Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q 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 . 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"). Our business is primarily conducted through our wholly-owned subsidiaries, Yinghua and Sifeng, Sifeng'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. 27
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 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 inChina is under the control. As of the date of this prospectus, there are some new Covid-19 cases discovered in a few provinces ofChina , however, the number of new cases is not significant due to the PRC government's strict control.
For the six months endedJune 30, 2021 and 2020, the Company had a net loss of$1,943,347 and$395,389 , respectively. For the three months endedJune 30, 2021 and 2020, the Company had a net loss of$2,220,571 and$993,940 , respectively. The Company has an accumulated deficit of$41.10 million as ofJune 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$150.99 million cash on hand atJune 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. 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 inthe 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. 28 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 ofJune 30, 2020 . 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. 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. 29 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.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the six months ended
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) 384,152 - % (1,258,758 ) - % Income (Loss) from operations (384,152 ) - % 1,258,758 - % Total non-operating income (expenses), net 2,229,546 - %
(863,369 ) - % Income before income tax 1,845,394 - % 395,389 % Income tax benefit (97,953 ) - % - - % Net loss$ 1,943,347 - %$ 395,389 - %
SALES. Total sales for the six months endedJune 30, 2021 and 2020 were$0 .
30
COST OF SALES. Cost of sales ("COS") for the six months ended
GROSS PROFIT. Gross income for the six months ended
OPERATING EXPENSES. Operating expenses consisted of general and administrative expenses, bad debt expense reversal totaling$384,152 for the six months endedJune 30, 2021 , compared to operating income$1,258,758 for the six months endedJune 30, 2020 , an increase of$1,642,910 or 131%. The increase in operating expenses was mainly due to decreased bad debt expense reversal by$1,615,043 . 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 six months endedJune 30, 2021 , net non-operating income was$2,229,546 compared to non-operating expense of$863,369 for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , we had$193,157 interest income and gain on termination of buy-back agreement of Chengli project of$3,155,959 (see Note 8), but the amount was offset by$227,701 interest expense on note payable, loss on note conversion of$2,719 and interest expense on failure of note redemption on time of$818,914 and other expenses of$70,236 . For the six months endedJune 30, 2020 , we had$72,617 interest income, but the amounts were offset by a$697,028 interest expense on entrusted loan and note payable,$198,330 loss on note conversion and other expenses of$40,628 .
INCOME TAX BENEFIT. Income tax benefit was
NET INCOME. Net income for the six months endedJune 30, 2021 was$1,943,347 compared to net income of$395,389 for the six months endedJune 30, 2020 , an increase of income of$1,547,958 . This increase in net income was mainly due to gain on termination of buy-back agreement of Chengli project by$3,155,959 , but was partly offset by decreased bad debt expense reversal by$1,615,043 as describe above.
Comparison of Results of Operations for the three months ended
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) 111,060 - % (1,412,936 ) - % Income (loss) from operations (111,060 ) - % 1,412,936 - % Total non-operating income (expenses), net 2,228,553 -
% (418,996 ) - % Income before income tax 2,117,493 - % 993,940 % Income tax benefit (103,078 ) - % - - % Net income$ 2,220,571 - %$ 993,940 - %
SALES. Total sales for the three months ended
COST OF SALES. Cost of sales ("COS") for the three months ended
GROSS PROFIT. Gross income for the three months ended
31 OPERATING EXPENSES. Operating expenses consisted of general and administrative expenses and bad debt expense reversal, totaling$111,060 for the three months endedJune 30, 2021 , compared to operating income$1,412,936 for the three months endedJune 30, 2020 , an increase of$1,523,996 or 108%. The increase was mainly due to decreased bad debt expense reversal by$1,615,043 which was partly offset by decreased G&A expenses by$91,047 . 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 endedJune 30, 2021 , net non-operating income was$2,228,553 compared to non-operating expenses of$418,996 for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , we had$109,461 interest income and gain on termination of buy-back agreement of Chengli project$3,155,959 (see Note 8), but the amount was offset by$145,615 interest expense on note payable, loss on note conversion of 2,719 and interest expense on failure of note redemption on time of$818,914 , and other expenses of$69,619 . For the three months endedJune 30, 2020 , we had$45,611 interest income, but the amounts were offset by a$341,784 interest expense on entrusted loan and note payable,$95,163 loss on note conversion
and other expenses of$27,660 . INCOME TAX BENEFIT. Income tax benefit was$103,078 for the three months endedJune 30, 2021 , compared with$0 for the three months endedJune 30, 2020 . The consolidated effective income tax rates for the three months endedJune 30 , 2021and 2020 were (4.9)% and 0%, respectively. NET INCOME. Net income for the three months endedJune 30, 2021 was$2,220,571 compared to net income of$993,940 for the three months endedJune 30, 2020 , an increase of income of$1,226,631 . This increase in net income was mainly due to gain on termination of buy-back agreement of Chengli project by$3,155,959 , increased interest income by$63,850 , increased income tax benefit by$103,078 and decreased interest expense by$196,169 , which was partly offset by decreased bad debt expense reversal by$1,615,043 and increased loss on note conversion by$726,470 .
LIQUIDITY AND CAPITAL RESOURCES
Comparison of six months Ended
As ofJune 30, 2021 , the Company had cash and equivalents of$150.99 million , other current assets of$253,098 , current liabilities of$11.99 million , working capital of$139.26 million , a current ratio of 12.61:1 and a liability-to-equity ratio of 0.13:1.
The following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended
2021 2020 Cash provided by (used in): Operating Activities$ (681,465 ) $ 46,996,596 Investing Activities - - Financing Activities$ 42,561,721 $ - Net cash used in operating activities was$681,465 during the six months endedJune 30, 2021 , compared to$47.00 million cash provided by operating activities for the six months endedJune 30, 2020 . The decrease in net cash inflow for the six months endedJune 30, 2021 was mainly due to our cash collection of sales type leases of Pucheng systems by$13.88 million , and cash collection of accounts receivable by$35.21 million for selling / disposing Huayu, Shenqiu,Zhongtai and Tian'an systems that were occurred in the six months endedJune 30, 2020 .
Net cash provided by (used in) investing activities was
Net cash provided by financing activities was$42,561,721 compared to net cash used in financing activities of$0 during the six months endedJune 30, 2021 and 2020, respectively. The cash inflow for the six months endedJune 30, 2021 was the proceeds from a private placement of$37,561,721 and issuance of notes
payable of$5,000,000 . 32
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 is 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 2021.
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 aCommon 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. 33 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 withinChina , will not be affected as long as the capital is not transferred in or out of the
PRC. 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. 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 ofJune 30 ,December 31, 2021
2020
Unrestricted retained earnings (accumulated deficit)$ (41,099,430 ) $ (43,026,465 ) Restricted retained earnings (surplus reserve fund) 15,171,354 15,155,042 Total retained earnings (accumulated deficit) $
(25,928,076 )
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
1 year or More than See Note Contractual Obligation less 1 year (for details) Notes payable including accrued interest of$227,222 , net of unamortized OID of$325,605 $ 8,620,531 $
- 10 Entrusted loan $ -$ 309,593 8 Total$ 8,620,531 $ 309,593 The Company believes it has sufficient cash in bank of$151 million as ofJune 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. 34
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