SMART POWERR CORP. Note Regarding Forward-Looking Statements
This annual report on Form 10-K and other reports filed by the Company from time to time with theSEC (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 ofthe 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
OVERVIEW The Company was incorporated onMay 8, 1980 asBoulder Brewing Company under the laws of theState of Colorado . OnSeptember 6, 2001 , the Company changed its state of incorporation to theState of Nevada . In 2004, the Company changed its name fromBoulder Brewing Company toChina Digital Wireless, Inc. and onMarch 8, 2007 , again changed its name fromChina Digital Wireless, Inc. to its current name,China Recycling Energy Corporation . OnMarch 3, 2022 , the Company changed its name toSmart Powerr Corp. 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 inthe Peoples Republic of China ("PRC"). 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. InDecember 2019 , a novel strain of coronavirus (COVID-19) was reported, and theWorld Health Organization declared the outbreak to constitute a "Public Health Emergency of International Concern." This contagious disease outbreak, which continues to spread to additional countries, and disrupts 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. The COVID-19 outbreak impacted the Company's operations for the first quarter of 2020. However, as a result of PRC government's effort on disease control, most cities inChina were reopened inApril 2020 , the outbreak inChina is under the control. SinceApril 2020 to the end of 2021, there were some new COVID-19 cases discovered in a few provinces ofChina , however, the number of new cases are not significant due to PRC government's strict control. SinceJanuary 2022 to date, COVID-19 case fluctuated and increased again in many cities ofChina includingXi'an Province where the Company is located. As a result of such increases, there have been periodic short-term lockdowns and restrictions on travel inXi'an Province and other areas ofChina , the Company's operations have been adversely impacted by the travel and work restrictions imposed on a temporary basis inChina to limit the spread of COVID-19. 46
For the years ended
The historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern. However, the Company had$152.01 million cash on hand onDecember 31, 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 business transforming and expansion discussed above are probable of occurring and the occurrence, as well as the cash flow discussed, mitigate the substantial doubt raised by its historical operating results. Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering, or debt financing
including bank loans. Our Subsidiaries and Projects
Our business is primarily conducted through our wholly-owned subsidiaries, Yinghua and Sifang, Sifang's wholly-owned subsidiaries, Huahong andShanghai 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'anZhonghong New Energy Technology Co., Ltd. , and Zhongxun. Shanghai TCH was established as a foreign investment enterprise inShanghai under the laws of the PRC onMay 25, 2004 , and currently has registered capital of$29.80 million . Xi'an TCH was incorporated inXi'an ,Shaanxi Province under the laws of the PRC inNovember 2007 . Erdos TCH was incorporated inApril 2009 . Huahong was incorporated inFebruary 2009 . Xi'anZhonghong New Energy Technology Co., Ltd. was incorporated inJuly 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 inMarch 2014 and is a wholly owned subsidiary of Xi'an TCH. Zhongxun 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. Yinghua was incorporated onFebruary 11, 2015 by theU.S. parent company. Yinghua will be mainly engaged in financial leasing, purchase of financial leasing assets, disposal and repair of financial leasing assets, consulting and ensuring of financial leasing transactions, and related factoring business. Yinghua has not yet commenced operations nor has any capital contribution been made as of the date of this report. 47
The Company's organizational chart as of
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Erdos TCH - Joint Venture
OnApril 14, 2009 , the Company formed a joint venture (the "JV") withErdos 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 wasInner Mongolia Erdos TCH Energy Saving Development Co., Ltd. ("Erdos TCH") with a term of 20 years. Erdos contributed 7% of the total investment of the project, and Xi'anTCH Energy Technology Co., Ltd. ("Xi'an TCH") contributed 93%. OnJune 15, 2013 , Xi'an TCH and Erdos entered into a share transfer agreement, pursuant to which Erdos sold its 7% ownership interest in the JV to Xi'an TCH for$1.29 million (RMB 8 million ), plus certain accumulated profits. Xi'an TCH paid the$1.29 million inJuly 2013 and, as a result, became the sole stockholder of the JV. Erdos TCH currently has two power generation systems in Phase I with a total of 18 MW power capacity, and three power generation systems in Phase II with a total of 27 MW power capacity. OnApril 28, 2016 , Erdos TCH and Erdos entered into a supplemental agreement, effectiveMay 1, 2016 , whereby Erdos TCH cancelled monthly minimum lease payments from Erdos, and started to charge Erdos based on actual electricity sold atRMB 0.30 / KWH. The selling price of each KWH is determined annually based on prevailing market conditions. SinceMay 2019 , Erdos TCH has ceased its operations due to renovations and furnace safety upgrades of Erdos, and the Company initially expected the resumption of operations inJuly 2020 , but the resumption of operations was further delayed due to government's mandate for Erdos to significantly lower its energy consumption per unit of GDP by implementing a comprehensive technical upgrade of its ferrosilicon production line to meet the City's energy-saving targets. Erdos is currently researching the technical rectification scheme. Once the scheme is determined, Erdos TCH will carry out supporting technical transformation for its waste heat power station project. During this period, Erdos will compensate Erdos TCHRMB 1 million ($145,460 ) per month, until operations resume. The Company has not recognized any income due to the uncertainty of collection. In addition, Erdos TCH has 30% ownership inDaTangShiDai (BinZhou) Energy Savings Technology Co., Ltd. ("BinZhou Energy Savings"), 30% ownership inDaTangShiDai DaTong Recycling Energy Technology Co., Ltd. ("DaTong Recycling Energy"), and 40% ownership inDaTang ShiDai TianYu XuZhou Recycling Energy Technology Co, Ltd. ("TianYu XuZhou Recycling Energy"). These companies were incorporated in 2012 but have not been any operations since then nor has any registered capital contribution been made. 48
Chengli Waste Heat Power Generation Projects
OnJuly 19, 2013 , Xi'an TCH formed a new company, "Xi'anZhonghong New Energy Technology Co., Ltd. " ("Zhonghong"), of which it owns 90% of Zhonghong, with HYREF owning the other 10%. Zhonghong is engaged to provide energy saving solution and services, including constructing, selling and leasing energy saving systems and equipment to customers. OnDecember 29, 2018 , Shanghai TCH entered into a Share Transfer Agreement with HYREF, pursuant to which HYREF transferred its 10% ownership in Zhonghong to Shanghai TCH forRMB 3 million ($0.44 million ). The transfer was completed onJanuary 22, 2019 . The Company owns 100% of Xi'an Zhonghong after the transaction. OnJuly 24, 2013 , Zhonghong entered into a Cooperative Agreement ofCDQ and CDQ WHPG Project (Coke Dry Quenching Waste Heat Power Generation Project ) withBoxing County Chengli Gas Supply Co., Ltd. ("Chengli"). The parties entered into a supplement agreement onJuly 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 ").
OnDecember 29, 2018 , Xi'an Zhonghong, Xi'an TCH, HYREF,Guohua Ku , and Mr. Chonggong Bai entered into a CDQ WHPG Station Fixed Assets Transfer Agreement, pursuant to which Xi'an Zhonghong transferred Chengli CDQ WHPG station ('the Station") as the repayment for the loan ofRMB 188,639,400 ($27.54 million ) to HYREF. Xi'an Zhonghong, Xi'an TCH,Guohua Ku and Chonggong Bai also agreed to a Buy Back Agreement for the Station when certain conditions are met (see Note 8). The transfer of the Station was completed onJanuary 22, 2019 , at which time the Company recorded a$624,133 loss. However, because the loan was not deemed repaid due to the buyback provision (See Note 8 for detail), the Company kept the loan and the Chengli project recognized in its consolidated financial statements ("CFS") untilApril 9, 2021 . The Buy Back Agreement was terminated onApril 9, 2021 , HYREF did not execute the buy-back option and did not ask for any additional payment from the buyers other than keeping the CDQ WHPG station.
OnJuly 19, 2013 , Zhonghong entered into a Cooperative Agreement (the "Tianyu Agreement") for Energy Management of CDQ and CDQ WHPG Projects withJiangsu 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") andXuzhou Huayu Coking Co., Ltd. ("Xuzhou Huayu") - to be located at Xuzhou Tian'an and Xuzhou Huayu's respective locations (the "Tianyu Project "). Upon completion of theTianyu Project , Zhonghong will charge Tianyu an energy saving fee ofRMB 0.534 ($0.087 ) per kilowatt hour (excluding tax). The term of the Tianyu Agreement is 20 years. The construction of the Xuzhou Tian'an Project was completed by the second quarter of 2020.The Xuzhou Huayu Project has been on hold due to a conflict betweenXuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues. OnJanuary 4, 2019 , Xi'an Zhonghong, Xi'an TCH, and Mr. Chonggong Bai entered into a Projects Transfer Agreement (the "Agreement"), pursuant to whichXi'an Zhonghong transferred a CDQ WHPG station (under construction) located in Xuzhou City forXuzhou Huayu Coking Co., Ltd. ("Xuzhou Huayu Project ") toMr. Bai forRMB 120,000,000 ($17.52 million ).Mr. Bai agreed that as consideration for the transfer of theXuzhou Huayu Project to him, as well as Shenqiu discussed above, he would transfer all the equity shares of his wholly owned company,Xi'an Hanneng, to HYREF as repayment for the loan made by Xi'an Zhonghong to HYREF. (Note 8). The transfer of the project was completed onFebruary 15, 2019 . The Company recorded$397,033 loss from this transfer during the year endedDecember 31, 2019 . OnJanuary 10, 2019 , Mr. Chonggong Bai transferred all the equity shares of his wholly owned company, Xi'an Hanneng, to HYREF as repayment for the loan. Xi'an Hanneng was expected to own 47,150,000 shares of Xi'anHuaxin New Energy Co., Ltd for the repayment of Huayu system and Shenqiu system. As ofSeptember 30, 2019 , Xi'an Hanneng already owned 29,948,000 shares ofHuaxin , but was not able to obtain the remaining 17,202,000 shares due to halted trading ofHuaxin stock by NEEQ for not filing its 2018 annual report. OnDecember 20, 2019 ,Mr. Bai and all the related parties agreed to haveMr. Bai instead making a payment in cash for the transfer price of Huayu (see Note 8 for detail).
49
On January 10, 2020 , Zhonghong, Tianyu and Huaxin signed a transfer agreement to
transfer all assets under construction and related rights and interests of
Xuzhou Tian'an Project to Tianyu for RMB 170 million including VAT ($24.37
million ) in three installment payments. The 1st installment payment of RMB 50
million ($7.17 million ) to be paid within 20 working days after the contract is
signed. The 2nd installment payment of RMB 50 million ($7.34 million ) is to be
paid within 20 working days after completion of the project construction but no
later than July 31, 2020 . The final installment payment of RMB 70 million
($10.28 million ) was to be paid before December 31, 2020 . The Company received
the payment in full for Tian'an Project as of December 31, 2020 .
Zhongtai Waste Heat Power Generation Energy Management Cooperative Agreement
OnDecember 6, 2013 , Xi'an TCH entered into a CDQ and WHPG Energy Management Cooperative Agreement (the "Zhongtai Agreement") withXuzhou Zhongtai Energy Technology Co., Ltd. ("Zhongtai"), a limited liability company incorporated inJiangsu 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 toZhongtai , and Xi'an TCH is also to build a furnace to generate steam from the smoke pipeline's waste heat and sell the steam toZhongtai .
InMarch 2016 , Xi'an TCH entered into a Transfer Agreement of CDQ and a CDQ WHPG system withZhongtai and Xi'anHuaxin (the "Transfer Agreement"). Under the Transfer Agreement, Xi'an TCH agreed to transfer toZhongtai all of the assets associated with theCDQ Waste Heat Power Generation Project (the "Project"), which is under construction pursuant to the Zhongtai Agreement. Additionally, Xi'an TCH agreed to transfer toZhongtai the Engineering, Procurement and Construction ("EPC") Contract for theCDQ Waste Heat Power Generation Project which Xi'an TCH had entered into with Xi'anHuaxin in connection with the Project. Xi'anHuaxin will continue to construct and complete the Project and Xi'an TCH agreed to transfer all its rights and obligations under the EPC Contract toZhongtai . As consideration for the transfer of the Project,Zhongtai agreed to pay to Xi'an TCHRMB 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 byZhongtai 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 thanJuly 30, 2016 ; and (c)RMB 87,360,000 ($13.45 million ) was to be paid no later thanJuly 30, 2017 .Xuzhou Taifa Special Steel Technology Co., Ltd. ("Xuzhou Taifa") guaranteed the payments fromZhongtai to Xi'an TCH. The ownership of the Project was conditionally transferred toZhongtai following the initial payment ofRMB 50,000,000 ($7.70 million ) byZhongtai to Xi'an TCH and the full ownership of the Project will be officially transferred toZhongtai 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 fromZhongtai onFebruary 23, 2018 , in whichZhongtai committed to pay the remaining payment ofRMB 87,360,000 ($13.45 million ) no later than the end ofJuly 2018 ; inJuly 2018 ,Zhongtai and the Company reached a further oral agreement to extend the repayment term ofRMB 87,360,000 ($13.45 million ) by another two to three months. InJanuary 2020 ,Zhongtai paidRMB 10 million ($1.41 million ); inMarch 2020 ,Zhongtai paidRMB 20 million ($2.82 million ); inJune 2020 ,Zhongtai paidRMB 10 million ($1.41 million ); and inDecember 2020 ,Zhongtai paidRMB 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.
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.
50
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
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 ofDecember 31, 2021 . All significant inter-company accounts and transactions were eliminated in consolidation. 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
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
OnJanuary 1, 2019 , the Company adoptedFinancial 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 afterJanuary 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. 51 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 toJanuary 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. 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.
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.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the years ended
The following table sets forth the results of our operations for the years
indicated as a percentage of net sales. Certain columns may not add due to
rounding.
% of % of
2021 Sales 2020 Sales
Sales $ - - % $ - - %
Cost of sales - - % - - %
Gross profit - - % - - %Interest income on sales-type leases - - % - - % Total operating expenses (income) 808,154 - % (5,287,019 ) - % Income (loss) from operations (808,154 ) - % 5,287,019 - % Total non-operating expenses, net (11,475,176 ) - % (1,776,195 ) - % Income (loss) before income tax (12,283,330 ) - %
4,050,824 % Income tax benefit (53,140 ) - % - - % Net Income (loss)$ (12,230,190 ) - %$ 4,050,824 - % 52
SALES. Total sales for the years endedDecember 31, 2021 and 2020 were$0 .
COST OF SALES. Cost of sales ("COS") for the years ended
GROSS PROFIT. Gross income for the years ended
OPERATING EXPENSES. Operating expenses consisted of general and administrative expenses, bad debt expense reversal totaling$808,154 for the year endedDecember 31, 2021 , compared to operating income$5,827,019 for the year endedDecember 31, 2020 , an increase of$6,635,173 or 114%. The increase in operating expenses was mainly due to decreased reversal of bad debt expense by$5,996,370 , and decreased reversal of accrued insurance expenses by$485,305 , increased stock compensation expense by$212,436 , which was partly offset by decreased other G&A expenses by$58,938 . NET NON-OPERATING EXPENSES. Net non-operating income (expenses) consisted of loss on note conversion, interest income, interest expenses, Impairment loss on long term equity investment of Xi'an TCH's investment into the HYREF fund, and miscellaneous expenses. For the year endedDecember 31, 2021 , net non-operating expense was$11,475,176 compared to non-operating expense of$1,776,195 for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , we had$414,468 interest income and gain on termination of buy-back agreement of Chengli project of$3,165,887 (see Note 8), but the amount was offset by$542,289 interest expense on note payable, loss on note conversion of$151,275 , interest expense on entrusted loan of$374,865 , interest expense on failure of note redemption on time of$2,189,811 , and impairment loss on long term equity investment into HYREF fund of$11,625,195 and other expenses of$172,096 . For the year endedDecember 31, 2020 , we had$185,527 interest income and$4,392 other income, but the amount was offset by$1,463,721 interest expense on entrusted loan and note payable, and$502,393 loss on note conversion. INCOME TAX BENEFIT. Income tax benefit was$53,140 for the year endedDecember 31, 2021 , compared with$0 for the year endedDecember 31, 2020 . The consolidated effective income tax rates for the years endedDecember 31 , 2021and 2020 were (18.8)% and 0%, respectively. NET INCOME (LOSS). Net loss for the year endedDecember 31, 2021 was$12,230,190 compared to net income of$4,050,824 for the year endedDecember 31, 2020 , a decrease of income of$16,281,014 . This decrease in net income was mainly due to decreased reversal of bad debt expense by$5,996,370 , increased impairment loss on long term equity investment into the HYREF fund by$11,625,195 , and increased interest expense by$1,643,244 , which was partly offset by gain on termination of buy-back agreement of Chengli project by$3,165,887 as described above.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of Years Ended
As of
The following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended
2021 2020
Cash provided by (used in):
Operating Activities $ (1,612,458 ) $ 82,248,467
Investing Activities - (1,885 )
Financing Activities $ 42,561,720 $ 3,497,187
53
Net cash used in operating activities was$1,612,458 during the year endedDecember 31, 2021 , compared to$82.25 million cash provided by operating activities for the year endedDecember 31, 2020 . The decrease in net cash inflow for the year endedDecember 31, 2021 was mainly due to that in the year endedDecember 31, 2020 , we had cash collection of sales type leases of Pucheng systems of$14.15 million , and cash collection of accounts receivable of$72.94 million for selling / disposing Huayu, Shenqiu,Zhongtai and Tian'an systems, but partly offset by cash outflow for accounts payable of$2,153,320 and taxes payable of$2,164,906 ; for the year endedDecember 31, 2021 , we had impairment loss on long term equity investment of Xi'an TCH's investment into the HYREF fund$11,625,195 , cash inflow from accounts receivable of$346,876 , outstanding interest payable on entrusted loan of$374,865 , and cash inflow from accrued liabilities and other payables of$434,495 , but partly offset by cash outflow on advance to suppliers by$850,000 , cash outflow on VAT receivable of$187,394 , cash outflow on income tax and other tax payable of$686,897 , and net loss
of$12,230,190 . OnAugust 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 ofDecember 31, 2021 . OnAugust 23, 2021 , the Company entered a Market Research and Project Development Service Agreement with a consulting company inXi'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 used in investing activities was$0 and$1,885 , respectively, for the years endedDecember 31, 2021 and 2020. For the year endedDecember 31, 2020 ,$1,885 was the purchase of the fixed assets. Net cash provided by financing activities was$42,561,720 compared to net cash provided by financing activities of$3,497,187 for the years endedDecember 31, 2021 and 2020, respectively. The cash inflow for the year endedDecember 31, 2021 was the proceeds from a private placement of$37,561,720 and issuance of notes payable of$5,000,000 . The cash inflow for the year endedDecember 31, 2020 was from the issuance of common stock of$497,187 and issuance of notes of$3,000,000 .
OnFebruary 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 was the Company's CEO (also is the Company's Chairman), he purchased 1,000,000 common shares of the Company. OnMarch 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. InApril 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 inApril 2021 .
We do not believe inflation has had or will have a significant negative impact on our results of operations in 2022.
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.
54
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
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 thePRC. PRC Regulations In accordance with PRC regulations on Enterprises withForeign 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 theState 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. 55
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
As of
December 31 , December 31,
2021 2020
Unrestricted accumulated deficit$ (55,281,680 ) $ (43,026,465 ) Restricted retained earnings (surplus reserve fund) 15,180,067
15,155,042 Total accumulated deficit$ (40,101,613 ) $ (27,871,423 )
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 ofDecember 31, 2021 are as follows: 1 year or More than See Note Contractual Obligation less 1 year (for details) Notes payable including accrued interest of$333,443 , net of unamortized OID of$225,605 $ 7,074,887 $ - 10 Entrusted loan including interest payable of$379,323 $ 12,456,428 $ - 8 Total$ 19,531,315 $ - The Company believes it has sufficient cash in bank of$152.01 million as ofDecember 31, 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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