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. Factors that might cause or contribute to such a discrepancy, include, but are not limited to, those listed under the heading "Risk Factors" and those listed in the Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K"). The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report and
in the 2019 Form 10-K. 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 OF BUSINESS BACKGROUND
China Recycling Energy Corporation (the "Company" or "CREG") was incorporated onMay 8, 1980 . OnMarch 8, 2007 , the Company again changed its name fromChina Digital Wireless, Inc. to its current name,China Recycling Energy Corporation . The Company, through its subsidiaries, sells and leases energy saving systems and equipment to its customers inthe People's Republic of China ("PRC"). Typically, the Company transfers ownership of the waste energy recycling power generating projects to its customers at the end of each sales-type lease and provides financing to its customers for the cost of the projects as described below.
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 smart energy cities with multi-energy supplies. By supporting and motivating all kinds of the electric power market to participate in resource development and utilization of demand response, we plan to provide services including peak shaving with compensation and frequency modulation. We intend to gradually form motor load performance for peak and low-hours, which will account for about 3% of the annual maximum power load on the demand side and to ensure the electricity supply and demand balance for situations of non-severe power shortages. 32
InDecember 2019 , a novel strain of coronavirus (COVID-19) was reported inWuhan, China . 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, most cities inChina were reopened, the outbreak inChina is under the control. The Company disposed all of its systems and currently holds only five power generating systems through Erdos TCH, the Company initially expected to resume production of these five power generating systems inJuly 2020 from the renovation and furnace safety upgrade, but the resumption of operations will be delayed due to the global pandemic of Covid-19; Erdos exports ferrosilicon to 27 countries, the Company decided not to resume the production in the third quarter of 2020 as a result of decreased sales order and overstocked inventory, and the Company is not able to provide a resumption date as it will depend on the overall progress of the global epidemic control. There are some new Covid-19 cases discovered in a few provinces ofChina includingBeijing andLiaoning province, no new case has been discovered inXi'an province where the Company is located as of today. For the six months endedJune 30, 2020 and 2019, the Company had a net income of$0.40 million and net loss$7.21 million , respectively. For the three months endedJune 30, 2020 and 2019, the Company had a net income of$0.99 million and net loss$5.26 million , respectively. The Company has an accumulated deficit of$46.19 million as ofJune 30, 2020 . 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$62.67 million cash on hand atJune 30, 2020 , this also 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. Our Subsidiaries
Our business is primarily conducted through our wholly-owned subsidiaries,Sifang Holdings Co., Ltd. ("Sifang") andShanghai Yinghua Financial Leasing Co., Ltd ("Yinghua"); Sifang's wholly-owned subsidiaries,Huahong New Energy Technology Co., Ltd. ("Huahong") andShanghai TCH Energy Tech Co., Ltd. ("Shanghai TCH"); Shanghai TCH's wholly-owned subsidiary, Xi'anTCH Energy Technology Company, Ltd ("Xi'an TCH"); Xi'an TCH's wholly-owned subsidiaries,Erdos TCH Energy Saving Development Co., Ltd ("Erdos TCH") andZhongxun Energy Investment (Beijing) Co., Ltd ("Zhongxun"); and Xi'an TCH's 90% andShanghai TCH's 10% owned subsidiary, Xi'anZhonghong New Energy Technology Co., Ltd. ("Zhonghong"). Zhonghong provides energy saving solutions and services, including constructing, selling and leasing energy saving systems and equipment to customers, project investment.
The Company's organizational chart as of
33 CREG Legal Structure [[Image Removed]]
Shanghai TCH and its Subsidiaries
Shanghai TCH was established as a foreign investment enterprise inShanghai under the laws of the PRC onMay 25, 2004 and has registered capital of$29.80 million . Xi'an TCH was incorporated inXi'an ,Shaanxi Province under the laws of the PRC onNovember 8, 2007 . InFebruary 2009 , Huahong was incorporated inXi'an ,Shaanxi province. Erdos TCH was incorporated inApril 2009 in Erdos,Inner Mongolia Autonomous Region . OnJuly 19, 2013 , Xi'an TCH formedXi'an Zhonghong New Energy Technology Co., Ltd ("Zhonghong"). Xi'an TCH owns 90% and Shanghai TCH owns 10% of Zhonghong.
OnJune 25, 2013 , Xi'anTCH and Hongyuan Huifu Venture Capital Co. Ltd ("Hongyuan Huifu") establishedBeijing Hongyuan Recycling Energy Investment Management Company Ltd. (the "Fund Management Company ") with registered capital ofRMB 10 million ($1.45 million ). Xi'an TCH made an initial capital contribution ofRMB 4 million ($650,000 ) and has 40% ownership interest in theFund Management Company . With respect to theFund Management Company , voting rights and dividend rights are allocated 80% and 20% between Hongyuan Huifu
and Xi'an TCH, respectively. 34The Fund Management Company is the general partner ofBeijing Hongyuan Recycling Energy Investment Center, LLP (the "HYREF Fund "), a limited liability partnership establishedJuly 18, 2013 inBeijing .The Fund Management Company made an initial capital contribution ofRMB 5 million ($830,000 ) to theHYREF Fund .RMB 460 million ($77 million ) was fully subscribed by all partners for theHYREF Fund .The HYREF Fund has three limited partners: (1)China Orient Asset Management Co., Ltd. , which made an initial capital contribution ofRMB 280 million ($46.67 million ) to theHYREF Fund and is a preferred limited partner; (2) Hongyuan Huifu, which made an initial capital contribution ofRMB 100 million ($16.67 million ) to theHYREF Fund and is an ordinary limited partner; and (3) the Company's wholly-owned subsidiary, Xi'an TCH, which made an initial capital contribution ofRMB 75 million ($12.5 million ) to theHYREF Fund and is a secondary limited partner. In addition, Xi'an TCH and Hongyuan Huifu formedBeijing Hongyuan Recycling Energy Investment Management Company Ltd. to manage this Fund and also subscribed in the amount ofRMB 5 million ($830,000 ) from the Fund. The term of theHYREF Fund's partnership is six years from the date of its establishment, expiring onJuly 18, 2019 . However, theHYREF Fund's partnership will not terminate until the HYREF loan is fully repaid and the buy-back period is over pursuant to that certain Buy-Back Agreement entered onDecember 29, 2018 by and among HYREF, Xi'an Zhonghong, Xi'an TCH,Guohua Ku , Chonggong Bai and Xi'an Hanneng (the "Buy-Back Agreement") (see Note 9). The term is four years from the date of contribution for the preferred limited partner, and four years from the date of contribution for the ordinary limited partner. The size of theHYREF Fund isRMB 460 million ($77 million ).The HYREF Fund was formed for the purpose of investing in Xi'anZhonghong New Energy Technology Co., Ltd. , a then 90% owned subsidiary of Xi'an TCH, for the construction of two coke dry quenching ("CDQ") waste heat power generation ("WHPG") stations withJiangsu Tianyu Energy and Chemical Group Co., Ltd. ("Tianyu") and one CDQ WHPG station withBoxing County Chengli Gas Supply Co., Ltd. ("Chengli"). OnDecember 29, 2018 , Xi'an TCH entered into a Share Transfer Agreement with Hongyuan Huifu, pursuant to which Xi'an TCH transferred its 40% ownership in theFund Management Company to Hongyuan Huifu forRMB 3,453,867 ($0.53 million ). The transfer was completedJanuary 22, 2019 . The Company recorded approximately$46,500 loss from the sale of a 40% equity interest inFund Management Company . The Company has no ownership in theFund Management Company after this transaction. Erdos TCH - Joint Venture OnApril 14, 2009 , the Company formed Erdos TCH as a joint venture (the "JV" or "Erdos TCH") 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 JV has a term of 20 years with a total investment for the project estimated at$79 million (RMB 500 million ) and an initial investment of$17.55 million (RMB 120 million ). Erdos contributed 7% of the total investment for the project, and Xi'an TCH contributed 93%. According to Xi'an TCH and Erdos' agreement on profit distribution, Xi'an TCH and Erdos will receive 80% and 20%, respectively, of the profit from the JV until Xi'an TCH receives the complete return of its investment. Xi'an TCH and Erdos will then receive 60% and 40%, respectively, of the profit from the JV. OnJune 15, 2013 , Xi'an TCH and Erdos entered into a share transfer agreement, pursuant to which Erdos transferred and sold its 7% ownership interest in the JV to Xi'an TCH for$1.29 million (RMB 8 million ), plus certain accumulated profits as described below. Xi'an TCH paid the$1.29 million inJuly 2013 and, as a result, became the sole stockholder of Erdos TCH. In addition, Xi'an TCH is required to pay Erdos accumulated profits from inception up toJune 30, 2013 in accordance with the supplementary agreement entered onAugust 6, 2013 . InAugust 2013 , Xi'an TCH paid 20% of the accumulated profit (calculated under PRC GAAP) of$226,000 to Erdos. 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.
With the current economic conditions in
After considering the challenging economic conditions facing Erdos, and to maintain the long-term cooperative relationship between the parties, which we believe will continue to produce long-term benefits, onApril 28, 2016 , Erdos TCH and Erdos entered into a supplemental agreement, effectiveMay 1, 2016 . Under the supplemental agreement, Erdos TCH cancelled monthly minimum lease payments from Erdos, and agreed to charge Erdos based on actual electricity sold atRMB 0.30 / KWH, which price will be adjusted 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 originally expected the resumption of operations inJuly 2020 . but the resumption of operations will be delayed due to the global pandemic of Covid-19, the Company is not able to provide a resumption date as it will depend on the overall progress of the global epidemic control. During this period, Erdos will compensate Erdos TCHRMB 1 million ($145,460 ) per month, until operations resume. 35 The Company evaluated the modified terms for payments based on actual electricity sold as minimum lease payments as defined in ASC 840-10-25-4, since lease payments that depend on a factor directly related to the future use of the leased property are contingent rentals and, accordingly, are excluded from minimum lease payments in their entirety. The Company wrote off the net investment receivables of these leases at the lease modification date. 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 had no operations since then nor any registered capital contribution was made.
Shenqiu Yuneng Biomass Power Generation Projects
OnMay 25, 2011 , Xi'an TCH entered into a Letter of Intent ("LOI") withShenqiu YuNeng Thermal Power Co., Ltd. ("Shenqiu") to reconstruct and transform a Thermal Power Generation System owned by Shenqiu into a 75T/H BMPG System for$3.57 million (RMB 22.5 million ). The project commenced inJune 2011 and was completed in the third quarter of 2011. OnSeptember 28, 2011 , Xi'an TCH entered into a Biomass Power Generation Asset Transfer Agreement with Shenqiu (the "Shenqiu Transfer Agreement"). Pursuant to the Shenqiu Transfer Agreement, Shenqiu sold Xi'an TCH a set of 12 MW BMPG systems (after Xi'an TCH converted the system for BMPG purposes). As consideration for the BMPG systems, Xi'an TCH paid Shenqiu$10.94 million (RMB 70 million ) in cash in three installments within six months upon the transfer of ownership of the systems. By the end of 2012, all the consideration was paid. OnSeptember 28, 2011 , Xi'an TCH and Shenqiu also entered into a Biomass Power Generation 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$286,000 (RMB 1.8 million ) for 11 years. Upon expiration of the 2011 Shenqiu Lease, ownership of this system will transfer from Xi'an TCH to Shenqiu at no additional cost. In connection with the 2011 Shenqiu Lease, Shenqiu paid one month's rent as a security deposit to Xi'an TCH, in addition to providing personal guarantees. OnOctober 8, 2012 , Xi'an TCH entered into a LOI for technical reformation of Shenqiu Project Phase II with Shenqiu for technical reformation to enlarge the capacity of the Shenqiu Project Phase I (the "Shenqiu Phase II Project "). The technical reformation involved the construction of another 12 MW BMPG system. After the reformation, the generation capacity of the power plant increased to 24 MW. The project commenced onOctober 25, 2012 and was completed during the first quarter of 2013. The total cost of the project was$11.1 million (RMB 68 million ). OnMarch 30, 2013 , Xi'an TCH and Shenqiu entered into aBMPG 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$239,000 (RMB 1.5 million ) per month for 9.5 years. When the 2013 Shenqiu Lease expires, ownership of this system will transfer from Xi'an TCH to Shenqiu at no additional cost. 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 TCH will transfer two Biomass Power Generation Projects in Shenqiu ("Shenqiu Phase I and II Projects") toMr. Bai forRMB 127,066,000 ($18.55 million ).Mr. Bai agreed to transfer all the equity shares of his wholly owned company,Xi'an Hanneng Enterprises Management Consulting Co. Ltd. ("Xi'an Hanneng") toBeijing Hongyuan Recycling Energy Investment Center, LLP (the "HYREF") as repayment for the loan made by Xi'an Zhonghong to HYREF as consideration for the transfer of the Shenqiu Phase I and II Projects (See Note 9). The transfer of projects was completedFebruary 15, 2019 . The Company recorded$208,359 loss from the transfer.Mr. Bai transferred all the equity shares of his wholly owned company, Xi'an Hanneng to theHYREF Fund as repayment for the loan onJanuary 10, 2019 . Xi'an Hanneng will own 47,150,000 shares of Xi'anHuaxin New Energy Co., Ltd for the repayment of Shenqiu system and Huayu system. However, Xi'an Hanneng was not able to obtain all theHuaxin shares due to halted trading ofHuaxin stock by NEEQ for not filing its 2018 annual report. OnDecember 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 wasRMB 261,727,506 ($37.52 million ) including accrued interest ofRMB 14,661,506 ($2.10 million ), and was paid in full by Xi'an TCH. OnDecember 20, 2019 ,Mr. Bai , Xi'an TCH and Xi'an Zhonghong, agreed to haveMr. Bai repay the Company in cash for the transfer price of Xuzhou Huayu and Shenqiu in five installment payments. The 1st payment ofRMB 50 million ($7.17 million ) is due onJanuary 5, 2020 , the 2nd payment ofRMB 50 million ($7.17 million ) was due onFebruary 5, 2020 , the 3rd payment ofRMB 50 million ($7.17 million ) was due onApril 5, 2020 , the 4th payment ofRMB 50 million ($7.17 million ) was due onJune 30, 2020 , and the final payment ofRMB 47,066,000 ($6.75 million ) was due onSeptember 30, 2020 . As of this report date, the Company already receivedRMB 200 million ($28.68 million ). 36
Pucheng Biomass Power Generation Projects
OnJune 29, 2010 , Xi'an TCH entered into a Biomass Power Generation ("BMPG") Project Lease Agreement withPucheng XinHengYuan Biomass Power Generation Co., Ltd. ("Pucheng"), a limited liability company incorporated inChina . Under this lease agreement, Xi'an TCH leased a set of 12MW BMPG systems to Pucheng at a minimum of$279,400 (RMB 1,900,000 ) per month for 15 years ("Pucheng Phase I"). OnSeptember 11, 2013 , Xi'an TCH entered into a BMPG Asset Transfer Agreement (the "Pucheng Transfer Agreement") withPucheng Xin Heng Yuan Biomass Power Generation Corporation ("Pucheng"), a limited liability company incorporated inChina . The Pucheng Transfer Agreement provided for the sale by Pucheng toXi'an TCH of a set of 12 MW BMPG systems with the completion of system transformation for a purchase price ofRMB 100 million ($16.48 million ) in the form of 87,666 shares (post-reverse stock split) of common stock of the Company at$187.0 (post-reverse stock price) per share. Also onSeptember 11, 2013 , Xi'an TCH also entered into a BMPG Project Lease Agreement with Pucheng (the "Pucheng Lease"). Under the Pucheng Lease, Xi'an TCH leases this same set of 12 MW BMPG system to Pucheng, and combines this lease with the lease for the 12 MW BMPG station of Pucheng Phase I project, under a single lease to Pucheng forRMB 3.8 million ($0.63 million ) per month (the "Pucheng Phase II Project "). The term for the consolidated lease is fromSeptember 2013 toJune 2025 . The lease agreement for the 12 MW station from Pucheng Phase I project terminated upon the effective date of the Pucheng Lease. The ownership of two 12 MW BMPG systems will transfer to Pucheng at no additional charge when the Pucheng Lease expires.
On
Pucheng failed to pay fees it owed to Xi'an TCH for leasing two biomass power generation systems from Xi'an TCH with total capacity of 24MW due to its long suspension of production resulting from the significant reduction of raw material supplies for its biomass power generation operation in Pucheng County, which caused the biomass power generation project to no longer be suitable. Pursuant to the Termination Agreement, the parties agreed: (i) Pucheng shall pay off outstanding lease fees ofRMB 97.6 million ($14 million ) owed as ofDecember 31, 2018 to Xi'an TCH beforeJanuary 15, 2020 ; (ii) Xi'an TCH will waive the lease fees owed afterJanuary 1, 2019 ; (iii) Xi'an TCH will not returnRMB 3.8 million ($542,857 ) in cash deposits paid by Pucheng; (iv) Xi'an TCH will transfer the Project to Pucheng at no additional cost after receivingRMB 97.6 million from Pucheng, and the original lease agreement between the parties will be formally terminated; and (v) if Pucheng fails to pay offRMB 97.6 million to Xi'an TCH beforeJanuary 15, 2020 , Xi'an TCH will still hold ownership of the Project and the original lease agreement shall still be valid. Xi'an TCH receivedRMB 97.6 million ($14 million ) in full inJanuary 14, 2020 and the ownership of the system was transferred.
Chengli Waste Heat Power Generation Projects
OnJuly 19, 2013 , Xi'an TCH formed a new company, "Xi'anZhonghong New Energy Technology Co., Ltd. " ("Zhonghong"), with registered capital ofRMB 30 million ($4.85 million ). Xi'an TCH paidRMB 27 million ($4.37 million ) and owns 90% of Zhonghong. 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 agreed to transfer its 10% ownership in Xi'an Zhonghong to Shanghai TCH forRMB 3 million ($0.44 million ). The transfer was completedJanuary 22, 2019 . 37
OnJuly 24, 2013 , Zhonghong entered into a Cooperative Agreement ofCDQ and CDQ WHPG Project withBoxing County Chengli Gas Supply Co., Ltd. ("Chengli"). The parties entered into a supplement agreement onJuly 26, 2013 . Pursuant to these agreements, Zhonghong agreed to design, build and maintain a 25 MW CDQ system and a CDQ WHPG system to supply power to Chengli, and Chengli agreed to pay energy saving fees (the "Chengli Project "). Chengli will contract the operation of the system to a third party contractor that is mutually agreed to by Zhonghong. In addition, Chengli will provide the land for the CDQ system and CDQ WHPG system at no cost to Zhonghong. The term of these Agreements is 20 years. The watt hours generated by theChengli Project will be charged atRMB 0.42 ($0.068 ) per KWH (excluding tax). The operating time shall be based upon an average 8,000 hours annually. If the operating time is less than 8,000 hours per year due to a reason attributable to Chengli, then time charged shall be 8,000 hours a year, and if it is less than 8,000 hours due to a reason attributable to Zhonghong, then it shall be charged at actual operating hours. The construction of theChengli Project was completed in the second quarter of 2015 and the project successfully completed commissioning tests in the first quarter of 2017.The Chengli Project is now operational, however, due to intensifying environmental protection, the local environmental authorities required the project owner constructing CDQ sewage treatment to complete supporting works, which were completed and passed through acceptance inspection during the quarter endedSeptember 30, 2018 . However, the owner ofChengli Project changed from Chengli toShandong Boxing Shengli Technology Company Ltd. ("Shengli"). This change resulted from transfer of the equity ownership of Chengli to Shengli (a private company) inMarch 2014 . Chengli, a 100% state-owned enterprise that is 100% owned by the localPower Supply Bureau , is no longer allowed to carry out business activities, and Shengli, the new owner, is not entitled to the high on-grid prices, and thus demanded a renegotiation of the settlement terms for the project. The Company negotiated with the new project owner on the lease term, settlement method and settlement price, but no agreement has been reached. OnJuly 22, 2013 , Zhonghong entered into an Engineering, Procurement and Construction ("EPC") General Contractor Agreement for theBoxing County Chengli Gas Supply Co., Ltd. CDQ Power Generation Project (the "Chengli Project ") with Xi'anHuaxin New Energy Co., Ltd. ("Huaxin"). Zhonghong, as the owner of theChengli Project , contracted EPC services for a CDQ system and a 25 MW CDQ WHPG system for Chengli toHuaxin .Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary services to complete theChengli Project and ensure the CDQ system and CDQ WHPG system for Chengli meet the inspection and acceptance requirements and work normally.The Chengli Project is a turn-key project in whichHuaxin is responsible for monitoring the quality, safety, duration and cost of theChengli Project . The total contract price isRMB 200 million ($33.34 million ), which includes all materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety costs. OnDecember 29, 2018 , Xi'an Zhonghong, Xi'an TCH, the "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 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 buy back theCDQ WHPG Station when conditions under the Buy Back Agreement are met (see Note 9). The transfer was completedJanuary 22, 2019 , and the Company recorded$624,133 loss from this transfer. Since the original terms of Buy Back Agreement are still valid, the Buy Back possibility is uncertain; therefore, the assets of Chengli CDQ WHPG station, and the corresponding loan principal and interest, cannot be terminated due to the existence of Buy Back clauses.
OnJuly 19, 2013 , Zhonghong entered into a Cooperative Agreement (the "Tianyu Agreement") for Energy Management of CDQ and CDQ WHPG 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 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 KWH (excluding tax). The operating time will be based upon an average 8,000 hours annually for each of Xuzhou Tian'an and Xuzhou Huayu. If the operating time is less than 8,000 hours per year due to a reason attributable to Tianyu, then time charged will be 8,000 hours a year. Because of the overcapacity and pollution of the iron and steel and related industries, the government has imposed production limitations for the energy-intensive enterprises with heavy pollution, including Xuzhou Tian'an. Xuzhou Tian'an has slowed the construction process for its dry quenching production line which caused the delay of our project. The construction of the Xuzhou Tian'an Project is anticipated to be completed by the second quarter of 2020. Xuzhou Tian'an will provide the land for the CDQ and CDQ WHPG systems for free. Xuzhou Tian'an has also guaranteed that it will purchase all of the power generated by the CDQ WHPG systems.The Xuzhou Huayu Project is currently on hold due to a conflict betweenXuzhou Huayu Coking Co., Ltd. and local residents on certain pollution-related issues. The local government acted in its capacity to coordinate the resolution of this issue. The local residents were requested to move from the hygienic buffer zone of the project location in exchange for compensatory payments from the government. Xuzhou Huayu was required to stop production and implement technical innovations to mitigate pollution discharge including sewage treatment, dust collection, noise control, and recycling of coal gas. Currently, some local residents have moved. Xuzhou Huayu completed the implementation of the technical innovations of sewage treatment, dust collection, and noise control, and the Company is waiting for local governmental agencies to approve these technical innovations so that we can resume construction. Due to the stricter administration of environmental protection policies and recent increase in environmental protections for the coking industry in Xuzhou, all local coking, as well as steel iron enterprises, are facing a similar situation of suspended production while rectifying technologies and procedures. 38 OnJuly 22, 2013 , Xi'anZhonghong New Energy Technology Co., Ltd. entered into an EPC General Contractor Agreement for theXuzhou Tianyu Group CDQ Power Generation Project (the "Project") with Xi'anHuaxin New Energy Co., Ltd. ("Huaxin"). Zhonghong as the owner of the Project contracted EPC for the two sets of CDQ and 25 MW CDQ WHPG systems for Tianyu toHuaxin -one for Xuzhou Tian'an and one for Xuzhou Huayu.Huaxin shall provide construction, equipment procurement, transportation, installation and adjustment, test run, construction engineering management and other necessary works to complete the Project and ensure the CDQ and CDQ WHPG systems for Tianyu meet the inspection and acceptance requirements and work normally. The Project is a turn-key project andHuaxin is responsible for the quality, safety, duration and cost of the Project. The total contract price isRMB 400 million ($66.67 million ), of whichRMB 200 million ($33.34 million ) is for the Xuzhou Tian'an system andRMB 200 million is for the Xuzhou Huayu system. The price is a cover-all price, which includes but not limited to all the materials, equipment, labor, transportation, electricity, water, waste disposal, machinery and safety matters. 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 to transfer all the equity shares of his wholly owned company, Xi'an Hanneng, to theHYREF Fund as repayment for the loan made by Xi'an Zhonghong to HYREF as consideration for the transfer of theXuzhou Huayu Project (see Note 9). The transfer of the projects was completedFebruary 15, 2019 . The Company recorded$397,033 loss from this transfer. OnJanuary 10, 2019 ,Mr. Bai transferred all the equity shares of his wholly owned company, Xi'an Hanneng, to HYREF as repayment for the loan.Xi'an Hanneng will 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 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 wasRMB 261,727,506 ($37.52 million ) including accrued interest ofRMB 14,661,506 ($2.10 million ), and was paid in full by Xi'an TCH. OnDecember 20, 2019 ,Mr. Bai , Xi'an TCH andXi'an Zhonghong, agreed to haveMr. Bai repay the Company in cash for the transfer price of Xuzhou Huayu and Shenqiu in five installment payments. The 1st payment ofRMB 50 million ($7.17 million ) is due onJanuary 5, 2020 , the 2nd payment ofRMB 50 million ($7.17 million ) was due onFebruary 5, 2020 , the 3rd payment ofRMB 50 million ($7.17 million ) was due onApril 5, 2020 , the 4th payment ofRMB 50 million ($7.17 million ) was due onJune 30, 2020 , and the final payment ofRMB 47,066,000 ($6.75 million ) is due onSeptember 30, 2020 . As of the date of this report, the Company has already receivedRMB 200 million ($28.68 million ). OnJanuary 10, 2020 , Zhonghong, Tianyu andHuaxin signed a transfer agreement to transfer all assets under construction and related rights and interests of Xuzhou Tian'an Project to Tianyu forRMB 170 million ($24.37 million ) by three installment payments. The 1st installment payment ofRMB 50 million ($7.17 million ) to be paid within 20 working days after the contract is signed. The 2nd installment payment ofRMB 50 million ($7.17 million ) is to be paid within 20 working days after completion of the project construction but no later thanJuly 31, 2020 . The final installment payment ofRMB 70 million ($10.03 million ) is to be paid beforeDecember 31, 2020 . OnMarch 11, 2020 , the Company received 1st installment payment. The repayment date for 2nd installment payment is delayed to fourth quarter of 2020. 39
Zhongtai WHPG 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 will design, build and maintain a 150 ton per hour CDQ system and a 25 MW CDQ WHPG system (the "Project") and sell the power to Zhongtai, and Xi'an TCH will also build a furnace to generate steam from the waste heat of the smoke pipeline and sell the steam to Zhongtai. The construction period of the Project is expected to be 18 months from the date when conditions are ready for construction to begin. Zhongtai will start to pay an energy saving fee from the date when the WHPG station passes the required 72-hour test run. The term of payment is 20 years. For the first 10 years of the term, Zhongtai shall pay an energy saving fee atRMB 0.534 ($0.089 ) per KWH (including value added tax) for the power generated from the system. For the second 10 years of the term, Zhongtai shall pay an energy saving fee atRMB 0.402 ($0.067 ) per KWH (including value added tax). During the term of the contract the energy saving fee shall be adjusted at the same percentage as the change of local grid electricity price. Zhongtai shall also pay an energy saving service fee for the steam supplied by Xi'an TCH atRMB 100 ($16.67 ) per ton (including value added tax). Zhongtai and its parent company will provide guarantees to ensure Zhongtai will fulfill its obligations under the Agreement. Upon the completion of the term, Xi'an TCH will transfer the systems to Zhongtai atRMB 1 ($0.16 ). Zhongtai shall provide waste heat to the systems for no less than 8,000 hours per year and waste gas volume no less than 150,000 Nm3 per hour with a temperature no less than 950°C. If these requirements are not met, the term of the Zhongtai Agreement will be extended accordingly. If Zhongtai wants to terminate the Zhongtai Agreement early, it shall provide Xi'an TCH a 60 day notice and pay the termination fee and compensation for the damages to Xi'an TCH according to the following formula: (i) if it is less than five years into the term when Zhongtai requests termination, Zhongtai shall pay: Xi'an TCH's total investment amount plus Xi'an TCH's annual investment return times five years minus the years in which the system has already operated; or (ii) if it is more than five years into the term when Zhongtai requests the termination, Zhongtai shall pay Xi'an TCH's total investment amount minus total amortization cost (the amortization period is 10 years). OnMarch 14, 2016 , Xi'an TCH entered into a Xuzhou Zhongtai CDQ and Waste Heat Power Generation System Transfer Agreement (the "Transfer Agreement") with Zhongtai and Xi'anHuaxin New Energy Co., Ltd. , a limited liability company incorporated inChina (the "Contractor"). The Transfer Agreement provides for the sale to Zhongtai of all the assets of the Project under construction from Xi'an TCH. Additionally, Xi'an TCH will transfer to Zhongtai the Engineering, Procurement and Construction ("EPC") Contract for the Project, which Xi'an TCH had entered into with the Contractor in connection with the Project. As consideration for the transfer of the Project, Zhongtai is to pay to Xi'an TCHRMB 167,360,000 ($25.77 million and the "Transfer Price"), on the following schedule: (i)RMB 50,000,000 ($7.70 million ) of the Transfer Price was paid within 20 business days from the execution of the Transfer Agreement; (ii)RMB 30,000,000 ($4.32 million ) of the Transfer Price was paid within 20 business days upon the completion of the construction of the Project but not later thanJuly 30, 2016 ; and (iii)RMB 87,360,000 ($13.45 million ) of the Transfer Price was to be paid beforeJuly 30, 2017 . The temporary ownership of the Project was transferred from Xi'an TCH to Zhongtai after the Xi'an TCH received the first payment ofRMB 50,000,000 , and the full ownership of the Project is to be officially transferred to Zhongtai upon full payment of the Transfer Price. The Zhongtai Agreement is to be terminated and Xi'an TCH will agree not to pursue any breach of contract liability against Zhongtai under the Zhongtai Agreement once Zhongtai fully pays the Transfer Price according to the terms of the Transfer Agreement. If the Transfer Price is not fully paid on time pursuant to the Transfer Agreement, the Transfer Agreement automatically terminates and Xi'an TCH retains ownership of the Project, and both parties would continue to possess their respective rights and obligations according to the Zhongtai Agreement and assume the liabilities for breach of the Zhongtai Agreement.Xuzhou Taifa Special Steel Technology Co., Ltd. ("Xuzhou Taifa") has guaranteed the payments by Zhongtai. The Company recorded a$2.82 million loss from this transaction in 2016. 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 onFebruary 23, 2018 , in which Zhongtai 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. InAugust 2018 , the Company received$1,070,000 from Zhongtai; as ofJune 30, 2020 , the Company had receivables from Zhongtai for$4.23 million (with bad debt allowance of$4.23 million ). InJanuary 2020 , Zhongtai paid RBM 10 million (1.41 million); inMarch 2020 , Zhongtai paidRMB 20 million ($2.82 million ); inJune 2020 , Zhongtai paidRMB 10 million ($1.41 million ). Zhongtai is committed to pay in full the remaining balance ofRMB 30 million ($4.24 million ) no later than the end of 2020. 40 OnSeptember 9, 2019 , we entered into a letter of intent to acquire a controlling interest in Xi'anYineng Zhihui Technology Co., Ltd. ("YNZH"), a next generation energy storage solution provider inChina . YNZH is a leading comprehensive high-tech intelligent energy service company integrated with energy efficiency improvement and storage management inChina . The energy efficiency management is to fully use big data cloud computing technology, effectively adopt the combination of the mature international and domestic clean energy technologies to make the customers' energy management more efficient, more economical, more secure and more scientific. The terms of this proposed transaction are currently being negotiated.
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. 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
41 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. Accounts Receivable As ofJune 30, 2020 , the Company had gross accounts receivable of$36.06 million ; of which,$13.71 million was for transferring the ownership of Huayu and Shenqiu Phase I and II systems toMr. Bai ;$4.23 million was from the sales of CDQ and a CDQ WHPG system to Zhongtai,$16.95 million was from transferring the ownership of Tian'an project to Tianyu, and$1.16 million accounts receivable of Erdos TCH for the electricity sold. As ofJune 30, 2020 , the Company had bad debt allowance of$4,237,587 for Zhongtai and$31,611 for Erdos TCH due to not making the payments as scheduled. InJuly 2020 , Erdos TCH collectedRMB 6 million ($0.86 million ) accounts receivable.
Investment in sales-type leases, net
The Company maintains reserves for potential credit losses on receivables. Management reviews the composition of receivables 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. Based on an evaluation of the collectability of such receivables, as ofJune 30, 2020 , the Company had bad debt allowance for net investment receivable on sales-type leases of$0 . 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. During the three months endedMarch 31, 2020 and 2019, 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 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 sales tax. 42 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.
New Accounting Pronouncements
InJune 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 afterDecember 15, 2022 . Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . The Company is currently evaluating the impact that the standard will have on its CFS. InDecember 2019 , the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning afterDecember 15, 2020 , and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its financial statements. 43 RESULTS OF OPERATIONS
Comparison of 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.
2020 % of Sales 2019 % of Sales Sales - contingent rental income $ - - %
$ 80,924 100 % Cost of sales - - % - - % Gross profit - - % 80,924 100 %
Interest income on sales-type leases - - % - - % Total operating income - - % 80,924 100 % Total operating income (expenses) 1,412,936 - % (3,399,419 ) (4,201 )% Income (loss) from operations 1,412,936 - % (3,318,495 ) (4,101 )% Total non-operating expenses, net (418,996 ) - % (1,839,767 ) (2,273 )% Income (loss) before income tax 993,940 - % (5,158,262 ) (6,374 )% Income tax expense - - % 104,827 130 % Net loss attributable toChina Recycling Energy Corp$ 993,940 - %$ (5,263,089 ) (6,504 )% SALES. Total sales for the three months endedJune 30, 2020 and 2019 were$0 and$80,924 , respectively. The sales were from the contingent rental income of
Erdos TCH.
COST OF SALES. Cost of sales ("COS") for the three months ended
GROSS PROFIT. Gross income for the three months ended
INTEREST INCOME ON SALES-TYPE LEASES. Interest income on sales-type leases for the three months endedJune 30, 2020 and 2019 was$0 . The Company disposed all of its systems and currently holds only five power generating systems through Erdos TCH, Erdos TCH operations was ceased due to renovation and furnace safety upgrade, the Company originally expected to resume production of these five power generating systems inJuly 2020 , but the resumption of operations will be delayed due to the global pandemic of Covid-19; Erdos exports ferrosilicon to 27 countries, the Company decided not to resume the production in the third quarter of 2020 as a result of decreased sales order and overstocked inventory, and the Company is not able to provide a resumption date as it will depend on the overall progress of the global epidemic control. OPERATING EXPENSES (INCOME). Operating expenses (income) consisted of general and administrative expenses, and bad debts expense (reversal) totaling$(1,412,936) operating income for the three months endedJune 30, 2020 , compared to$3,399,419 operating expenses for the three months endedJune 30, 2019 , a decrease of$4,812,355 or 142%. The decrease was mainly due to a reversal of bad debts expense of$1,649,622 , of which$1,422,090 was for Zhongtai and$227,532 was for Erdos TCH, during the three months endedJune 30, 2020 ; while we had bad debt expense of$2,716,507 for the three months endedJune 30, 2019 . NET NON-OPERATING EXPENSES. Net non-operating expenses consisted of loss on note redemption, interest income, interest expenses and miscellaneous expenses. For the three months endedJune 30, 2020 , net non-operating expense was$418,996 compared to$1.84 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 , we had$45,611 interest income but the amount was offset by$341,784 interest expense on entrusted loan and note payable and$95,163 loss on note redemption. For the three months endedJune 30, 2019 , we had$41,498 interest income but the amounts were offset by a$1.86 million interest expense on entrusted loan and note payable. INCOME TAX EXPENSE. Income tax expense was$0 for the three months endedJune 30, 2020 , compared with$104,827 income tax expense for the three months endedJune 30, 2019 . The consolidated effective income tax rates for the three months endedJune 30, 2020 and 2019 were 0 and 2.0%, respectively. The decrease in income tax expense for three months endedJune 30, 2020 was due to decreased taxable income as the reversal of bad debts expense of$1.65 million was not a taxable income. NET INCOME (LOSS). Net income for three months endedJune 30, 2020 was$993,940 compared to net loss$5,263,089 for the three months endedJune 30, 2019 , a decrease of loss of$6,527,029 . This decrease in net loss was mainly due to the decrease operating expenses resulting from a reversal of bad debts expense
as described above. 44
Comparison of 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.
2020 % of Sales 2019 % of Sales Sales - contingent rental income $ - - %
$ 702,973 100 % Cost of sales - - % - - % Gross profit - - % 702,973 100 %
Interest income on sales-type leases - - % 173,360 25 % Total operating income - - % 876,333 125 % Total operating income (expenses) 1,258,758 - % (6,106,495 ) (869 )% Income (Loss) from operations 1,258,758 - % (5,230,162 ) (744 )% Total non-operating expenses, net (863,369 ) - % (4,261,265 ) (606 )% Income (Loss) before income tax 395,389 - % (9,491,427 ) (1,350 )% Income tax benefit - - % (2,286,044 ) (325 )% Net income (loss) attributable toChina Recycling Energy Corp$ 395,389 - %$ (7,205,383 ) (1,025 )%
SALES. Total sales for the six months ended
COST OF SALES. Cost of sales ("COS") for the six months ended
GROSS PROFIT. Gross income for the six months ended
INTEREST INCOME ON SALES-TYPE LEASES. Interest income on sales-type leases for the six months endedJune 30, 2020 and 2019 was$0 and$173,360 , a$0.17 million decrease. During the six months endedJune 30, 2019 , the interest income was derived from the Shenqiu Phase I and II systems for the months ofJanuary 2019 . InFebruary 2019 , the Shenqiu Phase I and II systems were transferred toMr. Bai , and the Company only had Pucheng Phase I and II systems since then, which the Company has ceased to accrue interest income sinceApril 2018 because Pucheng power generation systems were suspended due to strict environmental protection policies and lack of supply of biomass waste raw materials. OnSeptember 29, 2019 , Xi'an TCH entered into a Termination Agreement of the Lease Agreement of theBiomass Power Generation Project with Pucheng. InJanuary 2020 , the Company received the full payment of outstanding leasing fee of Pucheng Phase I and II systems and transferred the ownership of two systems to the lessee Pucheng. The decreased interest income was due to the transfer of the Shenqiu Phase I and II systems toMr. Bai inFebruary 2019 and transfer of Pucheng Phase I and II systems to Pucheng inJanuary 2020 . OPERATING EXPENSES (INCOME). Operating expenses (income) consisted of general and administrative expenses, loss on disposal of systems and bad debts expense (reversal) totaling$(1,258,758) operating income for the six months endedJune 30, 2020 , compared to$6,106,495 operating expenses for the six months endedJune 30, 2019 , a decrease of$7,365,253 or 121%. The decrease was mainly due to decreased bad debts expense by$4,474,525 , decreased loss on disposal of systems by$1,264,256 and decreased operating expense by$1,471,525 of Erdos TCH due to cease of the operation.
NET NON-OPERATING EXPENSES. Net non-operating expenses consisted of loan on note redemption, interest income, interest expenses and miscellaneous expenses. For the six months endedJune 30, 2020 , net non-operating expense was$863,369 compared to$4.26 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we had$72,617 interest income but the amount was offset by$697,028 interest expense on entrusted loan and note payable, and$198,330 loss on note redemption. For the six months endedJune 30, 2019 , we had$82,610 interest income, but the amounts were offset by a$3.79 million interest expense on entrusted loan and note payable, and$893,958 loss on note redemption. 45
INCOME TAX BENEFIT. Income tax benefit was$0 for the six months endedJune 30, 2020 , compared with$2,286,044 income tax benefit for the six months endedJune 30, 2019 . The consolidated effective income tax rates for the six months endedJune 30, 2020 and 2019 were 0 and (24.1)%, respectively. During the six months endedJune 30, 2010 , the income from reversal of bad debts expense of$1.65 million was not a taxable income. NET INCOME (LOSS). Net income for six months endedJune 30, 2020 was$395,389 compared to net loss$7,205,383 for the six months endedJune 30, 2019 , a decrease of loss of$7,600,772 . This decrease in net loss was mainly due to the decrease operating expenses as described above.
Liquidity and Capital Resources
Comparison of six months ended
As ofJune 30, 2020 , the Company had cash and equivalents of$62.67 million , other current assets of$31.89 million , current liabilities of$35.68 million , working capital of$58.87 million , a current ratio of 2.65:1 and a liability-to-equity ratio of 0.53:1.
The following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended
2020 2019 Cash provided by (used in): Operating Activities$ 46,996,596 $ (6,971,096 ) Investing Activities - 5,162 Financing Activities - 5,309,475 Net cash provided by operating activities was$47 million during the six months endedJune 30, 2020 , compared to$6.97 million cash used in operating activities for the six months endedJune 30, 2019 . The increase in net cash inflow for the six months endedJune 30, 2020 was mainly due to increased cash inflow from collection of sales type leases of Pucheng systems by$13.88 million , and increased cash collection of accounts receivable by$35.55 million for selling / disposing Huayu, Shenqiu, Zhongtai and Tian'an systems and decreased cash outflow on accounts payable by$2.89 million . Net cash provided by investing activities was$0 and$5,162 , respectively, for the six months endedJune 30, 2020 and 2019. For the six months endedJune 30, 2019 ,$5,162 was the proceeds from disposal of the fixed assets. Net cash used in financing activities was$0 compared to net cash provided by financing activities of$5.31 million during the six months endedJune 30, 2020 and 2019, respectively. The cash inflow for the six months endedJune 30, 2019 came from the issuance of notes of$2.0 million and proceeds from issuance of common stock of$3.31 million .
We do not believe inflation has had or will have a significant negative impact on our results of operations in 2020.
46
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
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 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. 47
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 June 30, December 31, 2020 2019 Unrestricted retained earnings (accumulated deficit)$ (46,193,064 ) $ (46,447,959 ) Restricted retained earnings (surplus reserve fund) 14,666,206 14,525,712 Total retained earnings (accumulated deficit) $
(31,526,858 )
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
12 Entrusted loan including interest payable of$8,711,500 $ 28,892,878 $ 282,506 9 Total$ 29,810,223 $ 282,506 The Company believes it has a stable cash inflow each month 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. The Company does not believe it will have difficulties related to the repayment of its outstanding short-term loans since pursuant to that certain Station Fixed Assets Transfer Agreement, dated as ofDecember 29, 2018 , by and among Xi'an Zhonghong, Xi'an TCH, HYREF,Guohua Ku , and Mr. Chonggong Bai, Xi'an Zhonghong transferred Chengli CDQ WHPG station as the repayment for this Entrusted loan ofRMB 188,639,400 ($27.54 million ) to the lender, HYREF. The transfer was effectuated onJanuary 22, 2019 .Xi'an Zhonghong, Xi'an TCH,Guohua Ku and Chonggong Bai also agreed to buy back theChengli CDQ WHPG Station when the conditions under the Buy-Back Agreement are met. However, since the possibility of the repurchases under the terms of the Buy-Back Agreement is uncertain, until the existing repurchase clauses in the Buy Back Agreement are terminated, the assets of Chengli CDQ WHPG station, and the corresponding loan principal and interest of the Entrusted Loan will continue to show on the Company's books as outstanding contractual obligations (See Note 9 for details). 48
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