UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended:
or
For the transition period from ________________ to ________________
Commission
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate
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| ☐ | Smaller reporting company | | ||
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As
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CHINA RECYCLING ENERGY CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| SEPTEMBER 30,
2021 | DECEMBER 31,
2020 | |||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| VAT receivable | ||||||||
| Prepaid expenses | ||||||||
| Other receivables | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Long term deposit | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Fixed assets, net | ||||||||
| Asset subject to buyback | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Taxes payable | ||||||||
| Accrued interest on notes | ||||||||
| Notes payable, net of unamortized OID of | ||||||||
| Accrued liabilities and other payables | ||||||||
| Operating lease liability | ||||||||
| Due to related parties | ||||||||
| Interest payable on entrusted loans | ||||||||
| Entrusted loan payable | ||||||||
| Total current liabilities | ||||||||
| NONCURRENT LIABILITIES | ||||||||
| Income tax payable | ||||||||
| Operating lease liability | - | |||||||
| Long term payable | ||||||||
| Entrusted loan payable | ||||||||
| Total noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| CONTINGENCIES AND COMMITMENTS (NOTE 15 & 16) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Statutory reserve | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Company stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| NINE
MONTHS ENDED SEPTEMBER 30, | THREE
MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Contingent rental income | $ | $ | $ | $ | ||||||||||||
| Interest income on sales-type leases | ||||||||||||||||
| Total operating income | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Bad debts (reversal) | ( | ) | ( | ) | - | ( | ) | |||||||||
| General and administrative | ||||||||||||||||
| Total operating (income) expenses | ( | ) | ||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Non-operating income (expenses) | ||||||||||||||||
| Loss on note conversion | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on termination of buy-back agreement of Chengli project | ||||||||||||||||
| Other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total non-operating income (expenses), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before income tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (benefit) expense | ( | ) | ||||||||||||||
| Net income | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive items | ||||||||||||||||
| Foreign currency translation income (loss) | ( | ) | ||||||||||||||
| Comprehensive income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average shares used for computing basic and diluted loss per share | ||||||||||||||||
| Basic and diluted net income per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
2
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| NINE
MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Amortization of OID and debt issuing costs of notes | ||||||||
| Stock compensation expense | ||||||||
| Operating lease expenses | ||||||||
| Bad debts expense (reversal) | ( | ) | ( | ) | ||||
| Loss on note conversion | ||||||||
| Interest expense | ||||||||
| Gain on termination of buy-back agreement of Chengli project | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Collection of principal and interest on sales type leases for Pucheng systems | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Other receivables | ( | ) | ||||||
| Advance to suppliers | ( | ) | ||||||
| VAT receivable | ( | ) | ||||||
| Taxes payable | ( | ) | ( | ) | ||||
| Payment of lease liability | ( | ) | ( | ) | ||||
| Interest payable on entrusted loan | ||||||||
| Accrued liabilities and other payables | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Issuance of notes payable | ||||||||
| Issuance of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH | ||||||||
| NET INCREASE IN CASH | ||||||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
| Supplemental cash flow data: | ||||||||
| Income tax paid | $ | $ | ||||||
| Interest paid | $ | - | $ | |||||
| Supplemental disclosure of non-cash operating activities Repayment of entrusted loan resulting from termination of buy-back option for Chengli project | $ | $ | ||||||
| Transfer of Tian’an project from construction in progress to accounts receivable | $ | $ | ||||||
| Adoption of ASC 842-right-of-use asset | $ | $ | ||||||
| Adoption of ASC 842-operating lease liability | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Conversion of notes into common shares | $ | $ | ||||||
3
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
| Common Stock | Paid in | Statutory | Other Comprehensive | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | (Loss) / Income | Deficit | Total | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Shares to be issued | - | |||||||||||||||||||||||||||
| Transfer to Statutory Reserves | - | - | ( | ) | - | |||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Conversion of long-term notes into common shares | - | |||||||||||||||||||||||||||
| Issuance of common stock for equity financing | ( | ) | - | - | ||||||||||||||||||||||||
| Return of shares issued to CEO for equity financing | ( | ) | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||
| Transfer to Statutory Reserves | - | - | ( | ) | - | |||||||||||||||||||||||
| Foreign currency translation gain | - | - | ||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Conversion of long-term notes into common shares | - | - | - | |||||||||||||||||||||||||
| Stock compensation expense | - | - | - | |||||||||||||||||||||||||
| Transfer to statutory reserves | - | - | - | - | ( | ) | - | |||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Common Stock | Paid in | Statutory | Other Comprehensive | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | Capital | Reserves | Loss | Deficit | Total | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of common stock for stock compensation | - | |||||||||||||||||||||||||||
| Conversion of long-term notes into common shares | - | |||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||
| Balance at March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of long-term notes into common shares | - | |||||||||||||||||||||||||||
| Round-up of fractional shares due to reverse split | ( | ) | - | |||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Transfer to statutory reserves | - | - | - | ( | ) | - | ||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | |||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of long-term notes into common shares | - | - | - | |||||||||||||||||||||||||
| Shares issued for equity financing | - | - | - | |||||||||||||||||||||||||
| Net income | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Transfer to statutory reserves | - | - | - | - | ( | ) | - | |||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | ||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
4
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China
Recycling Energy Corporation (the “Company” or “CREG”) is incorporated in Nevada state. The Company,
The Company’s organizational chart as of September 30, 2021 is as follows:
Erdos TCH – Joint Venture
On
April 14, 2009, the Company formed a joint venture (the “JV”) with Erdos Metallurgy Co., Ltd. (“Erdos”) to recycle
waste heat from Erdos’ metal refining plants to generate power and steam to be sold back to Erdos. The name of the JV was Inner
Mongolia Erdos TCH Energy Saving Development Co., Ltd. (“Erdos TCH”) with a term of
5
In
addition, Erdos TCH has
Shenqiu Yuneng Biomass Power Generation Projects
On
September 28, 2011, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2011 Shenqiu Lease”). Under
the 2011 Shenqiu Lease, Xi’an TCH agreed to lease a set of 12 MW BMPG systems to Shenqiu at a monthly rental of $
On
March 30, 2013, Xi’an TCH and Shenqiu entered into a BMPG Project Lease Agreement (the “2013 Shenqiu Lease”). Under
the 2013 Shenqiu Lease, Xi’an TCH agreed to lease the second set of 12 MW BMPG systems to Shenqiu for $
As
repayment for a loan made by Xi’an Zhonghong to Beijing Hongyuan Recycling Energy Investment Center, LLP (the “HYREF”)
on January 10, 2019 (see further discussion in Note 8); on January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong
Bai (or “Mr. Bai”), a resident of China, entered into a Projects Transfer Agreement (the “Agreement”), pursuant
to which Xi’an TCH transferred two BMGP in Shenqiu (“Shenqiu Phase I and II Projects”) to Mr. Bai for RMB
Chengli Waste Heat Power Generation Projects
On
July 19, 2013, Xi’an TCH formed a new company, “Xi’an Zhonghong New Energy Technology Co., Ltd.” (“Zhonghong”),
of which it owns
On July 24, 2013, Zhonghong entered into a Cooperative Agreement of CDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power Generation Project) with Boxing County Chengli Gas Supply Co., Ltd. (“Chengli”). The parties entered into a supplement agreement on July 26, 2013. Pursuant to these agreements, Zhonghong will design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli will pay energy saving fees (the “Chengli Project”).
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Mr. Chonggong Bai entered into a CDQ WHPG Station Fixed
Assets Transfer Agreement,
Tianyu Waste Heat Power Generation Project
On
July 19, 2013, Zhonghong entered into a Cooperative Agreement (the “Tianyu Agreement”) for Energy Management of CDQ and CDQ
WHPG Projects with Jiangsu Tianyu Energy and Chemical Group Co., Ltd. (“Tianyu”). Pursuant to the Tianyu Agreement, Zhonghong
will design, build, operate and maintain two sets of 25 MW CDQ systems and CDQ WHPG systems for two subsidiaries of Tianyu – Xuzhou
Tian’an Chemical Co., Ltd. (“Xuzhou Tian’an”) and Xuzhou Huayu Coking Co., Ltd. (“Xuzhou Huayu”)
– to be located at Xuzhou Tian’an and Xuzhou Huayu’s respective locations (the “Tianyu Project”).
6
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the “Agreement”),
pursuant to which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking
Co., Ltd. (“Xuzhou Huayu Project”) to Mr. Bai for RMB
On
January 10, 2020,
Zhongtai Waste Heat Power Generation Energy Management Cooperative Agreement
On December 6, 2013, Xi’an TCH entered into a CDQ and WHPG Energy Management Cooperative Agreement (the “Zhongtai Agreement”) with Xuzhou Zhongtai Energy Technology Co., Ltd. (“Zhongtai”), a limited liability company incorporated in Jiangsu Province, China. Pursuant to the Zhongtai Agreement, Xi’an TCH was to design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG system and sell the power to Zhongtai, and Xi’an TCH is also to build a furnace to generate steam from the smoke pipeline’s waste heat and sell the steam to Zhongtai.
In March 2016, Xi’an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system with Zhongtai and Xi’an Huaxin (the “Transfer Agreement”). Under the Transfer Agreement, Xi’an TCH agreed to transfer to Zhongtai all of the assets associated with the CDQ Waste Heat Power Generation Project (the “Project”), which is under construction pursuant to the Zhongtai Agreement. Additionally, Xi’an TCH agreed to transfer to Zhongtai the Engineering, Procurement and Construction (“EPC”) Contract for the CDQ Waste Heat Power Generation Project which Xi’an TCH had entered into with Xi’an Huaxin in connection with the Project. Xi’an Huaxin will continue to construct and complete the Project and Xi’an TCH agreed to transfer all its rights and obligations under the EPC Contract to Zhongtai. As consideration for the transfer of the Project, Zhongtai agreed to pay to Xi’an TCH RMB 167,360,000 ($25.77 million) including (i) RMB 152,360,000 ($23.46 million) for the construction of the Project; and (ii) RMB 15,000,000 ($2.31 million) as payment for partial loan interest accrued during the construction period. Those amounts have been, or will be, paid by Zhongtai to Xi’an TCH according to the following schedule: (a) RMB 50,000,000 ($7.70 million) was to be paid within 20 business days after the Transfer Agreement was signed; (b) RMB 30,000,000 ($4.32 million) was to be paid within 20 business days after the Project was completed, but no later than July 30, 2016; and (c) RMB 87,360,000 ($13.45 million) was to be paid no later than July 30, 2017. Xuzhou Taifa Special Steel Technology Co., Ltd. (“Xuzhou Taifa”) guaranteed the payments from Zhongtai to Xi’an TCH. The ownership of the Project was conditionally transferred to Zhongtai following the initial payment of RMB 50,000,000 ($7.70 million) by Zhongtai to Xi’an TCH and the full ownership of the Project will be officially transferred to Zhongtai after it completes all payments pursuant to the Transfer Agreement. In 2016, Xi’an TCH had received the first payment of $7.70 million and the second payment of $4.32 million. However, the Company received a repayment commitment letter from Zhongtai on February 23, 2018, in which Zhongtai committed to pay the remaining payment of RMB 87,360,000 ($13.45 million) no later than the end of July 2018; in July 2018, Zhongtai and the Company reached a further oral agreement to extend the repayment term of RMB 87,360,000 ($13.45 million) by another two to three months. In January 2020, Zhongtai paid RMB 10 million ($1.41 million); in March 2020, Zhongtai paid RMB 20 million ($2.82 million); in June 2020, Zhongtai paid RMB 10 million ($1.41 million); and in December 2020, Zhongtai paid RMB 30 million ($4.28 million), which was payment in full. Accordingly, the Company reversed the bad debt expense of $5.80 million in 2020 which had been recorded earlier.
Formation of Zhongxun
On March 24, 2014, Xi’an TCH incorporated a subsidiary, Zhongxun Energy Investment (Beijing) Co., Ltd. (“Zhongxun”) with registered capital of $5,695,502 (RMB 35,000,000), which must be contributed before October 1, 2028. Zhongxun is 100% owned by Xi’an TCH and will be mainly engaged in project investment, investment management, economic information consulting, and technical services. Zhongxun has not yet commenced operations nor has any capital contribution been made as of the date of this report.
7
Formation of Yinghua
Reverse Stock Split
On
April 13, 2020,
Other Events
In December 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. However, as a result of PRC government’s effort on disease control, most cities in China were reopened, the outbreak in China is under the control. As of this report date, there are some new Covid-19 cases discovered in a few provinces of China, however, the number of new cases is not significant due to PRC government’s strict control.
On
July 27, 2021, the Company filed a certificate of change to the Company’s Articles of Incorporation with the Secretary of State
of the State of Nevada to increase the total number of the Company’s authorized shares of common stock from
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial information as of and for the nine and three months ended September 30, 2021 and 2020 has been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments, unless otherwise indicated) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the nine and three months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim period. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, previously filed with the SEC on April 15, 2021.
Basis of Consolidation
8
Uses and Sources of Liquidity
For
the nine and three months ended September 30, 2021, the Company had a net income of $
Use of Estimates
In preparing these CFS in accordance with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues and expenses during the period reported. Actual results may differ from these estimates. On an on-going basis, management evaluates their estimates, including those related to allowances for bad debt and inventory obsolescence, impairment loss on fixed assets and construction in progress, income taxes, and contingencies and litigation. Management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources.
Revenue Recognition
A) Sales-type Leasing and Related Revenue Recognition
On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. (See Operating lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue recognition fall under ASC 842. During the nine and three months ended September 30, 2021 and 2020, the Company did not sell any new power generating projects.
The Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically transfers legal ownership of the waste energy recycling power generating projects to its customers at the end of the lease. Prior to January 1, 2019, the investment in these projects was recorded as investment in sales-type leases in accordance with ASC Topic 840, “Leases,” and its various amendments and interpretations.
The Company finances construction of waste energy recycling power generating projects. The sales and cost of sales are recognized at the inception of the lease, which is when the control is transferred to the lessee. The Company accounts for the transfer of control as a sales type lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded when collection of payments is probable. This is in accordance with the revenue recognition principle in ASC 606 - Revenue from contracts with customers. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and contingent rentals, if any. Unearned interest is amortized to income over the lease term to produce a constant periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income and reduction of receivables. Revenue is recognized net of value-added tax.
9
B) Contingent Rental Income
The Company records income from actual electricity generated of each project in the period the income is earned, which is when the electricity is generated. Contingent rent is not part of minimum lease payments.
Operating Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU
assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent
from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used,
which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets
and liabilities. At September 30, 2021, the ROU was $
Operating leases are included in operating lease right-of-use assets and operating lease liabilities (current and non-current), on the consolidated balance sheets.
Cash
Cash include cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date.
Accounts Receivable
The Company’s policy is to maintain an allowance for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.
As of September 30, 2021 and December 31, 2020, the Company had gross accounts receivable of $0 and $342,974 of Erdos TCH for electricity sold, respectively. As of September 30, 2021 and December 31, 2020, the Company had bad debt allowance of $0 and $34,297 for Erdos TCH due to the customer not making the payments as scheduled, respectively. As of September 30, 2021, all outstanding accounts receivable balance was collected in full.
Concentration of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within China.
10
Certain other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The operations of the Company are in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method over the estimated lives as follows:
| Vehicles | ||
| Office and Other Equipment | ||
| Software |
Impairment of Long-lived Assets
In
accordance with FASB ASC Topic 360, “Property, Plant, and Equipment,” the Company reviews its long-lived assets,
including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the
assets may not be fully recoverable. If the total expected undiscounted future net cash flows are less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. The Company recorded $
Cost of Sales
Cost of sales consists primarily of the direct material of the power generating system and expenses incurred directly for project construction for sales-type leasing and sales tax and additions for contingent rental income.
Income Taxes
Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company follows FASB ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of FASB ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement of income. At September 30, 2021 and December 31, 2020, the Company did not take any uncertain positions that would necessitate recording a tax related liability.
11
Statement of Cash Flows
In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debts, the carrying amounts approximate their fair values due to their short maturities. Receivables on sales-type leases are based on interest rates implicit in the lease.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the FV of financial instruments held by the Company. FASB ASC Topic 825, “Financial Instruments,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their FV because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to FV measurement. |
Effective on January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement: 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 FV hierarchy.
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815, “Derivatives and Hedging.”
As of September 30, 2021 and December 31, 2020, the Company did not have any long-term debt obligations; and the Company did not identify any assets or liabilities that are required to be presented on the balance sheet at FV.
Stock-Based Compensation
The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.
The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the fair value of the equity instrument issued or committed to be issued, as this is more reliable than the fair value of the services received. The fair value is measured at the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.
Effective on January 1, 2020, the Company adopted ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The adoption of ASU 2018-07 did not have an impact on the Company’s financial statements.
12
Basic and Diluted Earnings per Share
The Company presents net income (loss) per share (“EPS”) in accordance with FASB ASC Topic 260, “Earning Per Share.” Accordingly, basic income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of shares outstanding, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income by the weighted-average number of common shares outstanding as well as common share equivalents outstanding for the period determined using the treasury-stock method for stock options and warrants and the if-converted method for convertible notes. The Company made an accounting policy election to use the if-converted method for convertible securities that are eligible to receive common stock dividends, if declared. Diluted EPS reflect the potential dilution that could occur based on the exercise of stock options or warrants or conversion of convertible securities using the if-converted method.
For
the nine and three months ended September 30, 2021 and 2020, the basic and diluted loss per share were the same due to the anti-dilutive
features of the warrants and options. For the nine and three months ended September 30, 2021,
Foreign Currency Translation and Comprehensive Income (Loss)
The Company’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains and losses resulting from foreign currency transactions are included in income. There was no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company follows FASB ASC Topic 220, “Comprehensive Income.” Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. FASB ASC Topic 280 has no effect on the Company’s CFS as substantially all of the Company’s operations are conducted in one industry segment. All of the Company’s assets are located in the PRC.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its CFS.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
13
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its consolidated financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future CFS.
3. OTHER RECEIVABLES
As
of September 30, 2021, other receivables mainly consisted of (i) advances to third parties of $
On
August 2, 2021, the Company entered a Research and Development Cooperation Agreement with a software development company to design, establish,
upgrade and maintenance of Smart Energy Management Cloud Platform for energy storage and remote-site monitoring; upon completion, the
Company will provide such platform to its customers at a fee. Total contracted research and development cost is $
On
August 23, 2021,
As
of December 31, 2020, other receivables mainly consisted of (i) advances to third parties of $
4. ASSET SUBJECT TO BUYBACK
As
of September 30, 2021 and December 31, 2020, the Company had asset subject to buyback of $
The
Chengli project finished construction, and was transferred to the Company’s fixed assets at a cost of $
14
On April 9, 2021, Xi’an
TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement (termination agreement).
Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated upon signing of the termination
agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from the buyers other than keeping the
CDQ WHPG station. As a result of the termination of the buy-back agreement, the Company recorded a gain of approximately $
5. TAXES PAYABLE
Taxes payable consisted of the following as of September 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Income tax – current | $ | $ | ||||||
| Value-added tax | ||||||||
| Other taxes | ||||||||
| Total – current | ||||||||
| Income tax – noncurrent | $ | $ | ||||||
Income
tax payable included $
6. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following as of September 30, 2021 and December 31, 2020:
| 2021 | 2020 | |||||||
| Education and union fund and social insurance payable | $ | $ | ||||||
| Consulting and legal expenses | ||||||||
| Accrued payroll and welfare | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
7. DEFERRED TAX, NET
Deferred tax assets resulted from asset impairment loss which was temporarily non-tax deductible for tax purposes but expensed in accordance with US GAAP; interest income in sales-type leases which was recognized as income for tax purposes but not for book purpose as it did not meet revenue recognition in accordance with US GAAP; accrued employee social insurance that can be deducted for tax purposes in the future, and the difference between tax and accounting basis of cost of fixed assets which was capitalized for tax purposes and expensed as part of cost of systems in accordance with US GAAP. Deferred tax liability arose from the difference between tax and accounting basis of net investment in sales-type leases.
As of September 30, 2021 and December 31, 2020, deferred tax assets consisted of the following:
| 2021 | 2020 | |||||||
| Accrued expenses | $ | $ | ||||||
| Write-off Erdos TCH net investment in sales-type leases * | ||||||||
| US NOL | ||||||||
| PRC NOL | ||||||||
| Total deferred tax assets | ||||||||
| Less: valuation allowance for deferred tax assets | ( | ) | ( | ) | ||||
| Deferred tax assets, net | $ | $ | ||||||
| * |
15
8. LOAN PAYABLE
Entrusted Loan Payable (HYREF Loan)
The
HYREF Fund was established in July 2013 with a total fund size of RMB
The
term of this loan was for 60 months from July 31, 2013 to July 30, 2018, with an interest rate of
Repayment of HYREF loan
1. Transfer of Chengli project as partial repayment
On
December 29, 2018, Xi’an Zhonghong, Xi’an TCH, HYREF, Guohua Ku, and Chonggong Bai entered into a CDQ WHPG Station Fixed
Assets Transfer Agreement, pursuant to which Xi’an Zhonghong transferred Chengli CDQ WHPG station as the repayment for the loan
of RMB
Xi’an TCH is a secondary limited partner of HYREF. The fair value of the CDQ WHPG station applied in the transfer was determined by the parties based upon the appraisal report issued by Zhonglian Assets Appraisal Group (Shaanxi) Co., Ltd. as of August 15, 2018. However, per the discussion below, Xi’an Zhonghong, Xi’an TCH, Guohua Ku and Chonggong Bai (the “Buyers”) entered into a Buy Back Agreement, also agreed to buy back the Station when conditions under the Buy Back Agreement are met. Due to the Buy Back agreement, the loan was not deemed repaid, and therefore the Company recognized Chengli project as assets subject to buyback and kept the loan payable remained recognized under ASC 405-20-40-1 as of December 31, 2020. The Buy Back agreement was terminated in April 2021 (see 2 below for detail).
16
2. Buy Back Agreement
On December 29, 2018, Xi’an TCH, Xi’an Zhonghong, HYREF, Guohua Ku, Chonggong Bai and Xi’an Hanneng Enterprises Management Consulting Co. Ltd. (“Xi’an Hanneng”) entered into a Buy Back Agreement.
Pursuant
to the Buy Back Agreement, the Buyers jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng
which was transferred to HYREF by Chonggong Bai (see 3 below), and a CDQ WHPG station in Boxing County which was transferred to HYREF
by Xi’an Zhonghong. The buy-back price for the Xi’an Hanneng’s equity was based on the higher of (i) the market price
of the equity shares at the time of buy-back; or (ii) the original transfer price of the equity shares plus bank interest. The buy-back
price for the Station was based on the higher of (i) the fair value of the Station on the date transferred; or (ii) the loan balance
at the date of the transfer plus interest accrued through that date. HYREF could request that the Buyers buy back the equity shares of
Xi’an Hanneng and/or the CDQ WHPG station if one of the following conditions is met: (i) HYREF holds the equity shares of Xi’an
Hanneng until December 31, 2021; (ii) Xi’an Huaxin New Energy Co., Ltd., is delisted from The National Equities Exchange And Quotations
Co., Ltd., a Chinese over-the-counter trading system (the “NEEQ”); (iii) Xi’an Huaxin New Energy, or any of the Buyers
or its affiliates has a credit problem, including not being able to issue an auditor report or standard auditor report or any control
person or executive of the Buyers is involved in crimes and is under prosecution or has other material credit problems, to HYREF’s
reasonable belief; (iv) if Xi’an Zhonghong fails to timely make repayment on principal or interest of the loan agreement, its supplemental
agreement or extension agreement; (v) the Buyers or any party to the Debt Repayment Agreement materially breaches the Debt Repayment
Agreement or its related transaction documents, including but not limited to the Share Transfer Agreement, the Pledged Assets Transfer
Agreement, the Entrusted Loan Agreement and their guarantee agreements and supplemental agreements. Due to halted trading of Huaxin
stock by NEEQ for not filing its 2018 annual report, on December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong
Bai jointly and severally agreed to buy back all outstanding capital equity of Xi’an Hanneng which was transferred to HYREF by
Chonggong Bai earlier. The total buy back price was RMB
On
April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement
(termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated
upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment
from the buyers other than keeping the CDQ WHPG station. The Company recorded a gain of approximately $
3. Transfer of Xuzhou Huayu Project and Shenqiu Phase I & II project to Mr. Bai for partial repayment of HYREF loan
On
January 4, 2019, Xi’an Zhonghong, Xi’an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement, pursuant to
which Xi’an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City for Xuzhou Huayu Coking Co., Ltd.
(“Xuzhou Huayu Project”) to Mr. Bai for RMB
On February 15, 2019, Xi’an Zhonghong completed the transfer of the Xuzhou Huayu Project and Xi’an TCH completed the transfer of Shenqiu Phase I and II Projects to Mr. Bai, and on January 10, 2019, Mr. Bai transferred all the equity shares of his wholly owned company, Xi’an Hanneng, to HYREF as repayment of Xi’an Zhonghong’s loan to HYREF as consideration for the transfer of the Xuzhou Huayu Project and Shenqiu Phase I and II Projects.
Xi’an Hanneng is a holding company and was supposed to own 47,150,000 shares of Xi’an Huaxin New Energy Co., Ltd. (“Huaxin”), so that HYREF will indirectly receive and own such shares of Xi’an Huaxin as the repayment for the loan of Zhonghong. Xi’an Hanneng already owned 29,948,000 shares of Huaxin; however, Xi’an Hanneng was not able to obtain the remaining 17,202,000 shares due to halted trading of Huaxin stock by NEEQ for not filing its 2018 annual report.
On
December 19, 2019, Xi’an TCH, Xi’an Zhonghong, Guohua Ku and Chonggong Bai jointly and severally agreed to buy back all outstanding
capital equity of Xi’an Hanneng which was transferred to HYREF by Chonggong Bai earlier. The total buy back price was RMB
17
On
April 9, 2021, Xi’an TCH, Xi’an Zhonghong, Guohua Ku, Chonggong Bai and HYREF entered a Termination of Fulfillment Agreement
(termination agreement). Under the termination agreement, the original buyback agreement entered on December 19, 2019 was terminated
upon signing of the termination agreement. HYREF will not execute the buy-back option and will not ask for any additional payment from
the buyers other than keeping the CDQ WHPG station. The Company recorded a gain of approximately $
4.
9. RELATED PARTY TRANSACTIONS
As
of September 30, 2021 and December 31, 2020, the Company had $
On
February 23, 2021, the Company entered into certain securities purchase agreements with several non-U.S. investors (the “Purchasers”),
10. NOTE PAYABLE, NET
Promissory Notes in December 2020
On
December 4, 2020, the Company entered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company sold
and issued to the Purchaser a Promissory Note of $
On
June 14, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned
a new Promissory Note in the original principal amount of $
During
the three months ended September 30, 2021, the Company and Lender partitioned four new Promissory Notes in the original principal amount
of $
18
Promissory Notes in April 2021
On
April 2, 2021, the Company entered into a Note Purchase Agreement with an institutional investor, pursuant to which the Company sold
and issued to the Purchaser a Promissory Note of $
11. SHARES ISSUED FOR EQUITY FINANCING AND STOCK COMPENSATION
Shares Issued for Equity Financing in 2021
On
February 23, 2021,
Warrants
Following is a summary of the activities of warrants that were issued from equity financing (post-reverse stock split) for the nine months ended September 30, 2021
| Number
of Warrants | Average Exercise Price (post-reverse stock split price) | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||
| Exercisable at January 1, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exchanged | ||||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Outstanding at September 30, 2021 | $ | |||||||||||
| Exercisable at September 30, 2021 | $ | |||||||||||
During
the three months ended September 30, 2021, the Company issued
12. INCOME TAX
The
Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally
subject to tax at
19
The
Company’s subsidiaries generate all of their income from their PRC operations. All of the Company’s Chinese subsidiaries’
effective income tax rate for 2021 and 2020 was
There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s CFS do not present any income tax provisions related to Cayman Islands tax jurisdiction, where Sifang Holding is domiciled.
The US parent company, CREG is taxed in the US and, as of September 30, 2021, had net operating loss (“NOL”) carry forwards for income taxes of $1.98 million; for federal income tax purposes, the NOL arising in tax years beginning after 2017 may only reduce 80% of a taxpayer’s taxable income, and may be carried forward indefinitely. However, the coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and 2020. The management believes the realization of benefits from these losses may be uncertain due to the US parent company’s continuing operating losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
As of September
30, 2021, the Company’s PRC subsidiaries had $
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2021 and 2020, respectively:
| 2021 | 2020 | |||||||
| U.S. statutory rates | % | ( | )% | |||||
| Tax rate difference – current provision | % | % | ||||||
| Prior year income tax adjustment in current year | ( | )% | ||||||
| Permanent differences | % | % | ||||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Tax benefit per financial statements | ( | )% | % | |||||
The provision for income tax expense for the nine months ended September 30, 2021 and 2020 consisted of the following:
| 2021 | 2020 | |||||||
| Income tax benefit – current | $ | $ | ||||||
| Income tax benefit – deferred | ||||||||
| Total income tax benefit | $ | $ | - | |||||
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September 30, 2021 and 2020, respectively:
| 2021 | 2020 | |||||||
| U.S. statutory rates | ( | )% | ( | )% | ||||
| Tax rate difference – current provision | % | ( | )% | |||||
| Permanent differences | % | % | ||||||
| Change in valuation allowance | ( | )% | % | |||||
| Tax expense per financial statements | % | - | % | |||||
The provision for income tax expense for the three months ended September 30, 2021 and 2020 consisted of the following:
| 2021 | 2020 | |||||||
| Income tax expense – current | $ | $ | ||||||
| Income tax expense– deferred | ||||||||
| Total income tax expense | $ | $ | ||||||
20
13. STOCK-BASED COMPENSATION PLAN
Options to Employees and Directors
On
June 19, 2015, the stockholders of the Company approved the China Recycling Energy Corporation Omnibus Equity Plan (the “Plan”)
at its annual meeting. The total shares of Common Stock authorized for issuance during the term of the Plan is
The following table summarizes option activity with respect to employees and independent directors for the nine months ended September 30, 2021, and the number of options reflects the Reverse Stock Split effective April 13, 2020:
| Number
of Shares | Average Exercise Price per Share (post-reverse stock split price) | Weighted Average Remaining Contractual Term in Years | ||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||
| Exercisable at January 1, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ||||||||||||
| Outstanding at September 30, 2021 | $ | |||||||||||
| Exercisable at September 30, 2021 | $ | |||||||||||
14. STATUTORY RESERVES
Pursuant to the corporate law of the PRC effective January 1, 2006, the Company is only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.
Surplus Reserve Fund
The
Company’s Chinese subsidiaries are required to transfer
21
During
the nine months ended September 30, 2021, the Company transferred $
| Name of Chinese Subsidiaries | Registered Capital | Maximum Statutory Reserve Amount | Statutory
reserve at September 30, 2021 | Statutory reserve at December 31, 2020 | ||||||||
| Shanghai TCH | $ | $ | ¥ | ¥ | ||||||||
| Xi’an TCH | ¥ | ¥ | ¥ | ¥ | ||||||||
| Erdos TCH | ¥ | ¥ | ¥ | ¥ | ||||||||
| Xi’an Zhonghong | ¥ | ¥ | ||||||||||
| Shaanxi Huahong | $ | $ | ||||||||||
| Zhongxun | ¥ | ¥ | ||||||||||
Common Welfare Fund
The
common welfare fund is a voluntary fund to which the Company can transfer
15. CONTINGENCIES
China maintains a “closed” capital account, meaning companies, banks, and individuals cannot move money in or out of the country except in accordance with strict rules. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) regulate the flow of foreign exchange in and out of the country. For inward or outward foreign currency transactions, the Company needs to make a timely declaration to the bank with sufficient supporting documents to declare the nature of the business transaction. The Company’s sales, purchases and expense transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. Remittances in currencies other than RMB may require certain supporting documentation in order to make the remittance.
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
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16. COMMITMENTS
Lease Commitment
The components of lease costs, lease term and discount rate with respect of the office lease with an initial term of more than 12 months are as follows:
| Nine
Months Ended | ||||
| September
30, 2021 | ||||
| Operating lease cost – amortization of ROU | $ | |||
| Operating lease cost – interest expense on lease liability | $ | |||
| Weighted Average Remaining Lease Term - Operating leases | ||||
| Weighted Average Discount Rate - Operating leases | % | |||
| Nine
Months Ended | ||||
| September
30, 2020 | ||||
| Operating lease cost– amortization of ROU | $ | |||
| Operating lease cost – interest expense on lease liability | $ | |||
| Weighted Average Remaining Lease Term - Operating leases | ||||
| Weighted Average Discount Rate - Operating leases | % | |||
| Three
Months Ended | ||||
| September
30, 2021 | ||||
| Operating lease cost – amortization of ROU | $ | |||
| Operating lease cost – interest expense on lease liability | $ | |||
| Three
Months Ended | ||||
| September
30, 2020 | ||||
| Operating lease cost– amortization of ROU | $ | |||
| Operating lease cost – interest expense on lease liability | $ | |||
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The following is a schedule, by years, of maturities of the office lease liabilities as of September 30, 2021:
| Operating Leases | ||||
| For the years ended September 30, 2022, | $ | |||
| For the years ended September 30, 2023 | ||||
| Total undiscounted cash flows | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
Employment Agreement
On
May 8, 2020, the Company entered an employment agreement with Yongjiang Shi, the Company’s CFO for a term of 24 months. The monthly
salary is RMB
Investment Banking Engagement Agreement
On
October 10, 2019,
On
May 2, 2021, the Company entered an agreement with an investment banker (who will serve as the exclusive placement agent or exclusive
lead underwriter of the Company) with the intension to raise approximately $
17. SUBSEQUENT EVENTS
The Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were issued and determined the Company has the following material subsequent events:
On
October 8, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned
a new Promissory Notes in the original principal amount of $
On
October 21, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned
a new Promissory Notes in the original principal amount of $
On
October 25, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned
a new Promissory Notes in the original principal amount of $
On November
9, 2021, Company entered into an Exchange Agreement with the lender. Pursuant to the Agreement, the Company and Lender partitioned a new
Promissory Notes in the original principal amount of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “may”, “will”, “should”, “would”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Company or Company’s management identify forward-looking statements. Such statements reflect the current view of Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the statements in the section “results of operations” below), and any businesses that Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of annual report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Foreign Currency Translation and Comprehensive Income (Loss)” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.
OVERVIEW
The Company was incorporated on May 8, 1980 as Boulder Brewing Company under the laws of the State of Colorado. On September 6, 2001, the Company changed its state of incorporation to the State of Nevada. In 2004, the Company changed its name from Boulder Brewing Company to China Digital Wireless, Inc. and on March 8, 2007, again changed its name from China Digital Wireless, Inc. to its current name, China Recycling Energy Corporation. The Company, through its subsidiaries, provides energy saving solutions and services, including selling and leasing energy saving systems and equipment to customers, project investment, investment management, economic information consulting, technical services, financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial leasing transactions in the Peoples Republic of China (“PRC”).
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Our business is primarily conducted through our wholly-owned subsidiaries, Yinghua and Sifang, Sifang’s wholly-owned subsidiaries, Huahong and Shanghai TCH, Shanghai TCH’s wholly-owned subsidiaries, Xi’an TCH, Xi’an TCH’s wholly-owned subsidiary Erdos TCH and Xi’an TCH’s 90% owned and Shanghai TCH’s 10% owned subsidiary Xi’an Zhonghong New Energy Technology Co., Ltd., and Zhongxun. Shanghai TCH was established as a foreign investment enterprise in Shanghai under the laws of the PRC on May 25, 2004, and currently has registered capital of $29.80 million. Xi’an TCH was incorporated in Xi’an, Shaanxi Province under the laws of the PRC in November 2007. Erdos TCH was incorporated in April 2009. Huahong was incorporated in February 2009. Xi’an Zhonghong New Energy Technology Co., Ltd. was incorporated in July 2013. Xi’an TCH owns 90% and Shanghai TCH owns 10% of Zhonghong. Zhonghong provides energy saving solutions and services, including constructing, selling and leasing energy saving systems and equipment to customers. Zhongxun was incorporated in March 2014 and is a wholly owned subsidiary of Xi’an TCH.
The Company is in the process of transforming and expanding into an energy storage integrated solution provider. We plan to pursue disciplined and targeted expansion strategies for market areas we currently do not serve. We actively seek and explore opportunities to apply energy storage technologies to new industries or segments with high growth potential, including industrial and commercial complexes, large scale photovoltaic (PV) and wind power stations, remote islands without electricity, and cities with multi-energy supplies.
In December 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This pandemic, which continues to spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. However, as a result of PRC government’s effort on disease control, the outbreak in China is under the control. As of the date of this report, there are some new Covid-19 cases discovered in a few provinces of China, however, the number of new cases is not significant due to the PRC government’s strict control.
For the nine months ended September 30, 2021 and 2020, the Company had a net income of $1,386,773 and net loss of $275,891, respectively. For the three months ended September 30, 2021 and 2020, the Company had a net loss of $556,574 and $671,280, respectively. The Company has an accumulated deficit of $41.66 million as of September 30, 2021. The Company is in the process of transforming and expanding into an energy storage integrated solution provider as described above.
The historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. However, the Company had $149.52 million cash on hand at September 30, 2021 as a result of collection the full payment from all the projects that were disposed earlier, this satisfies the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. The Company believes that the actions discussed above are probable of occurring and the occurrence, as well as the cash flow discussed, mitigate the substantial doubt raised by its historical operating results.
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Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering, or debt financing including bank loans.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements (“CFS”), which were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to assist you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
These accompanying CFS were prepared in accordance with US GAAP and pursuant to the rules and regulations of the SEC for financial statements.
Basis of Consolidation
The CFS include the accounts of CREG and, its subsidiary, Sifang Holdings and Yinghua; Sifang Holdings’ wholly-owned subsidiaries, Huahong and Shanghai TCH; Shanghai TCH’s wholly-owned subsidiary Xi’an TCH; and Xi’an TCH’s subsidiaries, Erdos TCH, Zhonghong, and Zhongxun. Substantially all of the Company’s revenues are derived from the operations of Shanghai TCH and its subsidiaries, which represent substantially all of the Company’s consolidated assets and liabilities as of September 30, 2021. All significant inter-company accounts and transactions were eliminated in consolidation.
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Use of Estimates
In preparing the CFS, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets as well as revenues and expenses during the year reported. Actual results may differ from these estimates.
Concentration of Credit Risk
Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions within China are not covered by insurance. The Company has not experienced any losses in such accounts.
Certain other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC.
Revenue Recognition
Sales-type Leasing and Related Revenue Recognition
On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under ASC Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. (See Operating lease below as relates to the Company as a lessee). The Company’s sales type lease contracts for revenue recognition fall under ASC 842.
The Company constructs and leases waste energy recycling power generating projects to its customers. The Company typically transfers ownership of the waste energy recycling power generating projects to its customers at the end of the lease. Prior to January 1, 2019, the investment in these projects was recorded as investment in sales-type leases in accordance with ASC Topic 840, “Leases,” and its various amendments and interpretations.
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The Company finances construction of waste energy recycling power generating projects. The sales and cost of sales are recognized at the inception of the lease, which is when the control is transferred to the lessee. The Company accounts for the transfer of control as a sales type lease in accordance with ASC 842-10-25-2. The underlying asset is derecognized, and revenue is recorded when collection of payments is probable. This is in accordance with the revenue recognition principle in ASC 606 -Revenue from contracts with customers. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less unearned interest income and estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as the lessor) and the customer (as the lessee). The discount rate implicit in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs and contingent rentals, if any. Unearned interest is amortized to income over the lease term to produce a constant periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income and reduction of receivables. Revenue is recognized net of sales tax.
Contingent Rental Income
The Company records the income from actual electricity usage in addition to minimum lease payment of each project as contingent rental income in the period earned. Contingent rent is not part of minimum lease payments.
Foreign Currency Translation and Comprehensive Income (Loss)
The Company’s functional currency is RMB. For financial reporting purposes, RMB figures were translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains and losses from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
The Company uses “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
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RESULTS OF OPERATIONS
Comparison of Results of Operations for the nine months ended September 30, 2021 and 2020
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales. Certain columns may not add due to rounding.
| 2021 | %
of Sales | 2020 | %
of Sales | |||||||||||||
| Sales - contingent rental income | $ | - | - | % | $ | - | - | % | ||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | - | - | % | - | - | % | ||||||||||
| Total operating expenses (income) | 764,192 | - | % | (1,181,743 | ) | - | % | |||||||||
| Income (Loss) from operations | (764,192 | ) | - | % | 1,181,743 | - | % | |||||||||
| Total non-operating income (expenses), net | 2,063,914 | - | % | (1,457,634 | ) | - | % | |||||||||
| Income (Loss) before income tax | 1,299,722 | - | % | (275,891 | ) | % | ||||||||||
| Income tax benefit | (87,051 | ) | - | % | - | - | % | |||||||||
| Net Income (loss0 | $ | 1,386,773 | - | % | $ | (275,891 | ) | - | % | |||||||
SALES. Total sales for the nine months ended September 30, 2021 and 2020 were $0.
COST OF SALES. Cost of sales (“COS”) for the nine months ended September 30, 2021 and 2020 were $0.
GROSS PROFIT. Gross income for the nine months ended September 30, 2021 and 2020 were $0 with gross margin of 0%.
OPERATING EXPENSES. Operating expenses consisted of general and administrative expenses, bad debt expense reversal totaling $764,192 for the nine months ended September 30, 2021, compared to operating income $1,181,743 for the nine months ended September 30, 2020, an increase of $1,945,935 or 165%. The increase in operating expenses was mainly due to decreased bad debt expense reversal by $1,624,520, and increased stock transfer agent fee by $200,960, increased social insurance expense by $35,420, increased amortization expense of OID on long term note by $29,160, increased payroll expense by $24,400 and increased other G&A expenses by $31,450.
NET NON-OPERATING INCOME (EXPENSES). Net non-operating income (expenses) consisted of loss on note conversion, interest income, interest expenses and miscellaneous expenses. For the nine months ended September 30, 2021, net non-operating income was $2,063,914 compared to non-operating expense of $1,457,634 for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, we had $302,426 interest income and gain on termination of buy-back agreement of Chengli project of $3,156,138 (see Note 8), but the amount was offset by $393,555 interest expense on note payable, loss on note conversion of $61,155 and interest expense on failure of note redemption on time of $818,914 and other expenses of $121,026. For the nine months ended September 30, 2020, we had $124,305 interest income, but the amounts were offset by a $1,037,183 interest expense on entrusted loan and note payable, $496,853 loss on note conversion and other expenses of $47,903.
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INCOME TAX BENEFIT. Income tax benefit was $87,051 for the nine months ended September 30, 2021, compared with $0 for the nine months ended September 30, 2020. The consolidated effective income tax rates for the nine months ended September 30, 2021and 2020 were (6.7)% and 0%, respectively.
NET INCOME. Net income for the nine months ended September 30, 2021 was $1,386,773 compared to net loss of $275,891 for the nine months ended September 30, 2020, an increase of income of $1,662,664. This increase in net income was mainly due to gain on termination of buy-back agreement of Chengli project by $3,156,138, but was partly offset by decreased bad debt expense reversal by $1,624,520 as describe above.
Comparison of Results of Operations for the three months ended September 30, 2021 and 2020
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales. Certain columns may not add due to rounding.
| 2021 | %
of Sales | 2020 | %
of Sales | |||||||||||||
| Sales - contingent rental income | $ | - | - | % | $ | - | - | % | ||||||||
| Cost of sales | - | - | % | - | - | % | ||||||||||
| Gross profit | - | - | % | - | - | % | ||||||||||
| Interest income on sales-type leases | - | - | % | - | - | % | ||||||||||
| Total operating expenses | 380,040 | - | % | 77,015 | - | % | ||||||||||
| Loss from operations | (380,040 | ) | - | % | (77,015 | ) | - | % | ||||||||
| Total non-operating expenses, net | (165,632 | ) | - | % | (594,265 | ) | - | % | ||||||||
| Loss before income tax | (545,672 | ) | - | % | (671,280 | ) | % | |||||||||
| Income tax expense | 10,902 | - | % | - | - | % | ||||||||||
| Net loss | $ | (556,574 | ) | - | % | $ | (671,280 | ) | - | % | ||||||
SALES. Total sales for the three months ended September 30, 2021 and 2020 were $0.
COST OF SALES. Cost of sales (“COS”) for the three months ended September 30, 2021 and 2020 were $0.
GROSS PROFIT. Gross income for the three months ended September30, 2021 and 2020 were $0 with gross margin of 0%.
OPERATING EXPENSES. Operating expenses consisted of general and administrative expenses and bad debt expense reversal, totaling $380,040 for the three months ended September 30, 2021, compared to $77,015 for the three months ended September 30, 2020, an increase of $303,025 or 393%. The increase was mainly due to increased stock transfer agent fee by $223,430, decreased bad debts reversal by $9,479, and increased other G&A expenses by $70,108.
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NET NON-OPERATING INCOME (EXPENSES). Net non-operating income (expenses) consisted of loss on note conversion, interest income, interest expenses and miscellaneous expenses. For the three months ended September 30, 2021, net non-operating expense was $165,632 compared to non-operating expenses of $594,265 for the three months ended September 30, 2020. For the three months ended September 30, 2021, we had $109,269 interest income but the amount was offset by $165,854 interest expense on note payable, loss on note conversion of $58,436, and other expenses of $50,790. For the three months ended September 30, 2020, we had $51,688 interest income but the amount was offset by $340,155 interest expense on entrusted loan and note payable, and $298,523 loss on note redemption.
INCOME TAX EXPENSE. Income tax expense was $10,902 for the three months ended September 30, 2021, compared with $0 for the three months ended September 30, 2020. The consolidated effective income tax rates for the three months ended September 30, 2021 and 2020 were 2.0% and 0%, respectively.
NET LOSS. Net loss for the three months ended September 30, 2021 was $556,574 compared to net loss of $671,280 for the three months ended September 30, 2020, a decrease of loss of $114,706. This decrease in net loss was mainly due to decreased loss on note conversion by $240,087, increased interest income by $57,581, decreased interest expense by $174,301, which was partly offset by increased other expenses by $43,515, and increased G&A expenses by $303,025 as describe above.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of nine months Ended September 30, 2021 and 2020
As of September 30, 2021, the Company had cash and equivalents of $149.52 million, other current assets of $1,106,842, current liabilities of $10.70 million, working capital of $139.93 million, a current ratio of 14.08:1 and a liability-to-equity ratio of 0.12:1.
The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Cash provided by (used in): | ||||||||
| Operating Activities | $ | (1,583,918 | ) | $ | 55,199,324 | |||
| Investing Activities | - | - | ||||||
| Financing Activities | $ | 42,561,721 | $ | 497,187 | ||||
Net cash used in operating activities was $1,583,918 during the nine months ended September 30, 2021, compared to $55.20 million cash provided by operating activities for the nine months ended September 30, 2020. The decrease in net cash inflow for the nine months ended September 30, 2021 was mainly due to our cash collection of sales type leases of Pucheng systems by $13.96 million, and cash collection of accounts receivable by $43.42 million for selling / disposing Huayu, Shenqiu, Zhongtai and Tian’an systems that were occurred in the nine months ended September 30, 2020.
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On August 2, 2021, the Company entered a Research and Development Cooperation Agreement with a software development company to design, establish, upgrade and maintenance of Smart Energy Management Cloud Platform for energy storage and remote-site monitoring; upon completion, the Company will provide such platform to its customers at a fee. Total contracted research and development cost is $1,000,000, the Company prepaid $200,000 as of September 30, 2021.
On August 23, 2021, the Company entered a Market Research and Project Development Service Agreement with a consulting company in Xi’an for a service period of 12 months. The consulting company will perform the market research for new energy industry including photovoltaic and energy storage, develop potential new customers and due diligence check, assisting the Company for business cooperation negotiation and relevant agreements preparation. Total contract amount is $1,150,000, and the Company prepaid $650,000 at commencement of the service; the Company will pay $200,000 upon issuance of the research report, and pay the remaining of $300,000 upon completion all the services.
Net cash provided by (used in) investing activities was $0 and $0, respectively, for the nine months ended September 30, 2021 and 2020.
Net cash provided by financing activities was $42,561,721 compared to net cash used in financing activities of $497,187 during the nine months ended September 30, 2021 and 2020, respectively. The cash inflow for the nine months ended September 30, 2021 was the proceeds from a private placement of $37,561,721 and issuance of notes payable of $5,000,000. The cash inflow for the nine months ended September 30, 2020 was from the issuance of Common Stock of $497,187.
On February 23, 2021, the Company entered into certain securities purchase agreements with several non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers, an aggregate of up to 3,320,000 shares of common stock of the Company, at $11.522 per share, which is the five-day average closing price immediately prior to signing the Purchase Agreements. One of the purchasers is the Company’s CEO (also is the Company’s Chairman), he purchased 1,000,000 common shares of the Company. On March 11, 2021, the Company received approximately $38.25 million proceeds from the issuance of 3,320,000 shares under the securities purchase agreements, there was no any fees paid in connection with this financing. In April 2021, the Company’s CEO amended the number of shares that he would purchase from 1,000,000 shares to 940,000 shares; accordingly, total number of shares sold in this offering became 3,260,000 shares. The Company returned $691,320 extra proceeds that were received earlier to the Company’s CEO in April 2021.
We do not believe inflation has had or will have a significant negative impact on our results of operations in 2021.
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Transfers of Cash to and from Our Subsidiaries
The PRC has currency and capital transfer regulations that require us to comply with certain requirements for the movement of capital. The Company is able to transfer cash (US Dollars) to its PRC subsidiaries through: (i) an investment (by increasing the Company’s registered capital in a PRC subsidiary), or (ii) a stockholder loan. The Company’s subsidiaries in the PRC have not transferred any earnings or cash to the Company to date. The Company’s business is primarily conducted through its subsidiaries. The Company is a holding company and its material assets consist solely of the ownership interests held in its PRC subsidiaries. The Company relies on dividends paid by its subsidiaries for its working capital and cash needs, including the funds necessary: (i) to pay dividends or cash distributions to its stockholders, (ii) to service any debt obligations and (iii) to pay operating expenses. As a result of PRC laws and regulations (noted below) that require annual appropriations of 10% of after-tax income to be set aside in a general reserve fund prior to payment of dividends, the Company’s PRC subsidiaries are restricted in that respect, as well as in others respects noted below, in their ability to transfer a portion of their net assets to the Company as a dividend.
With respect to transferring cash from the Company to its subsidiaries, increasing the Company’s registered capital in a PRC subsidiary requires the filing of the local commerce department, while a stockholder loan requires a filing with the state administration of foreign exchange or its local bureau.
With respect to the payment of dividends, we note the following:
| 1. | PRC regulations currently permit the payment of dividends only out of accumulated profits, as determined in accordance with accounting standards and PRC regulations (an in-depth description of the PRC regulations is set forth below); | |
| 2. | Our PRC subsidiaries are required to set aside, at a minimum, 10% of their net income after taxes, based on PRC accounting standards, each year as statutory surplus reserves until the cumulative amount of such reserves reaches 50% of their registered capital; | |
| 3. | Such reserves may not be distributed as cash dividends; | |
| 4. | Our PRC subsidiaries may also allocate a portion of their after-tax profits to fund their staff welfare and bonus funds; except in the event of a liquidation, these funds may also not be distributed to stockholders; the Company does not participate in a Common Welfare Fund; | |
| 5. | The incurrence of debt, specifically the instruments governing such debt, may restrict a subsidiary’s ability to pay stockholder dividends or make other cash distributions; and | |
| 6. | The Company is subject to covenants and consent requirements. |
If, for the reasons noted above, our subsidiaries are unable to pay stockholder dividends and/or make other cash payments to the Company when needed, the Company’s ability to conduct operations, make investments, engage in acquisitions, or undertake other activities requiring working capital may be materially and adversely affected. However, our operations and business, including investment and/or acquisitions by our subsidiaries within China, will not be affected as long as the capital is not transferred in or out of the PRC.
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PRC Regulations
In accordance with PRC regulations on Enterprises with Foreign Investment and their articles of association, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide statutory reserves, which are appropriated from net profit, as reported in the FIE’s PRC statutory accounts. A FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital (based on the FIE’s PRC statutory accounts). The aforementioned reserves may only be used for specific purposes and may not be distributed as cash dividends. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its stockholders, unless approved by the State Administration of Foreign Exchange. After satisfaction of this requirement, the remaining funds may be appropriated at the discretion of the FIE’s board of directors. Our subsidiary, Shanghai TCH, qualifies as a FIE and is therefore subject to the above-mandated regulations on distributable profits.
Additionally, in accordance with PRC corporate law, a domestic enterprise is required to maintain a surplus reserve of at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and may not be distributed as cash dividends. Xi’an TCH, Huahong, Zhonghong and Erdos TCH were established as domestic enterprises; therefore, each is subject to the above-mentioned restrictions on distributable profits.
As a result of PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends, in a general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend or otherwise.
Chart of the Company’s Statutory Reserve
Pursuant to PRC corporate law, effective January 1, 2006, the Company is required to maintain a statutory Pursuant to PRC corporate law, effective January 1, 2006, the Company is required to maintain a statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings. Our restricted and unrestricted retained earnings under US GAAP are set forth below:
| As of | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Unrestricted retained earnings (accumulated deficit) | $ | (41,659,277 | ) | $ | (43,026,465 | ) | ||
| Restricted retained earnings (surplus reserve fund) | 15,174,627 | 15,155,042 | ||||||
| Total retained earnings (accumulated deficit) | $ | (26,484,650 | ) | $ | (27,871,423 | ) | ||
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OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations as of September 30, 2021 are as follows:
| 1 year or | More than | See Note | ||||||||||
| Contractual Obligation | less | 1 year | (for details) | |||||||||
| Notes payable including accrued interest of $221,996, net of unamortized OID of $275,605 | $ | 7,355,319 | $ | - | 10 | |||||||
| Entrusted loan | $ | - | $ | 308,385 | 8 | |||||||
| Total | $ | 7,355,319 | $ | 308,385 | ||||||||
The Company believes it has sufficient cash in bank of $150 million as of September 30, 2021, and a sufficient channel to commercial institutions to obtain any loans that may be necessary to meet its working capital needs. Historically, we have been able to obtain loans or otherwise achieve our financing objectives due to the Chinese government’s support for energy-saving businesses with stable cash inflows, good credit ratings and history.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in RMB, which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) at the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended as of September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be subject to litigation, claims and assessments that arise in the ordinary course of business. Management believes that any liability resulting from such additional matters will not have a material adverse effect on our financial position, results of operations or cash flows. The Company is not a party to any legal proceedings that it believes will have a material adverse effect upon the conduct of its business or its financial position.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K as of and for the year ended December 31, 2020 and the registration statement on Form S-1 (filed no. 333-258232). An investment in our common stock involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described in our most recent Form 10-K and the registration statement as referenced above. If any of those risks, incorporated by reference in this Form 10-Q, occur, the market price of our shares of common stock could decline and investors could lose all or part of their investment. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information
Nome
ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| China Recycling Energy Corporation | ||
| Date: November 12, 2021 | By: | /s/ Guohua Ku |
| Guohua Ku | ||
Chairman of the Board and Chief
Executive Officer | ||
| Date: November 12, 2021 | By: | /s/ Yongjiang Shi |
| Yongjiang Shi | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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