowings	804	565	1,412
Repayments to bank borrowings	(1,008)	-	(1,509)

Net cash (used in) / provided by financing activities	(1,503)	565	(1,540)

Effect of exchange rate changes on cash and cash equivalents	(34)	(7)	(53)


Net (decrease) / increase in cash and cash equivalents and restricted cash	(1,529)	123	2,145

Cash, cash equivalents and restricted cash at beginning of year	6,720	6,597	4,452

Cash, cash equivalents and restricted cash at end of year	5,191	6,720	6,597


Cash breakdown
Cash and cash equivalents	3,519	5,991	5,267
Restricted cash	1,672	729	1,330

	5,191	6,720	6,597

	US$’000	US$’000	US$’000
Supplemental disclosure of consolidated cash flow information:
Cash paid during the period for income taxes	-	-	-
Cash paid during the period for interest	12	4	7
Operating leases (disclosed in accompanying Note 3)

Non-cash items:
Right-of-use assets obtained in exchange for new operating lease obligations	-	460	-

The accompanying notes form an integral part of these consolidated financial statements.

F-7

EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	EURO TECH HOLDINGS COMPANY LIMITED’S SHARHOLDERS
	Number of ordinary share	Ordinary share	Additional paid-in capital	Treasury stock	Accumulated other com- prehensive income	PRC statutory reserves	Retained earnings	Non-controlling interests	Total
		US$’000	US$’000	US$’000	US$’000	US$’000	US$’000	US$’000	US$’000

Balance at December 31, 2017	2,229,609	123	9,551	(786)	918	352	5,811	1,138	17,107
Net income / (loss)	-	-	-	-	-	-	88	(149)	(61)
Foreign currency translation adjustments	-	-	-	-	(25)	-	-	(33)	(58)
Appropriation of reserves	-	-	-	-	-	(36)	36	-	-
Dividend paid	-	-	-	-	-	-	(1,443)	-	(1,443)

Balance at December 31, 2018	2,229,609	123	9,551	(786)	893	316	4,492	956	15,545
Net loss	-	-	-	-	-	-	(146)	(64)	(210)
Foreign currency translation adjustments	-	-	-	-	6	-	-	(14)	(8)
Bonus shares issued	1,030,950	-	-	-	-	-	-	-	-
Stock-based compensation expense	-	-	10	-	-	-	-	-	10

Balance at December 31, 2019	3,260,559	123	9,561	(786)	899	316	4,346	878	15,337
Net income / (loss)	-	-	-	-	-	-	769	(367)	402
Foreign currency translation adjustments	-	-	-	-	(48)	-	-	17	(31)
Dividend paid	-	-	-	-	-	-	(1,299)	-	(1,299)
Stock-based compensation expense	-	-	54	-	-	-	-	-	54

Balance at December 31, 2020	3,260,559	123	9,615	(786)	851	316	3,816	528	14,463

The accompanying notes form an integral part of these consolidated financial statements.

F-8

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Organization and business

Euro Tech Holdings Company Limited (the “Company”) was incorporated in the British Virgin Islands on September 30, 1996.

Euro Tech (Far East) Limited (“Far East”) is the principal operating subsidiary of the Company. It is principally engaged in the marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems in Hong Kong and in the People’s Republic of China (the “PRC”).

The Group’s principal subsidiaries at December 31, 2020 and 2019 are set out below.

Name of entity	Ownership interest held by the Group		Place of incorporation and principal place of operation	Principal activities
	2020	2019

Euro Tech (Far East) Limited	100%	100%	Hong Kong	Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems

Euro Tech (China) Limited	-^	100%	Hong Kong	Inactive

Euro Tech Trading (Shanghai) Limited	100%	100%	The PRC	Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems

Shanghai Euro Tech Limited	100%	100%	The PRC	Manufacturing of analytical and testing equipment

Shanghai Euro Tech Environmental Engineering Company Limited	100%	100%	The PRC	Inactive

^ This company was deregistered on April 3, 2020.

F-9

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Organization and business (Cont’d)

The Group’s principal subsidiaries at December 31, 2020 and 2019 are set out below (Cont’d).

Name of entity	Ownership interest held by the Group		Place of incorporation and principal place of operation	Principal activities
	2020	2019

Yixing Pact Environmental Technology Co., Ltd.	58%	58%	The PRC	Design, manufacturing and operation of water and waste water treatment machinery and equipment

Pact Asia Pacific Limited	58%	58%	The British Virgin Islands	Selling of environmental protection equipment, undertaking environment protection projects and providing relevant technology advice, training and services

Affiliate:

Zhejiang Tianlan Environmental Protection Technology Co. Ltd. (“Blue Sky”)	19.4%*	19.4%*	The PRC	Design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted

* The Group’s interest in Blue Sky has been counted for as an affiliate using the equity method as the Group has representation on both the Board and Executive Committee of Blue Sky, and the ability to participate in the decision-making process and exercise significant influence.

The outbreak of COVID-19 worldwide and the various public health measures put in place in many countries to prevent the spread of COVID-19 have disrupted the overall business of the Group at different levels of time and regions in 2020. After the Chinese new year in February 2020, the Group’s domestic businesses were affected by the lock-down of various cities implemented in PRC, resulting in the forced suspension of some local operations until the gradual resumption of work beginning from late March to early April 2020. Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Group’s consolidated financial position, results of its operations, the specific impact is not readily determinable as of the date of these consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

F-10

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies

(a)

Basis of presentation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

(b)

Basis of consolidation

The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

(c)

Subsidiaries

Subsidiaries are all entities over which the Group has control; has the power to appoint or remove the majority of the members of the board of directors; has the right to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

(d)

Investments in Affiliates

We account for our interest in an investment using the equity method of accounting per Accounting Standards Codification (“ASC”) No. 323, “Investments - Equity Method and Joint Ventures” if we are not the primary beneficiary of a VIE or do not have a controlling interest. The investment is recorded at cost and the carrying amount is adjusted periodically to recognize our proportionate share of income or loss, additional contributions made and dividends and capital distributions received. We record the effect of any impairment or other than temporary decrease in the value of the investment.

In the event a partially owned equity affiliate were to incur a loss and our cumulative proportionate share of the loss exceeded the carrying amount of the equity method investment, application of the equity method would be suspended and our proportionate share of further losses would not be recognized unless we committed to provide further financial support to the affiliate. We would resume application of the equity method once the affiliate became profitable and our proportionate share of the affiliate’s earnings equals our cumulative proportionate share of losses that were not recognized during the period the application of the equity method was suspended.

F-11

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(e)

Revenue recognition

Our revenue is derived from long-term contracts for customers in our engineering segment, as well as short-term contracts for customers in our trading and manufacturing segment. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customer), is as follows:

Performance obligations satisfied over time (Engineering services)

Recognition of performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering service projects typically span between several days to over 5 years. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, is not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (engineering).

Revenues are recognized as our obligations are satisfied over time, by reference to the progress towards complete satisfaction of that performance obligation.

If the Group expects the reference to progress certificates issued by the customers, with additional adjustments where necessary, depicts the Group’s performance in transferring control of goods or services promised to customers for individual projects, the Group satisfies the performance obligation over time and therefore, recognizes revenue over time in accordance with the output method for measuring progress. Under output method, revenue recognition is based on the stage of completion of the contracts, provided that the stage of contract completion and the gross billing value of contracting work can be measured reliably. The stage of completion of a contract is established by reference to the construction works certified by customers.

Remaining performance obligations (“RPOs”)

RPOs represent the amount of revenues we expect to recognize in the future from our contract commitments on projects and are hereafter referred to as “Backlog”. Backlog includes the entire expected revenue values for subsidiary we consolidate. Backlog may not be indicative of future operating results, and projects included in Backlog may be canceled, modified or otherwise altered by customers.

The Group had the following backlog:

	2020	2019
	US$’000	US$’000

Engineering segment	11,581	8,611

Unrecognized contract revenue which is expected to be recognized in next 12 months is approximately US$11,581,000.

F-12

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(e)

Revenue recognition (Cont’d)

Performance obligations satisfied over time (Engineering services) (Cont’d)

Variable consideration

Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration service provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

The Group estimates variable consideration for a performance obligation at the most likely amount to which the Group expects to be entitled (or the most likely amount the Group expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Group will be entitled (or will be incurred in the case of liquidated damages). The Group includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Group’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Group.

The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Group’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.

Performance obligations satisfied at a point-in-time (Trading and manufacturing)

Revenue for our trading and manufacturing contracts is recognized at a point in time. Sales are recognized when control of the products has transferred, being when the products are delivered to the customer. Delivery occurs when the products have been delivered to the point of receipt by customer.

Rental income

Rental income from operating leases is recognized in consolidated statements of operations and comprehensive income / (loss) on a straight-line basis over the term of the relevant lease.

F-13

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(f)

Research and development costs

Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately US$497,000, US$35,000 and US$184,000 for the years ended December 31, 2020, 2019 and 2018 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).

(g)

Advertising and promotional expenses

Advertising and promotional expenses (“A&P” expenses) are expensed as incurred. The A&P expenses amounted to approximately US$7,000, US$13,000 and US$16,000 for the years ended December 31, 2020, 2019 and 2018 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).

(h)

Income taxes

The Group follows the liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. The Group also evaluates whether the recorded deferred tax assets and valuation allowances can be realized and, when necessary, reduces the amounts to what is expected to be realized.

The accounting guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Group does not believe it has any uncertain tax positions through the periods ended December 31, 2020, 2019 and 2018 respectively which would have a material impact on the Group’s consolidated financial statements.

The Group files tax returns in Hong Kong and the PRC. The tax returns for 2020, 2019 and 2018 are subject to examination by Hong Kong and PRC taxing authorities, commencing with the first year filed.

(i)

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, and bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal. There were no cash equivalents as of December 31, 2020 and 2019.

(j)

Restricted cash

Restricted cash represents cash deposits retained with banks in the PRC for issuance of performance guarantees to the customers and cash deposited by the Group into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.

(k)

Accounts receivable and allowance for doubtful accounts

The Group does not charge interest to its customers and carries its customer receivables at their face amounts, less an allowance for doubtful accounts. As is common practice in the industry, the Group classifies all accounts receivable as current assets.

The Group grants trade credit, on a non-collateralized basis, to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Group analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.

F-14

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(l)

Classification of contract assets and liabilities

For revenue recognized associated with its contracts with customers over time, for which the Group has an enforceable right to receive compensation. Many of our contracts contain specific provisions that determine when the Group can bill for its work performed under these contracts.

Any revenue earned on a contract that has not yet been billed to the customer is recorded as a contract asset on the Group’s consolidated balance sheets.

The Group’s consolidated balance sheets present contract liabilities that contain deferred revenue that represent any costs incurred on contracts in process for which revenue has not yet been recognized.

(m)

Inventories

Inventories are measured using the first-in, first-out method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity. Allowance is made for obsolete, slow moving or defective items, where appropriate.

(n)

Property, plant and equipment

Property, plant and equipment is carried at cost. Major modifications or refurbishments which extend the useful life of the assets are capitalized and depreciated over the adjusted remaining useful life of the assets. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in consolidated income from operations. The cost of maintenance and repairs is charged to expense as incurred. Property, plant and equipment is reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of property, plant and equipment exceeds its fair value, an impairment charge would be recorded in the consolidated statement of operations.

Depreciation of property, plant and equipment are computed using the straight-line method over the assets’ estimated useful lives as follows:

Office premises	47 to 51 years
Leasehold improvements	over terms of the leases or the useful lives whichever is less
Furniture, fixtures and office equipment	3 to 5 years
Motor vehicles	4 years
Testing equipment	3 years

F-15

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(o)

Long-term investment

The Group has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Group’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the investee.

(p)

Leases arrangements

In the ordinary course of business, the Group enters into a variety of operating lease arrangements.

Operating right-of-use leases are included in operating lease right-of-use assets, current portion of long-term operating lease obligations and long-term operating lease obligations, net of current maturities on the Group’s consolidated balance sheets, as appropriate. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Group’s leases do not provide an implicit rate to calculate present value, the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

(q)

Goodwill

Goodwill is not amortized. The Group performs either a qualitative or quantitative assessment to review goodwill for impairment on an annual basis. This assessment is performed at the beginning of the fourth quarter, or when circumstances change, such as a significant adverse change in the business climate or the decision to sell a business, both of which would indicate that impairment may have occurred.

A qualitative assessment considers financial, industry, segment and macroeconomic factors, if the qualitative assessment indicates a potential for impairment, a quantitative assessment is performed to determine if impairment exists. The quantitative assessment begins with a comparison of the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of the goodwill allocated to the reporting unit. If the carrying value of goodwill exceeds its implied fair value, an impairment charge would be recorded in the consolidated statement of operations and comprehensive income / (loss).

As a result of the annual qualitative review process in 2020 and 2019, the Group determined it was not necessary to perform a quantitative assessment.

F-16

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(r)

Foreign currency translation

The assets and liabilities of the Group’s subsidiaries denominated in currencies other than U.S. dollars are translated into U.S. dollars using the applicable exchange rates at the consolidated balance sheet date. For consolidated statements of operations and comprehensive income/(loss)’ items, amounts denominated in currencies other than U.S. dollars were translated into U.S. dollars using the average exchange rate during the period. Equity accounts were translated at their historical exchange rates. Net gains and losses resulting from translation of foreign currency on consolidated financial statements are included in the consolidated statements of stockholders’ equity as accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in the consolidated statements of operations and comprehensive income/(loss).

(s)

Comprehensive income / (loss)

We account for comprehensive income in accordance with ASC No. 220, “Comprehensive Income”, which specifies the computation, presentation and disclosure requirements for comprehensive income / (loss). Comprehensive income / (loss) consists of net income / (loss) and foreign currency translation adjustments, primarily from fluctuations in foreign currency exchange rates of our foreign subsidiaries with a functional currency other than the U.S. dollar.

(t)

Ordinary share

On November 22, 2011, the Company filed Amended and Restated Memorandum and Articles of Association with the Registry of Corporate Affairs of the BVI Financial Services Commission that on November 29, 2011 became effective as of the filing date to amend the Company’s ordinary shares of US$0.01 par value capital stock to no par value capital stock. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis.

On October 8, 2019, the Company issued bonus shares at the rate of one ordinary share for every two ordinary shares held, creating 1,030,950 new shares of common stock.

(u)

Net income per ordinary share

The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Euro Tech Holdings Company Limited are computed by dividing net income attributable to Euro Tech Holdings Company Limited by the weighted average number of ordinary shares outstanding during the period. The Group reports both basic earnings per share, which is based on the weighted average number of ordinary shares outstanding, and diluted earnings per share, which is based on the weighted average number of ordinary shares outstanding and all dilutive potential ordinary shares outstanding.

Outstanding stock options are the only dilutive potential shares of the Company.

F-17

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(v)

Stock-based compensation

The Group determines compensation expense for stock-based awards based on the estimated fair values at the grant date and recognizes the related compensation expense over the vesting period. The Group uses the straight-line amortization method to recognize compensation expense related to stock-based awards that have only service conditions. This method recognizes stock compensation expense on a straight-line basis over the requisite service period for the entire award.

(w)

Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from engineering contracts over time, the valuation of goodwill, and contract assets and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

(x)

Related parties

Related parties are affiliates of the Group; entities for which investments are accounted for by the equity method by the Group; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the Group; its management; members of the immediate families of principal owners of the Group and its management; and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

(y)

Segment information

The Group reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Group’s reportable segments. The Group categorises its operations into two business segments: Trading and manufacturing, and Engineering.

F-18

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(z)

Concentration

Financial instruments that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable, net. The Group maintains substantially all of its cash and cash equivalent balances with large financial institutions which are believed to be high quality institutions.

The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top customers accounting for more than 5% of the Group’s revenue generated approximately 23%, 34%, and 22% of consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, two customers (Customer A: 9%; Customer B: 8%), two customers (Customer A: 19%; Customer B: 10%) and one customer (Customer A: 15%) accounted for more than 10.0% of annual revenues, respectively.

The Group grants trade credit under contractual payment terms, generally without collateral, to its customers, which include high credit quality electric utilities, general contractors, owners and managers of industrial properties and government departments.

Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2020, three (2019: one) of the Group’s customers individually exceeded 10.0% of accounts receivable, net. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.

(aa)

Finance costs

Interest relating to loans repaid is expensed in the period the repayment occurs.

F-19

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(ab)

Warranties

The suppliers of the Group offer a standard one-year warranty to end customers of the Group. The Group only provides labour service to repair or replace parts. The Group does not maintain a general warranty reserve because historically labour costs for such repair or replacement have been de minimis.

(ac)

Shipping and handling costs

Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.

(ad)

Statutory reserves

The Group is required to make appropriation to reserve funds, comprising the statutory reserve fund and statutory staff welfare fund, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”).

Appropriations to the statutory reserve fund is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve fund is equal to 50% of the entities’ registered capital.

(ae)

Fair value measurements

The Group uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2020 and 2019, the Group determined that the carrying values of cash and cash equivalents, restricted cash, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, contract liabilities, other payables and accrued expenses and income tax payable approximate their fair values because of the short-term nature of these instruments.

F-20

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(af)

Recent accounting pronouncements

Changes to GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Group considers the applicability and impact of all ASUs. The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements.

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposures. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill, through the elimination of Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Group adopted this ASU on a prospective basis in January 2020 and there was no effect on the Group’s consolidated financial statements.

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 Group adopted this ASU in January 2020 and there was no effect on the consolidated financial statements or disclosures.

Recently issued accounting pronouncements not yet adopted

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 Group 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 adoption of this standard is not expected to have a material impact on the Group’s consolidated financial statements or disclosures.

F-21

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(af)

Recent accounting pronouncements (Cont'd)

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),” an amendment clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivative instruments. The guidance is effective for fiscal years beginning after December 15, 2020. ASU 2020-01 will become effective for the Group in fiscal 2022. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, “Codification Improvements,” this ASU affects a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early application of the amendments is permitted for and varies based on the entity. The amendments should be applied retrospectively and at the beginning of the period that includes the adoption date. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.

(ag)

Reclassification

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

(ah)

Non-controlling interests

For entities that are consolidated, but not 100% owned, a portion of the income or loss and equity is allocated to owners other than the Group. The aggregate of the income or loss and corresponding equity that is not owned by the Group is included within non-controlling interests in the consolidated financial statements.

Non-controlling interests is presented as a separate component of equity in the consolidated balance sheets. Net income includes the net income attributable to the holders of non-controlling interests in the consolidated statements of operations and comprehensive income / (loss). Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.

(ai)

Impairment of long lived assets

Long-lived assets such as property, plant and equipment with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets.

Lease obligations

The Group has operating leases primarily for office space. The Group’s leases have remaining lease terms of several months to two years.

The components of lease expense are as follows:

	Years ended December 31,
	2020	2019
	US$’000	US$’000

Operating lease cost	257	193
Short-term lease cost	64	153

Total lease cost	321	346

F-22

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Lease obligations

Supplemental consolidated cash flow information related to leases is as follows:

	Years ended December 31,
	2020	2019
	US$’000	US$’000

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases	195	346

Right-of-use assets obtained in exchange for lease obligations (noncash):
Operating leases	-	460

Supplemental consolidated balance sheet information related to leases is as follows:

	December 31,
	2020	2019
	US$’000	US$’000

Operating leases
Operating lease right-of-use assets	233	406

Current portion of long-term operating lease obligations	118	170
Long-term operating lease obligations, net of current maturities	94	216

Total operating lease liabilities	212	386


Weighted average remaining lease term
Operating leases	16 months	27 months

Weighted average discount rate
Operating leases	5%	5%

Maturities of lease liabilities are as follows:

	Operating leases
	US$’000

Year ending December 31,
2021	144
2022	102

Total lease payments	246
Less: imputed interest	(34)
Total	212

F-23

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Accounts receivable, net

Accounts receivable, net consisted of the following at December 31:

	2020	2019
	US$’000	US$’000

Contract receivables	3,229	3,622
Less: allowance for doubtful accounts	(30)	(36)

	3,199	3,586

The roll-forward of activity in the allowance for doubtful accounts was as follows for the years ended December 31:

	2020	2019
	US$’000	US$’000

Balance at beginning of period	36	112
Less : reversal in allowances	(6)	(76)

Balance at end of period	30	36

The following is an aging analysis of accounts receivable, net at December 31:

	2020	2019
	US$’000	US$’000

Current	2,014	1,495

Past due
1-30 days	85	41
31-60 days	202	1,343
61-90 days	41	99
Greater than or equal to 91 days	857	608

	1,185	2,091

	3,199	3,586

F-24

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Prepayments and other current assets

Prepayment and other current assets mainly represent deposits paid for purchases and services, rental and utilities deposits, and prepaid expenses.

	December 31,
	2020	2019
	US$’000	US$’000

Deposits paid	838	344
Prepayments	168	151
Other receivables	250	251
Other tax recoverable	258	2

	1,514	748

Contract assets and liabilities

Contracts with customers usually stipulate the timing of payment, which is defined by the terms found within the various contracts under which work was performed during the period. Therefore, contract assets and liabilities are created when the timing of costs incurred on work performed does not coincide with the billing terms.

The Group’s consolidated balance sheets present contract assets which contains earned unbilled revenue associated with contract work that has been completed but not paid by customers, that are generally due once the job is completed and approved.

Contract assets consisted of the following at December 31:

	2020	2019
	US$’000	US$’000

Unbilled revenue	202	441

The Group’s consolidated balance sheets present contract liabilities which contains deferred revenue (previously identified as billings in excess of costs and estimated earnings on uncompleted contracts).

F-25

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Contract assets and liabilities (Cont’d)

Contract liabilities consisted of the following at December 31:

	2020	2019
	US$’000	US$’000

Deferred revenue	1,063	869

The following table provides information about contract assets and contract liabilities from contracts with customers:

	December 31,
	2020	2019
	US$’000	US$’000

Contract assets	202	441
Contract liabilities	(1,063)	(869)

Net contract liabilities	(861)	(428)

The difference between the opening and closing balances of the Group’s contract assets and contract liabilities primarily results from the timing of the Group’s billings in relation to its performance of work. The amounts of revenue recognized in the period that were included in the opening contract liability balances were US$1,214,000 and US$1,225,000 for the years ended December 31, 2020 and 2019, respectively. The revenue consists primarily of work performed on previous billings to customers.

The net liabilities position for contracts in process consisted of the following at December 31:

	2020	2019
	US$’000	US$’000

Cost and estimated earnings on uncompleted contracts	1,904	5,150
Less: billings to date	(2,765)	(5,578)

	(861)	(428)

F-26

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Contract assets and liabilities (Cont’d)

The net liabilities position for contracts in process is included within the contract asset and contract liability in the accompanying consolidated balance sheets as follows at December 31:

	2020	2019
	US$’000	US$’000

Unbilled revenue	202	441
Deferred revenue	(1,063)	(869)

	(861)	(428)

Inventories

	December 31,
	2020	2019
	US$’000	US$’000

Raw materials	63	85
Work in progress	20	29
Finished goods	259	472

	342	586

Management continuously reviews obsolete and slow moving inventories and assesses the inventory valuation to determine if the write-down of inventories is deemed appropriate. For the years ended December 31, 2020, and 2019, write-down of inventories amounted to US$13,000 and US$35,000, respectively, which were charged to cost of revenue in consolidated statements of operations and comprehensive income / (loss).

F-27

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Property, plant and equipment, net

	December 31,
	2020	2019
	US$’000	US$’000

Office premises*	673	1,866
Leasehold improvements	157	155
Furniture, fixtures and office equipment	557	511
Motor vehicles	175	173
Testing equipment	37	37

	1,599	2,742

Less: Accumulated depreciation	(1,340)	(2,042)

	259	700

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000

Depreciation charge	49	69	60

* Far East earns rental income from a property in Beijing, PRC for which it does not hold the title. Far East is investigating various ways in which to obtain the title but has not formulated a specific plan as of the date of issuance of this consolidated financial statements. The net book value of the property at December 31, 2020 is approximately US$92,000 (2019: US$96,000).

Investments in affiliates

Investments in affiliates are accounted for using the equity method of accounting.

Far East is holding 19.4% (2019: 19.4%) equity interests in Blue Sky, a company incorporated in the PRC, with total cost of investment of US$5,540,000. Blue Sky provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants since 2000.

Blue Sky has listed its shares on the New Third Board in the PRC since November 17, 2015 and suspended trading from August 15, 2017 and resumed trading on February 2, 2018 and suspended trading from November 24, 2020 and resumed trading on January 6, 2021.

The Group’s interest in Blue Sky has been counted for as an affiliate using the equity method as the Group has representation on both the Board and Executive Committee of Blue Sky, and the ability to participate in the decision-making process and exercise significant influence.

F-28

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Investments in affiliates (Cont’d)

A summary of the financial information of the affiliate, Blue Sky, is set forth below:

	December 31,
	2020	2019
Balance Sheet:	US$’000	US$’000

Current assets	44,918	41,614

Non-current assets	15,258	15,666

Total assets	60,176	57,280

Total liabilities	(30,889)	(31,108)

Total shareholders’ equity	29,287	26,172

	Year ended December 31,
	2020	2019
Operating results:	US$’000	US$’000

Net sales	43,933	40,348


Operating income	2,214	677


Net income	1,946	704

Far East previously held 20% equity interests in Zhejiang Jia Huan Electronic Co. Ltd. (“Jia Huan”), a company incorporated in the PRC, with total cost of investment of US$2,486,000. Jia Huan provides a comprehensive service for environmental protection business since 1969 and is based in Jin Hua, Zhejiang. On March 5, 2018, Far East entered into an Equity Transfer Agreement to sell this 20% equity stake of Jia Huan for a purchase price of RMB31,312,500 to Ms. Jin Lijuan, the wife of the holder of the remaining 80% equity stake of Jia Huan. In accordance with the terms of the Agreement, all approvals and registrations with the relevant governmental authorities were obtained, the closing of the transaction has been completed, and the Purchaser paid the Purchase Price to the Company, in full in May 2018. The Company made gain of US$1,522,000 on this disposal.

F-29

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Other payables and accrued expenses

Other payables and accrued expenses mainly represent deposits received from customers and accruals for operating expenses.

	December 31,
	2020	2019
	US$’000	US$’000

Dividend payables	84	80
Deposits received from customers	-	31
Rental deposit received	4	12
Accruals for operating expenses	1,500	941
Other tax payables	5	78

	1,593	1,142

Ordinary share

During the years ended December 31, 2018 and 2020, there was no movement with the Company’s issued ordinary shares and outstanding shares.

On October 8, 2019, the Company issued bonus shares at the rate of one ordinary share for every two ordinary shares held, creating 1,030,950 new shares of common stock.

Number of outstanding shares at year end of:

	2020	2019

Shares issued	3,260,559	3,260,559
Less: shares under treasury stock	(167,700)	(167,700)

	3,092,859	3,092,859

Goodwill

Reporting units - The Group’s reporting units consist of its trading and manufacturing and engineering segments. Goodwill is not amortized, but instead is reviewed for impairment at least annually during the fourth quarter of each year at the reporting level, absent any interim indicators of impairment or other factors requiring an assessment.

Annual impairment assessment - For our 2020 annual impairment test we performed a qualitative assessment, using information as of October 1. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. We determined there were no factors indicating the need to perform a quantitative goodwill impairment test and concluded that it is more likely than not the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill.

F-30

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Goodwill (Cont'd)

In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No impairments were recorded to our goodwill during the years ended December 31, 2020, 2019 and 2018. No material events or changes occurred between the testing date and year end to trigger a subsequent impairment review.

At December 31, 2020 and 2019, we had goodwill for our engineering segment with a carrying amount of US$1,071,000 and US$1,071,000, respectively.

PRC statutory reserves

Under the relevant PRC laws and regulations, the PRC subsidiaries are required to appropriate a certain percentage of their respective net income to two statutory funds i.e. the statutory reserve fund and the statutory staff welfare fund. The PRC subsidiaries can also appropriate certain amount of its net income to the enterprise expansion fund.

(i)

Statutory reserve fund

Pursuant to applicable PRC laws and regulations, the PRC subsidiaries are required to allocate at least 10% of its net income to the statutory reserve fund until such fund reaches 50% of its registered capital. The statutory reserve fund can be utilised upon the approval by the relevant authorities, to offset accumulated losses or to increase its registered capital, provided that such fund be maintained at a minimum of 25% of its registered capital.

Under the PRC laws and regulations, the PRC subsidiaries are restricted in their ability to transfer certain of its net assets in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$3,174,000 as at December 31, 2020 (2019: US$3,174,000 and 2018: US$3,174,000).

(ii)

Statutory staff welfare fund

Pursuant to applicable PRC laws and regulations, the PRC subsidiaries are required to allocate a certain amount of its net income to the statutory staff welfare fund determined by it. The statutory staff welfare fund can only be used to provide staff welfare facilities and other collective benefits to its employees. This fund is non-distributable other than upon liquidation of the PRC subsidiaries.

(iii)

Enterprise expansion fund

The enterprise expansion fund shall only be used to make up losses, expand the PRC subsidiaries’ production operations, or increase the capital of the subsidiaries. The enterprise expansion fund can be utilised upon approval by relevant authorities, to convert into registered capital and issue bonus capital to existing investors, provided that such fund be maintained at a minimum of 25% of its registered capital.

F-31

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Other income / (losses), net

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000

Exchange gain / (loss), net	101	(30)	7
Rental income	59	82	51
Government subsidies – Employment Support Scheme *	147	-	-

	307	52	58

* The amount represents salaries and wage subsidies granted under Anti-Epidemic Fund by the Government of the Hong Kong Special Administrative Region for the use of paying wages of employees from June to November 2020.

Income taxes

No income tax arose in the United States of America by the Group for the years ended December 31, 2020, 2019 and 2018.

The Company and Pact Asia Pacific Limited are exempt from taxation in the British Virgin Islands (“BVI”).

Far East and Euro Tech (China) Limited provided for Hong Kong profits tax at a rate of 8.25% on assessable profits up to US$256,000; and 16.5% on any part of assessable profits over US$256,000 in year 2020 (2019 and 2018: 16.5%) on the basis of their income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for profits tax purposes.

Euro Tech Trading (Shanghai) Limited (“ETTS”), a subsidiary of Far East, provides for PRC Enterprise Income Tax (“EIT”) at a rate of 25% (2019 and 2018: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2020, ETTS had an assessable loss carried forward of US$604,778 as agreed by the local tax authority to offset its profit for the forth coming years (2019: US$518,328 and 2018: US$801,751). Such loss will expire in 5 years.

Shanghai Euro Tech Limited (“SET”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2019 and 2018: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2020, SET had an assessable loss carried forward of US$658,733 as agreed by the local tax authority to offset its profit for the forth coming years (2019: US$444,192 and 2018: US$317,098). Such loss will expire in 5 years.

F-32

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Income taxes (Cont'd)

Shanghai Euro Tech Environmental Engineering Company Limited (“SETEE”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2019 and 2018: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2020, SETEE had an assessable loss carried forward of US$34,032 as agreed by the local tax authority to offset its profit for the forth coming years (2019: US$380,591 and 2018: US$854,388). Such loss will expire in 5 years.

Yixing Pact Environmental Technology Co. Ltd. (“Yixing”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2019 and 2018: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2020, Yixing had an assessable loss carried forward of US$2,304,828 as agreed by the local tax authority to offset its profit for the forth coming years (2019: US$1,664,275 and 2018: US$1,228,223). Such loss will expire in 5 years.

Under the New Enterprise Income Tax Law and the implementation rules, profits of the PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries to foreign holding company are subject to a withholding tax at a rate of 10% unless reduced by tax treaty. Aggregate undistributed earnings of Far East’s subsidiaries located in the PRC that are available for distribution to Far East of approximately US$0.6 million at December 31, 2020 (2019: US$0.6 million and 2018: US$0.6 million) are intended to be reinvested, and accordingly, no deferred taxation has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to Far East. Distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax.

The Company and its subsidiaries are based in Hong Kong and PRC and file Hong Kong profits tax return and PRC EIT return, respectively. The components of the (provision) / credit for income taxes (expense ) / credit were as follows:

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Current taxes (expense) / credit
Hong Kong profits tax and the PRC EIT	(4)	-	346

Income tax (expense) / credit	(4)	-	346

Deferred tax expenses
Hong Kong and the PRC	(92)	(37)	(34)

Total deferred tax expense	(92)	(37)	(34)

Total (expense) / credit	(96)	(37)	312

F-33

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Income taxes (Cont’d)

The items comprising the difference between income taxes computed at the Hong Kong profits tax and PRC EIT statutory tax rates in effect for 2020, 2019 and 2018 and our effective tax rates were as follows:

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000

Income / (loss) before income taxes	498	173	(373)

Computed tax using respective companies’ statutory tax rates	133	69	254
Change in valuation allowances	48	30	68
Under / (over-provision) for income taxes in prior years	-	(5)	131
Non-deductible expenses	(277)	(131)	(5)

Income taxes (expense) / credit at effective tax rate	(96)	(37)	312

The components of deferred tax (liabilities) / assets are as follows:

	December 31,
	2020	2019
	US$’000	US$’000

Tax losses	901	858
Temporary differences	(5)	(19)
Less: Valuation allowances	(901)	(752)

Net deferred tax (liabilities) / assets	(5)	87

Uncertain tax positions

As a result of the Group’s analysis, management has determined that the Group does not have any material uncertain tax positions.

Net income per ordinary share

The calculation of the basic and diluted net income per ordinary share is based on the following data:

	December 31,
	2020	2019	2018
	Number of shares


Weighted average number of ordinary shares for the purposes of basic and diluted net income per share	3,092,859	2,301,993	2,061,909

F-34

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Stock options

2019 Stock Option and Incentive Plan

In April 2019, the Board of Directors approved the adoption of the 2019 Stock Option and Incentive Plan (the “Plan”). The Plan was also subsequently approved under a resolution of the Company's shareholders. The Plan provides for the granting of up to 300,000 Ordinary Shares (the “Share Limit”), in the form of options to Officers, Directors and Key Employees who perform services which contribute to the successful performance of the Company and its subsidiaries. In addition, the Plan provides that, on the first day of each fiscal year commencing on January 1, 2020, the Share Limit shall automatically be increased by that number of shares equal to 5% of the number of Ordinary Shares outstanding as of such date.

The Board of Directors or a committee (the “Committee”) appointed by the Board of Directors administers the Plan.

Appropriate adjustment in the maximum number of Ordinary Shares issuable pursuant to this Plan, the maximum number of Ordinary Shares with respect to which options may be granted within any 12-month period to any participant during the duration of this Plan, the number of shares subject to options granted under this Plan, and the exercise price with respect to options, shall be made to give effect to any increase or decrease in the number of issued Ordinary Shares resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, division of shares, reverse share split, spin-off, split-off, spin-out, or other distribution of assets to shareholders, issue of bonus shares or combination of shares, assumption and conversion of outstanding options due to an acquisition by the Company of the shares, stock or assets of any other company or corporation, other increase or decrease in the number of such shares outstanding effected, without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate.

The purchase price per share of the Ordinary Shares to be paid upon the exercise of the option must be at least 100% of the fair market value of an Ordinary Shares on the date on which the option was granted. Under the Plan, if the Ordinary Shares are principally traded on a national securities exchange or the Nasdaq Global Market or Capital Market at the time of grant, the Company is required to use, at fair market value, the average of the closing prices of the Ordinary Shares for the ten consecutive trading days immediately before the date of grant. If the Ordinary Shares are traded on a national securities exchange or the Nasdaq Stock Global Market or Capital Market, but no closing prices are reported for such ten-day period, or if the Ordinary Shares are principally traded in the over-the-counter market, the Company is required to use, as fair market value, the average of the mean between the bid and asked prices reported for the Company’s Ordinary Shares at the close of trading during such ten-day period before the date of grant. If the Ordinary Shares are traded neither on a national securities exchange, one of the Nasdaq’s Markets nor in the over-the-counter market or if bid and asked prices are otherwise not available, the fair market value of the Ordinary Shares on the date of grant will be determined in good faith by the Committee or the Board of Directors, as the case may be.

F-35

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Stock options (Cont’d)

2019 Stock option and incentive plan (Cont’d)

The Board of Directors or the Committee, as the case may be, determines, at the time of grant, when each option granted under the Plan will become exercisable. Notwithstanding the foregoing, all options held by a key employee of the Company or its subsidiaries become immediately exercisable, whether or not exercisable at the time, upon the death or disability, and shall be exercisable within twelve (12) months after the date of death or disability, but in no event later than the expiration date of such Options.

No option is to be exercisable more than ten years from the date the option is granted.

Payment of Exercise Price for Options. Under the Plans, payment for shares purchased upon exercise of an option may be made by any of the following methods, subject to certain requirements: (i) in cash, (ii) in Ordinary Shares which have been held by the participant for not less than six months prior to the exercise of the option, valued at its Fair Market Value (as defined) on the date of exercise, (iii) in cash by a broker-dealer to whom the holder of the option has submitted an exercise notice consisting of a fully endorsed option, or (iv) by such other medium of payment as the Board or the Committee, as applicable, in its sole discretion, shall authorize, or by any combination of (i), (ii), or (iii), at the sole discretion of the Board or the Committee, as applicable, or in any manner provided in the option agreement, except by directing the Company to withhold Ordinary Shares otherwise issuable upon the exercise of the Option in payment of the exercise price.

Transfer of Options. Under the Plans, an option may not be sold, assigned or otherwise transferred except to:

●

the spouse or lineal descendant of a plan participant;

●

the trustee of a trust for the primary benefit of a plan participant’s spouse or lineal descendant;

●

a partnership of which a plan participant and lineal descendants are the only partners; or

●

a tax exempt organization.

These assignments are only permitted if the assigning option holder does not receive any compensation in connection with the assignment and the assignment is expressly approved by the Board or Committee, as the case may be.

F-36

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Stock options (Cont’d)

2019 Stock option and incentive plan (Cont’d)

The Company indemnifies the members of any Committee and its delegates and the Chief Executive Officer against (a) the reasonable expenses (as such expenses are incurred), including attorneys’ fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein), to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any option granted under the Plan; and (b) all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or delegatee, as applicable, is liable for gross negligence or gross misconduct in the performance of his or her duties; provided that within 60 days after institution of any such action, suit or proceeding a Committee member or delegatee shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same.

The Board may terminate, suspend, or amend the Plan at any time without the authorization of shareholders to the extent allowed by law or the rules of any market on which the Company’s shares are then listed or quoted.

During the year ended December 31, 2019, the Company granted such options to its officers, directors and employees, which allow them to purchase up to 51,000 ordinary shares. The exercise price of all options granted is US$2.60 per share. The stock options granted are exercisable on January 1, 2022 and terminate on April 18, 2029.

The Company estimate the fair value of the options granted under the Binomial pricing model at US$2.324 per share.

Changes in outstanding options under various plans mentioned above were as follows:

	Year ended December 31,
	2020		2019		2018
	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price
		US$		US$		US$

Outstanding, beginning of year	51,000	2.60	-	-	-	-
Granted	-	-	51,000	2.60	-	-

Outstanding, end of year	51,000	2.60	51,000	2.60	-	-

Exercisable, end of year	-	-	-	-	-	-

F-37

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Stock options (Cont’d)

As of December 31, 2020, 2019 and 2018, there was no unrecognized ; stock-based compensation expense related to unvested stock options. The compensation expense for the year is US$54,157 (2019: US$10,358; 2018: US$ Nil).

The Group applies the provisions of ASC No. 718-10, which requires to recognise expense related to the fair value of stock-based compensation awards, including employee stock options.

The Binomial option-pricing model is used to estimate the fair value of the options granted. This requires the input of subjective assumptions, including the expected volatility of stock price, expected option term, expected risk-free rate over the expected option term and expected dividend yield rate over the expected option term. Because changes in subjective input assumptions can materially affect the fair value estimate, in directors’ opinion, the existing model may not necessarily provide a realisable measure of the fair value of the stock options. Expected volatility is based on historical volatility in the 180 days prior to the issue of the options. Expected option term and dividend yield rate are based on historical trends. Expected risk-free rate is based on US Treasury securities with similar maturities as the expected terms of the options at the date of grant.

Pension plan

Prior to December 1, 2000, Far East had only one defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions plus 50% to 100% of individual fund account balances contributed by Far East, depending on their years of service with Far East. Far East was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company.

With the introduction of the Mandatory Provident Fund Scheme (“MPF scheme”), a defined contribution scheme managed by an independent trustee on December 1, 2000, Far East and its employees who joined Far East subsequently make monthly contributions to the scheme at 5% of the employee’s cash income as defined under the Mandatory Provident Fund Schemes Ordinance. Under the MPF scheme, the employer and its employees are each required to make contributions to the plan at 5% of the employees' relevant income, subject to a cap of monthly relevant income of HK$30,000. Contributions to the plan vest immediately.

During the years ended December 31, 2020, 2019 and 2018, the aggregate contributions of the Group to the aforementioned pension plans and retirement benefit schemes were approximately US$104,000, US$332,000 and US$278,000 respectively.

As stipulated by the rules and regulations in the PRC, the PRC’s subsidiaries contributes to state-sponsored retirement plans for its employees in Mainland China. PRC’s subsidiaries’ contribution approximately 16% of the basic salaries of its employees, and have no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

F-38

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Risk factors

Financial risk factors

The Group’s activities expose it to a variety of financial risks: credit risk and foreign exchange rate risk.

(i)

Credit risk

The Group has no significant concentration of credit risk, cash in banks in Hong Kong and PRC is insured with limit of approximately US$64,000 and US$72,000, respectively per bank per each depositor. Uninsured cash in banks and restricted cash balances in Hong Kong and PRC are of approximately US$4,594,000 (2019: US$6,468,000). Cash transactions are limited to high credit quality banks.

(ii)

Foreign exchange rate risk

The Group operates in Hong Kong, the PRC and trades with both local and overseas customers and suppliers, and is exposed to foreign exchange rate risk arising from various currency exposures, primarily with respect to purchases in Hong Kong dollars, Renminbi and Euros. Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders and sales orders, recognized assets and liabilities, and net investment in the PRC operations.

Related party transactions

Other than compensation to directors and stock options available to the directors and disposal of long-term investment to associate Blue Sky for a total consideration of approximately US$148,000 with nil gain or loss on disposal during the year ended December 31, 2020, there were no transactions with other related parties in the years 2020, 2019 and 2018.

Commitments and contingencies

(i)

Banking facilities

As at December 31, 2020 and 2019, the Group had various banking facilities available for overdraft and import and export credits from which the Group can draw up to approximately US$897,000 and US$897,000 respectively, of which approximately US$596,000 and US$778,000 were utilised for issuance of bank guarantees as security for the performance of various contracts with customers and import loans. The various banking facilities are secured by a bank deposit of approximately US$897,000 and various blanket counter indemnities and counter indemnities. The weighted average interest rate for import loans as at December 31, 2020 was 4.9% per annum (December 31, 2019: 4.9% per annum). For the years ended December 31, 2020 and 2019, the average dollar amount of the bank borrowings was approximately US$457,000 and US$92,000 respectively and average interest rates were approximately 4.9% and 4.9% per annum respectively for the years ended December 31, 2020 and 2019.

F-39

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Commitments and contingencies (Cont’d)

(ii)

Non-controlling interest put option

The Group granted the non-controlling interest of Yixing Pact Environmental Technology Co., Ltd. and Pact Asia Pacific Limited a put option, which is effective from 2009, requiring the Group to acquire part or all remaining shares of these two companies at a purchase price per share calculated by 5.2 times of their average net income for the three prior fiscal years divided by total number of shares outstanding at the time of exercise of such option. Such put option did not have an expiry date.

(iii)

Insurance

The Group carries insurance policies to cover various risks, primarily general liability, automobile liability, workers’ compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid.

(iv)

Purchase commitments

To manage the risk of changes in material prices and subcontracting costs used in tendering bids for engineering contracts, most of the time, the Group obtains firm quotations from suppliers and subcontractors before submitting a bid. These quotations do not include any quantity guarantees. As soon as the Group is advised that its bid is successful, the Group enters into firm contracts with most of its materials suppliers and sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.

(v)

Litigations

The Group is now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the consolidated financial statements of the Group. There are no significant unresolved legal issues as of December 31, 2020 and 2019.

(vi)

Contingencies

The Group accounts for loss contingencies in accordance with ASC Topic 450 and other related guidelines. As of December 31, 2020 and 2019, the Group’s management is of the opinion that there are no commitments and contingencies to account for.

F-40

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Segment information

(i)

The Group reports under two segments: Trading and manufacturing, and Engineering.

Operating income represents total revenues less operating expenses, excluding other expense, interest and income taxes. The identifiable assets by segment are those used in each segment’s operations. Intersegment transactions are not significant and have been eliminated to arrive at consolidated totals.

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Revenue
Trading and manufacturing	9,476	11,877	13,770
Engineering	3,881	5,522	6,334

	13,357	17,399	20,104
Operating loss
Trading and manufacturing	(488)	(102)	(119)
Engineering	(1,027)	(158)	(821)
Unallocated corporate expenses	(186)	(180)	(119)

	(1,701)	(440)	(1,059)

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Depreciation:
Trading and manufacturing	39	54	43
Engineering	10	15	17

	49	69	60

Capital expenditures, gross
Trading and manufacturing	2	17	79
Engineering	9	4	6

	11	21	85

	December 31,
	2020	2019
	US$’000	US$’000
Assets
Trading and manufacturing	7,877	9,843
Engineering	12,218	12,370

	20,095	22,213
Liabilities
Trading and manufacturing	2,645	4,319
Engineering	2,987	2,557

	5,632	6,876

F-41

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Segment information (Cont’d)

(ii)

Geographical analysis of revenue by customer location is as follows:

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Revenue -
The PRC	5,072	6,886	8,026
Hong Kong	8,024	10,169	11,169
Others	261	344	909

	13,357	17,399	20,104

(iii)

Long-lived assets (1)

Geographical analysis of long-lived assets is as follows:

	December 31,
	2020	2019
	US$’000	US$’000

Hong Kong	47	478
The PRC	212	222

	259	700

(1)

Long-lived assets represent property, plant and equipment, net.

(iv)

Major suppliers

Details of individual suppliers accounting for more than 5% of the Group’s purchases are as follows:

	Year ended December 31,
	2020	2019	2018

Supplier A	30%	53%	55%
Supplier B	12%	-	-
Supplier C	10%	7%	8%
Supplier D	9%	6%	7%
Supplier E	6%	6%	7%
Supplier F	5%	-	-

F-42

EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Segment information (Cont’d)

(v)

Major customers

Details of individual customers accounting for more than 5% of the Group’s revenue are as follows:

	Year ended December 31,
	2020	2019	2018

Customer A	9%	19%	15%
Customer B	8%	-	-
Customer C	6%	10%	-
Customer D	-	5%	-
Customer E	-	-	7%

Disaggregated revenue from contracts

	Year ended December 31,
	2020	2019	2018
	US$’000	US$’000	US$’000
Revenue
Trading and manufacturing (revenue recognized at point in time)	9,476	11,877	13,770
Engineering (revenue recognized over time)	3,881	5,522	6,334
	13,357	17,399	20,104

Subsequent event

On February 11, 2021, the Company announced that the Company’s board of directors authorized the issuance of bonus shares (the “Bonus Shares”), which are issuable on March 2, 2021 to shareholders of record as of February 23, 2021 (the “Record Date”). Shareholders of record on the Record Date will receive two (2) ordinary shares for every three (3) ordinary shares held. All issuances resulting in a fractional share will be rounded down to the next whole share.

F-43

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION

TECHNOLOGY COMPANY LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm	F-45 to F-46
Consolidated Balance Sheets as of December 31, 2020 and 2019	F-47
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018	F-48
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018	F-49
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018	F-50
Notes to the Consolidated Financial Statements	F-51 to F-72

F-44

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Zhejiang Tianlan Environmental Protection Technology Company Limited

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Zhejiang Tianlan Environmental Protection Technology Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as of December 31, 2020 and 2019, the related consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2020 and 2019, and the results of its consolidated operations and its consolidated cash flows for each of the three years ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the management and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-45

Report of Independent Registered Public Accounting Firm (Cont’d)

To the Board of Directors and Shareholders of

Zhejiang Tianlan Environmental Protection Technology Company Limited

Critical Audit Matter (Cont’d)

Revenue Recognition

As described further in Note 2 to the consolidated financial statements, revenues derived from long-term contracts are recognized as the performance obligations are satisfied over time. The Group uses a ratio of project costs incurred to estimated total costs for each contract to recognize revenue. Under the cost-to-cost approach, the determination of the progress towards completion requires management to prepare estimates of the costs to complete. In addition, the Group’s contracts may include variable consideration related to contract modifications through change orders or claims, and management must also estimate the variable consideration the Group expects to receive in order to estimate the total contract revenue. We identified revenue recognized over time to be a critical audit matter.

The principal considerations for our determination that revenue recognized over time is a critical audit matter is that auditing management’s estimate of the progress toward completion of its projects was complex and subjective. This is due to the considerable judgement required to evaluate management’s determination of the forecasted costs to complete its long-term contracts as future results may vary significantly from past estimates due to changes in facts and circumstances. In addition, auditing the Group’s measurement of variable consideration is also complex and highly judgmental and can have a material effect on the amount of revenue recognized.

Our audit procedures related to revenue recognized over time included the following, among others.

●

We obtained an understanding, evaluated the design of the operating effectiveness of the Group’s processes and controls related to contract revenue recognition;

●

We tested the Group’s cost-to-cost estimates by evaluating the appropriate application of the cost-to-cost method, testing the significant assumptions used to develop the estimated cost to complete and testing the completeness and accuracy of the underlying data;

●

We tested the estimated variable consideration by evaluating the appropriate application of the most likely amount method, and tracing amounts to supporting documentation;

●

We evaluate management’s methodologies and the consistency of management’s methodologies over the life of the contracts;

●

We tested the original estimated costs and profit margins on projects that were commenced and completed during the year ended December 31, 2020, by obtaining the original estimates, compare to the actual costs and profit margin for the completed contracts and investigate significant changes; and

●

We tested the estimated costs to complete projects that were not completed during the year ended December 31, 2020 by comparing the estimated cost to complete at December 31, 2020 to actual cost incurred subsequent to December 31, 2020.

s/ Union Power HK CPA Limited

We have served as the Company’s auditor since 2018.

Hong Kong, the People’s Republic of China

May 13, 2021

F-46

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

	December 31,
	2020	2019
	RMB’000	RMB’000
Assets
Current assets:
Cash	50,969	11,614
Accounts receivable, net	118,621	138,778
Prepayments and other current assets	28,387	52,859
Contract assets, net	94,494	80,961
Inventories	2,389	5,755
Short-term investments	-	800

Total current assets	294,860	290,767

Property, plant and equipment, net	79,257	87,781
Intangible assets, net	2,120	927
Land use right, net	5,147	5,291
Deferred tax assets	13,639	13,970
Long-term investments	-	1,492

Total non-current assets	100,163	109,461

Total assets	395,023	400,228

Liabilities and shareholders’ equity
Current liabilities:
Bank borrowings	20,029	26,841
Accounts payable	97,795	89,372
Other payables and accrued expenses	17,747	7,583
Contract liabilities	47,135	55,898
Other taxes payable	15,169	9,531
Current portion of long-term finance lease obligations	-	25,785

Total current liabilities	197,875	215,010

Deferred government grant	4,894	2,349

Total non-current liabilities	4,894	2,349

Total liabilities	202,769	217,359

Commitments and contingencies (Note 21)

Shareholders’ equity:
Share capital 82,572,000 no par value shares authorised, issued and outstanding, as of December 31, 2020 and 2019, respectively	82,572	82,572
Capital reserve	35,761	35,510
PRC statutory reserve	15,670	14,421
Retained earnings	55,248	46,423

Total shareholders’ equity attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited	189,251	178,926
Non-controlling interests	3,003	3,943

Total shareholders’ equity	192,254	182,869


Total liabilities and shareholders’ equity	395,023	400,228

The accompanying notes form an integral part of these consolidated financial statements.

F-47

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Revenues	304,710	277,581	330,244

Cost of revenues	(261,478)	(227,632)	(274,062)

Gross profit	43,232	49,949	56,182

Selling and administrative expenses	(60,393)	(43,739)	(48,546)

Operating (loss) / income	(17,161)	6,210	7,636

Interest income	30	50	53
Interest expense	(1,676)	(2,258)	(2,998)
Other income	39,646	6,276	8,561
Other losses	(5,481)	(5,624)	(47,446)

Net income / (loss) before income tax	15,358	4,654	(34,194)

Income tax (expense) / credit	(1,858)	(296)	7,967

Net income / (loss)	13,500	4,358	(26,227)
Net loss / (income) attributable to non-controlling interests	2,032	484	(419)
Net income / (loss) attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited’s shareholders	15,532	4,842	(26,646)

Net income / (loss) per ordinary share attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited’s shareholders	RMB 0.19	RMB 0.06	(RMB 0.32)

Weighted average ordinary shares outstanding	82,572,000	82,572,000	82,572,000

The accompanying notes form an integral part of these consolidated financial statements.

F-48

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000
Cash flows from operating activities:
Net income/(loss)	13,500	4,358	(26,227)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Amortization of intangible assets	142	152	152
Amortization of land use right	159	149	149
Bad debts written off	-	5,383	13,946
Depreciation	6,359	6,556	11,755
Gain on disposal of property, plant and equipment	-	(39)	-
Impairment loss on contract assets	1,399	-	-
Impairment loss on long-term investments	1,340	-	-
Impairment loss on property, plant and equipment	2,742	-	33,500
Increase in allowance for doubtful accounts	-	2,437	-
Investment loss	-	241	-
Proceeds from deferred government grant	-	2,349	-
Property, plant and equipment written off	-	14	6
Reversal of allowance for doubtful accounts	(6,463)	-	-
Change in non-current assets and liabilities:
Deferred government grant	2,545	-	-
Deferred tax assets	331	268	(7,969)
Decrease / (increase) in current assets:
Accounts receivable, net	26,620	11,432	12,987
Prepayments and other current assets	24,472	(6,369)	1,403
Contract assets, net	(14,932)	20,033	18,262
Inventories	3,366	6,208	3,154
Short-term investments	800	-	-
Increase/(decrease) in current liabilities:
Accounts payable	8,423	(17,272)	(20,785)
Other payables and accrued expenses	10,164	(8,795)	(3,295)
Contract liabilities	(8,763)	14,852	(11,731)
Other taxes payable	5,638	(1,577)	22
Current portion of long-term finance lease obligations	(11,263)	-	-
Tax paid	(9,223)	(4,299)	(8,796)

Net cash provided by operating activities	57,356	36,081	16,533

Cash flows from investing activities:
Proceeds from investment	295	-	-
Proceeds from sale of long-term investments	-	-	133
Proceeds from sale of partial shareholding in a subsidiary	137	510	-
Proceeds from sale of property, plant and equipment	-	50	121
Proceeds from sale of subsidiaries	-	-	7,717
Purchase of intangible assets	(1,350)	-	(8)
Purchase of long-term investments	-	-	(111)
Purchase of property, plant and equipment	(577)	(1,584)	(913)
Purchase of short-term investments	-	(800)	-
Purchase of subsidiary	(5,100)	-	-

Net cash (used in)/provided by investing activities	(6,595)	(1,824)	6,939

Cash flows from financing activities:
Repayments of bank borrowings	(36,800)	(63,000)	(53,000)
Payment of principal obligations under long-term finance lease	-	(29,668)	(28,615)
Proceeds from bank borrowings	30,000	44,841	65,000
Proceeds from issuance of shares	-	-	2,450
Dividend paid to shareholders and interest paid	(4,606)	-	(9,908)

Net cash used in financing activities	(11,406)	(47,827)	(24,073)


Net increase/(decrease) in cash and cash equivalents	39,355	(13,570)	(601)

Cash and cash equivalents at beginning of year	11,614	25,184	25,785

Cash and cash equivalents at end of year	50,969	11,614	25,184

	RMB’000	RMB’000	RMB’000
Supplemental disclosure of consolidated cash flow information:

Cash paid during the period for income tax	-	5,237	8,796
Cash paid during the period for interest	1,716	2,258	2,924
Finance leases (disclosed in accompanying Note 3)

The accompanying notes form an integral part of these consolidated financial statements.

F-49

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED’S SHAREHOLDERS
	Share capital	Capital reserve	PRC statutory reserve	Retained earnings	Non-controlling interests	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Balance at December 31, 2017	82,572	32,480	14,122	79,646	2,494	211,314
Net income / (loss)	-	-	-	(26,646)	419	(26,227)
Dividend paid	-	-	-	(9,908)	-	(9,908)
Capitalization of gain on disposal of subsidiaries to the shareholders	-	1,874	-	-	(1,501)	373
Appropriation of reserves	-	1,212	(219)	(993)	-	-
Issuance of share	-	-	-	-	2,450	2,450
Balance at December 31, 2018	82,572	35,566	13,903	42,099	3,862	178,002
Net income / (loss)	-	-	-	4,842	(484)	4,358
Appropriation of reserves	-	-	518	(518)	-	-
Others	-	(56)	-	-	565	509
Balance at December 31, 2019	82,572	35,510	14,421	46,423	3,943	182,869
Net income / (loss)	-	-	-	15,532	(2,032)	13,500
Dividend paid	-	-	-	(2,890)	-	(2,890)
Others	-	251	(436)	(3,968)	(269)	(4,422)
Appropriation of reserves	-	-	1,685	(1,685)	-	-
Consolidation of companies under common control	-	3,600	-	1,836	2,122	7,558
Ordinary shares injected by shareholders	-	-	-	-	(761)	(761)
Utilization of reserve	-	(3,600)	-	-	-	(3,600)
Balance at December 31, 2020	82,572	35,761	15,670	55,248	3,003	192,254

The accompanying notes form an integral part of these consolidated financial statements.

F-50

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Organization and business

Zhejiang Tianlan Environmental Protection Technology Company Limited (the “Company”) was incorporated in Hangzhou City, Zhejiang Province, the People's Republic of China (“PRC”) on May 18, 2000. The Company is a limited liability company limited by shares with an operating period up to long term.

The Company provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants since 2000.

The Company has listed its shares on the New Third Board in the PRC since November 17, 2015 and suspended trading from August 15, 2017 and resumed trading on February 2, 2018 and suspended trading from November 24, 2020 and resumed trading on January 6, 2021.

The Group’s principal subsidiaries at December 31, 2020 and 2019 are set out below.

Name of entity	Ownership interest held by the Group		Place of incorporation and principal place of operation	Principal activities
	2020	2019

Zhejiang Tianlan Environmental Protection Engineering Company Limited	100%*	-	PRC	Design, general contract, installation and operating management of environmental protection projects
Hangzhou Tianlan Environmental Protection Equipment Company Limited	51%	51%	PRC	Manufacturing and installation services of environmental protection equipment
Hangzhou Tianlan Pure Environmental Protection Technology Company Limited	38.25%	40.8%	PRC	Manufacturing of environmental protection equipment
Hangzhou Tiancan Environmental Technology Company Limited	80%	100%	PRC	Manufacturing of environmental protection equipment

* This company was acquired in August 2020.

Summary of significant accounting policies

(a)

Basis of presentation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

F-51

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(b)

Basis of consolidation

The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

(c)

Subsidiaries

(d)

Revenue recognition

Our revenue is derived from long-term contracts for customers, as well as short-term contracts for customers. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers), is as follows:

Performance obligations satisfied over time (Design, installiation and operation management services)

Recognition of performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering projects typically span between 12 to 36 months. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design, installation and operation management services).

Revenues are recognized as our obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being installed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Group for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material, labor, subcontract and other costs.

F-52

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(d)

Revenue recognition (Cont’d)

Items excluded from cost-to-cost

Pre-contract costs are generally not material and are charged to expense as incurred, but in certain cases pre-contract recognition may be deferred if specific probability criteria are met.

Variable consideration

Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

The Group estimates variable consideration for a performance obligation at the most likely amount to which the Group expects to be entitled (or the most likely amount the Group expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Group will be entitled (or will incur in the case of liquidated damages). The Group includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Group’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Group.

Performance obligations satisfied at a point-in-time (Sales of equipment)

Revenue for our sales contracts is recognized at a point in time. Sales are recognized when control of the products has transferred, being when the products are delivered to the customer. Delivery occurs when the products have been delivered to the point of receipt by customer.

F-53

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(e)

Research and development costs

Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately RMB28,589,000, RMB19,018,000 and RMB14,363,000 for the years ended December 31, 2020, 2019 and 2018 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.

(f)

Income tax

The Group files tax returns in the PRC. The tax returns for 2020, 2019 and 2018 are subject to examination by the PRC taxing authorities, commencing with the first year filed.

(g)

Cash and cash equivalents

Cash and cash equivalents consist of bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal and uninsured. There were no cash equivalents as of December 31, 2020 and 2019.

(h)

Accounts receivable and allowance for doubtful accounts

(i)

Classification of contract assets, net and liabilities

Any revenue earned on a contract that has not yet been billed to the customer is recorded as a contract asset on the Group’s consolidated balance sheets.

F-54

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(j)

Inventories

Inventories are measured using the weighted average method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity.

(k)

Property, plant and equipment and land use right, net

Land in the PRC is owned by the PRC government. The government in the PRC, according to PRC Law, may sell the right to use the land for a specific period of time. Thus, all of the Group’s land purchases in the PRC are considered to be leasehold land and are classified as land use right.

Depreciation of property, plant and equipment and amortization of land use right are computed using the straight-line method over the assets’ estimated useful lives as follows:

Land use right	Over terms of the leases
Buildings and leasehold improvements	11 to 50 years, with 5% residual value
Furniture, fixtures and office equipment	5 years, with 5% residual value
Motor vehicles	5 years, with 5% residual value
Plant and machineries	5 to 10 years, with 5% residual value

F-55

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(l)

Intangible assets, net

The Group is currently amortizing its acquired intangible assets, consisted of patents and others, with finite-lived over periods generally ranging between three to twenty years.

(m)

Impairment of long lived assets

Long-lived assets such as property, plant and equipment and intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. The impairment of long-lived assets amounted to approximately RMB2,742,000, RMB Nil and RMB33,500,000 for the years ended December 31, 2020, 2019 and 2018 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.

(n)

Government grant income

Government grant income consists of receipt of funds to subsidize the investment cost of technical development in China. No present or future obligation arises from the receipt of such amount.

Government grants are recognized in the consolidated balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as income in the consolidated statement of operations on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in the consolidated statements of operations over the useful life of the asset by way of reduced depreciation expenses.

(o)

Leases arrangements

The Group adopted ASU No. 2016-02, Leases (Topic 842). The Group leases certain equipment under finance leases. The economic substance of the leases is a financing transaction for acquisition of the equipment. Accordingly, the right-of-use assets for these leases are included on the Group’s consolidated balance sheets in property, plant and equipment, net of accumulated depreciation, amortization and impairment losses, with a corresponding amount recorded in current portion of long-term finance lease obligations. The finance lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The financing component associated with finance lease obligations is included in interest expense. Generally, for the Group’s finance leases an implicit rate to calculate present value is provided in the lease agreement, however if a rate in not provided the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments.

The Group determines if an arrangement is a lease at inception. Lease liabilities are the Group’s obligation to make lease payments arising from a lease and are measured on a discounted basis.

F-56

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(p)

Share capital

Paid in capital refers to the registered capital paid up by the shareholders of the Company.

At December 31, 2020, there were 82,572,000 shares (2019: 82,572,000 shares) issued.

(q)

Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from contracts over time, contract assets, net and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

(r)

Related parties

Entities are considered to be related to the Group if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Group. Related parties also include principal owners of the Group, its management, members of the immediate families of principal owners of the Group and its management and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

(s)

Net income per ordinary share

The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited are computed by dividing net income attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited by the weighted average number of ordinary shares outstanding during the period.

(t)

Warranties

The suppliers of the Group offer a standard one-year warranty to end customer of the Group. The Group only provides labour service to repair or replace parts. The Group does not maintain a general warranty reserve because historically labour costs for such repair or replacement have been de minimis.

(u)

Shipping and handling costs

Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.

F-57

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(v)

Finance costs

Interest relating to loans repaid is expensed in the period the repayment occurs.

(w)

Concentrations

The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top five customers accounted for approximately 39%, 40%, and 31% of consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, one customer accounted for 16%, 17% and 14% of annual revenues, respectively.

Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2020 and 2019, none of the Group’s customers individually exceeded 10.0% of accounts receivable. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.

(x)

Statutory reserve

The Group is required to make appropriation to reserve, comprising the PRC statutory reserve, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”).

Appropriations to the PRC statutory reserve are required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital.

(y)

Fair value measurements

As of December 31, 2020 and 2019, the Group determined that the carrying values of cash, and cash equivalents, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, other payables and accrued expenses and contract liabilities approximate their fair values because of the short-term nature of these instruments.

F-58

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(z)

Short-term and long-term investments

(aa)

Recent accounting pronouncements

Recently adopted accounting pronouncements

Recently issued accounting pronouncements not yet adopted

F-59

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Summary of significant accounting policies (Cont’d)

(aa)

Recent accounting pronouncements (Cont’d)

Recently issued accounting pronouncements not yet adopted

(ab)

Non-controlling interests

F-60

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Lease obligations

The Group has finance leases primarily for equipment.

The components of lease expense are as follows:

	Years ended December 31,
	2020	2019
	RMB’000	RMB’000

Finance lease cost:
Amortization of right-of-use assets	5,837	4,347
Interest on lease liabilities included under cost of revenue and selling and administrative expenses	1,244	2,214
Total finance lease cost	7,081	6,561

Supplemental consolidated cash flow information related to leases is as follows:

	Years ended December 31,
	2020	2019
	RMB’000	RMB’000

Cash paid for amounts included in the measurement of lease liabilities:

Finance cash flows from finance leases	11,263	29,668
Right-of-use assets obtained in exchange for lease obligations (noncash):
Finance leases	-	-

Supplemental consolidated balance sheet information related to leases is as follows:

	December 31,
	2020	2019
	RMB’000	RMB’000

Finance leases
Property, plant and equipment, at cost	-	121,208
Accumulated depreciation and impairment losses	-	(71,508)

Property, plant and equipment, net	-	49,700

Current maturities of long-term debt	-	25,785
Total finance lease liabilities	-	25,785

Weighted average remaining lease term
Finance leases	-	1 year

Weighted average discount rate
Finance leases	5.9%	5.9%

F-61

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Accounts receivable, net

Accounts receivable, net consisted of the following at December 31:

	2020	2019
	RMB’000	RMB’000

Contract receivables	160,803	165,262
Less: allowance for doubtful accounts	(42,182)	(26,484)

	118,621	138,778

The roll-forward of activity in the allowance for doubtful accounts was as follows for the years ended December 31:

	2020	2019
	RMB’000	RMB’000

Balance at beginning of period	26,484	24,047
Add: provision for allowances	22,161	2,437
Less: Reversal of provision for allowances	(6,463)	-

Balance at end of period	42,182	26,484

The following is an aging analysis of accounts receivable, net at December 31:

	2020	2019
	RMB’000	RMB’000

Within 1 year	76,590	96,456
1 year - 2 years	31,389	30,252
2 years - 3 years	6,128	6,260
3 years - 4 years	3,678	5,179
4 years - 5 years	836	631

	118,621	138,778

At December 31, 2020, the accounts receivable, net pledged as security for the Company’s bank loans and third party loans amounted to RMB Nil (2019: RMB11,575,000).

F-62

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Prepayments and other current assets

Prepayments and other current assets mainly represent deposits paid for bidding projects, purchases, services and finance leases and prepaid expenses.

	December 31,
	2020	2019
	RMB’000	RMB’000

Prepayments	16,632	19,962
Deposits paid for bidding projects and temporary payments	10,448	13,988
Deposits for finance leases	-	17,512
Other current assets	1,307	1,397

	28,387	52,859

Contract assets, net and liabilities

The Group’s consolidated balance sheets present contract assets, net which contains earned unbilled revenue associated with contract work that has been completed but not paid by customers, that are generally due once the job is completed and approved.

Contract assets, net consisted of the following at December 31:

	2020	2019
	RMB’000	RMB’000

Unbilled revenue	94,494	80,961

The Group’s consolidated balance sheets present contract liabilities which contain deferred revenue (previously identified as billings in excess of costs and estimated earnings on uncompleted contracts).

Contract liabilities consisted of the following at December 31:

	2020	2019
	RMB’000	RMB’000

Deferred revenue	47,135	55,898

F-63

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Contract assets, net and liabilities (Cont’d)

The following table provides information about contract assets, net and contract liabilities from contracts with customers at December 31:

	2020	2019
	RMB’000	RMB’000

Contract assets	94,494	80,961
Contract liabilities	(47,135)	(55,898)

Net contract assets	47,359	25,063

The difference between the opening and closing balances of the Group’s contract assets, net and contract liabilities primarily results from the timing of the Group’s billings in relation to its performance of work.

The net asset position for contracts in process consisted of the following at December 31:

	2020	2019
	RMB’000	RMB’000

Costs and estimated earnings on uncompleted contracts	406,064	433,195
Less: billings to date	(358,705)	(408,132)

	47,359	25,063

Contract assets, net consisted of the following at December 31:

	2020	2019
	RMB’000	RMB’000

Gross contract assets	102,144	80,961
Less: allowance for doubtful accounts	(7,650)	-

	94,494	80,961

Inventories

	December 31,
	2020	2019
	RMB’000	RMB’000

Raw materials	341	5,742
Finished goods	2,048	13

	2,389	5,755

Short-term and long-term investments

The Group's short-term investments consist of wealth management products and long-term investments consist of minority ownership interests in Nil (2019: one) limited liability company, generally from private equity arrangements. These investments are carried under the equity method of accounting, with changes in the carrying value reported as realized gains or losses in the consolidated financial statements.

F-64

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Property, plant and equipment

	December 31,
	2020	2019
	RMB’000	RMB’000


Building and leasehold improvements	167,874	167,874
Furniture, fixtures and office equipment	3,658	3,543
Motor vehicles	4,808	4,808
Plant and machineries	9,399	8,937

Total	185,739	185,162

Less: Accumulated depreciation and amortization	(70,241)	(63,881)
Accumulated impairment losses	(36,241)	(33,500)

Total	(106,482)	(97,381)

Net	79,257	87,781

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Depreciation charge	6,359	6,556	11,755

At December 31, 2020, the net book value of property, plant and equipment pledged as security for the Company’s bank loans and third party loans amounted to approximately RMB34,403,000 (2019: RMB84,598,000).

F-65

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Intangible assets, net

	December 31,
	2020	2019
	RMB’000	RMB’000

Amortizable intangible assets

Gross carrying amount
Patents	3,750	2,400
Others	165	165

	3,915	2,565

Less: Accumulated amortization	(1,795)	(1,638)

Net carrying amount	2,120	927

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Amortization expense	142	152	152

At December 31, 2020, estimated future intangible assets amortization expense for the each of the next five years and thereafter was as follows:

	Future amortization expense
	RMB’000

2021	142
2022	142
2023	142
2024	142
2025	142
Thereafter	1,410

Total	2,120

At December 31, 2019, estimated future intangible asset amortization expense for the each of the next five years and thereafter was as follows:

	Future amortization expense
	RMB’000

2020	152
2021	152
2022	152
2023	152
2024	152
Thereafter	167

Total	927

F-66

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Land use right, net

	December 31,
	2020	2019
	RMB’000	RMB’000
Gross carrying amount

Land use right	7,361	7,361
Less: Accumulated amortization	(2,214)	(2,070)

Net carrying amount	5,147	5,291

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Amortization expense	159	149	149

At December 31, 2020, the land use right pledged as security for the Company’s bank loans and third party’s loans amounted to approximately RMB4,463,000 (2019: RMB5,291,000).

	Future amortization expense
	RMB’000

2021	159
2022	159
2023	159
2024	159
2025	159
Thereafter	4,352

Total	5,147

At December 31, 2019, estimated future intangible asset amortization expense for the each of the next five years and thereafter was as follows:

	Future amortization expense
	RMB’000

2020	149
2021	149
2022	149
2023	149
2024	149
Thereafter	4,546

Total	5,291

F-67

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Bank borrowings

	December 31,
	2020	2019
	RMB’000	RMB’000

Bank loans borrowed by the Company (note i)	10,014	21,834
Bank loans borrowed by subsidiaries of the Company (note ii)	10,015	5,007
	20,029	26,841

(i)

The bank loans are denominated in Renminbi and are repayable within 1 year. The bank loans borrowed by the Company as of December 31, 2020 bears interest at fixed rates of 4.79% (2019: 4.57% to 6.33%) per annum. Interest paid during the year ended December 31, 2020 was approximately RMB1,377,000 (2019: RMB1,991,000 and 2018: RMB2,089,000).

(ii)

The bank loans are denominated in Renminbi and are repayable within 1 year. The bank loans borrowed by subsidiaries of the Company as of December 31, 2020 bears interest at a fixed rate ranging from 4.5% to 4.79% (2019: 5.22%) per annum and are secured by the subsidiary’s office premises and leasehold improvements and land use right. Interest paid during the year ended December 31, 2020 was approximately RMB287,000 (2019: RMB246,000 and 2018: RMB278,000).

Other payables and accrued expenses

	December 31,
	2020	2019
	RMB’000	RMB’000

Accrued expenses	7,629	5,312
Output VAT	6,529	-
Deposits received and temporary receipts	3,589	2,271

	17,747	7,583

Other taxes payable

Other taxes payable mainly comprise Valued-Added Tax (“VAT”). The Group is subject to output VAT levied at the rate of 3% to 13 % (2019: 9% to 13%) of the revenue from sales of equipment. The input VAT paid on purchases of materials and other direct inputs can be used to offset the output VAT levied on operating revenue to determine the net VAT payable or recoverable.

F-68

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Capital reserve

Capital reserve represents capital contributions from shareholders in excess of the paid-in capital amount and capitalization of gain on disposal of subsidiaries to the shareholders in previous years .

Other income and other losses

Other income

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Compensation income	22,548	-	-
Gain on disposal of property, plant and equipment	-	39	-
Investment income	266	-	1,661
Amounts waived by payees	4,535	280	1,363
Reversal of allowance for doubtful accounts	6,463	-	-
Subsidy income from PRC government	5,834	5,957	5,537

	39,646	6,276	8,561

Other losses

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Bad debts written off	-	5,383	13,946
Impairment loss on contract assets	1,399	-	-
Impairment loss on long-term investments	1,340	-	-
Impairment loss on property, plant and equipment	2,742	-	33,500
Investment loss	-	241	-

	5,481	5,624	47,446

Income tax expense/(credit)

According to relevant PRC tax laws and regulations, entities incorporated in the PRC are subject to Enterprise Income Tax (“EIT”) at a statutory rate of 25% or reduced national EIT rates of 15% for certain High and New Technology Enterprises (“HNTE”) on PRC taxable income. Zhejiang Tianlan Environmental Protection Technology Company Limited and Hangzhou Tianlan Environmental Protection Equipment Company Limited are classified as HNTE which enjoy a preferential tax rate of 15%.

F-69

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Income tax expense/(credit) (Cont’d)

During the years ended December 31, 2020 and 2019, the PRC tax laws and regulations have launched a tax reduction scheme for small enterprises, Hangzhou Tianlan Pure Environmental Protection Technology Company Limited, Hangzhou Tiancan Environmental Technology Company Limited, Zhejiang Tianlan Environmental Engineering and Design Company Limited and Zhejiang Tianlan Environmental Protection Engineering Company Limited are entitled to enjoy this tax benefit. As such, they are subjects to Enterprise Income Tax rate of 20% only.

The Company and its subsidiaries are based in the PRC and file an EIT return. The components of the provision for income tax expense/(credit) were as follows:

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000


Current tax expense
PRC EIT	757	28	2

Income tax expense	757	28	2


Deferred tax expense/(credit)	1,101	268	(7,969)

Total deferred tax expense/(credit)	1,101	268	(7,969)

Total expense/(credit)	1,858	296	(7,967)

The items comprising the difference between income tax computed at the EIT statutory rates in effect for 2020, 2019 and 2018 and our effective tax rates were as follows:

	Year ended December 31,
	2020	2019	2018
	RMB’000	RMB’000	RMB’000

Income/(loss) before income tax	15,358	4,654	(34,194)
Computed tax using respective companies’ statutory tax rates	2,304	642	(4,987)
(Over)-provision for income tax in prior years	(48)	-	-
Temporary differences	182	202	(272)
Tax effect of revenue not subject to tax	-	-	(3,024)
Tax effect of expenses not deductible for tax purposes	2,306	693	316
Tax effect of special deduction for research and development costs	(3,001)	(2,103)	-
Others	115	862	-
Income taxes expense/(credit) at effective tax rate	1,858	296	(7,967)

F-70

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Income tax expense/(credit) (Cont’d)

The components of deferred tax assets are as follows:

	December 31,
	2020	2019
	RMB’000	RMB’000

Allowance for doubtful accounts	6,184	7,464
Deferred government grant	750	-
Impairment losses on assets	6,705	5,025
Tax losses	-	1,481

Total deferred tax assets	13,639	13,970

Uncertain tax positions

As a result of the Group’s analysis, management has determined that the Group does not have any material uncertain tax positions.

Pension plan

As stipulated by the rules and regulations in the PRC, the Group contributes to state-sponsored retirement plans for its employees in Mainland China. The Group contributes approximately 12% to 14% of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

During the years ended December 31, 2020, 2019 and 2018, the aggregate contributions of the Group to the aforementioned pension plans and retirement benefit schemes were approximately RMB5,645,000, RMB5,449,000 and RMB4,692,000 respectively.

Risk factors

Financial risk factors

The Group’s activities expose it mainly to credit risk.

Credit risk

The Group has no significant concentration of credit risk, cash in banks in PRC is insured with limit of approximately RMB500,000, per bank per each depositor. Uninsured cash in banks and restricted cash balances in PRC are of approximately RMB44,494,000 (2019: RMB7,258,000). Cash transactions are limited to high credit quality banks.

F-71

ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

Related party transaction

There were sales of certain shareholding in a subsidiary to a shareholder of the Company with gross sale proceeds of RMB510,000 in 2019, purchase of a subsidiary from shareholders of the Company with total consideration of approximately RMB4,590,000 (2019: RMB Nil), engineering service income from an investment of approximately RMB5,779,000 (2019: RMB Nil) and remuneration to key management personnel of approximately RMB1,400,000 (2019: RMB 1,473,000).

Commitments and contingencies

(i) Insurance

(ii) Purchase commitments

To manage the risk of changes in material prices and subcontracting costs used in tendering bids for contracts, most of the time, the Group obtains firm quotations from suppliers and subcontractors before submitting a bid. These quotations do not include any quantity guarantees. As soon as the Group is advised that its bid is successful, the Group enters into firm contracts with most of its materials suppliers and sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.

(iii) Litigation

(v) Contingencies

(vi) Operating leases

The Group has no operating leases expense during the year ended December 31, 2020 (2019 and 2018: RMB Nil). At December 31, 2020, the Group has no future minimum lease payments under non-cancellable operating leases.

Subsequent event

On April 24, 2021, the director of the Company proposed a cash dividend of an aggregate of approximately RMB13,212,000, which dividend was paid to all holders of record subject to approval in shareholders’ annual general meeting.

Title of each class		Trading Symbol		Name of each exchange on which registered
Ordinary Shares, no par value		CLWT		NASDAQ Capital Market



INTRODUCTION		4
FORWARD LOOKING STATEMENTS		4
GLOSSARY		5

	PART I

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	6
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	6
ITEM 3.	KEY INFORMATION	6
ITEM 4.	INFORMATION ON THE COMPANY	25
ITEM 4A.	UNRESOLVED STAFF COMMENTS	35
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	35
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	45
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	52
ITEM 8.	FINANCIAL INFORMATION	53

ITEM 9.	THE OFFER AND LISTING	53
ITEM 10.	ADDITIONAL INFORMATION	54
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	61

	PART II

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	62
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITYHOLDERS AND USE OF PROCEEDS	62
ITEM 15.	CONTROLS AND PROCEDURES	62
ITEM 16.	[RESERVED]	63
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	63
ITEM 16B.	CODE OF ETHICS	63
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	64
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE	64
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS	64
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	64
ITEM 16G.	CORPORATE GOVERNANCE	64
ITEM 16H.	MINE SAFETY DISCLOSURE	64

	PART III

ITEM 17.	FINANCIAL STATEMENTS	65
ITEM 18.	FINANCIAL STATEMENTS	65
ITEM 19.	EXHIBITS	66

Ambient Air:		Atmospheric air (outdoor as opposed to indoor air).

Anaerobic:		Treating waste water biologically in the absence of air.

Atomic Spectrometer:		An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample.

Coalescer:		A process that coalesces smaller oil particles to form larger oil particles that can readily float to a tank’s surface.

Colorimeter:		An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent.

Human Machine Interface Software:		A type of software to interface (or coordinate) the interaction between machine or equipment and a human being.

Lamella:		Synthetic media installed in a clarifier tank to assist in particle flocculation (coming together in a “floc” or “flakes”).

Mass Spectrometer:		An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds.

Membrane Biological Reactor (MBR):		A suspended-growth bioreactor combined with a membrane liquid/solids separation unit. The “MBR” uses an advanced membrane technology that treats biological wastes to a quality level which in many industries is sufficient for reuse or low-cost disposal to sewers.

Multi-Channel Digital Recorder:		A device that measures and records more than one input of a digitized signal (signal in the form of pulses).

pH Controller:		A process instrument that measures and controls the acidity or alkalinity of a fluid.

Reagent:		A chemical substance used to cause a chemical reaction and detect another substance.

Sequential Batch Reactor (SBR):		A waste-water treatment process that combines aeration and settling in one reactor tank thus saving on space. Used for the treatment of industrial waste-water as well as municipal sewage. The SBR is a batch process that is ideal for waste-waters of changing characteristics.

Customer Name	Year Ended December 31,2020	Year Ended December 31,2019	Year Ended December 31,2018
Customer A	-%	19%	15%
Customer B	-%	10%	—%

	2020		2019		2018		2017		2016
Revenue	$13,357	100%	$17,399	100%	$20,104	100%	$17,350	100%	$22,478	100%
Cost of revenue	$9,672	72.4%	$12,982	74.6%	$16,405	81.6%	$12,937	74.6%	$17,527	78.0%
Gross profit	3,685	27.6%	$4,417	25.4%	$3,699	18.4%	$4,413	25.4%	$4,951	22.0%
Selling and administrative expenses	$5,374	40.2%	$4,853	27.9%	$4,751	23.6%	$4,976	28.7%	$5,602	24.9%
Income / (loss) before income taxes, equity in income / (loss) of affiliates and non-controlling interests	$63	0.5%	$(310)	-1.8%	$(963)	-4.8%	$(564)	-3.3%	$(640)	-2.8%
Income taxes (expense) / credit	$(96)	-0.7%	$(37)	-0.2%	$312	1.6%	$(28)	-0.2%	$(228)	-1.0%
Equity in income / (loss) of affiliates	$435	3.3%	$137	0.8%	$(932)	-4.6%	$831	4.8%	$1,002	4.5%
Net gain on disposal of affiliate	$-	-	$-	-	$1,522	7.6%	-	-	-	-
Net income / (loss)	$402	3.0%	$(210)	-1.2%	$(61)	-0.3%	$367	2.1%	$158	0.7%
Net loss attributable to non-controlling interests	$367	2.7%	$64	0.4%	$149	0.7%	$106	0.6%	$73	0.3%
Net income / (loss) attributable to Euro Tech Holding Company Limited's shareholders	$769	5.7%	$(146)	-0.8%	$88	0.4%	$473	2.7%	$231	1.0%

Name of entity	Ownership interest held by the Group	Place of incorporation and principal place of operation	Principal activities

Subsidiaries:

Euro Tech (Far East) Limited	100%	Hong Kong	Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems

Euro Tech Trading (Shanghai) Limited	100%	PRC	Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems

Shanghai Euro Tech Limited	100%	PRC	Manufacturing of analytical and testing equipment

Shanghai Euro Tech Environmental Engineering Company Limited	100%	PRC	Undertaking water and waste-water treatment engineering projects

Yixing Pact Environmental Technology Co., Ltd	58%	PRC	Design, manufacturing and operation of water and waste water treatment machinery and equipment

Pact Asia Pacific Limited	58%	British Virgin Islands	Selling of environmental protection equipment, undertaking environment protection projects and providing relevant technology advice, training and services

Affiliate:

Zhejiang Tianlan Environmental Protection Technology Co. Ltd.	19.4%	PRC	Design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted

		Payment due by December 31, (in US$ thousands)
	Total	2021	2022	2023	2024 and after
Operating lease commitments	212	118	94	-	-
Total	212	118	94	-	-

Name	Age	Position
T.C. Leung	77	Chairman of the Board of Directors and Chief Executive Officer

Jerry Wong	62	Director and Chief Financial Officer

Alex Sham	57	Director

Y.K. Liang	91	Director

Fu Ming Chen	72	Director

Janet Cheang	65	Director

David YL Leung	47	Director

	Amount and Nature of Beneficial Ownership(4)	Approximate Percentage Of Ordinary Shares Owned
T.C. Leung (1)	2,659,810	51.6%

Alex Sham(1)	134,302	2.6%

Jerry Wong(1)	87,162	1.7%

Y.K. Liang(1)	—	—

Fu Ming Chen(1)	—	—

Janet Cheang(1)	—	—

David YL Leung	—	—

All Executive Officers And Directors of the Company as a group (7 persons)	2,881,274	55.9%

Item 8A.1	See – Item 18.

Item 8A.2	See – Item 18.

Item 8A.3	See – Report of Independent Registered Public Accounting Firm, page F-2.

Item 8A.4	We have complied with this requirement.

Item 8A.5	Not applicable.

Item 8A.6	Not applicable.

Item 8A.7	Legal Proceedings. See – Item 4B. Business Overview-Litigation.

Item 8A.8	Dividend Policy.

	For the Year Ended December 31
	2020	2019
	US$	US$
Audit fees (1)	160,000	185,000
Audit-related fees(2)	—	—
Tax fees(3)	—	—
All other fees	—	—

(1)	“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditor for the audit of our annual financial statements.
(2)	“Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal auditor that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.” Services comprising the fees disclosed under the category of “Audit-related fees” involve principally the performance of certain agreed upon procedures for the years ended December 31, 2020 and 2019, respectively.
(3)	“Tax fees” means the aggregated fees billed in each of the years listed for professional services rendered by our principal auditor for tax compliance, tax advice and tax planning.

Exhibit No.		Description

3.1		Amended and Restated Memorandum and Articles of Association (1)

3.2		Amendments to Exhibit 3.1 ( 2)

4.11		Registrant’s Audit Committee Charter (3)

4.13		Euro Tech Holdings Company Limited 2019 Stock Option and Incentive Plan (4)

12.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

12.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

13.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

13.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

23.1		List of Subsidiaries *

101 .INS*		XBRL Instance Document

101 .SCH*		XBRL Taxonomy Extension Schema Document

101 .CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101 .DBF*		XBRL Taxonomy Extension Definition Linkbase Document

101 .LAB*		XBRL Taxonomy Extension Label Linkbase Document

101 .PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

	EURO TECH HOLDINGS COMPANY LIMITED
	(REGISTRANT)

May 13, 2021	By:	/s/ T.C. Leung
		T.C. Leung
		Chief Executive Officer and Chairman of the Board of Directors
		(Principal Executive Officer)