20-F 1 f20f2019_hebrontechnology.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F 

 

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report_________________

 

For the transition period from                          to

 

Commission file number 001-37829

 

HEBRON TECHNOLOGY CO., LTD.

(Exact name of Registrant as specified in its charter)

 

British Virgin Islands 

(Jurisdiction of incorporation or organization)

 

No. 936, Jinhai 2rd Road, Konggang New Area

Longwan District

Wenzhou City, Zhejiang Province

People’s Republic of China 

(Address of principal executive offices)

 

Changjuan Liang, Chief Financial Officer

+86-577-8689-5678– telephone

liangchangjuan@cnisun.com

99 Danba Rd, Bldg C9, Putuo District

Shanghai, China

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

  

Title of each class   Symbol   Name of each exchange on which registered
Class A common shares, par value $0.001 per share   HEBT   Nasdaq Capital Market

    

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

  

 

 

  

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 16,269,577 Class A Common Shares and Nil Class B Common Shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

☐ Yes       ☒ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

☐ Yes        ☒ No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

☒ Yes        ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

☒ Yes        ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act:

 

☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☒ International Financial Reporting Standards as issued by
the International Accounting Standards Board ☐		 Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

☐ Item 17      ☐ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

☐ Yes       ☒ No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

☐ Yes      ☐ No

 

 

 

 

 

  

Table of Contents

 

    Page 
PART I    
Item 1. Identity of Directors, Senior Management and Advisers 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
Item 4. Information on the Company 29
Item 4A. Unresolved Staff Comments 68
Item 5. Operating and Financial Review and Prospects 69
Item 6. Directors, Senior Management and Employees 86
Item 7. Major Shareholders and Related Party Transactions 93
Item 8. Financial Information 95
Item 9. The Offer and Listing 96
Item 10. Additional Information 97
Item 11. Quantitative and Qualitative Disclosures About Market Risk 105
Item 12. Description of Securities Other than Equity Securities 105
     
PART II    
Item 13. Defaults, Dividend Arrearages and Delinquencies 106
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 106
Item 15. Controls and Procedures 106
Item 15T. Controls and Procedures 107
Item 16. [Reserved] 108
Item 16A. Audit Committee Financial Expert 108
Item 16B. Code of Ethics 108
Item 16C. Principal Accountant Fees and Services 108
Item 16D. Exemptions from the Listing Standards for Audit Committees 109
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 109
Item 16F. Change in Registrant’s Certifying Accountant 109
Item 16G. Corporate Governance 109
Item 16H. Mine Safety Disclosure 109
     
PART III    
Item 17. Financial Statements 110
Item 18. Financial Statements 110
Item 19. Exhibits 110

  

i

 

  

Conventions Used in this Annual Report

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F  only, “we,” “us,” “our company,” “Company,” “our” and “Hebron” refer to:

 

  ● Hebron Technology Co., Ltd., a British Virgin Islands company limited by shares (“Hebron Technology” when individually referenced);

 

  ● Hong Kong Xibolun Technology Limited, a Hong Kong limited company (“HK Xibolun” when individually referenced), which is a wholly owned subsidiary of Hebron Technology;

 

  ● Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”) (also referred to as or Zhejiang Xibolun Automatically Control System Engineering Technology Co., Ltd. in China), a PRC company, which is a wholly-owned subsidiary of HK Xibolun;

 

  ● Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) (also referred to as or Wenzhou Xibolun Fluid Equipment Co., Ltd. in China), a PRC company, which is a wholly-owned subsidiary of HK Xibolun, which holds 70% of Xibolun Equipment through HK Xibolun’s 100% subsidiary, Xibolun Automation, and which holds 30% of Xibolun Equipment directly;

 

  ●

NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”) (also referred to as ), a limited company established under the laws of the British Virgin Islands and a wholly-owned subsidiary of Hebron Technology;

 

  ● NiSun International Enterprise Management Group (Hong Kong) Co., Limited (“NiSun HK”) (also referred to as ), a limited company established under the laws of Hong Kong and a wholly-owned subsidiary of NiSun BVI;

 

  ● NingChen (Shanghai) Enterprise Management Co., Ltd (“NingChen” or “WFOE”) (also referred to as ), a PRC company and a wholly-owned subsidiary of NiSun HK;

 

  ● Fintech (Shanghai) Digital Technology Co., Ltd (“Fintech”) (also referred to as ), a PRC company controlled by NingChen through a series of contractual agreements.

 

  ● Khorgos Fintech Network Technology Co., Ltd (“Khorgos”) (also referred to as ), a limited company established under the laws of PRC and a wholly-owned subsidiary of Fintech;

 

  ● Jilin Lingang Trade Co., Ltd (“Jilin”) (also referred to as ), a limited company established under the laws of PRC and a wholly-owned subsidiary of Fintech;

 

  ● NiSun family office (“Guangzhou”) Co., Ltd (“Guangzhou”) (also referred to as ), a limited company established under the laws of PRC and a wholly-owned subsidiary of Fintech;

 

  ● Beijing Hengtai Puhui Information services Co., Ltd (“Hengpu”) (also referred to as ), a PRC company controlled by NingChen through a series of contractual agreements.

 

ii

 

 

  ● Dunhua Midtown Asset Management Registration Center Co., Ltd (“Midtown”) (also referred to as ), a limited company established under the laws of PRC and a wholly-owned subsidiary of Hengpu;

 

  ● Hangzhou Fengtai Technology Co., Ltd (“Fengtai”) (also referred to as ), a limited company established under the laws of PRC and a majority-owned subsidiary of Hengpu, which hold 92% directly.

  

  ● Shandong Taiding International Investment Co., Ltd (“Taiding”) (also referred to as ), a limited company established under the laws of PRC and a subsidiary of NiSun BVI, which holds 80% of the equity interest in Taiding.

  

In addition, Hebron is the English romanization of Xibolun in Chinese.

 

This annual report contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2019 and 2018 were US $1.00 for RMB 6.9618 and RMB 6.8755, respectively. The average exchange rates for the years ended December 31, 2019, 2018 and 2017 were US $1.00 for RMB 6.9081, RMB 6.6090 and RMB 6.7578, respectively. We use period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

For the sake of clarity, this annual report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of the Chief Executive Officer will be presented as “Anyuan Sun,” even though, in Chinese, Mr. Sun’s name is presented as “Sun Anyuan.”

 

We obtained the industry and market data used in this annual report or any document incorporated by reference from industry publications, research, surveys and studies conducted by third parties and our own internal estimates based on our management’s knowledge and experience in the markets in which we operate. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report. We have sought to provide current information in this annual report and believe that the statistics provided in this annual report remain up-to-date and reliable, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report.

 

iii

 

 

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under “Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission (the “SEC”) or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

  

iv

 

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable for annual reports on Form 20-F.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable for annual reports on Form 20-F.

   

Item 3. Key Information

 

  A. Selected Financial Data

 

The following table presents the selected consolidated financial information for our company. The selected consolidated statements of comprehensive income data for the three years ended December 31, 2019, 2018 and 2017, and the selected consolidated balance sheets data as of December 31, 2019, 2018 and 2017 have been derived from our audited consolidated financial statements. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance with US GAAP.

 

(All amounts in U.S. dollars, except Shares outstanding)

 

Statement of operations data:

 

   For the Years Ended December 31, 
   2019   2018   2017 
             
Revenue  $21,103,114   $25,290,060   $29,200,445 
Cost of revenue   13,046,493    17,712,108    18,756,284 
Gross profit   8,056,621    7,577,952    10,444,161 
General and administrative expenses   2,566,831    3,298,188    3,683,594 
Selling   985,252    1,337,321    2,187,253 
Bad debt    2,079,837    7,913,442    187,715)
Research and development   492,696    358,411    508,282 
Income (loss) on operations   1,932,005    (5,329,410)   3,877,317 
Other income (expense), net   1,255,149    (426,585)   377,174 
Interest expense   (158,119)   (208,306)   (56,953)
Income from investment   153,554    168,534    - 
Income (loss) before income taxes   3,182,589    (5,795,767)   4,197,538 
Provision (benefit) for income taxes   442,599    (651,052)   (2,938,849 
Net income (loss)   2,739,990    (5,144,715)   7,136,387 
Comprehensive income (loss)  $2,178,899   $(6,900,243)  $9,385,468 

 

Balance sheet data:

  

 

   2019   2018   2017 
Current assets  $43,711,758   $35,274,767   $38,580,847 
Total assets  $84,799,257   $56,653,676   $54,548,682 
Current liabilities  $28,233,265   $19,683,974   $13,189,549 
Total liabilities  $30,863,744   $19,896,325   $14,016,144 
Total shareholders’ equity  $53,945,320   $36,757,351   $40,532,538 
Shares outstanding   17,710,471    16,269,577    14,695,347 

  

B. Capitalization and Indebtedness

 

Not applicable for annual reports on Form 20-F.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable for annual reports on Form 20-F.

  

1

 

  

D. Risk Factors

 

Risks Related to Our Business and Industry

 

We may incur liabilities for unpaid taxes, including penalties.

 

In the normal course of its business, our Company, including subsidiaries and VIEs in PRC particularly Xibolun Automation and Xibolun Equipment, may be subject to challenges from various PRC taxing authorities regarding the amounts of taxes due. Although the Company’s management believes the Company has paid all or accrued for all taxes owed by the Company, PRC taxing authorities may take the position that the Company owes more taxes than it has paid based on transactions conducted by HK Xibolun, which may be deemed a resident enterprise, thereby resulting in taxable liability for us. HK Xibolun’s purchases and sales of fluid equipment control systems offshore in 2013 could, if so challenged, result in a tax liability for our company. (See “Risk Factors — Under the Enterprise Income Tax Law, we may be classified as a ‘Resident Enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”)

 

The Company has recorded a tax liability of $10,915,483, $9,085,746 and 7,067,593 as of December 31, 2019, 2018 and 2017, respectively, for the possible underpayment of income and business taxes. It is possible that the tax liability of the Company for past taxes may be higher than these amounts, if the PRC authorities determine that we are subject to penalties. Although we have had unofficial discussions with the local tax authority and believe that it is possible that the Company will reach an agreement with the local tax authority resulting in a settlement of a tax liability lower than the amount currently accrued, we have no guarantee that we will be able to negotiate such a reduction on the tax liability and we cannot be certain as to how much penalties would be assessed, if any. To the extent our Company is able to negotiate such amounts, national-level taxing authorities may take the position that localities are without power to reduce such liabilities, and such PRC taxing authorities may attempt to collect unpaid taxes and penalties in amounts greatly exceeding management’s estimates.

 

The industry in which our equipment and engineering segment operates is competitive in China.

 

The market for installation service in the pharmaceutical industry is fragmented and relatively competitive. Many of our clients require bidding process before choosing installation service providers. We compete on the basis of price and service quality.

 

The domestic market for valve products is fragmented and highly competitive. We estimate that there are three relatively large companies with which we compete and more than one hundred smaller companies with regional presences. The number of these companies varies from time to time. Some of our valve products compete on the basis of price and are sold in fragmented markets with low barriers to entry, allowing less expensive domestic producers to gain market share and reduce our margins. To the extent these competitors are able to grow and consolidate, they may be able to take advantage of economies of scale, which could put further pressure on our margins.

 

Our revenue from equipment and engineering segment will decrease if the industries in which our customers operate experience a protracted slowdown.

 

Our equipment and engineering services mainly serve as key components in projects and machines operated by our customers which are mostly in the pharmaceutical industry. Therefore, we are subject to the general changes in economic conditions affecting this industry segment of the economy. If the pharmaceutical industry in which our customers operate do not grow or if there is a contraction in those industries, demand for our services will decrease. Demand for our services is typically affected by a number of overarching economic factors, including, but not limited to, interest rates, the availability and magnitude of private and governmental investment in infrastructure projects and the health of the overall global economy. Although pharmaceutical industry is more resilient in the wake of general economic slowdown, if there is a decline in economic activity in China and the other markets in which we operate or a protracted slowdown in industries on which we rely for our sales, demand for our services and our revenue will likewise decrease.

  

2

 

  

Any decline in the availability, or increase in the cost of raw materials could materially affect our earnings.

 

Our valve manufacturing operations depend heavily on the availability of various raw materials and energy resources. The mix of raw materials used in the production of valves is mainly composed of casting steel blank parts, forging steel blank parts and steel. Steel costs account for approximately 30% of our total manufacturing costs. The fuel costs in our manufacturing operations, particularly heavy oil and electricity, account for approximately 2% of total manufacturing costs. The availability of raw materials and energy resources may decline and their prices may fluctuate greatly. If our suppliers are unable or unwilling to provide us with raw materials on terms favorable to us, we may be unable to produce certain products. While valve production is only a small part of our business, our inability to produce certain products could result in a decrease in revenue, earnings and damage to our reputation in our industry. In the event our raw material and energy costs increase, we may not be able to pass these higher costs on to our customers in full or at all. Any increase in the prices for raw materials or energy resources could materially increase our costs and therefore lower our earnings.

 

China’s appreciating currency may make our products more expensive to export to other countries.

 

While we sell most of our products in China, we may also export our products to a variety of other countries from time to time. Historically, we have relied on favorable exchange rates between China and other countries to drive revenues from products sold abroad. Over the last several years, China’s currency has appreciated against most foreign currencies, causing our products to become more expensive in other countries. To the extent the Chinese RMB continues to appreciate, our products could become more expensive and, as a result, less attractive to potential customers in other countries. The RMB depreciated from 2014 through the end of 2016, appreciated against the U.S. dollar in 2017, and has depreciated since the beginning of 2018.

 

Outstanding bank loans may reduce our available funds.

 

We have approximately $0.9 million and $1.7 million in bank loans outstanding as of December 31, 2019 and 2018, respectively. In addition, we have approximately $0.9 million and $2.1 million bank acceptance notes payable outstanding as of December 31, 2019 and 2018, respectively. The loans and bank acceptance notes payable are held at multiple banks, and all of the debt is guaranteed by members of our management, their immediate family members and unrelated third parties. In particular, our Chief Executive Officer and his brother have guaranteed this debt with recourse to their respective residences, and unrelated third parties have extended guarantees of our company’s debt in order to assist us in obtaining such loans. There can be no guarantee that we will be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.

 

Reciprocal debt guarantees may reduce our assets if we are required to honor a guarantee made in favor of a third party.

 

In the past, we have occasionally entered into reciprocal debt guarantees with other local businesses in order to meet funding requirements of lenders, who sometimes require greater assets or income than we have individually, but that could be satisfied if similarly situated businesses agreed to guarantee each other’s debts. These guarantees are typically time-limited and tend to be two years in length. Although we do not currently have any guarantee obligations, we could be subject to loss in the future if we undertake to guarantee another party’s debt and such third party subsequently defaults in payment.

  

3

 

 

The loss of any of our key customers could reduce our revenues and our profitability.

 

For the year ended December 31, 2019, three customers accounted for 24%, 21% and 16% of the Group’s total revenue from our equipment and engineering segment. As of December 31, 2019, two general contractors who engaged our Xibolun Subsidiary Group (defined below) in installation projects accounted for approximately 54% and 43% of our total contracts receivable balance from equipment and engineering segment. For the year ended December 31, 2019, one customer accounted for approximately 100% of our total financial services revenue and accounts receivable from the financial services segment.

 

For the year ended December 31, 2018, four customers accounted for approximately 13%, 12%, 11% and 10% of the Company’s total revenue. As of December 31, 2018, two general contractors who provided the Company’s installation projects accounted for approximately 58% and 42% of the Company’s total contracts receivable balance.

 

For the year ended December 31, 2017, four major customers accounted for approximately 22%, 21%, 13% and 10% of the Company’s total revenue. As of December 31, 2017, two general contractors for the Company’s installation projects accounted for approximately 58% and 42% of the Company’s total contracts receivable balance, respectively.

    

We have not entered into long-term contracts with any of these major customers and instead rely on individual orders from such customers. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to serve these customers at current levels or at all. As the majority of our revenues are driven by individual orders for installation services, our major customers often change each period based on when a given order is placed. Although long-term contracts do not exist in our industry and our customers often make orders repeatedly, if we cannot develop and maintain long-term relationships with major customers or replace major customers from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

 

We rely on a relatively limited number of vendors and customers.

 

We consider our major vendors in each period to be those vendors that accounted for more than 10% of overall purchases in such period.

 

For the year ended December 31, 2019, two major sub-contractors accounted for approximately 25% and 24% of subcontract costs in the equipment and engineering segment. For the year ended December 31, 2019, three supplier accounted for 22%, 15% and 11% of the Group’s accounts payable balance from equipment and engineering segment.

 

For the year ended December 31, 2018, six major sub-contractors accounted for approximately 21%, 19%, 18%, 16%, 15% and 11% of subcontract costs, respectively. For the year ended December 31, 2018, three supplier accounted for 34%, 21% and 15% of the Company’s accounts payable balance, and no individual supplier accounted for more than 10% of the Company’s advance to suppliers balance. 

 

For the year ended December 31, 2017, three major sub-contractors accounted for approximately 44%, 18% and 16% of subcontract costs, respectively. For the year ended December 31, 2017, only one supplier accounted for 18% of the Company’s accounts payable balance, and only one supplier accounted for 17% of the Company’s total advance to suppliers balance.

 

4

 

 

We have not entered into long-term contracts with any of these major vendors and instead rely on individual projects with such vendors. Although we believe that we can locate replacement vendors readily in the market for prevailing prices and that we would not have significant difficulty replacing a given vendor, any difficulty in replacing such a vendor could negatively affect our Company’s performance to the extent it results in higher prices or a slower supply chain.

 

Any disruption in the supply chain of raw materials for our equipment products could adversely impact our ability to produce and deliver products.

 

As to the products we manufacture in our equipment and engineering segment, we must manage our supply chain for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further complicates supply chain disruption risks. Local administrative bodies and physical infrastructure built to protect local interests pose transportation challenges for raw material transportation as well as product delivery. In addition, profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, health and natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products.

 

We do not maintain a reserve for warranty or defective products/installation claims. Our costs could increase if we experience a significant number of claims.

 

The Company generally obtains the customers’ acceptance when the Company delivers product or renders service to its customers of our equipment and engineering segment. The Company will not recognize revenue until a Completion and Evaluation Report has been provided by the customer. The Completion and Evaluation Report proves the quality of the installation projects, and there are no additional services performed by the Company later. Therefore, revenue is recognized when a Completion and Evaluation Report has been provided by the customer.

 

In practice, the Company allows customers to reserve approximately 5-10% of the agreed purchase or installation price as the quality security retention (retainage) for a period of one or up to five years after the Company delivers and/or implement a solution for them.

 

The Company considers this one year term as a warranty period for the Company’s products sold or services provided as defined under ASC Subtopic 450-20. Historically, the Company has not experienced significant customer complaints about the products and none of customers have claimed damages for any loss incurred due to quality problems. Therefore, no separate warranty provisions were provided as at December 31, 2019, 2018 and 2017 based on historical experience.

 

We believe that our customer support teams, our quality assurance and manufacturing monitoring procedures will continue to keep claims at a level that does not support a need for a reserve. However, if we were to experience a significant increase in claims or failures to pay this final payment, our financial results could be adversely affected. Moreover, China’s Product Quality Law generally allows customers two years (and in some cases ten years) to seek compensation for damages caused by product quality deficiencies in cases in which the product lacks an expiration period.

 

Rapid expansion could significantly strain our resources, management and operational infrastructure, which could impair our ability to meet increased demand for our equipment and engineering segment and financial services segment and hurt our business results.

 

To accommodate our anticipated growth, we will need to expand capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system. Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.

  

5

 

 

We face risks related to health epidemics or disease outbreaks.

 

Recently, there was an outbreak of a novel strain of coronavirus (“COVID-19”) in the PRC, which has spread rapidly to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in China for the past few months. In March, 2020, the World Health Organization declared the COVID-19 a pandemic.

 

Substantially all of our revenues and our workforce are concentrated in the PRC. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other epidemic harms the Chinese and global economy in general. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:

 

  ● temporary closure of offices, travel restrictions or suspension of services of our customers and suppliers have negatively affected, and could continue to negatively affect, the demand for our services;

 

  ● our customers that are negatively impacted by the outbreak of COVID-19, may reduce their budgets on equipment and engineering projects or delay the progress of the related projects or have less demands on our financial service  which may materially adversely impact our revenue;

 

  ● our customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable and require us to record additional allowances for doubtful accounts, which may in turn adversely affect our financial condition and operating results; and

 

  ● any disruption of our supply chains, logistics providers or customers could adversely impact our business and results of operations, including causing our subcontractors to temporarily cease operation for a period of time, which may also lead to delayed project progress and business harm to us;

 

Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. There is no guarantee that our total revenues will grow or remain at the similar level year-over-year in 2020. We may have to record downward adjustments, if conditions have not been significantly improved and global stock markets have not recovered from recent declines.

 

In general, our business could be adversely affected by the effects of epidemic, including but not limited to, the COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, or other outbreaks. In response to an epidemic, government and other organizations may adopt regulations and policies that could lead to severe disruptions to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our suppliers to make internal adjustments, including but not limited to, temporarily closing down our business, limiting business hours, and setting restrictions on travel and/or visits with clients and suppliers for a prolonged period of time. Various impacts arising from a severe condition may cause business disruption, resulting in a material, adverse impact to our financial condition and results of operations.

 

6

 

 

We must manage growth in operations to maximize our potential growth and achieve our expected revenues and any failure to manage growth will cause a disruption of our operations and impair our ability to generate revenue.

 

 In order to maximize potential growth in our current and potential markets, we believe that we must expand the scope of our valve manufacturing and production facilities and capabilities and continue to develop new and improved valves as well as expand and diversify our financial service to meet our client needs. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures and management information systems. We will also need to effectively train, motivate and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

 

We cannot assure you that our internal growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

 

One of our strategies is to grow internally through establishing our services in additional markets by increasing the development of new products and improving the quality of existing products. However, many obstacles to this expansion exist, including, but not limited to, increased competition from similar businesses, our ability to improve our products and product mix to realize the benefits of our research and development efforts, unexpected costs and costs associated with marketing efforts. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our services in any additional markets. Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.

 

Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.

 

Our internal growth strategy includes building our brand, expanding our services, developing repair and maintenance business, increasing market penetration of our existing products, developing new products and increasing our targeting of the pharmaceutical market in China. Pursuing these strategies has resulted in, and will continue to result in substantial demands on management resources. In particular, the management of our growth will require, among other things:

 

  ● continued enhancement of our research and development capabilities;

 

  ● information technology system enhancement;

 

  ● stringent cost controls and sufficient liquidity;

 

  ● strengthening of financial and management controls and information technology systems;

 

  ● increased marketing, sales and support activities; and

 

  ● hiring and training of new personnel.

 

If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.

  

7

 

  

Our Chinese subsidiaries’ books and records are prepared in accordance with China GAAP, not U.S. GAAP.

  

Substantially all of the business operations of the Company are located in Mainland China. Although Hebron Technology’s reports are prepared in accordance with U.S. GAAP, our PRC subsidiaries’ books and records are prepared in accordance with China GAAP. Despite our efforts to improve the Company’s controls and procedures, our accounting personnel do not have sufficient knowledge, experience and training in maintaining our books and records in accordance with U.S. GAAP standards. This has required us to obtain help to assist in the prepreation of our financial statements for U.S. GAAP reporting until we are capable of doing internally. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm the value of our shares.

 

We are substantially dependent upon our senior management and key research and development personnel.

 

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on our Chief Executive Officer, Anyuan Sun and our Chief Financial Officer, Changjuan Liang, to manage our operations. We also depend on our Chief Technical Officer, Xiaoliang Xue, for the development of new technology and products.

 

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel other than our Chief Executive Officer, Mr. Anyuan Sun. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our Company. Although each of our senior management and key personnel has signed a confidentiality agreement in connection with their employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

We compete for qualified personnel with other technology companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

 

We are heavily dependent upon the services of experienced personnel who possess skills that are valuable in our industry, and we may have to actively compete for their services.

 

We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired. See “Our Employees.”

 

While we are not aware of any data breach in the past, any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in a data breach which could materially adversely affect our reputation, financial condition and operating results.

 

The protection of our customers’, business partners’, our Company’s and employees’ data is critically important to us. Our customers, business partners, and employees expect we will adequately safeguard and protect their sensitive personal and business information. We have become increasingly dependent upon automated information technology processes. Improper activities by third parties, exploitation of encryption technology, data-hacking tools and discoveries and other events or developments may result in a future compromise or breach of our networks, payment terminals or other settlement systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. There can be no assurance that we will not suffer a criminal cyber-attack in the future, that unauthorized parties will not gain access to personal or business information or sensitive data, or that any such incident will be discovered in a timely manner. Any failure to maintain the security of our customers’ sensitive information, or data belonging to ourselves, our business partners or other relationship third parties, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.

 

8

 

 

Our equipment and engineering segment operations depend on intellectual property licensed from third parties, and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

 

Our Chief Executive Officer grants us the right to use two trademarks, three patents and one copyright without payment. As our Chief Executive Officer’s permission to use these two trademarks is provided at his discretion, he could choose to discontinue such permission in the future. While currently the only third party who grants us intellectual property license is our Chief Executive Officer, it is possible for us to obtain license from any other third parties. Any termination of these licenses could result in the loss of significant rights and could harm our ability to commercialize our products. We must therefore rely on these third parties to enforce their rights and obligations. If they do not successfully enforce such rights and obligations, our development and commercialization of such technology could be delayed or prevented.

   

When we are granted licenses to use intellectual property from third parties, those parties generally retain most or all of the obligations to maintain and extend, as well as the rights to assert, prosecute and defend, that intellectual property. If we or our licensors fail to adequately protect this intellectual property or if we do not have exclusivity for the marketing of our products, our ability to commercialize products could suffer.

 

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

 

We rely on a combination of patent, copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We are currently in control of 34 patents in China covering our valve production technology, 31 of which are now owned by PRC entities, and 3 of which are now owned by Mr. Anyuan Sun.

 

In addition, for those 3 patents owned by Mr. Anyuan Sun, Mr. Sun currently has no intention to transfer them to the ownership of our PRC entities. Although we are using the patents for free, Mr. Sun may require us to pay royalties in future, and that would increase our operational costs and adversely affect our business profitability.

 

Likewise, two of the trademarks and one of the copyrights as disclosed in the section of “Our Intellectual Property” we are currently using are under Mr. Anyuan Sun’s ownership but we’re currently using them for free. There is also a possibility that we will be required by Mr. Sun to pay royalties in future. If so, it will certainly increase our operation cost and adversely affect our business profitability.

 

As to the licenses on the aforementioned three patents, two trademarks, and one copyright, the license agreements we signed with Mr. Anyuan Sun did not specify expiration dates but only stated that we are entitled to use them during the valid terms of the patents, trademarks, and copyrights, which indicated that if the terms expire and Mr. Sun does not want to extend them, the licenses will expire. Also, according to China’s Intellectual Property Laws, including Patent Law, Trademark Law, and Copyrights Law, the license agreement is valid once the agreement is signed and the registration with regulatory agencies is not a necessity for the agreement to be valid. However, if the agreement is not registered, then the general public may not be aware of the agreement and the licensees’ rights will not be protected when the licensor assigns the intellectual property rights to other parties. We filed with the regulatory agencies the registration application of the license agreements in March of 2016, and the whole process shall be completed in a couple of months. In addition, since the license agreements are non-exclusive, Mr. Sun is still entitled to sign license agreements with other parties. If Mr. Sun does so, the market share for our products which are manufactured and sold with these licensed intellectual property rights will certainly shrink and our profits will be affected adversely.

 

The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or circumvented.

 

We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.

 

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

  

9

 

  

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other countries in Asia. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

 

  ● pay damage awards;

 

  ● seek licenses from third parties;

 

  ● pay ongoing royalties;

 

  ● redesign our branded products; or

 

  ● be restricted by injunctions,

 

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.

 

Risks Related to Our Recently Acquired Financial Services Segment Business and Industry

 

Our financial services segment has a limited operating history in a new and evolving market, which makes it difficult to evaluate its future prospects.

 

In our financial services segment, we primarily offer underwriting related advisory services to financial institutions and corporate clients and provide distribution and management services for direct banking products issued by small and medium commercial banks in the PRC. We began to conduct financial service business operations in 2019 after we acquired NiSun BVI and its subsidiaries and contractually controlled VIEs including Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information Services Co., Ltd (“Hengpu”) (collectively, “NiSun Subsidiary Group”). The NiSun Subsidiary Group has a limited operating history and the regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. Potential customers may not be familiar with this market and may have difficulty distinguishing our financial services from those of its competitors. Convincing potential new customers of the value of our financial services segment is critical to increasing the revenue from our financial services segment and to the success of its business. As our financial services business develops and competes with other financial service providers, it is expected to continue to introduce new services or make adjustments to the current business model. Any significant change to the current business model may not achieve expected results and may have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectively assess this segment’s future prospects.

   

If our financial services segment fails to attract new customers with the value of its services, if the market does not develop as we expect, or if we fail to address the needs of its target market, its business and results of operations will be harmed.

 

10

 

 

If certain categories of financial products currently traded on provincial or regional financial assets exchanges become restricted or prohibited, or if such financial assets exchanges are prohibited from listing exchange administered products, our underwriting related advisory services would be materially and adversely affected.

 

The PRC government has not adopted a regulatory framework governing such local exchanges or the listing, trading and distribution of exchange administered products. The local financial assets exchanges are established upon approval of the local governments, and the exchange administered products listed and traded on these exchanges are filed with and approved by local financial asset exchanges under the supervision of the offices of finance at the municipal and provincial levels. As a result, the major product types selected for distribution on such exchanges are dependent upon the local regulatory environment and policies. If any significant product types are discouraged by the local government authorities, our product portfolio, distribution services and related revenues may be negatively impacted.

 

In addition, although the local financial exchanges are regulated by the local government subject to the two prohibitive provisions issued by the State Council, we cannot guarantee that they would not be covered by the tightened national financial supervision system. If they are subject to approval or guidance of any national regulatory bodies, such as the People’s Bank of China, China Banking and Insurance Regulatory and Administration Committee, or the CSRC, these financial exchanges may be prohibited from listing certain or all of the products currently traded on such exchanges, or be prohibited from engaging in such listing and trading services. Under that circumstance, we may have to change our business model and as a result, our underwriting related advisory services would be materially and adversely affected.

 

If our financial services segment cannot compete effectively, our results of operations could be harmed.

 

The finance advisory services industry in China is intensely competitive and evolving. Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their financial service platforms and customers. Our competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of its existing competitors or form a strategic alliance with one or more of its competitors. Our competitors may be better at developing new products or services, responding faster to new technologies, or undertaking more extensive and effective marketing campaigns. If we are unable to compete with such companies and meet the need for innovation in the financial services industry, the demand for our financial services could stagnate or substantially decline, Our financial services segment could experience reduced revenues or fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.

 

We depend on our third-party financial product providers to derive a significant portion of our financial services segment’s revenues.

 

We derive a significant portion of our financial services segment’s revenues from a limited number of third-party financial product providers, including commercial banks, non-bank financial institutions and corporate debt issuers. If we lose any of our major product providers or any of these product providers significantly reduces its volume of business with us, our revenues and profitability would be substantially reduced if we are unable seek alternative product providers on a timely basis, or at all. In addition, the product volume we source and distribute from specific product providers may vary from period to period, particularly because we are not the exclusive distributor for any particular product provider. Our dependence on our financial product providers may also adversely affect our ability to negotiate fee rates with those product providers, which may in turn materially and adversely affect our results of operations.

 

11

 

 

Our financial advisory services segment may incur net losses in the future.

 

Our newly acquired financial services segment recorded a profit of approximately $1.5 million in 2019. However, we cannot assure you that it will be able to generate income in the future. Our financial services segment operating expenses may increase in the foreseeable future as we seek to continue to grow our business, attract financial institutions, corporate and individual customers and partners, and further enhance and develop our service products, services and customer platform. These efforts may prove more expensive than currently anticipated, and our financial services segment may not succeed in generating sufficient revenue to offset these higher expenses. As a result of possible increased expenses, our short financial services operating history, changes in market conditions and other factors, the financial services segment may not be able to achieve or maintain profitability or may experience losses in the future.

 

If we cannot respond to rapid financial product and service innovations in the financial industry in a timely and cost-effective manner, our business and operating results may suffer.

 

China’s financial services industry landscape has been changing rapidly with the frequent introduction of new products and services and the evolution of industry standards and customary practices. We believe that our future success will depend on our ability to continue to anticipate product innovations and to offer diverse product and service opportunities that meet industry and customer demands on a timely and cost-effective basis. We may not be successful in identifying new product and service opportunities in a timely and cost-effective manner. In addition, product and service opportunities that our competitors develop or introduce may render our products and services noncompetitive. As a result, any product or service innovations affecting the financial services industry in the future may cause us to lose market share and therefore, materially and adversely affect our financial condition and results of operations.

 

Any fraudulent activity on our technology platforms could negatively impact our financial services segment’s operating results, brand and reputation and cause the use of its loan products and services to decrease.

 

Our financial services segment is subject to the risk of potential fraudulent activity both on our digital technology platforms operated by Huijingshe and Hengpu and that targeted at our financial institutions, corporate and individual customer information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Increases in fraudulent activity, either on our technology platform or the systems of our customers or asset sources, could negatively impact our brand and reputation, reduce the volume of financial product transactions in our financial services operations and require us to take additional steps to reduce fraud risk, which could increase our financial services segment’s operating costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert management’s attention and cause our financial services segment to incur additional expenses and costs. Although our financial services segment has not experienced any material business or reputational harm as a result of fraudulent activities in our short history, we cannot rule out the possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial conditions could be materially and adversely affected.

 

12

 

 

Our financial services segment’s brands or reputation and the reputation of the financial advisory service industry may materially and adversely be affected by factors outside of its control.

 

Enhancing the recognition and reputation of the brands of our financial services segment is critical to its business and competitiveness. Factors that are vital to this objective include but are not limited to its ability to:

 

  ● maintain the quality and reliability of our technology platform;
     
  ● provide financial institutions, corporate and individual customers and industry partners with a superior client service experience;
     
  ● maintain accurate financial product matching and asset management tools and decision-making models;
     
  ● effectively manage and resolve any customer questions or concerns; and
     
  ● effectively protect personal information and privacy of customers and industry partners.

 

Any negative allegation made by the media or other parties about the foregoing or other aspects of our financial services segment, including but not limited to our financial services segment’s management, business, compliance with laws, whether with merit or not, could severely hurt its reputation and harm its business and operating results. In addition, the market for China’s finance advisory services is new and the regulatory framework for this market is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about China’s finance advisory services industry in general may also have a negative impact on its reputation, regardless of whether our financial services segment has engaged in any inappropriate activities.

 

Certain factors that may adversely affect our reputation are beyond our control. Negative publicity about our industry partners, service providers or other counterparties, such as negative publicity about their revenue generating practices and any failure by them to adequately protect the information of their investors, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm the reputation of our financial services segment working with those industry partners. Furthermore, any negative development in the financial advisory services industry, such as bankruptcies or failures of other financial technology platforms, or negative perception of the industry as a whole, such as that arises from any failure of other financial advisory service providers or their technology platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents, could compromise our financial services segment’s image, undermine the trust and credibility our financial services segment has established and have a negative impact on our ability to attract new customers. Negative developments in the financial advisory services industry, such as fraudulent behavior and/or the closure of other financial advisory service platforms or defaults on the financial products we underwrite, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by the financial advisory services industry. If any of the foregoing takes place, our financial services segment’s business and results of operations could be materially and adversely affected.

 

Successful strategic relationships with commercial banks and other financial institutions are important for the future success of our financial services segment.

 

We intend to continue to leverage our existing strategic relationships with commercial banks and other financial institutions to grow our business while also pursuing new relationships with potential additional customers and industry partners. Identifying, negotiating and documenting relationships with partners and customers requires significant time and resources as does integrating third-party data and services into our system. Our financial services segment’s current agreements with banking and other financial institutions do not prohibit them from working with our competitors or from offering competing services. The financial services segment’s competitors may be effective in providing incentives to such entities to favor their products or services, which may in turn reduce the volume of loans facilitated through our marketplace. In addition, partners may not perform as expected under our agreements with them, and the financial services segment may have disagreements or disputes with such partners, which could adversely affect its brand and reputation. If the financial services segment cannot successfully enter into and maintain effective strategic relationships with business partners, its business will be harmed.

 

13

 

 

Our financial services segment’s operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. NiSun Subsidiary Group primarily relies on a limited number of telecommunication service providers to provide it with data communications capacity through local telecommunications lines and internet data centers to host its servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our digital technology systems and platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

  

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pays for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

 

Risks Related to Our Contractual Relationships with our Affiliated VIEs

 

If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended in 2011, 2015 and 2017 and other applicable laws and regulations.

 

We are a British Virgin Islands company and our PRC subsidiary, Ning Chen (Shanghai) Enterprise Management Group Co., Ltd. (“NingChen” or “WFOE”), is considered a foreign invested enterprise. To comply with PRC laws and regulations, we conduct our financial service operations in China through a series of contractual arrangements entered into among NingChen, VIEs including Fintech, Hengpu, and shareholders of the VIEs. As a result of these contractual arrangements, We exert control over VIEs and their subsidiaries and consolidate the VIEs’ operating results in our financial statements under U.S. GAAP.

 

We believe our current ownership structure and the contractual arrangements among our WFOE, VIEs and the shareholders of the VIEs are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with our opinion.

 

14

 

 

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or MOFCOM, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. In December 2018, the Standing Committee of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law, aiming to replace the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft with slight revisions, or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment Law, foreign investments shall be subject to the negative list management system. However, the New Draft Foreign Investment Law does not mention “actual control” as regulated in the previous draft and the position to be taken with respect to the existing or future companies with the “variable interest entity” structure. On March 15, 2019, the Foreign Investment Law of the People’s Republic of China, or the Final Foreign Investment Law, with slight revision, was finally issued and became effective on January 1, 2020.

 

Although variable interest entity structures are not included in the Final Foreign Investment Law, it is uncertain whether any interpretation and implementation of the Final Foreign Investment Law or new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If the ownership structure, contractual arrangements and business of our PRC subsidiary or its consolidated VIEs are found to be in violation of any existing or future PRC laws or regulations, or our PRC subsidiary fails to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating its income or the income of its PRC subsidiary or consolidated variable interest entities, revoking the business licenses or operating licenses of its PRC subsidiary or consolidated variable interest entities, discontinuing or placing restrictions or onerous conditions on its operations, requiring our PRC operations to undergo a costly and disruptive restructuring and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our financial service business operations and severely damage its reputation, which would in turn materially and adversely affect its business, financial condition and results of operations. If any of these occurrences results in its inability to direct the activities of its consolidated variable interest entities, and/or its failure to receive economic benefits from its consolidated variable interest entities, we may not be able to consolidate our VIEs’ results into our consolidated financial statements in accordance with U.S. GAAP.

 

Our NiSun Subsidiary Group relies on NingChen’s contractual arrangements with VIEs and the shareholder of VIEs for its business operations, which may not be as effective as direct ownership in providing operational control.

 

Our NiSun Subsidiary Group has relied and expects to continue to rely on contractual arrangements with Fintech and Hengpu to operate the financial advisory services business in the future. These contractual arrangements may not be as effective as direct ownership in providing us with control over its consolidated variable interest entity. For example, VIEs and their shareholders could breach their contractual arrangements by, among other things, failing to conduct their operations, in an acceptable manner or taking other actions that are detrimental to NiSun Subsidiary Group’s interests.

 

If NingChen had direct ownership of the VIEs, it would be able to exercise its rights as a shareholder to effect changes in the VIEs. However, under the current contractual arrangements, NingChen relies on the performance by the VIEs and its shareholders of their obligations under the contracts to exercise control over its consolidated variable interest entities. The shareholders of VIEs may not act in the best interests of ours or may not perform their obligations under these contracts. Such risks exist throughout the period in which our NiSun Subsidiary Group intends to operate its business through the contractual arrangements with the VIEs. Although NingChen has the right to replace any shareholder of its consolidated variable interest entity under the contractual arrangement, if any shareholder of its consolidated variable interest entity is uncooperative or any dispute relating to these contracts remains unresolved, it will have to enforce its rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, these contractual arrangements with VIEs may not be as effective in ensuring NingChen’s control over the relevant portion of its business operations as direct ownership would be.

 

15

 

 

Any failure by our consolidated VIEs or their shareholders to perform their obligations under VIE agreements with them would have a material adverse effect on our financial services segment business.

 

If the VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of VIEs were to refuse to transfer their equity interests in the VIE to NingChen or its designee if it exercises the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward NingChen, then NingChen may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under the contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit its ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that NiSun BVI is unable to enforce these contractual arrangements, or if NiSun BVI suffers significant delay or other obstacles in the process of enforcing these contractual arrangements, NiSun BVI may not be able to exert effective control over its consolidated variable interest entity, and its ability to conduct its business may be negatively affected.

  

Shareholders of VIEs may have potential conflicts of interest with ours, which may materially and adversely affect its business and financial condition.

 

The equity interests of the VIEs are beneficially owned by several individual shareholders through holding companies including the largest shareholder of our Company, Mr. Bodang Liu. Such VIE shareholders’ interests in VIE may differ from the interests of our Company as a whole. VIE shareholders may breach, or cause VIEs to breach, the existing contractual arrangements between NingChen and VIEs, which would have a material adverse effect on NingChen’s ability to effectively control its consolidated variable interest entity and receive economic benefits from it. For example, Mr. Liu may be able to cause the VIE agreements with the VIE to be performed in a manner adverse to NingChen by, among other things, failing to remit payments due under the contractual arrangements to NingChen on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between VIE shareholders and ours, except that we could exercise the purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute with the shareholders of the VIE, we would have to rely on legal proceedings, which could result in the disruption of its business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

16

 

 

Contractual arrangements in relation to our consolidated variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between the WFOE, our wholly-owned subsidiary in China, its consolidated VIE in China, and the shareholders of the VIE were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the VIE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing WFOEs’ tax expenses. In addition, if the WFOE requests the shareholders of VIE to transfer their equity interests in the VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the VIE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on the VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if its consolidated variable interest entity’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

 

We may lose the ability to use and enjoy assets held by our consolidated VIEs that are material to the operation of our business if the VIE goes bankrupt or becomes subject to a dissolution or liquidation proceedings.

 

The VIE holds certain assets that are material to the operation of our financial services business, including domain names and equipment for our financial technology platform. Under the contractual arrangements, VIEs may not and VIE shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without its prior consent. However, in the event a VIE shareholder breaches these contractual arrangements and voluntarily liquidates the VIE or the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without the WFOE’s consent, it may be unable to continue some or all of its business activities, which could materially and adversely affect its business, financial condition and results of operations. If the VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of their assets, thereby hindering NiSun Subsidiary Group’s ability to operate its business, which could materially and adversely affect its business, financial condition and results of operations.

 

Risks Related to Doing Business in China

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company and our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations will be severely hampered and your investment in our stock could be rendered worthless.

  

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Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

 

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. This government involvements has been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy and our results of operations could be adversely affected as a result.

 

Labor laws in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008, which was further amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a competitive disadvantage.

 

Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.

 

We may experience barriers to conducting business and trade in our targeted emerging markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currencies, substantial taxes on profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.

 

Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

 

China passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

  

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On April 22, 2009, the State Administration of Taxation of China issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management are often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders.

 

Hebron Technology does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of the Notice, so we believe the Notice is not applicable to us. However, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in the Notice to evaluate the tax residence status of Hebron Technology.

 

We do not believe that we meet some of the conditions outlined. As a holding company, the key assets and records of Hebron Technology including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that Hebron Technology should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in the Notice were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, so this would have minimal effect on us; however, if we develop non-China source income in the future, we could be adversely affected. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.

 

If we were treated as a “resident enterprise” by the PRC tax authorities, we would be subject to taxation in both the U.S. and China, but our PRC source income will not be taxed in the U.S. again because the U.S.-China tax treaty will avoid double taxation between these two nations.

 

Since our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our Company, our directors and executive officers.

 

Our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

  

19

 

  

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws.

 

As a Nasdaq-listed public company, we are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of our employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities are in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption laws.

 

However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

  

PRC regulation of loans and direct investment by offshore holding companies in PRC entities may delay or prevent us from using the proceeds of our securities offerings to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing proceeds of our securities offerings, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

   

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Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. Currently, China is holding more open and tolerant attitude toward FIEs. More open rules and regulations are published in recent years to replace previous ones which are more restrictive. On March 30th, 2015, SAFE promulgated Circular 19 which is about Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises) and effective since June 1, 2015. Circular 19 has made some important changes in rules regarding the conversion of foreign exchanges to RMB, which are as follows in particular:

 

  (1) Instead of the payment-based exchange settlement system under previous Circular 142 and Circular 88, new rules of discretional foreign exchange settlement have been established, which means the foreign exchange capital in the capital account of foreign-invested enterprises for which the confirmation of rights and interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks in accordance with Circular 13 as we mentioned in the comment below) has been handled can be settled at the banks based on the actual operational needs of the enterprises, and the proportion of foreign exchange which can be discretionally converted by each FIE is temporarily determined as 100% (SAFE may adjust such scale as necessary). So regulation wise FIEs no longer needs to report the use of its RMB before or after a conversion which are required by previous Circular 142 and Circular 88. However, actually SAFE and the banks are experiencing a transitional period in this regard, so for the time being, most banks still need the FIEs to report their proposed use of the RMB to be converted from foreign exchanges, as well as the actual use of the RMB obtained in the last conversion. Certainly, the transitional period will not be too long and therefore optimistically from the year of 2016, the report obligation will no longer be required.

 

  (2) Foreign currency-denominated capital no longer needs to be verified by an accounting firm before converting into RMB.

 

  (3) As stipulated in Circular 19, the use of capital by FIEs shall follow the principles of authenticity and self-use within the business scope of enterprises, shall not be used for the following purposes:

 

  a) it shall not be directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by national laws and regulations;

 

  b) it shall not be directly or indirectly used for investment in securities unless otherwise provided by laws and regulations;

 

  c) it shall not be directly or indirectly used for granting the entrust loans in RMB (unless permitted by the scope of business), repaying the inter-enterprise borrowings (including advances by the third party) or repaying the bank loans in Renminbi that have been sub-lent to the third party; and

 

  d) it shall not be used for paying the expenses related to the purchase of real estate not for self-use, except for the foreign-invested real estate enterprises.

 

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013; also, on February 13, 2015 SAFE published Circular 13 (Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies) to update some measures stipulated in Circular 21. According to Circular 21, SAFE has significantly simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances. Meanwhile, Circular 13 has further simplified foreign exchange administration procedures, most important among which is that SAFE delegated foreign exchange registration to the banks, meanwhile the related registration approval by SAFE has been annulled.

 

Even with more and more open policy toward FDI and FIEs, the Circulars mentioned above may still have some limit our ability to convert, transfer and use the net proceeds from our securities offerings and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of our offerings and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

  

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Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income will currently only be derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our securities offerings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For the years ended December 31, 2019, 2018 and 2017, we had foreign currency translation loss of $(0.6) million, $(1.8) million and foreign currency translation gain of $2.2 million, respectively. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange gains and losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

 

The SAFE promulgated the Notice on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Notice 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off). On October 16, 2015, 9 of our shareholders who are Chinese residents completed  the registration with SAFE under this Notice.

  

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Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.

 

Other than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

 

We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.

 

It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of our securities offerings into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

Chinese economic growth slowdown may have a negative effect on our business.

 

Since 2014, Chinese economic growth has been slowing down from double-digit GDP speed. This situation has impacted many types of service industries, such as restaurant and tourism, and some manufacturing industries. Our business operations in China mainly rely on the pharmaceutical industry, which is less influenced by economic growth slowdown than service industries. However, if China’s economic growth continues to slow down, then our pharmaceutical engineering installation business will be adversely affected due to the slow expansion or shrinkage of the pharmaceutical industry. Recession in the steel industry on the other hand may cause us to benefit from decreased material costs.

 

Risks Related to Our Corporate Structure and Operation

 

We incur additional costs as a result of being a public company, which could negatively impact our net income and liquidity.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations implemented by the SEC and The NASDAQ Capital Market require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of our having become a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Class A common shares could decline.

  

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The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

As a publicly listed company, we are required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our Company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S.-listed public company, we are governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our continued public listing could affect our results of operations.

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

A lack of insurance could expose us to significant costs and business disruption.

 

While we have not purchased insurance to cover our assets and property of our business, it could leave our business unprotected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.

 

Land-use rights policy may cause significantly adverse effect to our operation.

 

China has very conservative land ownership and land use policy. All the lands in China are either belonging to the nation or collective units. Currently, our PRC entities’ new office buildings are on the land we leased from Dalangqiao Village, which is a collective unit and legal owning the land acknowledged by the local government. Therefore, the new offices will not be under the risk of being identified as illegal building, and we can continue its use of the new office as long as the lease do not expire or be terminated. However, since under PRC laws the building registration shall be in consistency with the land use right of the land it occupies, which will stay collectively owned by the members of the Dalangqiao Village, our PRC entities will not get Property Ownership Certificate in relation to the buildings of the new office, thus brings risks that our PRC entities may not be able to use the new office if any dispute arises between the Company and the members of the Dalangqiao Village which adversely effects, annuls, or even worse brings termination to the lease.

  

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Unqualified individual subcontractors may bring joint liability to us.

 

We and our PRC entities, Xibolun Equipment and Xibolun Automation, sometimes subcontract portions of our projects to third parties to complete. According to the Construction Law and Qualification Standard for Labor Subcontracting in Construction Business of the PRC, individual contractors are not in a position to obtain any qualification of labor subcontracting. So the subcontracting contracts by Xibolun Equipment and Xibolun Automation to such individual contractors are under the risk of being declared in avoidance of qualification by applicable courts. Article 29 of the Construction Law requires that “the overall contractors and subcontractors shall bear joint responsibilities to project owners for the subcontracted projects”. Even though our PRC entities Xibolun Equipment and Xibolun Automation are very cautious with subcontracting the projects to other parties, there are still possibilities that our PRC entities may subcontract the projects to individuals or parties without required qualifications. Despite the facts that the law enforcement and regulation on these types of subcontracting are not very strict, if the construction completed by unqualified individual subcontractors does not meet required quality and accident occurs, our PRC entities may jointly bear the consequences pursuant to Article 64 of the Construction Law. Also, according to the Article 54 of the Regulation on the Quality Management of Construction Projects, the liabilities for the consequences could be indemnifying the damages and paying penalty which could be ranging from five hundred thousand up to one million RMB.

 

Risks Related to Ownership of Our Common Shares

 

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A common shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our Class A common shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our Class A common shares less attractive because we may rely on these exemptions. If some investors find our Class A common shares less attractive as a result, there may be a less active trading market for our Class A common shares and our stock price may be more volatile. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.

  

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As a “controlled company” under the rules of The NASDAQ Capital Market, we may exempt our company from certain corporate governance requirements that could adversely affect our public shareholders.

 

Our principal shareholder beneficially owns a majority of the voting power of our outstanding common shares. Under the Rule 4350(c) of The NASDAQ Capital Market, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors to be independent, as defined in The NASDAQ Capital Market rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under The NASDAQ Capital Market rules, we could elect to rely on this exemption in the future. If we elected to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of The NASDAQ Capital Market corporate governance requirements.

 

If we elect to follow certain NASDAQ Capital Market rules available to foreign private issuers, our company could fail to meet corporate governance standards applicable to U.S. domestic issuers.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

If we continue to be unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common shares may decline.

 

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with the first annual report on Form 20-F, we have been required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we continue to identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our management, legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, semiannual, and current reports with respect to our business and operating results.

  

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As a result of disclosure of information in this annual report on Form 20-F and in filings required of a public company, our business and financial condition are more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The market price of our Class A common shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares.

 

The trading price for our Class A common shares has fluctuated since we first listed our common shares. After our common shares became listed on the Nasdaq on December 27, 2016, the trading price of our Class A common shares has ranged from US $0.72 to US $9.00 per share for the year ended December 31, 2019, and the last reported trading price on April 22, 2020 was $8.88 per Class A common share. The market price of our common shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  ● actual or anticipated fluctuations in our revenue and other operating results;

 

  ● the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

  ● actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

  ● announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  ● price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

  ● lawsuits threatened or filed against us; and

 

  ● other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

  

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We have in the past failed to comply with Nasdaq Listing Rules, including the meeting the minimum bid price requirement..

 

On March 1, 2019, we received a letter from the Listings Qualifications Department of The Nasdaq Capital Market (“Nasdaq”) notifying the Registrant that the minimum bid price per share for its Class A common shares was below $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). On June 28, 2019, we received a letter from Nasdaq Listing Qualifications notifying us that we had regained compliance with Listing Rule 5550(a)(2) and the matter was closed.

 

If for any reason we fail to maintain compliance with Nasdaq Listing Rules in the future, we could be subject to delisting procedures and sanctions, which could affect our reputation and the market value of our securities, and could result in shareholder litigation, which may divert the attention of our management and force us to expend resources to defend against such claims. Any litigation may have a material and adverse effect on our business and future results of operations.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A common shares if the market price of our Class A common shares increases.

 

We incur increased costs as a result of being a public company.

 

As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. GAAP auditors that we did not require as a private company, and we will have annual payments for listing on a stock exchange if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur additional expenses of between $500,000 and $1 million per year that we did not experience as a private company.

 

Our classified board structure may prevent a change in our control.

 

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2020, 2021 and 2022. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year the shareholders elect one class of directors. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders.

 

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Business Companies Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.

  

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There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

Item 4. Information on the Company

  

A. History and Development of the Company

 

Hebron Technology Co., Ltd. (“Hebron Technology” or the “Company”) was established under the laws of the British Virgin Islands (“BVI”) on May 29, 2012 as a company limited by shares. The Company is a holding company and conducts its business through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of VIEs in the People’s Republic of China (‘‘PRC’’).

 

The Company has had two major corporate reorganizations since its inception, through which the Company acquired two subsidiary groups that operate in two industry segments, equipment and engineering segment and financial services segment. The Company consummated the first reorganization for our equipment and engineering business in connection with our initial public offering (the “IPO Reorganization”) and undertook the second reorganization in 2019 for the acquisition of our financial advisory services business.

 

As a result of the IPO Reorganization, the Company became the ultimate parent company of Hong Kong Xibolun Technology Limited (“HK Xibolun”) and its PRC subsidiaries, Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) and Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”) (Xibolun subsidiaries collectively referred to as the “Xibolun Subsidiary Group”), which before the IPO Reorganization, were all controlled by Mr. Anyuan Sun, the Chairman of the Board and CEO of the Company.

 

The Xibolun Subsidiary Group conducts equipment and engineering service operations focusing on the research, development and manufacture of fluid equipment including valves, pipe fittings and others, with an emphasis on the manufacture and installation of intelligent valves used in the pharmaceutical, biological, food and beverage, and other clean industries in the PRC. The products and services are primarily used in pharmaceutical engineering construction.

 

We expanded our operations into the financial services industry and began to conduct financial advisory service operations in July 2019 through the acquisition of NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”), its subsidiaries and contractually controlled variable interest entities (“VIEs”), and subsidiaries of VIEs (such financial service entities collectively referred to as the “NiSun Subsidiary Group”). The NiSun Subsidiary Group is headquartered in Shanghai and operates in different regions in China.

 

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For our financial services segment, we primarily offer underwriting related advisory service to financial institutions and corporate clients and provide distribution and management service for direct banking products issued by small and medium commercial banks in China. Underwriting related advisory services are operated by Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information Services Co., Ltd. (“Hengpu”), both VIEs of our Company, and Fintech provides banking product distribution and management services.

 

Corporate Information

 

Our principal executive offices are located at No. 936, Jinhai 2nd Road, Konggang New Area, Longwan District, Wenzhou, Zhejiang Province, People’s Republic of China, for our Xibolun Subsidiary Group. Its telephone number is +86-577-8689-5678. Our principal executive offices for our NiSun Subsidiary Group are located at No. 99 Danba Road, Bldg C9, Putuo District, Shanghai, People’s Republic of China. Its telephone number is +86-21-2357-0055.

 

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. We maintain our website at http://www.hebrontechnology.com for our Xibolun Subsidiary Group. Our newly acquired NiSun Subsidiary Group has websites at https://www.fintaike.com for Fintech and https://www.ihengpu.com for Hengpu.

 

Principal Corporate Activities

 

Below is a brief summary of principal activities of our Company since its formation.

 

  ● January 25, 2005, Xibolun Equipment was incorporated.

 

  ● June 14, 2011, HK Xibolun was formed in accordance with laws and regulations of Hong Kong.

 

  ● July 21, 2011, HK Xibolun acquired 30% ownership interest of Xibolun Equipment.

 

  ● May 29, 2012, Hebron Technology was established under the laws of the British Virgin Islands as a holding company.

 

  ● September 24, 2012, Xibolun Automation was incorporated.

 

  ● December 5, 2012, HK Xibolun acquired 100% ownership interest of Xibolun Automation from Hebron Technology, Xibolun Equipment, and Zhejiang Xibolun.

 

  ● October 22, 2012, Hebron Technology acquired 100% ownership interest of HK Xibolun. As a result, HK Xibolun became a wholly owned subsidiary of Hebron Technology.

 

  ● July 29, 2013, Mr. Anyuan Sun transferred his 70% ownership interest in Xibolun Equipment to Xibolun Automation.

 

  ● December 27, 2016, Hebron Technology completed an initial public offering of 2,695,347 common shares. The offering was completed at an issuance price of $4.00 per share. Prior to the offering, the Company had 12,000,000 issued and outstanding shares, and after the offering, the Company had 14,695,347 issued and outstanding shares. The Company issued to the placement agent in the initial public offering, warrants to purchase 134,768 common shares for an exercise price of $4.80 per share. The placement agent’s warrants have a term of three years.

 

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  ● March 7, 2018, Hebron Technology re-classified and re-designated our common shares into Class A common shares and Class B common shares by filing the Third Amended and Restated Memorandum of Association with the BVI Registrar of Corporate Affairs. Pursuant to the Third Amended and Restated Memorandum of Association, our authorized shares are re-classified and re-designated into 50,000,000 common shares of par value of US$0.001 each, of which 40,000,000 share are designated as Class A common shares of par value of US$0.001 each and 10,000,000 shares are designated as Class B common shares of par value of US$0.001 each. Each Class A common share is entitled to one vote and each Class B common share is entitled to five votes on all matters subject to vote at our shareholders’ meetings. After the reclassification and re-designation, 6,916,947 Class A common shares and 7,778,400 Class B common shares were issued and outstanding. Our Chief Executive Officer, Mr. Anyuan Sun, beneficially owns all of the 7,778,400 Class B common shares. The Nasdaq marketplace effective date is March 12, 2018.

 

  ● March 10, 2018, Hebron Technology entered into a share acquisition agreement with the sole shareholder of Xuzhou Weijia Bio-Tech Co., Ltd. (“Weijia Bio-Tech”) and Weijia Bio-Tech to acquire 49% of the equity in Weijia Bio-Tech. As consideration, we were obligated to issue 1,442,778 unregistered Class A common shares (based on an agreed value of $2.00 per share) to the individuals designated by the selling shareholder of Weijia Bio-Tech within 20 business days after signing the agreement. On April 17, 2018, the parties signed an addendum to extend 20 business days to 40 business days. Effective as of April 9, 2018, we issued 1,442,778 unregistered Class A common shares pursuant to the agreement. On or about April 11, 2018, we completed the acquisition of the 49% equity interest in Weijia Bio-Tech.

  

  ● April 16, 2019, Hebron Technology entered into a securities purchase agreement with Wise Metro Development Co., Ltd. (“Wise”), Zuoqiao Sun Zhang (“Sun Zhang”; and together with Wise, “Sellers”) and NiSun International Enterprise Management Group Co., Ltd. (“NiSun Cayman”) pursuant to which NiSun Cayman would acquire 7,778,400 Class B Common Shares from the sellers. Upon the share purchase transaction consummated in July 2019, all of the Class B common shares were automatically converted into Class A common shares.

 

  ● July 12, 2019, Hebron Technology acquired all of the equity of NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”) for a consideration of $7 million. NiSun BVI effectively controls Fintech through a series of variable interest agreements (the “VIE Agreements”). Fintech’s wholly owned subsidiaries consist of Khorgos Fintech Network Technology Co., Ltd (“Khorgos”), Jilin Lingang Trade Co., Ltd (“Jilin”) and NiSun Family Office (Guangzhou) Co., Ltd (“Guangzhou”).

 

  ●

November 8, 2019, NiSun BVI entered into a cooperation agreement with Tai’an Keyuan Infrastructure Investment Construction Co., Ltd. (“Keyuan”) to form a joint venture entity, Shandong Taiding International Investment Co., Ltd (“Taiding”), of which NiSun BVI and Keyuan hold 80% and 20%, respectively, of the equity interest in Taiding. Taiding was formed on November 12, 2019.

 

  ● December 15, 2019, Hebron Technology entered into a share exchange agreement with Beijing Hengtai Puhui Information Service Co. Ltd. (“Hengpu”) and shareholders of Hengpu to acquire a controlling interest via VIE arrangements in Hengpu in exchange for issuance of 1,440,894 Class A Common Share of the Company to Hengpu’s shareholders. The Company, through its subsidiary NingChen, obtained an effective control of Hengpu upon the entry into a series of VIE agreements with Hengpu. Hengpu owns 92% equity interest of Hangzhou Fengtai Technology Co., Ltd (“Fengtai”) and 100% equity interest of Dunhua Midtown Assets Management Registration Center Co., Ltd (“Midtown”).

 

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B. Business Overview

 

We conduct our business operations primarily in two industry segments, equipment and engineering segment and financial services segment in China. Xibolun Subsidiary Group operates our equipment and engineering segment business and NiSun Subsidiary Group provides financial advisory services for our financial services segment.

 

Equipment and Engineering Segment

 

We engage in the research, development and manufacture of fluid equipment including valves, pipe fittings and others, with an emphasis on the manufacture and installation of intelligentized valves, used in the pharmaceutical, biological, food and beverage, and other clean industries. A significant majority of our revenues from equipment and engineering segment have come from these installation services.

 

  (a) Installation services. We specialize in installing valves and pipes with skilled and experienced workers and specialized equipment. Revenues from installation services were approximately 50%, 68% 81% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

  (b) Fluid equipment. We develop and manufacture valves and pipe fittings for use in pharmaceutical, biological, food and beverage, and other clean industries with an established sales and distribution network. Revenues from the sales of fluid equipment constitute approximately 38%, 32% and 19% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

We develop, manufacture and provide customized installation of valves and pipe fittings for use in the pharmaceutical, biological, food and beverage, and other clean industries. We are a highly specialized high-tech enterprise producing, researching, developing and installing valves and pipe fitting products with an established sales and distribution network. We offer our customers comprehensive pipeline design, installation, construction, ongoing maintenance services as well as holistic solution services.

 

We provide our installation services and valve and pipe fitting products in the following areas:

 

  ● Pharmaceuticals
     
  ● Biology
     
  ● Food
     
  ● Beverage

 

Our sales network has presence in Shanghai, Wenzhou and Taiwan.

 

We mainly provide installation services for our customers, although we also sell our products to third parties for installation. A significant majority of our revenues have come from these installation services. We anticipate that we will continue to derive significant income from our installation services, both of our products and those purchased from third parties. The profit margins associated with installing our customized valve and pipe fitting designs have historically been higher than those associated with the sale of our products for installation by third parties.

 

We specialize in installing valves and pipes for customers that require customized fluid control system solutions. We also specialize in designing and implementing solutions services for industries with a high need for sanitary fluid systems with product manufacture, installation services and after-sales services. Currently, we have customers for our services in the industries of pharmaceuticals, dairy products, water purification, beverage production, cosmetics and chemical industry, and we are looking forward to expanding our customer base in the future to more clean industries.

 

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Our equipment and engineering segment’s executive office is located in Wenzhou in the Southeastern Zhejiang Province, which is situated on the south bank of the Ou River, some 19 miles (30 km) from its mouth. The estuary of the Ou River is filled with small islands and mud banks, but the port is accessible by ships of up to about 1,000 tons. The Ou long provided the main transport artery for the mountainous southeastern section of Zhejiang. The Company is adjacent to the Wenzhou airport, train station and international container terminal.

  

Wenzhou, with its tradition as a commercial city, its dense population, and the scarcity of cultivated land in the region, long has been home to those highly skilled at doing business. Its citizens started their own household businesses and workshops in the early 1970s, and their efforts redoubled later in the decade as China officially began to liberalize economic policy and to move toward more of a market system. This became known as the “Wenzhou model”; there are now tens of thousands of Wenzhou merchants doing business around the country and abroad.

 

In 1984, Wenzhou was designated one of China’s “open” cities in the new policy of inviting foreign investment, and there has been considerable economic growth in Wenzhou. We are engaged in a permitted industry for foreign investment. Local products now include ceramics, machinery, chemicals, electronics, processed foods, and wearing apparel; shipbuilding is also important. The region’s transportation infrastructure has been greatly improved. A branch rail line, completed in the late 1990s, links the city with the Zhejiang-Jiangxi trunk line at Jinhua. Expressways northeast to Ningbo and northwest to Jinhua opened for traffic in the early 21st century. Newer and larger port facilities also have been constructed, including docks near the mouth of the Ou River with berths capable of accommodating 10,000-ton ships. The city’s airport, on the seacoast, provides scheduled flights to many cities in the country. The population was 3,0395,00 according to the 2010 Chinese Census.

 

Financial Services Segment

 

We primarily offer underwriting related advisory service to PRC financial institutions, investment firms and corporate clients and provide distribution and management service for direct banking products issued by small and medium commercial banks in PRC. We also provide ongoing user management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products.

 

  (a) Underwriting related advisory fees. Revenues from underwriting related advisory fees were approximately 12%, 0% 0% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
     
  (b) Recurring service fees. Revenues from recurring service fees amounted to $3,381, nil and nil for the years ended December 31, 2019, 2018 and 2017, respectively.

 

We use cutting-edge technologies, including big data, artificial intelligence, Internet of Things, and blockchain in the financial service industry and have developed credit technology, wealth technology, insurance technology, and asset management technology. We are committed to creating an open financial technology ecosystem and providing comprehensive solutions in technology, products and services to our customers for facilitation of the digital transformation of financial institutions such as banks, securities firms, trusts, investment funds, and insurance companies.

 

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Our Products and Services

 

Equipment and Engineering Segment

 

We provided installation services and fluid equipment sales for the years ended December 31, 2019, 2018 and 2017.

 

Our Engineering Services

 

We specialize in installing valves and pipes for customers that require customized fluid control system solutions. We also specialize in designing and implementing solutions for industries with a high need for sanitary fluid systems. Currently, we have customers for our services in the industries of pharmaceuticals, dairy products, water purification, beverage production, cosmetics and chemical industries. We hope to expand our customer base in the future to the semi-conductor, electronic and other clean industries, but we have no near-term plans to provide services in any of these industries. Due to the requirements in these industries to avoid contamination, we focus on designing systems that may be easily and frequently cleaned and maintained. We use skilled workers to install these systems. Because the scope of a given project can be relatively large, our revenues per installation project tend to be much higher than the average product-only order; accordingly, installation services make up the largest component of our revenues. Revenues from installation services were approximately 50%, 68% and 81% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

  

We started the business of repair and maintenance service in 2015. It is provided to pharmaceutical manufacturers after the expiration of warranties for products and installation services. We have established a repair and maintenance center in Nanjing, Jiangsu Province to cover Eastern China (Jiangsu Province, Zhejiang Province, Anhui Province and Shanghai) with investment of RMB 2,452,684 (approximately $380,000).

   

The following pictures illustrate some of our installation projects:

 

  (1) Holistic solution for process pipeline of power for injection production line for a company in Beijing, China.

 

 

 

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  (2) Holistic solution for process pipeline of medicaments production line for a company in Shandong, China.

  

 

 

  (3) Holistic solution for process pipeline of chemical & pharmaceutical production line for a company in Tianjin, China.

   

 

 

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  (4) Holistic solution for process pipeline of pharmaceutical water system for a company in Guangdong, China.

  

 

 

  (5) Holistic solution for process pipeline of an automatic biological engineering project for a company in Shandong, China.

  

 

 

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 Our Equipment Products

 

Our product line was originally focused on the construction service and pharmaceutical engineering sectors. In 2005, we shifted our product line to focus primarily on the pharmaceutical engineering sector. We focus on innovation and developing new products.

 

Revenues from product sales were approximately 38%, 32% and 19% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

Our products are used in the pharmaceutical, biological, food and beverage, and other clean industries. All of our products are produced and in compliance with China Good Manufacturing Practices. Our products enjoy a good reputation in the industry. Additionally, we have established sales offices in Shanghai, Taiwan and Wenzhou City.

 

The following products are examples illustrating our expertise and R&D capability.

 

Diaphragm Valve

 

We have multiple variations of the diaphragm valve including the process control diaphragm valve, pneumatic diaphragm valve, manual diaphragm valve and three-way diaphragm valve and diaphragm tank bottom valve. All of these valves are widely used in the bio-pharmacy, bio-vaccines, electronic semiconductor, water purification and food and beverage industries. These valves can be designed and manufactured according to customers’ unique specifications, such as working temperature, connection mode, driving mode, and control mode.

 

Our flagship product, the process control diaphragm valve, is a microprocessor-based smart locator. It can adjust the valve opening quickly and accurately allowing it to achieve the control of fluid flow rate and temperature. This valve is user-customizable and features remote automatic control, which makes it suitable for use in sealed spaces.

 

Angle Seat Valve

 

The angle seat valve is a pneumatic valve, which is widely used in the process of food and chemicals, and sterilization, including high-pressure sterilization. These valves can be designed and manufactured according to customers’ unique specifications, such as working temperature, connection mode, driving mode, and control mode.

 

Sanitary Centrifugal Pump

 

The Sanitary Centrifugal Pump is a centrifugal pump with an open impeller design. It is made from stainless steel to provide for better pressurization, earthquake resistance, impact resistance, lower operating noise and to protect against corrosive substances. The pump uses a hydrodynamic design to decrease its operating temperature.

 

Sanitary Liquid-Ring Pump

 

Our Sanitary Liquid-Ring Pump is a self-priming pump specially designed for pumping with gas or other gas liquids. This pump is used in the food, chemical and pharmaceutical industries. In addition, this pump can be used with volatiles such as alcohol, acetone or other solvents and near the boiling point temperature of other liquids. The pump can be used to perform both exhaust and intake functions.

 

Clean-in-Place (“CIP”) Return Pump

 

Our CIP Return Pump is specially designed for pumping with gas or other gas liquids. This pump is used in the food, chemical and pharmaceutical industries. In addition, this pump can be used with volatiles such as alcohol, acetone or other solvents and near the boiling point temperature of other liquids. The pump can be used to perform both exhaust and intake functions. The CIP design allows for easier cleaning without requiring disassembly of the closed pipe system, making it appropriate for use in industries that demand high levels of hygiene and frequent cleaning of systems.

 

Sanitary Ball Valves

 

Our sanitary ball valves are used in the biological, pharmaceutical, water purification, food and beverage industries. The ball valves are designed for simple operation and can open and close rapidly. The valves are designed to eliminate dead legs (the inhibition of fluid-flow), have good seal performance and are resistant to high temperatures.

  

Sanitary Pipe Fittings

 

Our sanitary pipe fittings are used in biological, pharmaceutical, water purification, electronics and semi-conductor fields and are commonly used in the water injection process. The major designs include elbows, tees, crosses, head size, 180-degree u-tee and connectors. These pipe fittings are compliant with bio-pharmaceutical standards.

 

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Intelligent Process Control Valve

  

 

 

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Expanded View of Intelligent Process Control Valve

 

Previously, we could only install our own angle seat valves or diaphragm valves on the intelligent control sections imported from other countries, such as Japan, Germany and United States, to produce intelligent process control valves for sale. Through our collaboration with Zhejiang University, we have developed an intelligent process control valve which can be wholly produced by us, though this product is still in trial period. While non-intelligent process control valves can only operate manually or through air compression, intelligent process control valves contain CPU chips and other electronic elements that enable them to operate automatically. Intelligent process control valves are mostly used in sterile workshops, workshops with automated production lines and other environments which are unfit for manual operation. However, intelligent process control valves are higher in production cost and maintenance cost compared with non-intelligent ones, so customers usually deploy them only for purposes that have higher technical requirements than non-intelligent valves can serve.

 

Sources of Raw Materials for Equipment Products

 

We purchase raw materials on the market at prevailing market prices. We purchase from a variety of suppliers and believe these raw materials are widely available. If we were unable to purchase from our primary suppliers, we do not expect we would face difficulties in locating another supplier at substantially the same price.

 

We have secure and efficient access to all the raw materials necessary for the production of our products. We believe our relationships with the suppliers of these raw materials are strong. We do not expect the prices of such raw materials to vary greatly from their current prices, as there has traditionally been little price volatility for such materials.

 

Below is a description showing the percentage of purchases from such suppliers to the extent it exceeds 10% of our expenses in a given period:

 

For the year ended December 31, 2019, two major sub-contractors accounted for approximately 25% and 24% of subcontract costs in the equipment and engineering segment, respectively. For the year ended December 31, 2019, three supplier accounted for 25%, 15% and 11% of our accounts payable balance from equipment and engineering segment.

 

For the year ended December 31, 2018, six major sub-contractors accounted for approximately 21%, 19%, 18%, 16%, 15% and 11% of subcontract costs, respectively. For the year ended December 31, 2018, three supplier accounted for 34%, 21% and 15% of the Company’s accounts payable balance, and no individual supplier accounted for more than 10% of the Company’s advance to suppliers balance.

 

For the year ended December 31, 2017, three major sub-contractors accounted for approximately 44%, 18% and 16% of subcontract costs, respectively. For the year ended December 31, 2017, only one supplier accounted for 18% of the Company’s accounts payable balance, and one supplier accounted for 17% of the Company’s total advance to suppliers balance. 

   

Our Financial Services Segment

 

We offer underwriting related advisory service to financial institutions and corporate clients and provide distribution and management service for direct banking products issued by small and medium commercial banks in the PRC.

 

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We expanded our operations into the financial service industry in 2019 after we acquired NiSun Subsidiary Group. Our financial services are primarily provided by the two contractually controlled VIEs, Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information services Co., Ltd (“Hengpu”), and their subsidiaries.

 

We earn one-time underwriting advisory fees from our service provided to financial institutions or corporate issuers for offerings on PRC provincial or national financial assets exchanges or other designated capital markets. We also provide ongoing customer management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products in exchange for recurring service fees.

 

  (a) Underwriting related advisory fees. Revenues from underwriting related advisory fees were approximately 12%, 0% 0% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

  (b) Recurring service fees. Revenues from Recurring service fees amounted to $3,381, nil and nil for the years ended December 31, 2019, 2018 and 2017, respectively.

 

Contractual Agreements with VIEs

 

We conduct our financial service operations through our PRC subsidiary, NingChen and two contractually controlled VIEs, Fintech and Hengpu, and their subsidiaries. Our relationships with the VIEs and their respective nominee shareholders are governed by a series of contractual arrangements.

 

Management and Consulting Service Agreement

 

Under the Consulting Services Agreement, NingChen has the exclusive right to provide management and consulting and other services to VIEs for a consulting service fee from VIEs and agrees to authorize the VIEs to use the trademarks, technologies and related intellectual property rights held by NingChen. VIEs agree to pay NingChen or the designated agent of NingChen for the management and consulting service in the amount equivalent to all the VIEs net profits after tax. The agreement shall be effective as of the date of agreement and shall remain effective until the date when NingChen terminates such agreement or Fintech ceases to exist.

 

Equity Interest Pledge Agreements

 

Pursuant to the Equity Pledge Agreements, each shareholder of the VIEs agreed to pledge his equity interest in the VIEs to NingChen to secure nominal loans provided to the shareholders of VIEs for a loan term of 100 years. Each shareholder of VIEs agrees that the repayment of loan can only happen on loan maturity date or NingChen agrees to collect the loan repayment. If VIEs or their shareholders breach their contractual obligations under these agreements, NingChen, as pledgee, will have the right to dispose of the pledged equity interests and will have priority in receiving the proceeds from the auction or sale of the pledged equity interests. NingChen is entitled to any dividends declared or paid in connection with the pledged equity interests during the term of this agreement. The VIEs and their shareholders have further agreed that they will not transfer or encumber the pledged equity interests without the prior written consent from NingChen during the term of this agreement. The Equity Pledge Agreement remains effective and no provision of this agreement may be amended, modified, supplemented discharged or terminated unless all parties consent thereto in writing.

 

Voting Rights Proxy Agreement

 

Under the Voting Rights Proxy Agreement, each shareholder of the VIEs irrevocably authorizes NingChen to exercise rights and powers as the shareholders of the VIEs, including but not limited to, convening and attending shareholders’ meetings, voting on all matters of the VIEs requiring shareholder approval and appointing directors and senior management members. The Voting Rights Proxy Agreement will remain in force unless otherwise terminated in writing by NingChen or with the written consent of all parties.

 

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Exclusive Call Option Agreement

 

Under the Exclusive Call Option Agreement, the VIEs and their shareholders have irrevocably granted NingChen an exclusive option to purchase, or authorize their designated persons to purchase all or part of each shareholder’s equity interests in VIEs. The purchase price shall be equal to the minimum price required by the relevant PRC laws. Without prior written consent of NingChen, VIEs shall not to, among other things, amend their articles of association, sell or otherwise dispose of their assets or beneficial interests, enter into transactions which may adversely affect their assets, liabilities, business operations, equity interests and other legal interests, or merge with any other entities or make any investments, or distribute dividends. NingChen has right to transfer the rights and obligations pursuant to the Exclusive Call Option Agreement to any third party, which does not require any prior consent of VIEs and their shareholders. The Exclusive Call Option Agreement will remain effective until NingChen terminates this agreement with 30 days advance notice.

  

Those contractual arrangements enable us to exercise effective control over our VIEs, have the right to all net profits earned by the VIEs, is obligated to absorb all of net losses borne by VIEs, and have an exclusive option to purchase 100% of the equity interest in our VIEs, when and to the extent permitted by PRC law. Through such arrangements, our VIEs have become our contractually controlled affiliates and their financial statements are consolidated with that of our Company for financial reporting purposes.

 

User Management Services

 

Fintech provides ongoing customer management services to small and medium commercial banks and other financial institutions in their distribution and management of direct banking and other financial products through its proprietary financial technology platform “Huijingshe” (the “Huijingshe Platform”) that Fintech owns. The Huijingshe Platform provides specialized asset allocation and financial planning services for various institutions or individual investors. In the meantime, the Huijingshe Platform optimizes and improves risk and asset management procedures to meet the investors’ financial planning needs and minimize their investment risks. The Huijingshe Platform focuses on helping our clients, licensed small and medium commercial banks, to achieve the best matching and configuration of directing bank financial product and distributes and manages financial products. By connecting with the Huijingshe Platform, those licensed small and medium commercial banks can launch various financial products through our online channel, directly reach various institutional or individual investors, market the banking financial products effectively and match with investment institutions and individuals efficiently.

 

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The Huijingshe Platform, through integrating four-dimensional elements of Internet finance, Internet plus, finance and advanced technology, builds an ecological fintech platform serving various investment institutions and individuals. The Huijingshe Platform features the following functionality:

 

●Customer financial needs and bank financial products matching

 

●API direct connection, one-click account opening, improve user use process

 

●Unified interface of cooperation channels, enriched the financial scene

 

●Precision marketing of banking products

 

 

 

 

 

 

Underwriting Related Services

 

Khorgos, a subsidiary of Fintech, and Hengpu provide underwriting related advisory services to investment companies, financial institutions and small and medium corporate issuers of debt financial products on PRC provincial and municipal financial assets exchanges or other designated markets. In general, a service provider is required to register as a member of these municipal or provincial financial asset exchanges to provide full services of underwriting for financial product issuance and distribution. Khorgos, a participating member of several local financial assets exchanges, provides underwriting related services, such as designing debt financial products, preparing product descriptions and other related advisory services, to underwriters or financial institutions. Hengpu, also a member of a number of provincial or municipal asset exchanges, provides full services for financial product underwriting, such as due diligence investigations, government registration, customer recommendations, investor education and maintenance, and other related services.

 

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The financial assets products traded on the assets exchanges are backed by financial assets of registered members of those assets exchanges and issued by exchange designated product issuers (typically investment or asset management companies). The financial assets exchanges list qualified financial products for trading after evaluation and provide payment clearance and settlement, credit rating and custodian services. The underlying listed products administered by these exchanges primarily include commercial loans, receivables, creditors’ right and other financial products. 

 

Distribution Channels and Methods of Competition

 

Domestic Markets and Customers

 

Our sales network has a presence in Shanghai, Taiwan and Wenzhou City.

 

International Markets

 

All of our products are available for sale to international markets. We are exploring the international market with our valves and pipe fittings products, though there is no guarantee that we will be able to conduct the plan. Although our efforts to focus on higher-margin installation services continue, the Company has no current plans to expand internationally and instead intends to focus its growth efforts within China with regards to the services we provide as a result of the Company’s assessment of current market opportunities.

 

Activity Distribution of Revenues

 

The chart below is a breakdown of total revenues by activities for the year ended December 31, 2019, 2018 and 2017, respectively.

 

    Fiscal 2019     Fiscal 2018     Fiscal 2017  
Installation services     50 %     68 %     81 %
Fluid equipment     38 %     32 %     19 %
Financial service     12 %     -       -  
Total     100 %     100 %     100 %

 

Geographic Distribution of Revenues

 

Nearly all (approximately 99%) of the Company’s revenue is generated in the PRC.

 

Customer Concentration

 

Because of the nature of our business which involves relatively large value sales of installation services or products to a discrete number of customers, sales to a small number of customers amount to a great percentage of our total revenue.

 

For the years ended December 31, 2019, three customers accounted for 24%, 21% and 16% of our total revenue from equipment and engineering segment, respectively. As of December 31, 2019, two general contractors who engaged us on installation projects accounted for approximately 54% and 43% of our total contracts receivable balance from equipment and engineering segment, respectively. For the year ended December 31, 2019, one customer accounted for approximately 100% of the Group’s total financial service revenue from financial services segment.

 

For the year ended December 31, 2018, four customers accounted for approximately 13%, 12%, 11% and 10% of our revenue from equipment and engineer segment. As of December 31, 2018, two general contractors for the Company’s installation projects accounted for approximately 58% and 42% of the Company’s total contracts receivable balance from the equipment and engineering segment, respectively.

 

For the year ended December 31, 2017, four major customers accounted for approximately 22%, 21%, 13% and 10% of the Company’s total revenue. As of December 31, 2017, two general contractors (“Contractor A” and “Contractor B”) for the Company’s installation projects accounted for approximately 58% and 42% of the Company’s total contracts receivable balance, respectively. 

   

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Summary of Customer Agreements

 

Our customers order our services and products using our form of purchase agreement. While the contract price depends on the services or products we deliver in any particular case, the remaining business terms are generally similar.

 

For our equipment and engineering business, a 5% to 10% of the contract price sometimes is considered a quality guaranty, which is paid shortly after the end of the one or up to five year period beginning on customer acceptance of delivery or installation. During the quality assurance period, we cooperate with our customers to ensure the products work as expected, repairing or paying for the cost of repair or replacement for covered occurrences during such period. The Company has never experienced any significant warranty issues.

 

Methods of Competition

 

We plan to compete domestically by establishing new branch offices in more cities in China. We will also develop our online store or provide more financial services through our platforms, which will enable our customers to communicate with us online and order, purchase and have our products and services delivered in a more convenient and faster manner. With the development of the Company, we plan to increase our capacity to conduct 2 to 4 more service projects at a time for our equipment and engineering segment.  To expand our business as mentioned above, we expect to recruit more employees to ensure service quality and efficiency. 

  

Most of our service customers are companies in the biological pharmaceutical industry, financial institutions and corporate clients, which has great development potential and customer demand in China. We compete on the basis of the experience and technology we have developed in serving customers.

 

In addition, for our equipment and engineering segment, our holistic biological pharmaceutical engineering solution services combine product manufacturing, installation and after-sales services. Most of our competitors in this area only install the components they purchase from third parties without capacity to manufacture on their own, while most of our product provider competitors focus on producing products without installation services. We not only produce our own products through research and development, but also provide installation and after-sales services. If any problem occurs after sales or installation, our customers can look to us for product and installation support, rather than having to reach out to other service providers. If customers face issues outside our specialty, we can contact the appropriate subcontractors to ensure that our customers’ needs are met and they need only look to us for help. We have a professional team with product research and development staff, production staff, installation service staff, and project designers.

 

We have focused on providing high quality services quickly and at a competitive price. We are able to reduce the overall price of the projects or services we perform by producing some of the components or provide more customized services. Because we have deep product and services knowledge based on experience with market demand, it normally takes us only a short time to complete the projects or services. Also, our products and pricing can be easily tailored to the customers’ needs, and we price our products and services aggressively. We have short cycles in providing products and services. On average it takes only one week from receiving orders to delivery to the customer for our equipment and engineering segment and all of our products are in compliance with GMP standards. We pride ourselves on high quality services and products, so that our customers receive good value for the price they pay.

 

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Our Competitive Position

 

Our primary competitors are the following companies. We have set forth our assessment of our Company’s relative strengths and challenges. The tables below represent our belief about our competitive position and is based on our observations, rather than objective data. Our assessment may not be shared by others, including such competitors, but it does represent management’s assessment of our industry position.

 

We compete with the following listed companies in different areas. Currently there is no competitor that competes with us in all areas.

 

Equipment and Engineering Segment

 

Competitors   Products/Services   Comparative Strengths/Challenges
GEA Group Aktiengesellschaft (“GEA”)   Valves, valve-related products and installation services   We believe GEA’s brand is more well-known. We compete against GEA’s installation services on the basis of price.
         
Austar International (“Austar”)   Valves, valve-related products and installation services   We believe Austar’s international brand name is more well-known. We compete against Austar’s installation services on the basis of price.
         
Shanghai Langmai Clean Technology Co., Ltd. (“Shanghai Langmai”)   Installation services   Shanghai Langmai provides only installation services, while we provide both installation services and products. We compete against Shanghai Langmai on the basis of range of products and services, installation speed and service.
         
Sensong Group (“Sensong”)   Installation services   Sensong’s brand name is more well-known, but it provides only installation services, while we provide both installation services and products. We compete against Sensong on the basis of installation speed.
         
Shandong Weifang Regal Circulation Equipment Co. (“Shandong Weifang”)   Installation services   Shandong Weifang’s market share is relatively small. We compete against Shandong Weifang on the basis of installation speed and services.
         
Nanjing Inavo Bio-engineering Co., Ltd. (“Nanjing Inavo”)   Valves and valve-related products   We compete against Nanjing Inavo’s products on the basis of price and brand recognition.
         
GEMÜ Gebr. Müller Apparatebau GmbH & Co. KG (“GEMÜ”)   Valves and valve-related products   We believe GEMÜ’s international brand name is more well-known. We compete against GEMÜ on the basis of price and delivery speed.
         
Christian Bürkert GmbH & Co. KG (“Bürkert”)   Valves and valve-related products   We believe Bürkert’s international brand name is more well-known. We compete against Bürkert on the basis of price, delivery speed and service.
         
Crane Process Flow Technologies Ltd. (“Saunders Valves”)   Valves and valve-related products   We believe Saunders Valves’ international brand name is more well-known. We compete against Saunders Valves on the basis of price, delivery/installation speed and service.
         
Wenzhou Baiji Machinery Manufacturing Co., Ltd. (“Wenzhou Baiji”)   Valves and valve-related products   We compete against Wenzhou Baiji on the basis of product quality, delivery speed and service.
         
Ningbo Information Pharmaceutical Equipment Co., Ltd. (“Ningbo Information”)   Pharmaceutical equipment   Ningbo Information generally has lower prices and, we believe, lower visibility than our company. We compete against Ningbo Information on the basis of quality, service and delivery speed.

  

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Financial services segment 

  

Competitors   Services   Comparative Strengths/Challenges

Client Service International Inc

(“Client Service”)

   Financial software and financial solution service provider  

●

 

●

 

●

 

Client service focuses on providing financial software development

Fintech integrates the financial product management service with technology service.

Fintech assists the commercial banks to analyze and gain better understanding of their business needs, while Client Service only develops software to meet client needs

           

Shanghai Amarsoft Information and Technology Co

(“Amarsoft”)

   Financial software developer  

●

 

●

 

●

Amarsoft focuses on providing financial software development

Fintech integrates the financial product management service with technology service.

Fintech assists the commercial banks to analyze and gain better understanding of their business needs, while Amarsoft only develops software to meet client needs

           

Beijing Udomedia Advertising Co., Ltd.

(“Udomedia”)

   Financial product recommendation  

●

 

●

 

●

Amarsoft focuses on providing financial product comparison and recommendations to investors

Fintech offers asset-side options to financial institutions as well as the financial planning service to investors

Fintech competes against Amarsoft on financial product distribution service

           

PUYI INC.

(“PUYI”)

   Third-party wealth management services provider  

●

 

 

●

 

●

The business goal of PUYI is to provide investor various financial product and asset allocation service to investor, which is similar to the goal of Hengpu

PUYI is mainly engaged in private fund, and supply chain financing

Hengpu is primarily engaged in underwriting related service for debt financial product

 

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Awards and Recognition

 

Our CEO, Mr. Anyuan Sun, is a member of American Society of Mechanical Engineers (“ASME”). Our products meet ASME Bioprocessing Equipment Standards (“BPE”). We have earned a certificate of ISO9001. All our products are designed and manufactured according to the standards of the International Standardization Organization (“ISO”), German Institute for Standardization (“DIN”), Safety Management System (“SMS”), ASME and BPE.

 

Year   Award   Regulatory Body   Significance
2007   AAA Credit Rating   Hangzhou Credit Evaluation Company & Bank of China Zhejiang Branch   AAA is the highest credit ranking available to Chinese enterprises and evidences strong credit and ability to repay debt.
             
    Longwan District Hi-Tech Enterprise   Wenzhou Longwan District Government   This award recognizes our R&D capabilities and technology and makes us eligible for beneficial tax policies.
             
2008   Chinese Meritorious Enterprise in Food and Pharmaceutical Machinery Industry Base   China Machinery Enterprise Management Association, Research Institute of Machinery Industry Economic & Management, & Wenzhou Food and Pharmaceutical Machinery Industry Association   It is awarded for our contributions to industry and society.
             
    Zhejiang Province Small and Medium-sized Entities in Technology Certificate   Department of Science and Technology of Zhejiang Province   This award recognizes our R&D capabilities and technology and makes us eligible for policy support available to technology based enterprises.
             
    Affiliate of the American Society of Mechanical Engineers   The American Society of Mechanical Engineers   Mr. Anyuan Sun is entitled to all the privileges granted by the Constitution of the Society.

  

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Year   Award   Regulatory Body   Significance
2009   AAA Credit Rating   Hangzhou Credit Evaluation Company & Bank of China Zhejiang Branch   AAA is the highest credit ranking available to Chinese enterprises and evidences strong credit and ability to repay debt.
             
    AAA Certificate of Enterprise Credit Grade   China Medical Equipment Engineering Association   AAA is the highest credit ranking available to Chinese enterprises and evidences strong credit and ability to repay debt.
             
    Affiliate of the American Society of Mechanical Engineers   The American Society of Mechanical Engineers   Mr. Anyuan Sun is entitled to all the privileges granted by the Constitution of the Society.
             
2010   AAA Credit Rating   Hangzhou Credit Evaluation Company & Bank of China Zhejiang Branch   AAA is the highest credit ranking available to Chinese enterprises and evidences strong credit and ability to repay debt.
             
    Small and Medium-sized Enterprise Technology Innovation Fund Project Certificate   China Department of Science and Technology Small and Medium-sized Enterprise Technology Innovation Fund Project Management Center   This award granted us funding for research on our Intelligent Control Valves project.
             
    Quality Management System Certificate   China Classification Society Certification Company   Our sanitary valves and pipe fittings conform to GB/T 19001-2000 — ISO 9001:2000.
             
2011   Small and Medium-sized Enterprise Technology Innovation Fund Project Certificate   China Department of Science and Technology Small and Medium-sized Enterprise Technology Innovation Fund Project Management Center   This award granted us funding for research on our Intelligent Control Valves project.
             
    Quality Management System Certificate   China Classification Society Certification Company   Our sanitary valves and pipe fittings conform to GB/T 19001-2008 —  ISO 9001:2008.
             
    Wenzhou Longwan Patent Model Enterprise   Wenzhou Longwan District Government   It is awarded because we have many innovative patents.
             
2012   AAA Credit Rating   Hangzhou Credit Evaluation Company & Bank of China Zhejiang Branch   AAA is the highest credit ranking available to Chinese enterprises and evidences strong credit and ability to repay debt.
             
    Zhejiang Province Industrial Products Executive Standard Registration Certificate   Wenzhou Quality Technical Supervising Bureau Longwan Branch   It is awarded as technical reference for the enterprise organizing production, sales and accepting product quality supervision and inspection, and signing trade contracts.
             
    Membership of CAPE   China Association For Pharmaceutical Equipment   It is a national industry association.

  

 

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Year   Award   Regulatory Body   Significance
2013   Quality Management System Certificate   China Classification Society Certification Company   Our sanitary valves and pipe fittings conform to GB/T 19001-2000 —  ISO 9001:2000.
             
2015   Wenzhou Economic & Technology Development Zone Science and Technology Enterprise   Wenzhou Economic & Technology Development Zone Science and Technology Bureau   This award recognizes us as an enterprise which complies with the industrial policy of China and continues to conduct research and development to transform technology into product to form our core intellectual property.
             
    Wenzhou City Science and Technology (innovation) Enterprise   Wenzhou Science and Technology Bureau   This award recognizes us as an enterprise which complies with the industrial policy of China and continues to conduct research and development to transform technology into product to form our core intellectual property.
             
2016   Quality Management System Certificate   China Quality Certification Center   Our production line (according to Quality Requirement) mainly focuses on valves and pipes conforms to ISO 9001:2008 GB/T 19001-2008.
             
2018   High-tech Enterprise Certificate   Zhejiang Science and Technology Bureau & Zhejiang Finance Bureau   This certificate reflects that the company is a high-tech enterprise, and its products have innovative competitiveness.
             
    Safety production standardization certificate   Wenzhou Safety Production Supervision Bureau   Indicates that the company’s production meets the requirements for safe production.

 

Research and Development

 

We are committed to researching and developing valves for use in the pharmaceutical, biological, food and beverage, semi-conductor, electronic and other clean industries. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. Our research and development efforts, led by our Chief

 

Technical Officer, Xiaoliang Xue, are an integral part of our operations and the crux of its competitive advantage and differentiation strategy.

 

The Research and Development team has ten (10) dedicated researchers and analysts focusing on mechanical design, mechatronics, CAD design, mold design and welding. Quality control is an important aspect of the team’s work and ensuring quality at every stage of the process has been a key driver in maintaining and developing brand value for the Company.

 

In addition, we sent employees to Italy, Germany and the United States to study clean product manufacturing, installation and connection process so that the Company is current on advanced International Technology. It is through these collaborations that we have managed to secure important breakthroughs resulting in proprietary knowledge and patents.

 

For the years ended December 31, 2019, 2018 and 2017, we spent $492,696, $358,411 and $508,282, respectively, on R&D. We anticipate that we will continue to focus our research and development efforts on developing new technology and improving existing products in the coming years.  

     

49

 

  

Our Research Projects

 

We have participated in following numerous scientific projects.

 

Project Description   Time Period   Government Agency   Subsidy
Pneumatic Diaphragm Valve Device   2007 – 2009   Bureau of Science and Technology of Longwan District of Wenzhou City   RMB 100,000
             
Butterfly Valve Pneumatic Actuator   2008 – 2010   Bureau of Science and Technology of Wenzhou City   RMB 250,000
             
Intelligent Control Valve   2009 – 2012   Chinese Ministry of Science and Technology and Zhejiang Bureau of Science and Technology   RMB 1,050,000
             
Aseptic Diaphragm Remote Control   2011 – 2012   Bureau of Science and Technology of Longwan District of Wenzhou City   RMB 170,000
             
Intelligent and Efficient Development of Multi-Process Valve   2012 – 2013   Bureau of Economic Development of Economic-Technological Development District of Wenzhou City   RMB 100,000
             
Integral Sanitary Grade Check Valve   2018.12-2019.06   N/A   N/A
             
Non-residue Automatic Induction Hand Valve   2018.12-2019.06   N/A   N/A
             
Third Generation Manual Diaphragm Valve   2019.05-2020.06   N/A   N/A

 

In some of the above projects, the government agencies provided us subsidies to support us to develop various scientific research projects. These projects are funded to encourage research and development. We have successfully developed all the products in the above projects which passed the examination of the governmental agencies.

 

In 2015, we began developing intelligent remote control services. We hope to use the internet of things to establish an intelligent remote control system and a data center solutions division system. It will enable us to position, track and monitor the actual operation of the equipment of pharmaceutical manufacturers 24 hours and online. In this way, we can target issues promptly and conduct troubleshooting on the basis of advanced technology. As a result, we will be more efficient in serving our clients and reducing the clients’ operation and maintenance cost significantly.

  

50

 

  

Our Intellectual Property

 

We rely on our technology patents to protect our domestic business interests and ensure our competitive position in our industry. The issued patents we hold are as follows: 

 

Patent Name   Patent No.   Patent
Type		   Application
Date		   Issuance
Date		   Expiration
Date		   Owner
Valve pneumatic actuator with prompting switch   ZL 2010 2 0668775.3   Utility model   12/20/2010   7/20/2011   12/19/2020   Xibolun Automation
                         
Sampling valves   ZL 2010 2 0668776.8   Utility model   12/20/2010   7/20/2011   12/19/2020   Xibolun Automation
                         
Three-way diaphragm valves   ZL 2010 2 0668430.8   Utility model   12/20/2010   7/20/2011   12/19/2020   Xibolun Automation
                         
Microporous membrane filters   ZL 2010 2 0668429.5   Utility model   12/20/2010   7/20/2011   12/19/2020   Xibolun Automation
                         
Tank bottom valve   ZL 2010 2 0668772. X   Utility model   12/20/2010   7/20/2011   12/19/2020   Xibolun Automation
                         
Angle seat valve   ZL 2011 2 0513124.1   Utility model   12/9/2011   8/22/2012   12/8/2021   Xibolun Automation
                         
Diaphragm valve body   ZL 2011 2 0512271.7   Utility model   12/9/2011   8/22/2012   12/8/2021   Xibolun Automation
                         
Diaphragm valve   ZL 2011 2 0512279.3   Utility model   12/9/2011   8/29/2012   12/8/2021   Xibolun Automation
                         
Angle seat valve   ZL 2011 2 0510956.8   Utility model   12/9/2011   8/22/2012   12/8/2021   Xibolun Automation
                         
A type of valve stem of sterile respondent valve   ZL 2014 2 0616427. X   Utility model   10/23/2014   2/25/2015   10/22/2024   Xibolun Automation
                         
A type of sterile respondent valve   ZL 2014 2 0616627.5   Utility model   10/23/2014   4/1/2015   10/22/2024   Xibolun Automation
                         
A type of diaphragm valve with double diaphragms   ZL 2013 2 0890760.5   Utility model   12/30/2013   6/18/2014   12/29/2023   Anyuan Sun
                         
A type of valve terminal on valve controller   ZL 2014 2 0617591.2   Utility model   10/23/2014   2/25/2015   10/22/2024   Xibolun Automation
                         
A type of blow-down valve   ZL 2014 2 0616636.4   Utility model   10/23/2014   3/11/2015   10/22/2024   Xibolun Automation
                         
A type of valve pneumatic actuator   ZL 2014 2 0617900.6   Utility model   10/23/2014   2/25/2015   10/22/2024   Xibolun Automation
                         
A type of sanitary grade ball valve   ZL 2014 2 0616568.1   Utility model   10/23/2014   2/25/2015   10/22/2024   Xibolun Automation
                         
A type of manual and pneumatic combine sterile sampling valve   ZL 2014 2 0027096.6   Utility model   1/16/2014   6/25/2014   1/15/2024   Anyuan Sun

  

51

 

 

Patent Name   Patent No.   Patent
Type		   Application
Date		   Issuance
Date		   Expiration
Date		   Owner
Process control diaphragm valve   ZL 2012 3 0602853.4   Design   12/5/2012   5/1/2013   12/4/2022   Xibolun Automation
                         
Process control angle seat valve   ZL 2012 3 0602850.0   Design   12/5/2012   4/17/2013   12/4/2022   Xibolun Automation
                         
A type of manual sterile sampling valve   ZL 2013 1 0751950.3   Invention   12/30/2013   1/13/2016   12/29/2033   Anyuan Sun

 

Our Chief Executive Officer, Mr. Anyuan Sun, personally holds three patents that our Company has the license to use pursuant to agreements that provide us the right, without further payment, to use such patents for their applicable terms. The right is non-exclusive and is terminable at Mr. Sun’s decision; however, Mr. Sun does not currently intend to license the right to any third party. Mr. Sun does not, at the present time, have any plans to transfer the patents to our Company, either.

 

In addition, we have the right to use the following trademark registrations issued in the PRC, among which two registrations are held by our Chief Executive Officer:

 

Trademarks   Reg. No.   Issue
Date		   Expiration
Date		   Owner   Goods/Services
  3903979   12/28/2005   12/27/2025   Anyuan Sun   Metal pipe elbows; metal pipe joints; metal valves (not machine accessories); metal pipe fittings; additional materials for metal pipe; metal reinforce materials for pipes; metal pipe clams; metal sleeves; metal pipes; steel pipes
                     
  5610464   12/7/2009  

12/6/2019

Renewal application pending

   Anyuan Sun   Steel pipes; metal pipes, metal pipe clams; metal water pipes; metal pipe elbows; metal pipe fittings; metal pipe joints, metal collecting tubes; metal sleeves
                     
  14488573   6/14/2015   6/13/2025   Xibolun Automation   Construction status check; construction; heating equipment installation and repair; indoor construction; machine installation, maintenance, and repair; medical equipment installation and repair; vehicle maintenance service; machine installation and repair; sanitary equipment installation and repair; water pipe installation
                     
  14488475   7/28/2015   7/27/2025   Xibolun Automation   Steel alloy; metal valves (not machine accessories); metal pipes; steel moulds; metal tracks; common metal alloy wire (except fuses); metal grommets; metal hinge; metal tools; padlock

 

52

 

 

Our Chief Executive Officer, Mr. Anyuan Sun, personally holds two trademarks that our company has the license to use pursuant to an agreement that provides us the right, without further payment, to use such trademarks for their applicable terms. The right is non-exclusive and is terminable at Mr. Sun’s decision; however, Mr. Sun does not currently intend to license the right to any third party. Mr. Sun does not, at the present time, have any plans to transfer the trademarks to our Company, either.

 

For our financial services segment, we have the right to use the following trademark registrations issued in the PRC:

 

Trademarks   Reg. No.   Issue
Date		   Expiration
Date		   Owner   Goods/Services
                     
  26449617   9/7/2018   9/6/2028   Hengpu  

Arrange and organize the conference; Translated; Planning a party (entertainment); Provide online electronic publications (non-download); Manuscript writing; Journalist Service; Zoo Service; Online publishing of e-books and magazines; Arrange and organize seminars; Arrange and organize on-site education forum

                     
  26432309   9/7/2018   9/6/2028   Hengpu   Insurance Broker; Real estate agency; Guarantee; Raise Charity Fund; Fiduciary management; Pawn; Finance lease; Financial Information; Coin valuation; Brokerage
                     
  26434423   9/7/2018   9/6/2028   Hengpu   Downloadable mobile application software; Computer program (downloadable software); Computer peripherals; Animation; Electronic Notepad; Automatic Teller Machine (ATM) ; Portable media player;  Interactive touch screen terminal; Computer software (recorded); Mobile phone; Automatic teller machine (ATM)
                     
  26428912   9/7/2018   9/6/2028   Hengpu   Online publishing of e-books and magazines; Translated; Arrange and organize the conference; Journalist Service; Planning a party (entertainment); Provide online electronic publications (non-download); Arrange and organize seminars; Arrange and organize on-site education forum; Zoo Service;  Manuscript writing
                     
  26438038   10/28/2018   10/27/2028   Hengpu   Interactive touch screen terminal; Computer software (recorded);  Computer peripherals; Automatic Teller Machine (ATM); Portable media player; Animation;  Downloadable mobile application software; Electronic Notepad; Mobile phone; Computer program (downloadable software)

 

53

 

 

  26449606   3/14/2020   9/6/2028   Hengpu  

Urban planning; Computer Programming; Data Security Consulting; Technical Studies; Cloud computing; Art identification; Intangible assets assessment; Energy audit; Provide Internet Search Engine

Information Technology Consulting Services; Intangible assets evaluation (-)

                     
  26434403   10/28/2019   10/27/2029   Hengpu  

Technical Studies; Urban planning; Energy audit; Data Security Consulting; Art identification; Intangible assets assessment; Information Technology Consulting Services; Cloud computing; Computer Programming; Provide Internet Search Engine; Intangible assets evaluation (-)

                     
  26438039   10/28/2018   10/27/2028   Hengpu   Provide Internet chat rooms; Digital file transfer; Provide database access service; Data streaming; Telephone service; Provide online forums;  Information transmission; Email transmission; Provide telecommunications connection services with global computer networks; Video on demand transmission
                     
  26448031   3/14/2020   9/6/2028   Hengpu  

Looking for sponsorship; Purchasing for others (purchasing goods or services for other companies); Marketing; Retail or wholesale services of pharmaceutical, veterinary, hygienic preparations and medical supplies (-); Franchise business management ; Sell ​​for others; Advertising; Online advertising on computer networks;

Import and export agent; Provide online markets for buyers and sellers of goods and services

                     
  26438032   1/14/2019   1/13/2029   Hengpu  

Electronic Notepad; Animation; Computer software (recorded); Computer program (downloadable software); Computer peripherals;

Mobile phone; Portable media player

Automatic Teller Machine (ATM);

Interactive touch screen terminal;

Downloadable mobile application software

                     
  26443894   9/7/2018   9/6/2028   Hengpu  

Information transmission; Telephone service; Provide Internet chat rooms

Provide online forums; Provide telecommunications connection services with global computer networks; Digital file transfer; Video on demand transmission; Email transmission; Provide database access service; Data streaming

 

54

 

 

  26428917   10/28/2018   10/27/2028   Hengpu  

Technical Studies; Information Technology Consulting Services; Cloud computing; Art identification;

Intangible assets assessment; Urban planning; Energy audit; Computer Programming; Provide Internet Search Engine; Data Security Consulting

                     
  26434429   10/28/2018   10/27/2028   Hengpu  

Online advertising on computer networks; Purchasing for others (purchasing goods or services for other companies); Provide online markets for buyers and sellers of goods and services; Marketing;

Looking for sponsorship; Advertising; Retail or wholesale services of pharmaceutical, veterinary, hygienic preparations and medical supplies (-); Franchise business management; Import and export agent; Sell ​​for others

                     
  26439293   10/28/2018   10/27/2028   Hengpu  

Guarantee; Fiduciary management;

Financial Information; Brokerage;

Pawn; Insurance Broker; Finance lease; Coin valuation; Real estate agency; Raise Charity Fund

                     
  26443885   01/28/2019   01/27/2029   Hengpu  

Interactive touch screen terminal;

Computer program (downloadable software) ; Electronic Notepad; Mobile phone; Portable media player;

Downloadable mobile application software; Computer software (recorded); Automatic Teller Machine (ATM); Animation; Computer peripherals

                     
  26428913   1/14/2019   1/13/2029   Hengpu  

Coin valuation; Pawn; Fiduciary management; Finance lease; Real estate agency; Guarantee;

Brokerage (3605)

Financial Information (3602)

Raise Charity Fund (3607)

                     
  20689649   9/14/2017   9/13/2027   Hengpu  

Insurance Underwriting;

Financial Services; Financial Management; Financial loans;

Art valuation; Real estate management; Brokerage;

Guarantee; Raise Charity Fund;

Pawn

                     
  17764453   12/21/2016   12/20/2026   Hengpu  

Quality assessment; Technical Project Research; Hosted computer station (website); Provide Internet Search Engine;

Computer system remote monitoring; Create and maintain websites for others; Art identification; Intangible assets assessment; Intangible assets evaluation (-)

 

55

 

 

  26008168   10/28/2018   10/27/2028   Fintech   Looking for sponsorship; Provide online markets for buyers and sellers of goods and services; Accounting; Provide business information through the website; Business intermediary services; Personnel management consulting; Advertising; Commercial enterprise relocation; Update and maintain data in computer databases; Sell ​​for others; Franchise business management.
                     
  26008168   10/28/2018   10/27/2028   Fintech   Provide global computer network user access service; Telephone communication; TV broadcast; Communication equipment rental; Computer terminal communication;  Satellite transmission; Provide database access service; Provide telecommunications connection services with global computer networks; Provide Internet chat rooms; Wireless broadcasting
                     
  26008168   10/28/2018   10/27/2028   Fintech  

Internal communication device;

Electronic monitoring device (-)

Downloadable computer application software; Computer software (recorded); Computer program (downloadable software); Recorded computer program; Cash register; Remote control device; Electronic Publication (-); Electronic Notepad; Electronic Note (-);

cashier(-); Electronic monitoring device (-)

Remote control device (-)

                     
  26008168   10/28/2018   10/27/2028   Fintech  

Credit card related investigations

Financial loans; Art valuation;

Real estate agency; Brokerage;

Insurance Underwriting; Guarantee; Raise Charity Fund;

Fiduciary management; Capital investment; Organize collections; Financial Information; Provide financial information through the website

Insurance information; Pawn;

Trust; Financial Management;

Financial Consulting; Bank;

Jewelry valuation

                     
  26008168   10/28/2018   10/27/2028   Fintech  

Adoption Agent; Security and anti-theft alarm system monitoring; Open the safety lock

Clothing rental; Computer Software License (Legal Service); Social companionship;

Online social networking services; Lost and Found; Dating Service; Safe rental; Adoption agents; security and anti-theft alarm system monitoring; unlocking locks; clothing rental; computer software licensing (legal services); social companionship; online social networking services; lost and found; dating services; safe rental (-)

                     
  26008168   10/28/2018   10/27/2028   Fintech  

Quality system certification;

Convert tangible data or files into electronic media; Technical Studies; Computer system remote monitoring; Interior Design; Computer Software Design; Electronic data storage;

Cosmetic Research; Industrial design; Intangible assets assessment

 

56

 

 

We own the following copyrights, of which the copyright of a computer software is held by Mr. Anyuan Sun:

 

Copyright Name   Reg. No.   Completion
Date		   Owner
Proportioning locator control system V1.0   2013SR072143   9/1/2012   Anyuan Sun
             
New three board data mobile display system   2019SR0914974   9/3/2019   Hengpu
             
Hengpu offline financial management system   2019SR0914982   9/3/2019   Hengpu
             
Application and display system of equity pledge financing   2019SR0915056   9/3/2019   Hengpu
             
Hengpu offline financing mobile investment system   2019SR0912121   9/2/2019   Hengpu
             
Hengpu offline financial investment system   2019SR0912070   9/2/2019   Hengpu
             
Hengpu Financial RMB Withdrawal System   2018SR498978   6/28/2018   Hengpu
             
Hengpu Financial Bank Depository Docking System   2018SR269474   4/20/2018   Hengpu
             
Hengpu Financial Mobile Investment System   2018SR265882   4/19/2018   Hengpu
             
Hengpu Financial Transaction Return System   2018SR265875   4/19/2018   Hengpu
             
Hengpu financial product search recommendation system   2018SR265870   4/19/2018   Hengpu
             
Hengpu Financial Identity Verification System   2018SR178293   3/19/2018   Hengpu
             
Hengpu financial investment marketing activity system   2018SR178208   3/19/2018   Hengpu
             
Hengpu Financial Virtual Account System   2018SR178316   3/19/2018   Hengpu
             
Hengpu Financial Commission Trading System   2018SR178319   3/18/2019   Hengpu
             
Hengpu Financial Personal Name Coin Recharge System   2018SR178295   3/19/2018   Hengpu
             
Huijingshe APP platform   2018SR241757   4/10/2018   Fintech

  

57

 

 

Our Company has the license to use the copyright above pursuant to an agreement that provides us the right, without further payment, to use such copyright for its applicable terms. The right is non-exclusive and is terminable at Mr. Sun’s decision; however, Mr. Sun does not currently intend to license the right to any third party. Mr. Sun does not, at the present time, have any plans to transfer the copyright to our company, either.

 

Our Employees 

 

As of December 31, 2019, we employed total of 142 full-time and no part-time employees in the following functions:

  

Department  December 31,
2019		   December 31,
2018		   December 31,
2017		 

Management and administration

   28    10    11 
Research and Development   33    10    9 
Production and operation   50    56    54 
Sales   31    12    15 
Total   142    88    89 

  

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.

 

We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC employment laws.

 

Chinese Laws and Regulations

 

Laws and Regulations in China Regarding Medical Devices Manufacturing and Distribution

 

Laws regulating medical device manufacturers and distributors cover a broad array of subjects. We must comply with numerous additional state and local laws relating to matters such as safe working conditions, manufacturing practices, environmental protection and fire hazard control. We believe we are in compliance with these laws and regulations in all material respects. So far, our industry does belong to pharmacy or hospitality so that we do not need to get special license or approval for our business operation. Meanwhile, we have successfully obtained two licenses for manufacture and installation of special equipment from regulatory authorities and renewed in October 2019. Also, unanticipated changes in existing regulatory requirements or adoption of new requirements may force us to incur more cost to maintain the licenses and failure to do so could materially adversely affect our business, financial condition and results of operations.

 

We and our PRC entities sometimes subcontract portions of our projects to third parties to complete. See section titled “Risk Factors — Unqualified individual subcontractors may bring joint liability to us.” According to Construction Law and Qualification Standard for Labor Subcontracting in Construction Business of the PRC, individual contractors are not in a position to obtain any qualification of labor subcontracting. So the subcontracting contracts by Xibolun Equipment and Xibolun Automation to such individual contractors are under the risk of being declared of avoidance of qualification by applicable courts. Article 29 of the Construction Law requires that “the overall contractors and subcontractors shall bear joint responsibilities to project owners for the subcontracted projects”. Even though our PRC entities Xibolun Equipment and Xibolun Automation are very cautious with subcontracting the projects to other parties, there are still possibilities that our PRC entities may subcontract the projects to individuals or parties without required qualifications. Despite the facts that the law enforcement and regulation on these types of subcontracting are not very strict, if the construction completed by unqualified individual subcontractors does not meet required quality and accident occurs, our PRC entities may jointly bear the consequences pursuant to the Article 64 of the Construction Law. Also, according to the Article 54 of the Regulation on the Quality Management of Construction Projects, the liabilities for the consequences could be indemnifying the damages and paying penalties which could be ranging from five hundred thousand up to one million RMB.

  

58

 

 

Regulation on Product Liability

 

Manufacturers and vendors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles of the Civil Laws of the PRC, which became effective on January 1, 1987 and were amended on August 27, 2009, manufacturers or retailers of defective products that cause property damage or physical injury to any person will be subject to civil liability.

 

In 1993, the General Principles of the PRC Civil Law were supplemented by the Product Quality Law of the PRC (as amended in 2000 and 2009) and the Law of the PRC on the Protection of the Rights and Interests of Consumers (as amended in 2009), which were enacted to protect the legitimate rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products. If our products are defective and cause any personal injuries or damage to assets, our customers have the right to claim compensation from us.

 

The PRC Tort Law was promulgated on December 26, 2009 and became effective from July 1, 2010. Under this law, a patient who suffers injury from a defective medical device can claim damages from either the medical institution or the manufacturer of the defective device. If our valve products and installation and construction services injure a patient, and if the patient claims damages from the medical institution, the medical institution is entitled to claim repayment from us. Pursuant to the PRC Tort Law, where a personal injury is caused by a tort, the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, as well as death compensation and funeral costs and expenses if it causes the death of the victim. There is no cap on monetary damages the plaintiffs may seek under the PRC Tort Law.

 

Regulation related to Exchange Administered Financial Asset Securities Distribution

 

The distribution of exchange administered financial asset securities is currently regulated by the Decision Regarding Straightening out and Rectifying Various Types of Trading Venues to Effectively Prevent Financial Risks (“Document 38”) and the Implementation Opinions on Straightening out and Rectifying Various Types of Trading Venues (“Document 37”), promulgated by the General Office of the State Council on November 11, 2011 and July 12, 2012, respectively. Both Document 38 and Document 37 stipulate that exchanges that are subject to the approval of the State Council or its administration department of finance for establishment, shall be regulated by the administration department of finance of the State Council; all other exchanges shall be regulated by the local People’s Government at the provincial level, which in practice, are the offices of finance at municipal and provincial levels. Document 38 and Document 37 emphasize on the prohibitive activities relating to the issuance and distribution of exchange administered funds, for example, that the number of investors of exchange administered funds shall not exceed 200 accumulatively.

 

Regulation on Foreign Exchange Control

 

Foreign exchange in China is primarily regulated by:

 

  ● The Foreign Currency Administration Regulations (1996), as amended on January 14, 1997 and August 5, 2008; and

 

  ● The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Under the Foreign Currency Administration Regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as, loans, investment in securities and repatriation of investments, however, remains subject to the registration of the SAFE or its local counterparts as required by law. Under the Administration Rules, foreign-invested enterprises may buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions for settlement of current account transactions after providing valid commercial documents and, in the case of capital account item transactions, only after registration with the SAFE and, as the case may be, other relevant PRC government authorities as required by law. Capital investments directed outside of China by foreign-invested enterprises are also subject to restrictions, which include registration filing with MOFCOM. If the investment is made to the sensitive countries, districts, or industries, it needs to be approved by MOFCOM.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. We receive a significant portion of our revenue in Renminbi, which is not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from our subsidiaries in China. Even though we may remit the income from China to anywhere we want, the fluctuation of exchange rate may be a disadvantage to us if the Renminbi depreciated.

 

59

 

 

Regulation on Foreign Exchange Registration of Offshore Investment by PRC Residents

 

The Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on July 14, 2014 and designed to replace the former circular commonly known as “Notice 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in Notice 37 as “special purpose vehicle.”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets or equity into such entity.

 

Notice 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).

 

Regulation on Dividend Distributions

 

Our PRC subsidiaries, Xibolun Automation and Xibolun Equipment, are wholly foreign-owned and joint venture enterprises under the PRC law. The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include:

 

  ● Corporate Law (1993) as amended in 2005 and 2013;

 

  ● The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000;

 

  ● The Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001; and

 

  ● The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).

 

Under these regulations, wholly foreign-owned and joint venture enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital. Our Company’s reserve fund has not yet reached this level. The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These reserve funds, however, may not be distributed as cash dividends.

 

On March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate. See “Taxation.”

 

M&A Rules and Regulation on Overseas Listings

 

On August 8, 2006, six PRC regulatory agencies, MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006. The M&A Rules purport, among other things, to require that offshore SPVs that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interests held by such PRC companies or individuals, obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.

 

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While the application of the M&A Rules remains unclear, our prior PRC counsel, our PRC legal counsel advised us that, based on their understanding of the current PRC laws and regulations as well as the notice announced on September 21, 2006:

 

  ● the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings such as our initial public offering are subject to the CSRC approval procedures under the M&A Rules; and

 

  ● despite the lack of any definitive rule or interpretation from CSRC, the main purpose of the M&A rule is for national security and national industrial policy and so far none of the Chinese companies that have completed their public listing in the U.S. have obtained such approval; and

 

  ● Our business operations in China do not belong to a prohibited industry by foreign investment; and

 

  ● Our M&A to our Chinese subsidiary companies have all obtained properly the approval from local governmental authorizations; and

 

  ● Our BVI company is not established by a Chinese citizen. Accordingly, although the purpose of BVI incorporation is for overseas listing, the M&A rule should not apply to us.

 

Our PRC counsel also advises us, however, that there is still uncertainty as to how the M&A Rules will be interpreted and implemented. If the CSRC or other PRC regulatory agencies, subsequently determine that CSRC approval was required for our initial public offering, we may need to apply for remedial approval from the CSRC and we may be subject to penalties and administrative sanctions administered by these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could materially adversely affect our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Class A common shares. Consequently, even though our PRC counsel believes the probability for the aforementioned actions is small, if you engage in market trading or other activities in anticipation of, and prior to, settlement and delivery, you do so at the risk settlement and delivery may not occur.

 

In addition, if the CSRC later requires that we obtain its approval for our initial public offering, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding the CSRC approval requirements could have a material adverse effect on the trading price of our Class A common shares.

 

Restriction on Foreign Ownership

 

The principal regulation governing foreign ownership of businesses in the PRC is Guidance Catalogue for Industrial Structure Adjustments (2015 edition), effective as of April 10, 2015 (the “Catalogue”). The Catalogue classifies the various industries into three categories: encouraged, restricted and prohibited. Our company’s primary market is the pharmaceutical industry. We are not engaged in any activities placing us in the encouraged, restricted or prohibited categories and so it could be inferred that we are engaged in a permitted industry for foreign investment. Such a designation offers businesses certain advantages. For example, businesses engaged in permitted industries:

 

  ● are not subject to restrictions on foreign investment, and, as such, foreigners can own a majority interest in Sino-foreign joint ventures or establish wholly-owned foreign enterprises in the PRC;

 

  ● provided such business has total investment of less than $100 million, are subject to regional (not central) government examination and approval which are generally more efficient and less time-consuming. Our current total investment is less than $100 million.

 

The National Development and Reform Commission and MOFCOM periodically jointly revise the Foreign Investment Industrial Guidance Catalogue. As such, there is a possibility that our company’s business may fall outside the scope of the definition of a permitted industry in the future. Should this occur, we would no longer benefit from such designation.

 

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On January 19, 2015, China’s Ministry of Commerce issued a draft Foreign Investment Law. The effective date of the official publication of the law is yet unknown. In the draft, foreign investment in China will be classified into three categories: prohibited, restricted, and others. This idea of classification is similar as previously published Catalogue. If the foreign investment falls in the areas that are closely related to national security, then it will be prohibited; if the investment may have some impact on national security but could be controlled through conditions, then it can be done with restrictions or qualifications; if the investment falls outside of those two categories, then it will not need approval from the Chinese government to operate in China.

  

According to the current Catalogue, our Company’s business does not fall in any prohibited or restricted industries. If China’s Ministry of Commerce adopts a list as same as the Catalogue along with the draft, the draft will have very limited impact on our business, if any. The probability that our business will be classified as prohibited or restricted industry is very low. However, If China’s Ministry of Commerce adopts a list by our business is prohibited or restricted, and it treats our business in China as foreign investment by deciding our actual controller is Mr. Sun Zhang who is not a Chinese citizen, we may face certain restrictions or even be prohibited to conduct business in China.

 

Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries

 

An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.

 

Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC.

 

Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, which debts are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.

 

Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be incurred by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to governmental approval.

 

Regulations on Trademarks

 

Trademarks are protected by the PRC Trademark Law adopted in 1982, as subsequently amended, as well as the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 2002 and 2013. The Trademark Office under the SAIC handles trademark registrations. Trademarks can be registered for a term of ten years and can be extended for another ten years if requested upon expiration of the first or any renewed ten-year term. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration application has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same type of or similar commodities or services, the application for such trademark registration may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such other party’s use. Trademark license agreements must be filed with the Trademark Office or its regional offices. We are currently using at no expense two trademarks registered in China and owned by Mr. Anyuan Sun. Meanwhile, we have successfully applied on our own name two trademarks in 2015, for both of which we have obtained the certificate issued by the authority (SAIC).

 

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Regulations on Patents

 

The PRC Patent Law provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness and practical applicability. The State Intellectual Property Office is responsible for examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. We have obtained 20 patents, 17 are owned by us, and 3 are still under the ownership of Mr. Anyuan Sun but we are currently using them without payment pursuant to two freely terminable nonexclusive licenses from Mr. Sun.

 

PRC Enterprise Income Tax Law and Individual Income Tax Law

 

Under the Enterprise Income Tax Law or EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its “de facto management bodies” located within the PRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementation rules of the EIT Law define “de facto management body” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

The SAT Circular 82 issued by the SAT in April 2009 provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled offshore incorporated enterprise is located in China. Pursuant to the SAT Circular 82, a PRC-controlled offshore incorporated enterprise has its “de facto management body” in China only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. The SAT Bulletin 45, in effect from September 2011, provides more guidance on the implementation of the SAT Circular 82 and provides for procedures and administration details on determining resident status and administration on post-determination matters. Although the SAT Circular 82 and the SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth there may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals.

  

Due to the lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals. We may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.

 

Regarding other local taxes and VAT tax, please see the discussion in PRC Business Tax and PRC VAT Tax sections.

 

Employment Laws

 

In accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social insurance plan and the housing fund plan for employees.

 

We have entered into employment agreements with all of our full-time employees. We have contributed to the basic and minimum social insurance plan. Due to a high employee turnover rate in our industry, it is difficult for us to comply fully with the law. While we believe we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any failure to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to be in violation of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late fees and fines. 

 

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C. Organizational structure

 

Corporate Structure

 

Below is a chart illustrating our current corporate structure:

 

 

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Organization and description of business

 

Hebron Technology

 

Hebron Technology Co., Ltd, (“Hebron Technology” or the “Company”) was established under the laws of the British Virgin Islands (“BVI”) on May 29, 2012 as a company limited by shares. The Company is a holding company and conducts its business mainly through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of VIEs in the People’s Republic of China (‘‘PRC’’). The Group is organized into two business segments consisting of equipment and engineering segment and financial services segment.

 

Equipment and Engineering Segment

 

Xibolun Equipment

 

The predecessor of the Company, Xibolun Equipment was incorporated on January 25, 2005. Currently, 30% of its equity is held by HK Xibolun, and 70% of its equity is held by Xibolun Automation.  Xibolun Equipment is primarily engaged in the manufacture of fluid equipment including valves, pumps, pipe fittings and other products, with a particular emphasis on intelligentized valves.

 

HK Xibolun

 

HK Xibolun is a limited company formed in accordance with laws and regulations of Hong Kong on June 14, 2011, as a trading company. HK Xibolun is wholly owned by Hebron Technology.

 

Xibolun Automation

 

Xibolun Automation was incorporated on September 24, 2012. It is currently 100% owned by HK Xibolun. Xibolun Automation has mainly engaged in installation services for pharmaceutical engineering construction since its incorporation in 2012.

 

Reorganization

 

For the purpose of our initial public offering, we reorganized our Company as described below. As part of this Reorganization, Hebron Technology became the ultimate holding company of HK Xibolun, Xibolun Automation and Xibolun Equipment, which were all controlled by the then Controlling Shareholder, Mr. Anyuan Sun, before the Reorganization. In some cases, the equity transfer agreement entry date and the actual effective may be different. According to PRC law, since Xibolun Equipment and Xibolun Automation are foreigner invested companies, the share transfer is effective as of the approval date. As HK Xibolun is incorporated in Hong Kong, its equity transfer is effective as of the transfer agreement entry date. In the following statements regarding the reorganization, the equity transfer effective dates of Xibolun Equipment and Xibolun Automation are as approval date while the equity transfer effective dates of HK Xibolun are as of transfer agreement entry date.

 

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Xibolun Equipment

 

Xibolun Equipment was incorporated on January 25, 2005 as a Sino-Foreign joint venture. It met the requirements of Xibolun Equipment’s joint venture status according to Chinese laws because 70% of the equity was initially held by Wenzhou City Xibolun Fluid Equipment Factory (“Xibolun Factory”), a Chinese partnership founded by the Controlling Shareholder, Mr. Lingmin Sun and Mr. Bin Wang on May 6, 2003, and the remaining 30% was held by Ms. Kong Sok Kin, who is an Italian citizen. On April 13, 2006, Xibolun Factory transferred 60% of its equity in Xibolun Equipment to the Controlling Shareholder, and the rest 10% to Mr. Yuanshun Shao. On September 15, 2010, Ms. Kong Sok Kin transferred 30% of her equity in Xibolun Equipment to Mr. Gongqi Xiang, while Mr. Yuanshun Shao transferred 10% of his equity in Xibolun Equipment to the Controlling Shareholder. After the above transactions, by July 20, 2011, Xibolun Equipment was owned by the Controlling shareholder and another foreign shareholder, Mr. Gongqi Xiang, a Spanish citizen, by holding shares of 70% and 30%, respectively. On June 30, 2011, HK Xibolun entered into an equity transfer agreement with Mr. Xiang, in which HK Xibolun agreed to acquire 30% ownership interest of Xibolun Equipment for RMB 300,000. The transfer was effective on July 21, 2011. On July 29, 2013, the Controlling shareholder transferred his 70% ownership interest in Xibolun Equipment to Xibolun Automation for RMB 700,000 equal to 70% of the registered capital of Xibolun Equipment. Because Xibolun Automation is a wholly owned subsidiary of HK Xibolun, as a result of these equity transfers, Xibolun Equipment is 100% owned by HK Xibolun.

 

HK Xibolun

 

HK Xibolun was formed in accordance with laws and regulations of Hong Kong on June 14, 2011. By the time of its incorporation, as the Controlling Shareholder owned 70% of the equity of Xibolun Equipment, and an offshore and non-Controlling Shareholder held entity was needed to hold 30% of the shares of Xibolun Equipment in order to maintain its Sino-Foreign joint venture status, Mr. Lingmin Sun nominally held 100% of the equity of HK Xibolun for the Controlling Shareholder pursuant to a Shareholding Entrustment Agreement by and between the controlling shareholder and Mr. Lingmin Sun entered on May 21, 2011. According to the Shareholding Entrustment Agreement mentioned above, the controlling shareholder actually owned 100% of the shares of HK Xibolun and had all the rights and duties of the shares while Mr. Lingmin Sun was the nominal shareholder who had no actual rights or duties regarding the shares. On May 15, 2012, in order to meet the new requirement that a foreign company should be held by a non-Chinese citizen, Mr. Lingmin Sun transferred 100% of the equity of HK Xibolun to Mr. Shih Chang Chen, who is a friend of Mr. Anyuan Sun and a Taiwanese citizen. Pursuant to the Shareholding Entrustment Agreement by and between Mr. Lingmin Sun and Mr. Shih Chang Chen entered on May 21, 2012, they both agreed that the equity of HK Xibolun would be entrusted to Mr. Chen, and Mr. Chen would hold the aforesaid equity for Mr. Lingmin Sun (who continued to act for the benefit of Mr. Anyuan Sun) without any actual rights of shares such as disposition rights and rights to retain proceeds. On October 22, 2012, in anticipation of an initial public offering (“IPO”) of its equity securities, Mr. Shih Chang Chen transferred all his equity in HK Xibolun to Hebron Technology without any consideration. As a result, HK Xibolun became a wholly owned subsidiary of Hebron Technology.

 

Xibolun Automation

 

Xibolun Automation was incorporated on September 24, 2012 and initially owned by Hebron Technology (80%), Xibolun Equipment (10%), and Zhejiang Xibolun Technology Co., Ltd. (“Zhejiang Xibolun”), a Chinese company also controlled by the Controlling Shareholder (10%). On October 30, 2012, HK Xibolun entered into separate equity transfer agreements with Hebron Technology, Xibolun Equipment, and Zhejiang Xibolun, pursuant to which HK Xibolun acquired Hebron Technology’s 80% ownership interest, Xibolun Equipment’s 10% ownership interest and Zhejiang Xibolun’s 10% ownership interest in Xibolun Automation without consideration. The transfers were effective as of December 5, 2012.

 

Mr. Anyuan Sun initially owned 70% of Xibolun Equipment while HK Xibolun owns the other 30%. HK Xibolun was established as an offshore entity by Mr. Lingmin Sun as a nominal owner. In order to meet China’s regulation on maintaining Sino-Foreign joint venture status, Mr. Anyuan Sun designated his brother Mr. Lingmin Sun as the nominal owner of HK Xibolun. Prior to October 22, 2012, Mr. Shih Chang Chen nominally held 100% of HK Xibolun on behalf of Mr. Lingmin Sun, who nominally held HK Xibolun for Mr. Anyuan Sun. Mr. Lingmin Sun had no voting rights or equity transfer rights regarding the shares of HK Xibolun. Consequently, HK Xibolun is effectively controlled by Mr. Anyuan Sun. Prior to the reorganization, Mr. Anyuan Sun owned 70% of the shares of Xibolun Equipment while HK Xibolun held the other 30% of the shares. Upon reorganization, Mr. Anyuan Sun transferred his ownership of Xibolun Equipment to Xibolun Automation, Xibolun Automation now owns 70% of Xibolun Equipment while HK Xibolun still owns the other 30%. HK Xibolun also owns 100% of the shares of Xibolun Automation. After the reorganization process, HK Xibolun, Xibolun Equipment and Xibolun Automation directly or indirectly became 100% subsidiaries of the Hebron Technology.

 

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After reorganization, Mr. Zuoqiao Sun Zhang was the sole shareholder of the company since August 5, 2013. As Mr. Sun Zhang is the father of Mr. Anyuan Sun, Mr. Sun Zhang nominally held all the shares of Hebron Technology for Mr. Sun who has the rights to direct voting and transfer the shares, which made Mr. Sun the controlling shareholder of Hebron Technology. After the April 2015 share transfers from Mr. Sun Zhang to different parties at the approval of Mr. Anyuan Sun, Mr. Sun Zhang nominally holds 49.82% of Hebron Technology’s issued and outstanding shares, while Mr. Anyuan Sun holds 15% of the Company’s shares through Wise Metro Development Co., Ltd., a British Virgin Islands company. Also, Mr. Lingmin Sun holds 9% of the Company’s shares through Vast Express Development Co. Ltd., a British Virgin Islands company, and Mr. Chengchun Wang holds 9% of the Company’s shares through Able State International Industrial Co., Ltd., a British Virgin Islands company. Both Mr. Anyuan Sun and Mr. Lingmin Sun are Mr. Sun Zhang’s sons, and Mr. Wang is Mr. Anyuan Sun’s father-in-law. Though they appear to be four separate shareholders, Mr. Sun Zhang, with voting rights, equity transfer rights and rights to retain proceeds from equity transfer withheld by Mr. Anyuan Sun, nominally holds his shares for Mr. Anyuan Sun. Although Mr. Lingmin Sun and Mr. Chengchun Wang have rights to retain proceeds from equity transfer, but Mr. Anyuan Sun has the sole right to direct the voting of the shares held by them. In addition, Mr. Lingmin Sun and Mr. Anyuan Sun have the shared power to direct the transfer of the shares held by Mr. Lingmin Sun, and Mr. Anyuan Sun has the sole right to direct the transfer of shares held by Mr. Chengchun Wang. By virtue of Mr. Anyuan Sun’s power to direct voting and equity transfer with regards to the shares held by Mr. Sun Zhang, Mr. Lingmin Sun and Mr. Wang, in addition to his being the Company’s Chairman of the Board and Chief Executive Officer who actually controls the board and runs the Company, Mr. Anyuan Sun is our largest shareholder of the Company in control of a total of approximately 68% of the Company’s issued and outstanding shares immediately after the reorganization. Based on the above, before and after the reorganization, Hebron Technology, HK Xibolun, Xibolun Equipment and Xibolun Automation were all considered under common control by Mr. Anyuan Sun.

 

The above mentioned transactions were accounted for in a manner similar to a recapitalization. Hebron Technology and its wholly-owned subsidiary HK Xibolun, who own 100% interest of Xibolun Automation and Xibolun Equipment, were effectively controlled by the same Controlling Shareholder before and after the reorganization and therefore the Reorganization is considered under common control. The consolidation of Hebron Technology and its subsidiaries has been accounted for at historical cost as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

Financial Services Segment

 

NiSun BVI

 

NiSun BVI was organized on January 17, 2019 under the laws of the British Virgin Islands as a company limited by shares and a wholly-owned subsidiary of Hebron Technology.

 

NiSun HK

 

NiSun HK is a limited company organized under the laws of Hong Kong on January 25, 2019, and a wholly-owned subsidiary of NiSun BVI.

 

NingChen

 

NingChen is a PRC company formed on April 10, 2019 and is a wholly-owned subsidiary of NiSun HK.

 

Taiding

 

Taiding is a PRC company formed on November 12, 2019 based on a joint venture agreement entered into between NiSun BVI and an unrelated PRC company. It is expected to be 80% owned by NiSun BVI and 20% owned by the third party after the completion of funding by the owners.

 

Fintech

 

Fintech is a PRC company formed on January 20, 2016 and is controlled by NingChen through a series of VIE agreements.

 

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Khorgos

 

Khorgos is a PRC company formed on June 18, 2019 and is a wholly-owned subsidiary of Fintech.

 

Jilin

 

Jilin is a PRC company formed on November 27, 2019 and is a wholly-owned subsidiary of Fintech.

 

Guangzhou

 

Guangzhou is a PRC company formed on October 29, 2019 and is a wholly-owned subsidiary of Fintech.

 

Hengpu

 

Henpu is a PRC company formed on April 17, 2015 and is controlled by NingChen through a series of VIE agreements.

 

Fengtai

 

Fengtai is a PRC company formed on October 11, 2018 and is 92%-owned by Hengpu.

 

Midtown

 

Midtown is a PRC company formed on April 3, 2019 and is a wholly-owned subsidiary of Hengpu.

  

D. Property, plant and equipment

 

Description of Property

 

There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We were granted land use rights for our facilities in Wenzhou, which extend until December 31, 2036. Following is a list of our properties, all of which we lease:

 

Property   Rental Term   Space   Ground
Floor Area
No. 936, Jinhai 2rd Road, Konggang New Area, Longwan District Wenzhou City, Zhejiang Province, China (C05, Binhai Ind. Park, Dalangqiao Village, Shacheng Town, Longwan District, Wenzhou).   Jan. 1, 2012 – Dec. 31, 2036       17,537 m2
             
Airport Xiaowei Beiyuan, Shacheng standard facility, Wenzhou, Zhejiang Province, China   January 20, 2017 – May 30, 2037        1,860 m2
             
99 Damba Road, Putuo District, Shanghai   May 20, 2019 – October 19, 2023        354 m2

  

Our property in No.936 Jinhai 2nd Ave. Airport New District, Longwan District, Wenzhou, Zhejiang Province, China is our central office and manufacturing facility. At this location, we have a variety of heavy equipment required to produce our valves, pipefittings and other products, including computer numerical control (“CNC”) milling machines, office equipment and product testing equipment. Our office in Shanghai provides financial services to our customers. None of our properties are encumbered by debt, and we are not aware of any environmental concerns or limitations on the use of our properties for the purposes we currently use them or intend to use them in the future. 

 

Item 4A. Unresolved Staff Comments

 

None.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”

 

A. Operating Results

 

Overview

 

We conducts our business mainly through our subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs (collectively referred to as the “Group”) in the People’s Republic of China (‘‘PRC’’). The Group is organized into two business segments consisting of the equipment and engineering segment and financial services segment.

 

(i) The equipment and engineering segment is engaged in research, development and manufacture and installation of fluid equipment including valves, pipe fittings and others, with particular emphasis on the manufacture and installation of intelligentized valves, used in the pharmaceutical, biological, food and beverage, and other clean industries. A significant majority of our revenues from equipment and engineering segment have come from these installation services. We anticipate that we will continue to derive significant income from our installation services. The profit margins associated with installing our customized valve and pipe fitting designs have historically been higher than those associated with the sale of our products for installation by third parties.

 

  (1) Installation services. We specialize in installing valves and pipes with skilled and experienced workers and professional equipment. Revenues from installation services were approximately 50%, 68% 81% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

  (2) Fluid equipment. We develop and manufacture valves and pipe fittings for use in pharmaceutical, biological, food and beverage, and other clean industries with an established sales and distribution network. Revenues from the sales of fluid equipment constitute approximately 38%, 32% and 19% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

(ii) The financial services segment primarily offers underwriting related advisory service to financial institutions and corporate clients and provides distribution and management service for direct banking products issued by small and medium commercial banks in PRC. The Financial services segment began to conduct its operations in PRC in 2019 through the Group’s newly acquired entities including Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information services Co., Ltd (“Hengpu”) with their subsidiaries. We earn one-time advisory fees for our services provided to underwriters, financial institutions or underlying corporate issuers for offerings on PRC provincial or national assets exchanges or other designated markets. We also provide ongoing user management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products in exchange for recurring service fees.

 

  (1) Underwriting related advisory fees. Revenues from underwriting related advisory fees were approximately 12%, 0% 0% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

 

  (2) Recurring service fees. Revenues from recurring service fees amounted to $3,381 for the year ended December 31, 2019. There were no fees during the years ended December 31, 2018 and 2017.

 

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The World Health Organization or WHO, has since March, 2020 declared the coronavirus (“COVID-19”) a pandemic. Our operating results could be negatively impacted by the COVID-19. For a detailed description of the risks associated with the novel coronavirus, see “Risk Factors — Risks Relating to Our Business — We face risks related to health epidemics and disease outbreaks.”

 

The following table presents an overview of our results of operations for the year ended December 31, 2019 and 2018:

 

   Year ended December 31,   Changes 
   2019   2018   ($)   (%) 
Revenue  $21,103,114   $25,290,060    (4,186,946)   (17)%
Cost of revenue   13,046,493    17,712,108    (4,665,615)   (26)%
Gross profit   8,056,621    7,577,952    478,669    6%
General and administrative   2,566,831    3,298,188    (731,357)   (22)%
Selling expenses   985,252    1,337,321    (352,069)   (26)%
Bad debt expenses   2,079,837    7,913,442    (5,833,605)   (74)%
Research and development expenses   492,696    358,411    134,285    37%
Total operating expenses   6,124,616    12,907,362    (6,782,746)   (53)%
Income (loss) from operations   1,932,005    (5,329,410)   7,261,415    (136)%
Other income, net   1,255,149    (426,585)   1,681,734    (394)%
Interest expense   (158,119)   (208,306)   50,187    (24)%
Income from investment   153,554    168,534    (14,980)   (9)%
Total other income (expense), net   1,250,584    (466,357)   1,716,941    (368)%
Income (loss) before income taxes   3,182,589    (5,795,767)   8,978,356    (155)%
Income taxes (benefit)   442,599    (651,052)   1,093,651    (168)%
Net income (loss)   2,739,990    (5,144,715)   7,884,705    (153)%
Foreign currency translation (loss)   (561,091)   (1,755,528)   1,194,437    (68)%
Comprehensive income (loss)  $2,178,899   $(6,900,243)   9,079,142    (132)%

 

The following table presents an overview of our results of operations for the year ended December 31, 2018 and 2017:

 

   Year ended December 31,   Changes 
   2018   2017   ($)   (%) 
Revenue  $25,290,060   $29,200,445    (3,910,385)   (13)%
Cost of revenue   17,712,108    18,756,284    (1,044,176)   (6)%
Gross profit   7,577,952    10,444,161    (2,866,209)   (27)%
General and administrative   3,298,188    3,683,594    (385,406)   (10)%
Selling expenses   1,337,321    2,187,253    (849,932)   (39)%
Bad debt expenses   7,913,442    187,715    (7,725,727)   4,116%
Research and development expenses   358,411    508,282    (149,871)   (29)%
Total operating expenses   12,907,362    6,566,844    6,340,518    97%
(Loss) income from operations   (5,329,410)   3,877,317    (9,206,727)   (237)%
Other income, net   (426,585)   377,174    (803,759)   (213)%
Interest expense   (208,306)   (56,953)   (151,353)   266%
Income from investment   168,534    -    168,534    100%
Total other (expense) income, net   (466,357)   320,221    (786,578)   (246)%
(Loss) income before income taxes   (5,795,767)   4,197,538    (9,993,305)   (238)%
Income taxes (recovery)   (651,052)   (2,938,849)   2,287,797    (78)%
Net (loss) income   (5,144,715)   7,136,387    (12,281,102)   (172)%
Foreign currency translation (loss)   (1,755,528)   2,249,081    (4,004,609)   (178)%
Comprehensive (loss) income  $(6,900,243)  $9,385,468    (16,285,711)   (174)%

 

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Revenue

 

The following table sets forth the breakdown of our revenue for the years ended December 31, 2019 and 2018:

 

   Years ended December 31,   Changes   Changes 
   2019   %   2018   %   ($)   (%) 
Installation service  $10,490,191    50%  $17,297,212    68%   (6,807,021)   (39)%
Fluid equipment sales   8,087,399    38%   7,992,848    32%   94,551    1%
Financial service – underwriting related   2,522,143    12%   -    -%   2,522,143    100%
Financial service – recurring service   3,381    0%   -    -%   3,381    100%
Total revenue  $21,103,114    100%  $25,290,060    100%   (4,186,946)   (17)%

 

The following table sets forth the breakdown of our revenue for the year ended December 31, 2018 and 2017:

 

   Years ended December 31,   Changes   Changes 
   2018   %   2017   %   ($)   (%) 
Installation service  $17,297,212    68%  $23,748,141    81%   (6,450,929)   (27)%
Fluid equipment sales   7,992,848    32%   5,452,304    19%   2,540,544    47%
Total revenue  $25,290,060    100%  $29,200,445    100%   (3,910,385)   (13)%

 

For the years ended December 31, 2019 and 2018, revenue from sales of our fluid equipment was $8.1 million and $8.0 million, respectively, representing an increase of approximately $0.1 million. For the years ended December 31, 2018 and 2017, revenue from sales of our fluid equipment was $8.0 million and $5.5 million, respectively, representing an increase of approximately $2.5 million. The increase in revenue from our fluid equipment sales was primarily due to the increase of valve demand resulting from our efforts to expand our sales network and increase marketing activities.

 

   Number of
Major Projects		   Average Project
Revenue (USD)		 
2019  5   $2.1 million 
2018  6   $2.9 million 
2017  12   $2.0 million 

 

Revenue from installation service was $10.5 million and $17.3 million for the years ended December 31, 2019, and 2018, respectively, representing a decrease of approximately of $6.8 million, due to a decrease in average contract amount during fiscal 2019. In fiscal 2019, the Company had 5 major installation projects, comparing to 6 installation projects in fiscal 2018. However, the average individual contract amount decreased from $2.9 million in fiscal 2018 to $2.1 million in fiscal 2019.

 

Revenue from installation service was $17.3 million and $23.7 million for the years ended December 31, 2018, and 2017, respectively, representing a decrease of approximately of $6.45 million, due to a decrease in project volume during fiscal 2018. In fiscal 2018, the Company had 6 major installation projects, comparing to 12 installation projects in fiscal 2017. However, the average individual contract amount increased from $2.0 million in fiscal 2017 to $2.9 million in fiscal 2018.

 

Revenue from financial service was $2.5 million for year ended December 31, 2019, which was mainly related to the underwriting related advisory service we provided to a financial institution client. We will continue to expand the revenue base in this segment.

 

Cost of revenue

 

The following table presents a breakdown of our cost of revenue for the years ended December 31, 2019 and 2018.

 

   Years ended December 31,   Changes   Changes 
   2019   %   2018   %   ($)   (%) 
Installation service  $6,639,031    51%  $10,941,208    62%   (4,302,177)   (39)%
Fluid equipment sales   6,387,970    49%   6,770,900    38%   (382,930)   (6)%
Financial service   19,492    -%   -    -%   19,492    100%
Total cost of revenue  $13,046,493    100%  $17,712,108    100%   (4,665,615)   (26)%

 

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The following table presents a breakdown of our cost of revenue for the years ended December 31, 2018 and 2017.

 

   Years ended December 31,   Changes   Changes 
   2018   %   2017   %   ($)   (%) 
Installation service  $10,941,208    62%  $14,278,067    76%   (3,336,859)   (23)%
Fluid equipment sales   6,770,900    38%   4,478,217    24%   2,292,683    51%
Total cost of revenue  $17,712,108    100%  $18,756,284    100%   (1,044,176)   6%

 

For 2019 and 2018, cost of installation services were $6.6 million and $10.9 million, respectively, representing a decrease of $4.3 million, which was in line with the decrease in the installation revenue in fiscal 2019. For 2018 and 2017, cost of installation services were $10.9 million and $14.3 million, respectively, representing a decrease of $3.3 million, which was in line with the decrease in the installation revenue in 2018.

 

For 2019 and 2018, cost of our fluid equipment sales were $6.4 million and $6.8 million, respectively, representing an approximate decrease of $0.4 million. For 2018 and 2017, cost of our fluid equipment sales were $6.8 million and $4.5 million, respectively, representing an approximate increase of $2.3 million, which was consistent with the 47% increase in fluid equipment sales in 2018.

 

Gross profit

 

The following table presents the gross profit of our businesses for the years ended December 31, 2019 and 2018:

 

   Years ended December 31,   Changes   Changes 
   2019   %   2018   %   ($)   (%) 
Installation service  $3,851,160    37%  $6,356,004    37%   (2,504,844)   (39)%
Fluid equipment sales   1,699,429    21%   1,221,948    15%   477,481    39%
Financial services   2,506,032    99%   -    -    2,506,032    100%
Gross profit  $8,056,621    38%  $7,577,952    30%   478,669    6%

 

The following table presents the gross profit of our businesses for the year ended December 31, 2018 and 2017:

 

   Years ended December 31,   Changes   Changes 
   2018   %   2017   %   ($)   (%) 
Installation service  $6,356,004    37%  $9,470,074    40%   (3,114,070)   (33)%
Fluid equipment sales   1,221,948    15%   974,087    18%   247,861    25%
Gross profit  $7,577,952    30%  $10,444,161    36%   (2,886,209)   (27)%

 

The overall gross profit percentage for 2019 increased 8% from fiscal 2018, primarily because of the high-margin financial services revenue in fiscal 2019. Gross profit from installation service for 2019 decreased approximately $2.5 million or 39% as compared to fiscal 2018, due to reduced individual project size in fiscal 2019. Gross profit percentage from installation service in 2019 remained 37% as compared to that of 2018. Gross profit from our fluid equipment sales increased 39% in 2019 as compared to 2018. The gross profit percentage from fluid equipment sales increased to 21% in 2019 from 15% in 2018 due to higher pricing and improved production efficiency due to large production capacity.

 

The gross profit percentage for 2018 decreased 6% from fiscal 2017, primarily because the gross profit from installation sales decreased for 2018 as compared to fiscal 2017. Gross profit from installation service for 2018 decreased approximately $3.1 million or 33% as compared to 2017. Gross profit from our fluid equipment sales increased 25% in 2018 as compared to 2017. The gross profit percentage from fluid equipment sales sight decreased from 18% in 2017 to 15% in 2018.

 

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Expenses

 

   Years ended December 31,   Changes   Changes 
   2019   %   2018   %   ($)   (%) 
General and administrative expenses  $2,566,831    42%  $3,298,188    26%   (731,357)   (22)%
Selling expense   985,252    16%   1,337,321    10%   (352,069)   (26)%
Bad debt expenses   2,079,837    34%   7,913,442    61%   (5,833,605)   (74)%
Research development expenses   492,696    8%   358,411    3%   134,285    37%
Total operating expense  $6,124,616    100%  $12,907,362    100%   (6,782,746)   (53)%

  

   Years ended December 31,   Changes   Changes 
   2018   %   2017   %   ($)   (%) 
General and administrative expenses  $3,298,188    26%  $3,683,594    56%   (385,406)   (10)%
Selling expense   1,337,321    10%   2,187,253    33%   (849,932)   (39)%
Bad debt expenses   7,913,442    61%   187,715    3%   7,725,727    4,116%
Research development expenses   358,411    3%   508,282    8%   (149,871)   (29)%
Total operating expense  $12,907,362    100%  $6,566,844    100%   6,340,518    97%

 

General and administrative expenses

  

For 2019, our general and administrative expenses were $2.6 million, representing an approximate decrease of $0.7 million compared to 2018. The decrease in general and administrative expenses was mainly because the Company spent less in professional fees in 2019. In 2018, the Company had more consulting and professional services related to acquiring new technology and mergers and acquisitions (M&A).

 

For 2018, our general and administrative expenses were $3.3 million, representing an approximate decrease of $0.4 million compared to 2017. The decrease in general and administrative expenses was mainly due to the Company incurred less consulting and professional fees in 2018.

 

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Selling expense

  

For the fiscal 2019, our selling expenses were $1.0 million, representing a 26% decrease from fiscal 2018. For the fiscal 2018, our selling expenses were $1.3 million, representing a 39% decrease from fiscal 2017. The decrease in selling expense was mainly due to the fact that the Company has established branding awareness in the market therefore reduced marketing activities in fiscal 2019 and 2018.

 

Bad debt expenses (recovery)

 

For the fiscal 2019, we recorded a bad debt expense of approximately $2.1 million. For the fiscal 2018, we recorded a bad debt expense of approximately $7.9 million. The decrease of bad debt expenses was mainly because we recorded approximately $7.6 million of bad debt allowance for our prepayments and advances to suppliers in fiscal 2018.

 

Research and development expenses

 

For fiscal 2019, our research and development (R&D) expenses were $0.5 million, representing an increase of $0.1 million compared to $0.4 million in research and development expenses in fiscal 2018. The increase in R&D expense was primary due to R&D developments in our new segment - financial services segment in 2019.

 

For fiscal 2018, our R&D expenses were $0.4 million, representing a decrease of $0.1 million compared to $0.5 million in research and development expenses in fiscal 2017. The decrease in R&D expense was due to less investment on R&D devices in fiscal year 2018. 

  

Interest expense

 

Our interest expenses for fiscal 2019 were $158,119, representing a 24% decrease compared to $208,306 in fiscal 2018 due to lower outstanding loan balance in fiscal 2019.

 

Our interest expenses for fiscal 2018 was $208,306, representing a 266% increase compared to $56,953 in fiscal 2017 due to higher outstanding loan balance and higher interest rate in fiscal 2018.

 

Other income (expense), net

 

Other income (expense), net, is used to record our non-operating income and expense, including government grants and other expenses. For the years ended December 31, 2019, the Company had a net other income of approximately $1.3 million. The increase in other income for the year ended December 31, 2019 was due to gain from settlements of liabilities in fiscal 2019. For the years ended December 31, 2018, the Company had a net other income expense of $426,585. The decrease in other income for the year ended December 31, 2018 was due to net loss from disposition of fixed assets.

 

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Income taxes and other taxes

 

For the years ended December 31, 2019 and 2018, Xibolun Automation and Hengpu are recognized as a High-technology Company by Chinese government and subject to a favorable income tax rate of 15%, a reduction from the normal unified rate of 25%. The High-technology certificate is valid for three year starting from November, 2018 and subject to renewal. In accordance with the implementation rules of the Income Tax Law of the PRC, for the enterprises newly established in the Horgos Development Zone within the scope of “preferential catalogue of income tax for key industries encouraged to develop in Xinjiang’s difficult areas”, the enterprise income tax shall be exempt for five years from the tax year of the first production and operations income. Khorgos is established in the Horgos Development Zone and its income tax is eligible to be exempt for five years starting from 2019. The rest of the subsidiaries, VIEs and VIEs’ subsidiaries are subject to corporate income tax at the PRC unified rate of 25%.

 

The provision for income taxes increased by $1.1 million in fiscal 2019 compared to fiscal 2018, which was mainly because the Company realized an income before taxes of approximately $3.2 million compared with a loss before tax of approximately $5.8 million in fiscal 2018. The effective tax rate in fiscal 2019 were approximately negative 13.9%, comparing to the effective tax rate of approximately 11.2% for fiscal year 2018.

 

The provision for income taxes decreased by $2.3 million in fiscal 2018 compared to fiscal 2017, which was mainly because the Company reversed the accumulated tax liabilities before January 1, 2015 of approximately $5.0 million in fiscal 2017, as well as the Company had a net loss in fiscal 2018. The effective tax rate in fiscal 2018 were approximately negative 11.2%, comparing to the effective tax rate of approximately negative 70% for fiscal year 2017; the significant change was mainly due to the income tax settlement with the local tax authority. 

 

In the normal course of its business, the Company, in particular including Xibolun Automation and Xibolun Equipment, may be subject to challenges from various PRC taxing authorities regarding the amounts of taxes due. The Company’s management believes the Company has paid or accrued for all taxes owed by the Company. As of December 31, 2019, 2018 and 2017, the Company had accrued total tax liabilities of $10.9 million, $9.1 million and $7.1 million, respectively, related to taxable years since the inception. According to PRC taxation regulation and administrative practice and procedures, the statute of limitation on the tax authority’s audit or examination of previously filed tax returns expires three years from the date they were filed. As of December 31, 2017, the tax payable before adjustment was $12.0 million. The Company obtained a written statement from the local tax authority that no additional taxes are due as of December 31, 2014. Based on these facts, the Company reversed the accrued tax liabilities in the total amount of approximately $5.0 million relating to the tax liabilities accrued for the period prior to January 1, 2015, resulting in the decrease of accrued tax liabilities from approximately $12.0 million to $7.1 million as of December 31, 2017. The Company has not made any additional tax payments since 2015 and will continue to discuss with the local tax authority to try to settle the remaining tax liabilities as soon as practicable, mostly related to its unpaid income tax and business tax, both of which are governed by the local tax authority.

 

The total amount of unpaid tax liabilities was accrued based on the calculation using the current prevailing tax rates without including potential interest and penalties because management cannot be certain as to how much interest and penalties would be assessed, if any. Those potential interest and penalty liabilities are contingent upon the outcome of tax settlement and management estimates that the potential contingent loss related to potential interest and penalties could be Nil or as high as $2.0 million based on rates stipulated by the tax authority. Due to uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with the interest and penalties on these unpaid tax balances. The final outcome of this tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of the statute status of limitations. As the ongoing settlement discussions continue, management believes that it is more likely than not that the Company will not have to pay any interest and penalties associated with the unpaid taxes.

 

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B. Liquidity and Capital Resources

 

Our current cash and cash equivalents primarily consist of cash on hand, which are unrestricted as to withdrawal and use and are deposited with banks in China.

 

We believe that we can obtain additional loans from banks or private placements of our securities if necessary. We are expecting to generate additional cash flows in the near term from our installation projects and equipment sales, and from our developing new customers, expanding our equipment sales and our sales networks and additional revenues from our new financial services segment. In March 2020, the World Health Organization or WHO declared the coronavirus (“COVID-19”) a pandemic. Our operating results could be negatively impacted by the COVID-19. Due to the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. In assessing our liquidity, we monitor and analyze our cash on-hand and our operating expenditure commitments. Our liquidity needs are to meet our working capital requirements and operating expenses obligations. To date, our management believes that current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this prospectus. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities or obtain supports from our controlling shareholder. As of December 31, 2019, 2018 and 2017, we had cash and cash equivalents of $3,452,647, $947,588 and $3,220,781, respectively. Subject to the possibility that we may be required to pay some or all of certain taxes due by our company in three to five years by installment, we believe that our current cash, cash flows provided by operating activities and access to help from our related party will be sufficient to meet our working capital needs for at least the next 12 months. In addition, on December 9, 2019, the Group entered into a definitive share purchase agreement with certain investors for a private placement of approximately 1.05 million Class A common shares at $6.21 per share. Due to the business disruptions related to COVID-19, the close of the transaction was deferred and the Group expects to close the private placement prior to the end of April 2020.

 

Substantially all of our operations are conducted in China and all of our revenues, expense, and cash are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars.

 

The majority of cash balance reported by us as of the latest balance sheet date, December 31, 2019, is foreign cash (RMB), the amount of foreign cash and cash equivalents and restricted cash we have was approximately $4.4 million.

 

Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. For the years ended December 31, 2019 and 2018, the statutory reserve balance for the Company’s entities established in the PRC was $516,193 and $15,069, respectively. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.

 

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We have never declared or paid any cash dividends to our shareholders. We did not pay any dividends out of our retained earnings for the years ended December 31, 2019, 2018 and 2017. With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.

 

We have limited financial obligations dominated in US dollars, thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on the liquidity, financial condition and results of operations of the Company.

 

The following table provides information about our working capital and other factors the Company takes into consideration to measure its liquidity as of December 31, 2019, 2018 and 2017:

 

Working Capital

 

   For the years ended December 31, 
   2019   2018   2017 
Current asset  $43,711,758   $35,274,767    38,580,847 
Current liabilities   28,233,265    19,683,974    13,189,549 
Working Capital   15,478,493    15,590,793    25,391,298 
Contract and accounts receivable turnover in days   523    344    196 
Contract and accounts receivable turnover ratio   0.7    1.1    1.9 
Inventory turnover in days   9    14    24 

 

Our working capital was approximately $15.5 million as of December 31, 2019, a decrease of approximately $0.1 million from December 31, 2018, mainly due to higher accrued liabilities, increase in the amount due to related party and tax payable balance. Our working capital was approximately $15.6 million as of December 31, 2018, a decrease of approximately $9.8 million from December 31, 2017, mainly due to higher short-term loans, notes payables, accrued liabilities and taxes payable as of December 31, 2018.

 

As of December 31, 2019 and 2018, our net contract receivable balance was $30,120,533 and $24,669,365, respectively, related to our installation projects. For the year ended December 31, 2019 and 2018, our accounts receivable including contract receivable turnover in days were 523 days and 344 days, respectively. The slow in turnover in 2019 was due to the slow progress in the installation contracts. With the increased collection efforts, we believe we are able to successfully collect the balance.

 

For the year ended December 31, 2018 and 2017, our accounts receivable including contract receivable turnover in days were 344 days and 196 days, respectively. The slow in turnover in the fiscal 2018 was due to the high margin installation contracts were complicated projects.

 

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We intend to continue to carefully execute our growth plans and manage market risk. Our anticipated short-term and long-term liquidity requirements primarily include working capital for funding our ongoing operations. We plan to fund our future liquidity requirements from cash provided by operating activities. We currently anticipate that we will be able to meet our needs to fund our operations beyond the next twelve months with operating cash flows and existing cash balances.

 

Cash Flows

 

The following table provides detailed information about our net cash flows for the year ended December 31, 2019, 2018 and 2017:

  

   Years ended December 31, 
   2019   2018   2017 
Net cash (used in) provided by operating activities  $335,233   $(725,080)  $(6,096,784)
Net cash used in investing activities   (1,963,494)   (115,210)   (3,126,777)
Net cash provided by financing activities   3,152,786    730,669    916,640 
Effect of exchange rate changes on cash   (184,449)   (94,239)   (292,869)
Net (decrease) increase in cash  $1,340,076   $(203,860)  $(8,599,790)
Cash and restricted cash at beginning of year   3,072,243    3,276,103    11,875,893 
Cash and restricted cash at end of year  $4,412,319   $3,072,243   $3,276,103 

  

Operating Activities

 

Net cash provided by operating activities for fiscal 2019 was approximately $0.3 million, which was primarily attributable to a net income of approximately $2.7 million, adjusted for non-cash items of approximately $2.7 million and adjustments for changes in working capital of approximately negative $5.1 million. The adjustments for changes in working capital mainly included (i) an increase in accounts and contract receivable of $6.9 million, primarily from our recent completed installation projects, (ii) a decrease in prepayment and advances to suppliers of $1.4 million due more utilizations of prepayment and advances in our purchase from suppliers, (iii) a decrease in notes payable of $1.2 million due to repayment, (iv) a decrease in advances from customers of $1.8 million, (iv) an increase in tax payable of $1.9 million due to higher earnings, and (vi) an increase in accrued expenses and other current liabilities of $1.0 million due to more purchase made in 2019.

 

Net cash used in operating activities for fiscal 2018 was approximately $0.7 million, which was primarily attributable to a net loss of approximately $5.1 million, adjusted for non-cash items of approximately $7.9 million and adjustments for changes in working capital of approximately $(3.5) million. The adjustments for changes in working capital mainly included (i) an increase in accounts and contract receivable of $10.4 million from recent completed installation projects, (ii) an increase in tax payable of $2.7 million, (iii) an increase in notes payable of $2.1 million, and (iv) a decrease in inventory of $1.2 million.

 

Net cash used in operating activities for fiscal 2017 was approximately $6.1 million, which was primarily attributable to a net income of approximately $7.1 million, adjusted for non-cash items of approximately $1.2 million and adjustments for changes in working capital of approximately $(14.4) million. The adjustments for changes in working capital mainly included (i) an increase in accounts and contract receivable of $3.9 million from recent completed installation projects, (ii) an increase in advance to suppliers and prepayments of $7.1 million to secure the supply and meet the needs of increasing installation services and equipment sales, (iii) a decrease in deferred revenue of $1.1 million, and (iv) a decrease in tax payable around $2.4 million, which was offset by the decrease in inventory of $0.8 million. 

 

Investing Activities

 

Net cash used in investing activities was approximately $2.0 million for fiscal 2019, including $0.4 million paid for property and equipment purchase, $3.6 million loans to third parties and $2.0 million cash acquired for business combination. Net cash used in investing activities was approximately $0.1 million for fiscal 2018 and $3.1 million for fiscal 2017, nearly all of which was primarily attributable to amounts spent on constructing the Company’s new office and manufacturing facility.

 

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Financing activities

  

Net cash provided in financing activities was approximately $3.2 million for fiscal 2019. It was primarily attributable to the approximately $3.6 million additional shareholder’s contribution, offset by net loan repayments of approximately $0.8 million during the year.

 

Net cash provided in financing activities was approximately $0.7 million for fiscal 2018. It was primarily attributable to the approximately $2.0 million proceeds from various loans, offset by the loan repayments of during the year.

 

Net cash provided in financing activities was approximately $0.9 million for fiscal 2017. It was primarily attributable to the approximately $1.05 million proceeds from various loans, offset by the loan repayments of during the year. 

 

Loan facility

 

As of December 31, 2019, we had $861,846 in bank loans. These are bank loans maturing in less than one year and must be paid in full upon maturity. We have had good credit relations and believe our current creditors will make additional loans to us, if required, as they have done in the past.

 

Loans consisted of the following as of December 31, 2019:

 

Lender  December 31,
2019		   Term  Effective
Interest Rate		 
Longwan Rural Commercial Bank Shacheng Branch  $287,282   August 09, 2019 to August 08, 2020   4.50%
Industrial and Commercial Bank of China   574,564   August 15, 2019 to August 15, 2020   4.35%
Total  $861,846         

 

Loans consisted of the following as of December 31, 2018:

 

Lender  December 31,
2018		   Term  Effective
Interest Rate		 
Bank of China Longwan Branch  $202,894   April 13, 2016 to April 14, 2019   5.70%
Bank of China Longwan Branch   186,168   June 8, 2016 to April 14, 2019   5.70%
Industrial and Commercial Bank of China -Wenzhou Branch   727,220   July 17, 2018 to July 17, 2019   6.04%
Longwan Rural Commercial Bank Shacheng Branch   290,888   July 23, 2018 to July 17, 2019   8.71%
Longwan Rural Commercial Bank Shacheng Branch   290,888   July 25, 2018 to July 17, 2019   8.71%
Total   1,698,058         

 

All principal of the above loans as of December 31, 2019 are due upon maturity and interest payments are due on monthly basis. For the loans borrowed from various bank, the outstanding balances were guaranteed by a Company’s executive officer and his immediate family members and unrelated third parties.

 

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Obligations under Material Contracts

 

The future undiscounted aggregate minimum lease payments under non-cancellable operating leases are as follows as of December 31, 2019:

 

For the Year Ending December 31,    
2020  $275,516 
2021   256,505 
2022   261,676 
2023   225,479 
2024   116,886 
thereafter   1,557,507 
Total undiscounted future minimum lease payments   2,693,569 
Less: Amounts representing interest   (735,085)
Total present value of operation lease liabilities   1,958,484 
Less: current portion of operating lease liabilities   (188,557)
Non-current portion of operating lease liabilities  $1,769,927 

 

Capital Expenditures

 

We spent approximately $0.4 million, $0.1 million and $3.1 million on property and equipment purchase in fiscal 2019, 2018 and 2017, respectively. The significant capital expenditure spending in 2017 was for our new building on No. 936, Jinhai 2rd Road, Konggang New Area, Longwan District Wenzhou City, Zhejiang Province, China (C05, Binhai Ind. Park, Dalangqiao Village, Shacheng Town, Longwan District, Wenzhou). The building was completed during the year ended December 31, 2017.

 

Impact of Inflation

 

We do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates have been relatively stable in the last three years: 2.9% in 2019, 2.1% in 2018 and 1.9% in 2017.

 

Impact of Foreign Currency Fluctuations

 

We do not believe the impact of foreign currency fluctuations on our Company is material.

 

Regarding purchase of raw materials, we are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China.

 

Regarding sales, export sales only accounted a small portion of our revenues, and most of export sales contracts are not priced in foreign currency because they were sold to foreign companies’ agents in China. Our export sales for the year ended December 31, 2019, 2018 and 2017 accounted for less 1% of total revenue and none of revenue priced in the foreign currency.

 

We have not and have not had any foreign currency hedge investments, borrowings or other hedging instruments. We manage our price risks through productivity improvements and cost-containment measures.

 

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Critical Accounting Policies

 

We believe it is helpful to investors to understand the critical accounting policies underlying our consolidated financial statements and the following discussion of our Company’s financial condition and results of operations. 

 

Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and subsidiaries of the VIEs for which the Company or its subsidiary is the primary beneficiary.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of director under a statute or agreement among the shareholders or equity holders.

 

A consolidated VIE is an entity in which the Company, or its subsidiaries, through contractual arrangements, has the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiaries are the primary beneficiary of the entity.

 

All transactions and balances among the Company, its subsidiaries, the VIEs and subsidiaries of the VIEs have been eliminated upon consolidation.

 

Uses of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the allowance for doubtful accounts, the valuation of inventory, realizability of deferred tax assets, costs to complete contracts, estimated useful lives and fair values in connection with the impairment of property and equipment, intangible assets, goodwill and accruals for income tax uncertainties.

 

Business combinations

 

The Group accounts for business combinations using the purchase method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic 805, Business Combinations. The purchase method of accounting requires the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities the Group acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total acquisition cost, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings as a bargain purchase gain.

 

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The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period. The fair value of the identifiable assets acquired and liabilities assumed at the acquisition date is based on a valuation performed by an independent valuation firm engaged by the Group.

 

Revenue recognition

 

The Group adopted FASB ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective approach. Revenues for the years ended December 31, 2019 and 2018 were presented under ASC 606, and revenues for the year ended December 31, 2017 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There was no adjustment to the opening balance of retained earnings at January 1, 2018 since there was no significant change to the timing and pattern of revenue recognition upon adoption of ASC 606. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services.

 

Under the guidance of ASC 606, the Group is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Group satisfies its performance obligation. In determining the transaction price, the Group has included variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur. Revenues are recorded, net of sales related taxes and surcharges.

 

A.Equipment and engineering segment revenues

 

Revenues from the equipment and engineering segment are primarily derived from the following sources:

 

Sales of products:  The Group recognizes revenue when the products are delivered and control is transferred. The Group generally provides a warranty for a period of 12 months after the customers receive the products. The Group determines that such product warranty is not a separate performance obligation because the nature of warranty is to provide assurance that a product will function as expected and in accordance with the customer’s specifications and the Group does not sell the warranty separately. From its past experience, the Group has not experienced any material warranty costs and, therefore, the Group does not believe an accrual for warranty cost is necessary for the years ended December 31, 2019, 2018 and 2017. The Group’s sales revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).

 

Installation contracts: The Group recognizes revenue associated with these contracts over time as services are performed and the transfer of control occurs, based on a percentage-of-completion method using cost-to-cost input methods as a measure of progress. When the percentage-of-completion method is used, the Company estimates the costs to complete individual contracts and records as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs (the cost-to-cost approach).

 

Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue includes all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

 

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The Group sometimes enters into installation service contracts in connection with product sales. The manufacture of fluid equipment control systems comprises two stages: (a) manufacture; and (b) installation. The Group always enters into separate product and installation contracts with the customer as the customer has the choice to use its own staff or external contractors to install the products based on product installation manuals provided by the Group when the products are delivered. The Group usually sells the product on a standalone basis and also is engaged by customers to install the systems they purchase from other suppliers. It is the Group’s policy to sell its products at the set prices regardless of whether the customer separately enters into an installation contract with the Company. The Company always prices its installation services at market competitive rates regardless of whether the installation service relates to its own products or standalone installation services. Therefore, the Group determined there are two separate performance obligations, and recognizes product sales and installation revenue separately.

 

B.Financial services

 

Underwriting related advisory fees: The Group earns one-time advisory fees from its services provided to underwriters, financial institutions or underlying corporate issuers for offerings on PRC provincial or national asset exchanges or other designated markets. The Group enters into one-time advisory fee agreements with underwriters, financial institutions and issuers, which specifies the key terms and conditions of the arrangement. Such agreements generally do not include rights of return, credits or discounts, rebates, price protection or other similar privileges. The Group earns a one-time advisory fee from its clients upon offerings on the PRC provincial or national asset exchanges or other designated markets. Revenue is calculated as a fixed charge rate with the amount of the offering (prorated by the period length). The Group believes such arrangement represents a performance obligation and is satisfied at point of time, therefore, the underwriting related advisory fees are recognized as revenue upon the closing of the offerings.

 

Recurring service fees: The Group also provides ongoing user management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products in exchange for a recurring service fee. Recurring service agreements do not include rights of return, credits or discounts, rebates, price protection or other similar privileges. Recurring service fees are calculated as a fixed percentage of the qualified investments made by users during the contractual investment period of the direct banking and other financial products. Payment of recurring service fees by commercial banks and financial institutions are normally on a regular basis (typically quarterly or annually). The Group believes such arrangement requires the Group to provide ongoing user management services, which represents a performance obligation that the Group satisfies over time. Therefore, the recurring service revenue is recognized over the contract term.

 

Practical expedient

 

The Group has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Group recognizes revenue in proportion to the amount the Group has the right to invoice for services performed.

 

Accounts and Contract Receivables

 

Accounts and contract receivables from equipment sales, installation services and financial services are stated at net realizable value. An allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. Judgment is required in assessing the realizability of these receivables, including the current credit worthiness of each customer and the related aging analysis. An allowance is provided for accounts when management has determined that the likelihood of collection is doubtful. The Group writes off accounts and contract receivables against the allowance when a balance is determined to be uncollectible.

 

Retainage receivables

 

Retainage receivables represent the amount retained by the Group’s customers to ensure the quality of the installation services and any possible follow-up maintenance related to the installation. If there is no dispute regarding the quality of the installation project during the year, such retainage receivable will be paid by the Group’s customer based on contractual term, which is typically from one year to five years. Management regularly reviews the aging of retainage receivables and changes in payment trends and records an allowance when management believes collection of amounts due are at risk.

 

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Inventories

 

Inventories are stated at the lower of cost or market value. Inventories consist of raw materials, finished goods, working in process, low value consumables, and installation projects in process that had not been completed. Provision is made for slow moving, obsolete or unusable inventory.

 

Income taxes

 

The Group’s subsidiaries in China are subject to the income tax laws of the PRC and Hong Kong. No taxable income was generated outside the PRC and Hong Kong for the years ended December 31, 2019, 2018 and 2017. The Group accounts for income tax under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the differences between financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Deferred tax assets are also provided for carryforward losses which can be used to offset future taxable income. Deferred income taxes will be recognized if significant temporary differences between tax and financial statements occur. A valuation allowance is established against net deferred tax assets when it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The Group recorded a valuation allowance of $1,341,877 to reduce the amount of deferred tax assets as of December 31, 2019, and considered no valuation allowance is necessary as of December 31, 2018 and 2017.

 

The Group continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties relating to income taxes have been incurred during the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, the tax years ended December 31, 2017 through December 31, 2019 for the Group’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

Under the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income. The Group believes that it has provided the best estimates of its accrued tax liabilities because those accruals are based on the prevailing tax rates stipulated by the laws.

 

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C. Research and development, patents and licenses

 

Research and Development

 

For the years ended December 31, 2019, 2018 and 2017, we spent $492,696, $358,411 and $508,282, respectively, on R&D. We anticipate that we will focus our research and development efforts on improving existing products and developing new technology in the coming years.

 

We are committed to researching and developing valves for use in the pharmaceutical, biological, food and beverage, semi-conductor, electronic and other clean industries. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. Our research and development efforts, led by our Chief Technical Officer, Xiaoliang Xue, are an integral part of our operations and the crux of its competitive advantage and differentiation strategy.

 

The Research and Development team has ten (10) dedicated researchers and analysts focusing on mechanical design, mechatronics, CAD design, mold design and welding. Quality control is an important aspect of the team’s work and ensuring quality at every stage of the process has been a key driver in maintaining and developing brand value for the Company.

 

In addition, we sent employees to Italy, Germany and the United States to study clean product manufacturing, installation and connection process so that the Company is current on advanced International Technology. It is through these collaborations that we have managed to secure important breakthroughs resulting in proprietary knowledge and patents.

 

D. Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

E. Off-balance Sheet Arrangements

 

There were no off-balance sheet arrangements as of December 31, 2019, December 31, 2018 and December 31, 2017 that have or that in the opinion of management are likely to have, a current or future material effect on our financial condition or results of operations.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2019:

  

   Payment Due by Period 
       Less than   1 – 3   3 – 5   More than 
Contractual Obligations  Total   1 year   years   years   5 years 
Bank loans  $861,846   $861,846   $-   $-   $- 
Operating lease arrangement   2,693,569    275,516    518,181    342,365    1,557,507 
Financing lease arrangement   211,300    156,574    54,726    -    - 
Total  $3,766,715   $1,293,936   $572,907   $342,365   $1,557,507 

 

G. Safe Harbor

 

See “SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.”

 

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Item 6. Directors, Senior Management and Employees

 

A. Directors and Management

 

The following table provides information regarding our executive officers and directors:

 

Name   Age   Position(s)
Anyuan Sun   42   Chief Executive Officer and Chairman of Board
Xiaoliang Xue   34   Chief Technical Officer
Changjuan Liang   37   Chief Financial Officer
Xiao Jin   55   Financial Controller
Zuoqiao Sun Zhang   65   Director
Lingmin Sun   36   Director
Xuesong Liu   46   Independent Director
Hua Zhang   54   Independent Director
Xianpang Hu   51   Independent Director
Haiying Xiang   37   Independent Director

 

The business address of each of the directors and senior management is c/o Zhejiang Xibolun Automation Project Technology Co., Ltd., No. 587-A 15th Road, 3rd Av. Binhai Ind. Park, Economic & Technology Development Zone, Wenzhou, Zhejiang, China 325000.

 

Anyuan Sun. Mr. Sun was our director from May 2012 to August 2013, and he was appointed as the Chairman of the Board of Directors in September 2015. Mr. Sun is also the Chief Executive Officer of the Company. He is a director of Xibolun Equipment since January 2016, a Supervisor of Zhejiang Xibolun since 2014 and a director of HK Xibolun since 2012. Mr. Sun is a valve engineer who co-founded our oldest subsidiary, Xibolun Equipment, in 2005. For more than ten years, Mr. Sun has also served as our Company’s chief engineer and president. Mr. Sun completed his continuing education in Zhejiang University in 2011 and he earned his MBA from City University of Macau in 2014.

 

Xiaoliang Xue. Mr. Xue has been with the Company for over ten years. He is also a director of Xibolun Equipment since January 2016. Mr. Xue started his employment with Xibolun Equipment. During his time in the Company, he has helped our company to obtain more than 20 inventions and patents. In addition to serving as our Chief Technical Officer now, Mr. Xue used to serve in Xibolun Equipment as a technician, technical director, sales director and engineering director since 2005 to assist with and manage technology, sales and engineering related matters. During his tenure in the Company, Mr. Xue has been involved in the development and design of a variety of valves, such as sanitary ball valves, sanitary butterfly valves and sanitary diaphragm valves.

  

Changjuan Liang. Ms. Liang has been our Chief Financial Officer since August 2019. Ms. Liang has served as Chief Financial Officer of Fintech (Shanghai) Investment Holding Co., Ltd. since May 2019. From August 2018 through April 2019, Ms. Liang was a senior financial manager for Shanghai NiSun Enterprise Management Group Co., Ltd., a PRC company controlled by Bodang Liu, the largest shareholder of our Company. From October 2010 through August 2017, Ms. Liang was a Financial Officer of Chubutsu Precise Electronic Company Limited, a PRC company engaged in the air conditioning industry. Ms. Liang obtained her bachelor’s degree in Accounting from China Central Radio and TV University in January 2010.

 

Xiao Jin. Mr. Jin has been our Financial Controller since 2012. Mr. Jin started his employment with Xibolun Equipment. He has overall responsibility for the Company’s accounting, financial management, internal control and financing services. From 2002 through April of 2012, Mr. Jin was the Chief Financial Officer of Zhejiang Juneng Lesi Pharmaceutical Co., Ltd., where he was responsible for the company’s overall accounting, financial management, internal control, financing, investment and administration, logistics management and outreach work. Mr. Jin received his Executive MBA from Shanghai Jiaotong University in 2011 and his bachelor’s degree majored in Economic Management from Open College in Party School of the Central Committee of C.P.C. in 2002 in China.

 

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Zuoqiao Sun Zhang. Mr. Sun Zhang was a director of our Company since 2013 to September 2015, and he was appointed as the director of the Company again in January 15, 2016. He has been a Supervisor of Xibolun Automation since 2012. Since our founding, Mr. Sun Zhang has been our largest shareholder. Mr. Sun Zhang has been involved in business since 1985, when he established the first electrical appliance switch factory in Wenzhou, which employed more than 50 people. From 1996 to 2003, he was the factory manager of Si Jia Tong Yong Biological and Chemical Dairy Products in Wenzhou. From 2004 to 2012 he expanded his business geological coverage to Wuhan City and North China for our company. Over 30 years in business, Mr. Sun Zhang has become an expert in the valve manufacturing sector for pharmaceutical and medical companies. In addition to his activities with our company, Mr. Sun Zhang also invests privately. Mr. Sun Zhang graduated from Wenzhou Adult Vocational High School in 2011. We have selected Mr. Sun Zhang as a director because of his experience in the valve manufacturing business.

 

Lingmin Sun. Mr. Lingmin Sun has served as our Marketing Director since March 2017 and a member of our Board of Directors since December 2017. In this role as the Marketing Director, he is responsible for all aspects of sales and marketing of our products and product-related services. Mr. Sun has managed sales and marketing services related to pharmaceutical fluid equipment and engineering for more than 10 years and accumulated a wealth of customer resources and management experience. From March 2014 to February 2017, he was the Director of Marketing for Zhejiang Xibolun Automatically Control System Engineering Technology Co., Ltd. We have elected Mr. Sun as a director to serve as a director because of his business and management skills and experience in our industry and business.

 

Xuesong Liu. Since 2015, Dr. Xuesong Liu has been the General Manager and Chairman of the Board of Luoyang Zeda Huikang Pharmaceutical Technology Co., Ltd., and the Chairman of the Board of both Hangzhou Zeda Health Technology Co., Ltd. and Hangzhou Huikang Health Care Product Co., Ltd. Started from 2011, he has been the deputy director of the Institute of Modern Traditional Chinese Medicine of Zhejiang University, a doctoral supervisor in College of Pharmaceutical Science of Zhejiang University, General Manager and Chairman of the Board of Suzhou Zeda XingBang Pharmaceutical Technology Co., Ltd., Chairman of the Board of Suzhou Zheyuan Automation Engineering Technology Co., Ltd. and Supervisor of Hangzhou Enneng Technology Co., Ltd. From 2010, Dr. Liu started to be a director in Hangzhou Tianchang Railway Equipment Technology Co., Ltd. and a professor in College of Pharmaceutical Science of Zhejiang University. Since 2009, Dr. Liu has been the Chairman of the Board of Wenzhou Zhekang Pharmaceutical Equipment Technology Co., Ltd. He is also the director of the Chinese Medicine Pharmaceutical Engineering Research Laboratory in Zhejiang University since 2006. At Zhejiang University, his work focuses on process analytical technology, advanced manufacturing technology and quality control technology for pharmaceutical production. Over the past five years, he has undertaken approximately twenty-five scientific research projects in his fields of expertise, including ten projects at a national or province level, including projects for China’s National Natural Science Foundation and National Development and Reform Commission. Dr. Liu received a doctorate degree majored in Pharmaceutical Analysis in 2005, a master’s degree majored in Industry Automation in 1998, and a bachelor’s degree majored in Industry Electric Automation in 1995, all from Zhejiang University. We have selected Dr. Liu as a director because of his expertise in our industry.

 

Hua Zhang. Since 2009, Mr. Zhang has been the General Manager of Hangzhou Topchoice Medical Investment Management Co., Ltd. He has also been a Manager of Hangzhou Fenghao Technology Co., Ltd. since 2003. From 2001 through 2009, Mr. Zhang was the Chief Executive Officer of Zhejiang Topchoice Investment Technology Co., Ltd. In these roles, Mr. Zhang has leveraged his expertise in the financial investment and medical equipment industries. From 1987 to 2001, Mr. Zhang was an associate professor and dean at Zhejiang Physical Education Technology Institute. Mr. Zhang obtained his bachelor degree in Education from Zhejiang University in 1987. We have chosen Mr. Zhang to serve as a director because of his expertise in finance.

 

Xianpang Hu. Mr. Hu was appointed as a member of the Academic Committee of China Academy of Management Science since 2013. Since 2011, Mr. Hu has served as the Director of the Institute of Law of China Academy of Management Science and the Secretary General of Chen Guang Zhong Education Foundation. In addition, he has been a researcher in the Institute of Education Science of China Academy of Management Science since 2010. From 2009, Mr. Hu has also served as a lawyer in Beijing Hanheng Law Firm. Mr. Hu brings his experience as a lawyer who has published more than 20 papers on legal matters in China. In his capacity with the Institute of Law, Mr. Hu has organized and hosted international symposia on criminal law matters. From 2010 to 2014, Mr. Hu was the Vice President of the Zhejiang Chamber of Commerce in Beijing. From October 2010 to March 2011, Mr. Hu was the Deputy Director of the Second Prosecution Office of Shanxi Provincial People’s Procuratorate. Mr. Hu received his doctorate degree from the Central University of Nationalities in 2009 in China. After being a postdoctoral researcher in legal studies area in China University of Political Science and Law from 2009 to 2012, he also obtained a postdoctoral certificate in 2012. We have chosen Mr. Hu to serve as a director because of the perspective he brings to legal matters in China and his reputation as a well-respected scholar.

 

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Haiying Xiang. Ms. Xiang is a Commercial Officer at China Tiesiju Civil Engineering Group Co., Ltd Angolan Branch and responsible for contract management, commercial information management and marketing management. Previously she was a Senior Internal Controller with Siemens Limited China where she worked since 2012. She works in the Controlling Department of Industry Sector and is tasked with Sarbanes-Oxley compliance and support, coordination of compliance with global risk management and internal control programs for eighteen operating companies and analysis and optimization of business processes. She has been a Supervisor of Shanghai Bobo Biological Technology Co., Ltd. since 2011. Previously she was an Internal Controller at Siemens Mechanical Drive (Tianjin) Co., Ltd. from 2008 through 2011, where she focused on compliance, internal controls and risk control. Before that, Ms. Xiang was a member of the Trading Department of Qingdao Far East Gem and Jewelry Co., Ltd. from 2006 through 2007. Ms. Xiang obtained her certified Internal Auditor qualification in 2012. She received her bachelor’s degree in Economics from Nankai University in 2004. She also received her master’s degree in Economics from Nankai University in 2006. We have chosen Ms. Xiang as a director because of her experience with financial matters and experience with public company compliance matters. We appointed Ms. Xiang as our audit committee financial expert.

 

Election of Officers

 

Our executive officers are elected by, and serve at the discretion of, our board of directors. Our Chief Executive Officer and Chairman of the Board, Anyuan Sun, and one of our directors, Lingmin Sun, are the sons of one of our directors, Mr. Zuoqiao Sun Zhang. Anyuan Sun and Lingmin Sun are brothers. Other than these relationships, there is no family relationship among any of our directors or executive officers.

 

Board of Directors and Board Committees

 

Our board of directors consists of seven (7) directors. We expect that all current directors will continue to serve until the next annual meeting of shareholders at which their respective class of directors is re-elected or until their successors have been duly elected and qualified. A majority of our Board of Directors (namely, Mr. Xuesong Liu, Mr. Hua Zhang, Mr. Xianpang Hu and Ms. Haiying Xiang) are independent, as such term is defined by The Nasdaq Capital Market.

 

The directors are divided into three classes, as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual general meeting of shareholders in 2020 and every three years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders in 2021 and every three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2021 and every three years thereafter.

 

If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third parties to gain control of our company by making it difficult to replace members of the Board of Directors.

 

A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.

 

Mr. Anyuan Sun currently holds both the positions of Chief Executive Officer and Chairman of the Board. We do not have a lead independent director because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a relatively small company; as such we deem it appropriate to be able to benefit from the guidance of Mr. Sun as both our principal executive officer and Chairman of the Board. Our Board of Directors plays a key role in our risk oversight. The Board of Directors makes all relevant Company decisions. As a smaller company with a relatively small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.

 

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Board Committees

 

We have established three standing committees under the board: the audit committee, the compensation committee and the nominating committee. The audit committee is responsible for overseeing the accounting and financial reporting processes of our Company and audits of the financial statements of our Company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors.

 

Haiying Xiang qualifies as an audit committee financial expert and she is the chair of the audit committee. Xianpang Hu is the chair of the compensation committee. Xuesong Liu is the chair of the nominating committee. Xuesong Liu and Xianpang Hu serve on all three committees, Hua Zhang serves in compensation committee and nomination committee, Haiying Xiang only serves in audit committee, and each is an independent director.

 

Duties of Directors

 

Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

 

The functions and powers of our board of directors include, among others:

 

  ● appointing officers and determining the term of office of the officers;

 

  ● authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;

 

  ● exercising the borrowing powers of the company and mortgaging the property of the company;

 

  ● executing checks, promissory notes and other negotiable instruments on behalf of the company; and

 

  ● maintaining or registering a register of mortgages, charges or other encumbrances of the company.

 

Interested Transactions

 

A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.

 

Remuneration and Borrowing

 

The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party.

 

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Qualification

 

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.

 

Limitation of Director and Officer Liability

 

Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

 

Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.

 

We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.

 

We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our amended and restated memorandum and articles of association.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

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Code of Business Conduct and Ethics

 

The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s directors, officers, employees and advisors. The Code of Ethics is attached as an exhibit to this annual report. We have also posted a copy of our code of business conduct and ethics on our website at www.hebrontechnology.com.

 

B. Compensation

 

Director Compensation

 

All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected or until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled to receive $10,000 per year for serving as directors and may receive option grants from our company. In addition, non-employee directors are entitled to receive reimbursement for their actual travel expenses for each Board of Directors meeting attended.

 

During fiscal 2019, 2018 and 2017, no employee members of our Board of Directors received compensation in their capacity as directors. 

 

During the year ended December 31, 2019, we paid each of our four independent directors an annual director fee of $10,000. We also reimburse all directors for any out-of-pocket expenses incurred by them in connection with their services provided in such capacity. In addition, we may provide incentive grants of stock, options or other securities convertible into or exchangeable for, our securities. Prior to our initial public offering, we did not pay any non-employee directors because we did not have any non-employee directors.

 

Executive Compensation

 

We have a compensation committee approving our salary and benefit policies. Our compensation committee determines the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.

 

Our board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The board of directors will make an independent evaluation of appropriate compensation to key employees, with input from management. The board of directors has oversight of executive compensation plans, policies and programs.

 

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Summary Compensation Table 

 

The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to us for the year ended December 31, 2019, 2018, and 2017.

 

Name and Principal Position  Fiscal 
Year		  Salary
($)		   Bonus
($)		   Stock 
Awards
($)		   All Other 
Compensation
($)		   Total
($)		 
Anyuan Sun  2019   60,000    0    0    0    60,000 
Chief Executive Officer  2018   60,000    0    0    0    60,000 
   2017   60,000    0    0    0    60,000 
                             
Steven Fu (1)  2019   -                   - 
Former Chief Financial Officer  2018   45,000    0    0    0    45,000 
   2017   45,000    0    0    0    45,000 
                             
Changjuan Liang (2)  2019   48,068    0    0    0    48,068 
Current Chief Financial Officer  2018   -    -    -    -      
   2017   -    -    -    -      
                             
Xiaoliang Xue  2019   30,000    0    0    0    30,000 
Chief Technical Officer  2018   30,000    0    0    0    30,000 
   2017   30,000    0    0    0    30,000 

 

(1)Steven Fu resigned as the Chief Financial Officer, effective on August 8, 2019.
(2)Changjuan Liang was appointed as the succeeding Chief Financial Officer, effective on August 8, 2019.

 

Equity-Based Compensation

 

In addition to base salary, we also offer certain equity-based incentive compensation awards to employees, directors or consultants. Our existing stock-based incentive compensation plan, the 2019 One Million Share Incentive Plan, was approved by our Board of Directors on November 20, 2019 and ratified by shareholders on December 20, 2019. This plan serves as the primary vehicle by which we offer long-term incentives and rewards to our executive officers and key employees. We regard the 2019 stock incentive plan as a key retention tool. Retention serves as an important factor in our determination of the type of award to grant and the number of underlying shares that are granted in connection with that award.

 

Employment Agreements

 

Our employment agreements with our officers generally provide for employment for a specific term (typically approximately two years at a time) and pay annual salary, health insurance, pension insurance, and paid vacation and family leave time. The agreement may be terminated by either party as permitted by law. In the event of a breach or termination of the agreement by our company, we may be obligated to pay the employee twice the ordinary statutory rate. In the event of a breach or termination causing loss to our company by the employee, the employee may be required to indemnify us against loss.

 

Anyuan Sun

 

We entered an employment agreement with our Chief Executive Officer, Mr. Sun, effective as of January 1, 2012 and running through December 31, 2014 that provided a salary of approximately $2,522 per month. We renewed the employment agreement a few times and the current employment agreement provided an annual salary of $60,000.

 

Changjuan Liang

 

We entered an employment agreement with our Chief Financial Officer, Mr. Changjuan Liang, effective as of August 8, 2019 and running through July 31, 2022 that provide an annual salary of $48,468.

 

Xiaoliang Xue

 

We entered an employment agreement with Chief Technical Officer, Mr. Xiaoliang Xue, effective as of January 1, 2012 and running through December 31, 2014 at the salary of approximately $1,513 per month. We renewed the employment agreement a few times and the current agreement provided an annual salary of $30,000.

 

Xiao Jin

 

We entered an employment agreement with our Financial Controller, Mr. Xiao Jin, effective as of January 16, 2014 and running through January 15, 2017 with a salary of approximately $1,135 per month. We renewed the employment agreement a few times and the current agreement provided a salary of approximately $3,591 per month.

 

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Item 7. Major Shareholders and Related Party Transactions

 

Major Shareholders 

 

The following table sets forth information with respect to beneficial ownership of our common shares as of April 24, 2020 by:

 

  ● Each person who is known by us to beneficially own more than 5% of our outstanding common shares;

 

  ● Each of our director, director nominees and named executive officers; and

 

  ● All directors and named executive officers as a group.

 

The number and percentage of Common Shares beneficially owned are based on 16,569,577 Common Shares issued as of April 24, 2020 (the Company has 17,710,471 common shares outstanding if including 1,440,894 common shares to be issued to the original shareholders of Hengpu as a purchase consideration in connection with the Hengpu Acquisition). Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or greater of our Common Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of Common Shares beneficially owned by a person listed below and the percentage ownership of such person, Common Shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of April 24, 2020 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all Common Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of Hebron Technology Co., Ltd., No. 936, Jinhai 2nd Road, Konggang New Area, Longwan District, Wenzhou City, Zhejiang Province, People’s Republic of China. As of April 23, 2020, we had 100 shareholders of record.

 

Named Executive Officers and Directors   Amount of
Beneficial
Ownership(1)		     Percentage
Ownership		     Percentage
Voting
Power(2)		  
Directors and Named Executive Officers:                  
Anyuan Sun, Chief Executive Officer and Chairman(3)     -       -       -  
Xiaoliang Xue, Chief Technical Officer     -       -       -  
Changjuan Liang, Chief Financial Officer(4)     100,000       *       *  
Xiao Jin, Financial Controller     -       -       -  
Zuoqiao Sun Zhang, Director(5)     -       -       -  
Lingmin Sun, Director     -       -       -  
Xuesong Liu, Director     -       -       -  
Hua Zhang, Director     -       -       -  
Haiying Xiang, Director     -       -       -  
Xianpang Hu, Director     -       -       -  
All directors and executive officers as a group (10 persons)     100,000       *       *  
5% Beneficial Owners:                        
NiSun International Enterprise Management Group Co., Ltd.(6)     7,778,400       46.94 %     46.94 %
Yung Kong Chin(7)     1,200,000       7.24 %     7.24 %

   

*Less than 1% of our outstanding shares.

(1)Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the Common Shares. All shares represent only Common Shares held by shareholders as no options are issued or outstanding.

(2)Class A Common Shares have one vote per share. Prior to a share purchase transaction consummated in July 2019, our issued and outstanding shares consisted of Class A common shares and Class B common shares. Class B Common Shares had five votes per share. In a share purchase transaction consummated in July 2019, NiSun International Enterprise Management Group Co., Ltd. acquired all of Class B Common Shares previously held by Zuoqiao Sun Zhang and Wise Metro Development Co., Ltd., respectively, and all of the Class B Common Shares were automatically converted into Class A Common Shares upon the share transfers. See notes 3 and 5 below.

(3)Mr. Anyuan Sun previously beneficially owned: (a) the 1,800,000 Class B Common Shares held by Wise Metro Development Co., Ltd., and (b) the 5,978,400 Class B Common Shares held by Mr. Zuoqiao Sun Zhang. In a share purchase transaction consummated in July 2019, all of such 7,778,400 Class B Common Shares beneficially owned by Mr. Sun were acquired by NiSun International Enterprise Management Group Co., Ltd., a Cayman Islands company, and automatically converted into Class A Common Shares upon the transfers.

(4)

Consists of 100,000 Class A Common Shares granted under the restricted stock award on April 6, 2020 pursuant to the Company’s 2019 One Million Share Incentive Plan.

(5) Mr. Zuoqiao Sun Zhang, father of Mr. Anyuan Sun, previously nominally held 5,978,400 Class B Common Shares of the Company for Mr. Anyuan Sun and did not, directly or indirectly, exercise or share voting or investment power of any shares held by him. In a share purchase transaction consummated in July 2019, all of such shares were transferred to NiSun International Enterprise Management Group Co., Ltd. and automatically converted into Class A Common Shares upon the transfer.

(6)NiSun International Enterprise Management Group Co., Ltd., a Cayman Islands company, holding 7,778,400 Class A Common Shares of the Company, is solely owned by Mr. Bodang Liu, who may be deemed to have the voting and dispositive power of such shares.

(7)Mr. Yung Kong Chin owns 90% of Paces Battle Group, Inc., a capital broker/dealer, through Westwind LLC owned by him. He is not a FINRA registered person, and has no role in the operations of Paces Battle Group.

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Related party transactions

 

In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since January 1, 2010, to which we have been a participant, in which the amount involved in the transaction is material to our company and in which any of the following is a party: (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, our Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of our Company that gives them significant influence over our Company, and close members of any such individual’s family; (d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of our Company, including directors and senior management of companies and close members of such individuals’ families; and (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence.

  

There are no other related party transactions for the year ended December 31, 2019, 2018 and 2017, except the transactions mentioned below.

 

Starting on July 12, 2019, we rented office from NiSun Shanghai and incurred $63,749 rent expense for the year ended December 31, 2019. The annual rent from NiSun Shanghai is approximately $113,200.

 

As of December 31, 2019, we had due to related party balance of $7,345,399 due to Mr. Bodang Liu, our largest shareholder, of which, $7 million was related to purchase price payable for acquisition of NiSun BVI. The due to related party balance was non-interest bearing and due on demand. There was nil balance due to related party as of December 31, 2018 and 2017.

 

From time to time, our chief executive office and his immediate family members jointly provided guarantees or personal assets as collateral to our loan agreements, trade financing agreements, letters of guarantee, funding agreements and other credit agreements with commercial banks. For the years ended December 31, 2019, 2018 and 2017, the outstanding bank loan balance amounted to $861,846, $1,698,058 and $872,852, respectively, were guaranteed by the Group’s chief executive officer and his immediate family members.

  

Future Related Party Transactions

 

Our Corporate Governance Committee of our board of directors (which consists solely of independent directors) have approved all related party transactions. All material related party transactions are made or entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties.

 

C.Interests of experts and counsel

 

Not applicable for annual reports on Form 20-F.

 

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ITEM 8. Financial Information

 

A.Consolidated Statements and Other Financial Information

 

Please refer to Item 18.

 

We incorporate by reference in the Registration Statement on Form F-3 (File No. 333- 222995) our consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2019, which appears in this Annual Report on Form 20-F.

 

Legal and Administrative Proceedings

 

We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

 

Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.

 

If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries. Current PRC regulations permit our PRC subsidiaries to pay dividends to HK Xibolun only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Our subsidiaries in China are required to set aside statutory reserves and have done so.

 

In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations in China may be used to pay dividends to our company.

 

B.Significant Changes

 

We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

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Item 9. The Offer and Listing

 

A.Offer and listing details

 

Our common shares (or Class A common shares since March 19, 2018) have been listed and traded on the Nasdaq Capital Market since December 27, 2016 under the symbol “HEBT.”  

 

B.Plan of distribution

 

Not applicable for annual reports on Form 20-F.

 

C.Markets

 

Our Class A common shares are listed on the Nasdaq Capital Market under the symbol “HEBT.”

 

D.Selling shareholders

 

Not applicable for annual reports on Form 20-F.

 

E.Dilution

 

Not applicable for annual reports on Form 20-F.

 

F.Expenses of the issue

 

Not applicable for annual reports on Form 20-F.

 

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Item 10. Additional Information

 

A.Share capital

 

Not applicable for annual reports on Form 20-F.

 

B.Memorandum and articles of association

 

The information required by this item is incorporated by reference to the material headed “Description of Share Capital” in our Registration Statement on Form F-1, File no. 333-208583, filed with the SEC on July 13, 2016, as amended. We incorporate by reference into this annual report our Third Amended and Restated Memorandum and Articles of Association filed as Exhibit 1.6 to our annual report on Form 20-F filed with the Securities and Exchange Commission on April 26, 2018.

 

C.Material contracts

 

We have not entered into any material contracts other than in the ordinary course of business and otherwise described elsewhere in this annual report.

 

D.Exchange controls

 

Foreign Currency Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries. 

 

In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. 

 

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. 

 

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We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary. 

 

SAFE Circular 75 

 

Under the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, issued by SAFE on October 21, 2005 and its implementation rules, a PRC resident (whether a natural or legal person) is required to complete an initial registration with its local SAFE branch before incorporating or acquiring control of an offshore special purpose vehicle, or SPV, with assets or equity interests in a PRC company, for the purpose of offshore equity financing. The PRC resident is also required to amend the registration or make a filing upon (1) the injection of any assets or equity interests in an onshore company or undertaking of offshore financing, or (2) the occurrence of a material change that may affect the capital structure of a SPV. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE Circular 75, which imposed obligations on PRC subsidiaries of offshore companies to coordinate with and supervise any PRC-resident beneficial owners of offshore entities in relation to the SAFE registration process.

 

Regulation of Dividend Distribution 

 

The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.

 

E.Taxation

 

The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax consequences related to an investment in our Class A common shares. It is directed to U.S. Holders (as defined below) of our Class A common shares and is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our Class A common shares, such as the tax consequences under state, local and other tax laws.

 

The following brief description applies only to U.S. Holders (defined below) that hold Class A common shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. 

 

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The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes,

 

●an individual who is a citizen or resident of the United States;

 

  ● a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;

 

  ● an estate whose income is subject to U.S. federal income taxation regardless of its source; or

 

  ● a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

Generally

 

HEBT and Nisun BVI are a tax-exempt companies incorporated in the British Virgin Islands. HK Xibolun and Nisun HK are subject to Hong Kong profits tax rate. The rest of the Company’s subsidiaries and VIEs and VIEs’ subsidiaries in PRC are governed by PRC laws.

 

Our company pays PRC enterprise income taxes, value added taxes and business taxes in China for revenues from our subsidiaries, VIEs and VIEs’ subsidiaries (The business tax has been incorporated into VAT since May 1, 2016.).

 

People’s Republic of China Enterprise Taxation

 

The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”

 

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. The Enterprise Income Tax Law (the “EIT Law”), effective as of January 1, 2008, enterprises pay a unified income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises.

 

Xibolun Automation and Hengpu are recognized as a High-technology Company by the Chinese government and is subject to a favorable income tax rate of 15%. Both Xibolun Automation and Hengpen’s High-technology certificates are valid for three years starting from November 2018 and subject to renewal. In accordance with the implementation rules of the Income Tax Law of the PRC, for the enterprises newly established in the Horgos Development Zone within the scope of "preferential catalogue of income tax for key industries encouraged to develop in Xinjiang's difficult areas", the enterprise income tax shall be exempt for five years from the tax year of the first production and operations income. Khorgos is established in the Horgos Development Zone and its income tax is eligible to be exempt for five years starting from 2019. The rest of the Company’s subsidiaries, VIEs and VIEs’ subsidiaries are subject to corporate income tax at the PRC unified rate of 25%.

 

Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. If the PRC tax authorities subsequently determine that we, HK Xibolun and NiSun HK or any future non-PRC subsidiary should be classified as a PRC resident enterprise, then such entity’s global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments from our subsidiaries and VIEs in PRC to us may be subject to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If HEBT or HK Xibolun or NiSun HK is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid by its Chinese subsidiaries to such entity. In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.

 

According to the Sino-U.S. Tax Treaty which was effective on January 1, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation should be taxed by that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to foreigner in other nations, a rate 10% tax will be charged.

 

Our Company will have to withhold that tax when we are distributing dividends to our foreign investors. If we do not fulfill this duty, we will receive a fine up to five times of the amount we are supposed to pay as tax or other administrative penalties from government. The worst case could be criminal charge of tax evasion to responsible persons. The criminal penalty for this offense depends on the tax amount the offender evaded, and the maximum penalty will be 3-7 years imprisonment plus fine.

 

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PRC Value Added Tax

 

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, issued in December 1993, all entities and individuals that are engaged in the businesses of sales of goods, provision of services and importation of goods into China are generally subject to a VAT at a rate ranging from 6% to 13% of the gross sales proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of services that have generated the gross sales proceeds.

 

PRC Business Tax

 

Companies in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from providing services and revenue generated from the transfer of intangibles. However, since May 1, 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. In general, this newly implemented policy is intended to relieve many companies from heavy taxes under currently slowing down economy. In the case of Hebron’s Chinese subsidiaries, even though the VAT rate ranges from 6% to 13%, with the deductibles the company may get in the business process, it will bear less burden than previous Business Tax.

 

British Virgin Islands Taxation

 

Under the BVI Business Companies Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Business Companies Act.

 

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Business Companies Act. In addition, shares of companies incorporated or re-registered under the BVI Business Companies Act are not subject to transfer taxes, stamp duties or similar charges.

 

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.

 

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United States Federal Income Taxation

 

The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:

 

  ● banks;

 

  ● financial institutions;

 

  ● insurance companies;

 

  ● regulated investment companies;

 

  ● real estate investment trusts;

 

  ● broker-dealers;

 

  ● traders that elect to mark-to-market;

 

  ● U.S. expatriates;

 

  ● tax-exempt entities;

 

  ● persons liable for alternative minimum tax;

 

  ● persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction;

 

  ● persons that actually or constructively own 10% or more of our voting shares;

 

  ● persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or

 

  ● persons holding our common shares through partnerships or other pass-through entities.

 

Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.

 

Tax Treaties

 

As above mentioned, according to the Sino-U.S. Tax Treaty which was effective on January 1, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation should be taxed by that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to foreigners in other nations, a rate 10% tax will be charged.

 

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Taxation of Dividends and Other Distributions on our Common Shares

 

Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the common shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, common shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on The NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares.

 

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

 

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Class A common shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

 

Taxation of Dispositions of Common Shares

 

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the common shares. The gain or loss will generally be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Class A common shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.

  

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Passive Foreign Investment Company

 

A non-U.S. corporation is considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year if either:

 

  ● at least 75% of its gross income is passive income, defined as income from interest, dividends, rents, royalties, gains on property producing foreign personal holding company income and certain other income that does not involve the active conduct of a trade or business; or

 

  ● at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

 

We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

 

Based on the market price of our common shares, the value of our assets and the composition of our assets and income, we believe that we were not a PFIC for our taxable year ended December 31, 2019, December 31, 2018 or December 31, 2017. However, given the factual nature of the analyses and the lack of guidance, no assurance can be given. We do not expect to be a PFIC for our taxable year ending December 31, 2019. However, because PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year, our actual PFIC status will not be determinable until the close of the taxable year and, accordingly, there is no guarantee that we will not be a PFIC for the current taxable year or any future taxable year.

 

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will depend in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised in our initial public offering. If we are a PFIC for any year during which you hold common shares, we will continue to be treated as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common shares.

 

If we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these special tax rules:

 

  ● the excess distribution or gain will be allocated ratably over your holding period for the common shares;

 

  ● the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and

 

  ● the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital assets.

  

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in such common shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “Taxation of Dividends and Other Distributions on our Common shares” generally would not apply.

 

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The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including The NASDAQ Capital Market. If the common shares are regularly traded on The NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would be available to you were we to be or become a PFIC.

 

Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold common shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the common shares and any gain realized on the disposition of the common shares.

 

You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections discussed above.

 

Information Reporting and Backup Withholding

 

Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.

 

Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to common shares, subject to certain exceptions (including an exception for common shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold common shares. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

  

F.Dividends and paying agents

 

Not applicable for annual reports on Form 20-F.

 

G.Statement by experts

 

Not applicable for annual reports on Form 20-F.

 

H.Documents on display

 

We are subject to the information requirements of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC.

 

I.Subsidiary Information

 

Not applicable.

 

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to a variety of financial risks, including market risk (including currency risk, price risk and cash flow and fair value interest rate risk), credit risk and liquidity risk. Our overall risk management program focuses on preservation of capital and the unpredictability of financial markets and has sought to minimize potential adverse effects on our financial performance and position.

 

Foreign Exchange Risk

 

While our reporting currency is the U.S. Dollar, all of our consolidated sales and consolidated costs and expenses are denominated in the RMB. All of our assets are denominated in the RMB. As a result, we are exposed to foreign exchange risk as our sales and results of operations may be affected by fluctuations in the exchange rate between the U.S. Dollar and the RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB sales, earnings and assets as expressed in our U.S. Dollar financial statements will decline.

 

Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of stockholders’ equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or the Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market. The RMB depreciated approximately 2% in 2019.

 

Interest Rate Risk

 

Our interest rate risk arises from short and long-term borrowings. As of December 31, 2019 and 2018, we had no borrowings with variable rates and we were not exposed to cash flow interest rate risk. Borrowings issued at fixed rates expose us to fair value interest rate risk.

 

As of December 31, 2019 and 2018, we had no long-term interest-bearing assets or long-term interest-bearing liabilities.

 

Credit Risk

 

Our cash is invested primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a small amount of interest income.

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, contracts receivable, accounts receivable and retainage receivables. As of December 31, 2019 and 2018, $4,412,319 and $3,072,243 of the Group’s cash and cash equivalents and restricted cash was on deposit at financial institutions in the PRC, which the management believes are of high credit quality. In May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the Group’s accounts, as its aggregate deposits are much higher than the compensation limit. However, the Group believes that the risk of failure of any of these Chinese banks is remote. Bank failure is uncommon in China and the Group believes that those Chinese banks that hold the Group’s cash and cash equivalents, restricted cash and short-term investments are financially sound based on public available information.

 

Contracts receivable, accounts receivable and retainage receivables are typically unsecured and derived from revenue earned from customers, thereby they are exposed to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

 

Inflation

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

 

Item 12. Description of Securities Other than Equity Securities

 

With the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4, this Item 12 is not applicable, as the Company does not have any American Depositary Shares.

 

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PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

We do not have any material defaults in the payment of principal, interest, or any installments under a sinking or purchase fund.

 

Item 14. Material Modifications to the Rights of Securities Holders and Use of Proceeds

 

Material Modifications to the Rights of Security Holders

 

See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.

 

Use of Proceeds

 

Not applicable as we disclosed application of all the offering proceeds in our Annual Report on Form 20-F, File 001-37829, filed with the SEC on May 15, 2019.

  

Item 15. Controls and Procedures

 

  (a) Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Security Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of December 31, 2019, the end of the fiscal year covered by this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures were ineffective. Such conclusion is due to the presence of material weakness in internal control over financial reporting as described below.

 

106

 

 

  (b) Management’s annual report on internal control over financial reporting.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making its assessment, management used the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “2013 COSO Framework”). The 2013 COSO Framework outlines the 17 underlying principles and the following fundamental components of a company’s internal control:,(i) control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Our management has implemented and tested our internal control over financial reporting based on these criteria and identified certain material weaknesses set forth below. Based on the assessment, management determined that, as of December 31, 2019, we did not maintain effective internal control over financial reporting due to the existence of the following material weaknesses: 

 

  ● The Company does not have adequate internal accounting personnel with sufficient knowledge of the US GAAP and SEC reporting standards, which could lead to material misstatements being undetected in a timely manner.

 

  (c) Attestation report of the registered public accounting firm.

 

Not applicable. 

 

  (d) Changes in internal control over financial reporting.

 

The following changes in our internal controls over financial reporting occurred during the twelve months ended December 31, 2019 and have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

 

  ● We have begun to maintain written policies and procedures, and prepare Board minutes and resolutions for significant transactions on a timely basis. We believe these efforts will improve our internal controls.

 

Although we believe there is room to improve our segregation of duties related to certain job responsibilities for initiating, authorizing, and recording of certain transactions, our ability to improve such segregation is limited as a small-size public company.

 

Item 15T. Controls and Procedures

 

Not applicable.

 

107

 

  

Item 16. [Reserved]

 

Item 16A. Audit Committee Financial Expert

 

The Company’s board of directors has determined that Ms. Haiying Xiang qualifies as an “audit committee financial expert” in accordance with applicable Nasdaq Capital Market standards. The Company’s board of directors has also determined that Ms. Xiang and the other members of the Audit Committee are all “independent” in accordance with the applicable Nasdaq Capital Market standards.

 

Item 16B. Code of Ethics

 

The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s directors, officers, employees and advisors. The Code of Ethics is attached as an exhibit to this annual report. We have also posted a copy of our code of business conduct and ethics on our website at www.hebrontechnology.com.

 

Item 16C. Principal Accountant Fees and Services

 

Wei, Wei & Co., LLP was appointed by the Company on February 26, 2019 to serve as its independent registered public accounting firm for the year ended December 31, 2018 and re-appointed to serve for the year ended December 31, 2019. The Company’s previous independent auditors, Friedman LLP (“Friedman”), was dismissed on February 26, 2019. During the years ended December 31, 2017 and 2016 through the dismissal of Friedman on February 26, 2019, there were no disagreements between the Company and Friedman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Friedman, would have caused it to make reference to the subject matter of the disagreements in connection with its report on the Company’s consolidated financial statements for such periods. In addition, Friedman’s reports on the financial statements for the years of 2017 and 2016 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During 2017 and 2016 through the dismissal of Friedman on February 26, 2019, there were no “reportable events” as that term is defined in Item 16F(a)(1)(v) of Form 20-F.

 

Audit services provided by Wei, Wei & Co., LLP for the years of 2019 and 2018 included the examination of the consolidated financial statements of the Company and services related to periodic filings made with the SEC.

  

Fees Paid To Independent Registered Public Accounting Firm 

 

Audit Fees 

 

Wei, Wei & Co., LLP’s fees for the annual audit of our financial statements and review of the financial statements for fiscal 2019 was $275,000.

 

Wei, Wei & Co., LLP’s fees for the annual audit of our financial statements and review of the financial statements for fiscal 2018 were $180,000. 

 

Audit-Related Fees 

 

The Company has not paid Wei, Wei & Co., LLP for audit-related services in fiscal 2019 and 2018.  

 

Tax Fees 

 

The Company has not paid Wei, Wei & Co., LLP for tax services in fiscal 2019 and 2018.

 

All Other Fees 

 

The Company has not paid Wei, Wei & Co., LLP for any other services in fiscal 2019 and 2018.

 

Audit Committee Pre-Approval Policies 

 

Before Wei, Wei & Co., LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All services rendered by Wei, Wei & Co., LLP have been so approved.

 

Percentage of Hours 

 

All hours expended on the principal accountants’ engagement to audit our consolidated financial statements for 2019 were attributed to work performed by Wei, Wei & Co., LLP’s full-time permanent employees.

 

108

 

  

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Not applicable.

 

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Neither the Company nor any affiliated purchaser has purchased any shares or other units of any class of the Company’s equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act during the fiscal year ended December 31, 2019.

 

Item 16F. Change in Registrant’s Certifying Accountant

 

Not applicable.

 

Item 16G. Corporate Governance

 

We are incorporated in the British Virgin Islands and our corporate governance practices are governed by applicable British Virgin Islands law. In addition, because our Class A common shares are listed on The Nasdaq Capital Market, we are subject to Nasdaq’s corporate governance requirements. 

 

Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the NASDAQ Capital Market. NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities equaling 20% or more of the company’s common stock or voting power for less than the greater of market or book value. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers like the Company to follow their home country practice rather than this shareholder approval requirement. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above.

 

Item 16H. Mine Safety Disclosure

 

Not applicable.

 

109

 

  

PART III

 

Item 17. Financial Statements

 

See Item 18.

 

Item 18. Financial Statements

 

Our consolidated financial statements are included at the end of this annual report, beginning with page F-1.

 

Item 19. Exhibits

 

Exhibit No.   Description of Exhibit
     
1.1(1)   Articles of Association of Hebron Technology Co., Ltd.
     
1.2(2)   First Amended and Restated Articles of Association of Hebron Technology Co., Ltd.
     
1.3(1)   Memorandum of Association of Hebron Technology Co., Ltd.
     
1.4(1)   First Amended and Restated Memorandum of Association of Hebron Technology Co., Ltd.
     
1.5(2)   Second Amended and Restated Memorandum of Association of Hebron Technology Co., Ltd.
     
1.6(5)   Third Amended and Restated Memorandum of Association of Hebron Technology Co., Ltd.
     
2.1(6)   Registrant’s Form of Class A common share Certificate
     
2.2(6)   Registrant’s Form of Class B common share Certificate
     
4.1   Share Purchase Agreement dated April 16, 2019 among Hebron Technology Co., Ltd., Wise Metro Development Co., Ltd., Zuoqiao Sun Zhang, and NiSun International Enterprise Management Group Co., Ltd. (Cayman) (incorporated by reference to Exhibit 99.2 to Form 6-K filed with the Commission on June 4, 2019)
     
4.2(7)   English Translation of Office Lease dated April 25, 2019 between Shanghai Ningsheng Enterprise Management Group Co., Ltd. and Fintech (Shanghai) Digital Technology Co., Ltd.
     
4.3(7)   Trademarks, Technologies & Management and Consulting Services Agreement dated May 17, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Fintech (Shanghai) Digital Technology Co., Ltd., Shanghai Ningsheng Enterprise Management Group Co., Ltd. and Peng Jiang   
     
4.4(7)   Equity Interest Pledge Agreement dated May 17, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Fintech (Shanghai) Digital Technology Co., Ltd., Shanghai Ningsheng Enterprise Management Group Co., Ltd. and Peng Jiang   
     
4.5(7)   Equity Interest Holders’ Voting Rights Proxy Agreement dated May 17, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Shanghai Ningsheng Enterprise Management Group Co., Ltd. and Peng Jiang
     
4.6(7)   Exclusive Right and Option to Purchase Agreement dated May 17, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Fintech (Shanghai) Digital Technology Co., Ltd., Shanghai Ningsheng Enterprise Management Group Co., Ltd. and Peng Jiang
     
4.7   Form of Call Option Agreement (incorporated by reference to Exhibit 99.4 to Form 6-K filed with the Commission on June 4, 2019)
     
4.8(7)   Share Purchase Agreement dated July 12, 2019 between Hebron Technology Co., Ltd. and Bodang Liu
     
4.9   Employment Contract dated August 8, 2019 between Hebron Technology Co. Ltd. and Changjuan Liang (incorporated by reference to Exhibit 10.1 to Form 6-K filed with the Commission on August 13, 2019)
     
4.10(7)  

English Translation of Cooperation Contract dated November 8, 2019 between NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. and Tai'an Keyuan Basic Industry Investment and Construction Co., Ltd.

     
4.11  

2019 One Million Share Incentive Plan (incorporated by reference to Exhibit 99.1 to Form 6-K filed with the Commission on November 20, 2019)

     
4.12(7)   Share Purchase Agreement dated December 6, 2019 among Hebron Technology Co., Ltd., Jupiter Trading Co., Ltd (BVI) and Loong Fang Trading Co., Ltd (BVI)

 

110

 

 

4.13(7)   Share Exchange Agreement dated December 15, 2019 among Hebron Technology Co., Ltd., Beijing Hengtai Puhui Information Service Co. Ltd, Guoya Asset Management Co. Ltd. (BVI) and  HongKong D&L Technology Co., Limited
     
4.14(7)   Trademarks, Technologies & Management and Consulting Services Agreement dated December 31, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Beijing Hengtai Puhui Information Service Co. Ltd and Guoya Asset Management (Shenzhen) Co. Ltd.
     
4.15(7)   Equity Interest Pledge Agreement dated Equity Interest Pledge Agreement dated December 31, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Beijing Hengtai Puhui Information Service Co. Ltd and Guoya Asset Management (Shenzhen) Co. Ltd.
     
4.16(7)   Equity Interest Holders’ Voting Rights Proxy Agreement dated December 31, 2019 between NingChen (Shanghai) Enterprise Management Group Co., Ltd. and Guoya Asset Management (Shenzhen) Co. Ltd.
     
4.17(7)   Exclusive Right and Option to Purchase Agreement dated December 31, 2019 among NingChen (Shanghai) Enterprise Management Group Co., Ltd., Beijing Hengtai Puhui Information Service Co. Ltd and Guoya Asset Management (Shenzhen) Co. Ltd.
     
4.18(7)  

First Amendment to Share Exchange Agreement dated April 8, 2020 among Hebron Technology Co., Ltd., Beijing Hengtai Puhui Information Service Co. Ltd, Guoya Asset Management Co. Ltd. (BVI) and HongKong D&L Technology Co., Limited

     
8.1(7)   List of Subsidiaries of the Registrant
     
11.1(4)   Code of Business Conduct and Ethics
     
12.1(7)   Certification of Chief Executive Officer Required by Rule 13a-14(a)
     
12.2(7)   Certification of Chief Financial Officer Required by Rule 13a-14(a)
     
13.1(7)   Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
     
13.2(7)   Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
     
15.1(7)   Consent Letter of Wei, Wei & Co., LLP 
     
99.1(7)   Press release dated April 24, 2020 titled “Hebron Technology Co., Ltd. Reports Fiscal Year 2019 Financial Results”
     
101.INS(7)   XBRL Instance Document.
     
101.SCH(7)   XBRL Taxonomy Extension Schema Document.
     
101.CAL(7)   XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF(7)   XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB(7)   XBRL Taxonomy Extension Labels Linkbase Document.
     
101.PRE(7)   XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1)Incorporated by reference to Form F-1 filed on April 29, 2016 (Accession No.: 0001144204-16-097715)

(2)Incorporated by reference to Form F-1 filed on June 13, 2016 (Accession No.: 0001144204-16-107930)

(3)Incorporated by reference to Form F-1 filed on December 16, 2015 (Accession No.: 0001144204-15-071344)

(4)Incorporated by reference to Form 20-F filed on April 11, 2017 (File No.: 001-37829)

(5)Incorporated by reference to Form 6-K filed on March 9, 2018 (File No.: 001-37829)

(6)Incorporated by reference to Form 20-F filed on April 26, 2018 (File No.: 001-37829)

(7)Filed herewith.

111

 

  

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  Hebron Technology Co., Ltd.
       
  By: /s/ Anyuan Sun
    Name: Anyuan Sun
    Title: Chief Executive Officer
       
Date: April 24, 2020      

   

112

 

 

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

TABLE OF CONTENTS

 

  Page
Consolidated Financial Statements  
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Changes in Shareholders’ Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7

 

F-1

 

  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Hebron Technology Co., Ltd.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Hebron Technology Co., Ltd. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and other comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

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

 

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

 

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

 

/s/ Wei, Wei & Co., LLP

 

We have served as the Company’s auditor since 2019.

 

Flushing, New York

 

April 24, 2020

 

F-2

 

 

 

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Stated In U.S. Dollars)

 

   December 31,
2019		   December 31,
2018		 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents  $3,452,647   $947,588 
Restricted cash   959,672    2,124,655 
Contracts receivable, net   30,120,533    24,669,365 
Accounts receivable, net   3,024,531    2,655,845 
Bank acceptance notes receivable   22,660    81,611 
Inventories   635,989    365,480 
Prepayments and advances to suppliers, net   2,526,056    3,568,003 
Other receivables, net   516,607    767,681 
Loans to third parties-current portion   2,434,715    - 
Prepaid expenses and other current assets   18,348    94,539 
TOTAL CURRENT ASSETS   43,711,758    35,274,767 
           
NON-CURRENT ASSETS:          
Property and equipment at cost, net   11,889,373    12,515,894 
Intangible assets, net   5,124,264    969,339 
Retainage receivables, net   2,408,070    3,146,986 
Right of use assets   1,915,577    - 
Rent and other deposits   85,999    43,633 
Loans to third parties – long term portion   2,872,820    - 
Long term investments   3,708,359    3,054,090 
Goodwill   11,074,864    - 
Deferred tax assets   2,008,173    1,648,967 
TOTAL ASSETS  $84,799,257   $56,653,676 
           
LIABILITIES          
CURRENT LIABILITIES:          
Short-term loans  $861,846   $1,698,058 
Bank acceptance notes Payable   929,148    2,117,382 
Accounts payable   2,386,061    1,361,687 
Accrued expenses and other current liabilities   3,725,149    2,112,472 
Operating lease liabilities   188,557    - 
Loan payable - current   156,574    177,291 
Advances from customers   1,311,004    3,131,338 
Tax payable   10,915,483    9,085,746 
Due to related party   7,759,443    - 
TOTAL CURRENT LIABILITIES   28,233,265    19,683,974 
           
Loan payable – long-term   54,726    212,351 
Operating lease liabilities – long term   1,769,927    - 
Deferred tax liabilities   805,826    - 
TOTAL LIABILITIES   30,863,744    19,896.325 
Commitments and contingencies          
EQUITY:          
Class A common stock, $0.001 par value, 40,000,000 shares authorized, 17,710,471 and 8,491,177 shares issued and outstanding as of December 31, 2019 and 2018 respectively.   17,710    8,491 
Class B common stock, $0.001 par value, 10,000,000 shares authorized, nil and 7,778,400 shares issued and outstanding as of December 31, 2019 and 2018 respectively.   -    7,778 
Additional paid-in capital   28,369,076    13,361,447 
Retained earnings   27,472,766    24,732,776 
Accumulated other comprehensive income (loss)   (1,914,232)   (1,353,141)
TOTAL SHAREHOLDERS’ EQUITY   53,945,320    36,757,351 
 Non-controlling interests   (9,807)   - 
TOTAL EQUITY   53,935,513    36,757,351 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $84,799,257   $56,653,676 

 

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

 

F-3

 

 

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

  

   For the Years Ended December 31, 
   2019   2018   2017 
REVENUE:            
Installation service  $10,490,191   $17,297,212   $23,748,141 
Fluid equipment sales   8,087,399    7,992,848    5,452,304 
Financial services   2,525,524    -    - 
    21,103,114    25,290,060    29,200,445 
COST OF REVENUE               
Cost of revenue   12,882,094    17,458,252    18,080,777 
Business and sales related taxes   164,399    253,856    675,507 
GROSS PROFIT   8,056,621    7,577,952    10,444,161 
                
OPERATING EXPENSES:               
                
General and administrative   2,566,831    3,298,188    3,683,594 
Selling and marketing   985,252    1,337,321    2,187,253 
 Bad debt   2,079,837    7,913,442    187,715 
Research and development   492,696    358,411    508,282 
Total operating expenses   6,124,616    12,907,362    6,566,844 
INCOME (LOSS) FROM OPERATIONS   1,932,005    (5,329,410)   3,877,317 
                
OTHER INCOME (EXPENSE):               
Other income, net   1,255,149    (426,585)   377,174 
Interest expense   (158,119)   (208,306)   (56,953)
 Income from investments   153,554    168,534    - 
Total other income (expense), net   1,250,584    (466,357)   320,221 
                
INCOME (LOSS) BEFORE INCOME TAXES   3,182,589    (5,795,767)   4,197,538 
PROVISION (BENEFIT) FOR INCOME TAXES   442,599    (651,052)   (2,938,849)
                
NET INCOME(LOSS)   2,739,990    (5,144,715)   7,136,387 
 Net income (loss) attributable to non-controlling interests   -    -    - 
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS   2,739,990    (5,144,715)   7,136,387 
                
OTHER COMPREHENSIVE INCOME (LOSS)               
Foreign currency translation (loss) income   (561,091)   (1,755,528)   2,249,081 
COMPREHENSIVE INCOME (LOSS)   2,178,899   $(6,900,243)   9,385,468 
 Total comprehensive loss attributable to non-controlling interests   -    -    - 
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS  $2,178,899   $(6,900,243)  $9,385,468 
                
Basic and diluted earnings (loss) per common share  $0.17   $(0.33)  $0.49 
                
Weighted average number of shares outstanding-basic and diluted   16,269,577    15,760,633    14,695,347 

  

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

 

F-4

 

 

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

  

Class A
Common Stock

  

Class B

Common Stock		   Additional
paid in		   Retained   Accumulated
Other
Comprehensive		   Non-controlling     
   Shares   Amount   Shares   Amount   capital   Earnings   Income (Loss)   Interests   Total 
Balance at January 1, 2017   6,916,947   $6,917    7,778,400   $7,778   $10,237,965   $22,741,104   $(1,846,694)   -   $31,147,070 
Net income   -         -    -    -    7,136,687    -    -    7,136,387 
Foreign currency translation gain   -    -    -    -    -    -    2,249,081    -    2,249,081 
Balance at December 31, 2017   6,916,947    6,917    7,778,400    7,778    10,237,965    29,877,491    402,387    -    40,532,538 
                                              
Net (loss)   -    -    -    -    -    (5,144,715)   -    -    (5,144,715)
Foreign currency translation loss   -    -    -    -    -    -    (1,755,528)   -    (1,755,528)
Issuance of class A common stock for consulting services   131,452    131    -    -    239,369    -    -    -    239,500 
Issuance of common stock for equity investment   1,442,778    1,443    -    -    2,884,113    -    -    -    2,885,556 
Balance at December 31, 2018   8,491,177    8,491    7,778,400    7,778    13,361,447    24,732,776    (1,353,141)   -    36,757,351 
                                              
Net income   -    -    -    -    -    2,739,990    -    -    2,739,990 
Foreign currency translation loss   -    -    -    -    -    -    (561,091)   -    (561,091)
Capital contribution by shareholder   -    -    -    -    3,582,781    -    -    -    3,582,781 
Shares to be issued for acquisition   1,440,894    1,441    -    -    11,424,848    -    -    -    11,426,289 
Non-controlling interests arising from business combination   -    -    -    -    -    -    -    (9,807)   (9,807)
Reclassification of common stock   7,778,400    7,778    (7,778,400)   (7,778)   -    -    -    -    - 
Balance at December 31, 2019   17,710,471   $17,710    -   $-   $28,369,076   $27,472,766   $(1,914,232)   (9,807)  $53,935,513 

 

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

 

F-5

 

 

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated In U.S. Dollars)

 

   For the Years Ended December 31, 
   2019   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income (loss)  $2,739,990   $(5,144,715)  $7,136,387 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:               
Depreciation and amortization   1,225,977    1,195,161    939,995 
Loss on disposition of property and equipment   -    283,487    12,179 
Deferred tax (benefit) expense   (418,131)   (1,471,938)   11,526 
Equity investment income   (153,554)   (168,534)   - 
Bad debt expense   2,079,837    7,913,442    187,715 
Changes in operating assets and liabilities:               
Contracts receivable   (5,801,693)   (8,850,502)   (2,992,867)
Accounts receivable   (1,141,352)   (1,383,452)   (950,850 
Bank acceptance notes receivable   58,390    593,674    (378,205)
Retainage receivables   (489,283)   (748,903)   (80,360)
Prepayment and advances to suppliers   1,392,426    93,149    (7,127,018)
Inventories   (277,176)   1,177,956    788,000 
Other receivables   341,339    (598,764)   (156,074)
Accounts payable   822,461    146,546    26,450 
Bank acceptance notes Payable   (1,171,013)   2,148,292    53,272 
Advances from customers   (1,828,259)   429,217    (370,964)
Deferred revenue   -    -    (1,071,355)
Taxes payable   1,933,516    2,770,253    (2,365,120)
Accrued expenses and other current liabilities   1,021,758    890,551    240,505 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   335,233    (725,080)   (6,096,784)
                
CASH FLOWS FROM INVESTING ACTIVITIES:               
Acquisition of property and equipment   (394,988)   (74,210)   (3,126,777)
Loans to third parties   (3,611,682)   -    - 
Payments for intangible assets   -    (41,000)   - 
Cash acquired from business acquisitions   2,043,176    -    - 
NET CASH (USED IN) INVESTING ACTIVITIES   (1,963,494)   (115,210)   (3,126,777)
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Proceeds from short-term bank loans   911,968    1,995,763    295,954 
Repayment of short-term bank loans   (1,733,462)   (1,088,667)   - 
Capital contribution   3,582,781    -    - 
Proceeds from long-term loans   -    -    173,873 
Repayment of long-term loans   -    -    (47,353)
(Repayment) proceeds from loan   (174,861)   (176,427)   560,748 
Advances from and (repayments to) related parties   566,360    -    (66,582)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   3,152,786    730,669    916,640 
                
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENT   (184,449)   (94,239)   (292,869)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENT   1,340,076    (203,860)   (8,599,790 
CASH AND CASH EQUIVALENT AND RESTRICTED CASH-beginning of year   3,072,243    3,276,103    11,875,893 
                
CASH AND CASH EQUIVALENT AND RESTRICTED CASH-end of year  $4,412,319   $3,072,243   $3,276,103 
                
SUPPLEMENTAL CASH FLOW DISCLOSURES:               
Cash paid for income taxes  $5,158   $42,250   $- 
Cash paid for interest  $147,900   $91,917   $75,704 
                
Non-cash financing activities               
Warrants issued to placement agent in connection with the Company’s IPO  $-   $-   $- 
Payment by related party for NiSun BVI acquisition  $7,000,000    -    - 
Issuance of shares for business combination  $11,426,289   $-   $- 
Issuance of shares for consulting services  $-   $239,500   $- 
Issuance of shares for equity investment  $-   $2,885,556   $- 
                
CASH AND CASH EQUIVALENTS COMPRISE OF THE FOLLOWING:               
Cash and cash equivalent  $3,452,647   $947,588   $3,220,781 
Restricted cash   959,672    2,124,655    55,322 
Total cash, cash equivalents and restricted cash  $4,412,319   $3,072,243   $3,276,103 

 

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

 

F-6

 

  

HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — ORGANIZATION AND BUSINESS DESCRIPTION

 

Organization and description of business

 

Hebron Technology Co., Ltd, (“Hebron Technology” or the “Company”) is an investment holding company established under the laws of the British Virgin Islands (“BVI”) on May 29, 2012 and conducts its business mainly through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs (collectively referred to as the “Group”) in the People’s Republic of China (‘‘PRC’’). The Group is organized into two business segments consisting of equipment and engineering segment and the financial services segment.

 

●The equipment and engineering segment is engaged in research, development and manufacture of fluid equipment including valves, pipe fittings and other related products, with particular emphasis on the manufacture and installation of intelligent valves, used in the pharmaceutical, biological, food and beverage, and other clean industries. The products and services are primarily used in pharmaceutical engineering construction. The fluid equipment and engineering segment primarily conducts its operations in the PRC through the Group’s subsidiaries including Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) and Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”)

 

  ● The newly acquired financial services segment primarily offers underwriting related advisory services to financial institutions and corporate clients and provides distribution and management services for direct banking products issued by small and medium commercial banks in the PRC. The financial services segments began to conduct its operations in 2019 through the Group’s newly acquired entities, Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information services Co., Ltd. (“Hengtai”) and their subsidiaries.

  

On July 12, 2019, the Group acquired all of the equity of NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”) for $7 million. NiSun BVI effectively controls Fintech through a series contractual agreements (“VIE Agreements”). Fintech’s wholly owned subsidiaries consists of Khorgos Fintech Network Technology Co., Ltd (“Khorgos”), Jilin Lingang Trade Co., Ltd (“Jilin”) and NiSun Family Office (Guangzhou) Co., Ltd (“Guangzhou”).

 

On December 31, 2019, the Group, through VIE agreements, started to effectively control Beijing Hengtai Puhui Information Service Co. Ltd. (“Hengtai”) by issuance of 1,440,894 shares of our common stock to Hengtai’s original shareholders. Hengtai owns 92% of Hangzhou Fengtai Technology Co., Ltd (“Fengtai”) and 100% of Dunhua Midtown Assets management registration Center Co., Ltd (“Midtown”).

 

As of December 31 2019, the Company’s subsidiaries and consolidated VIEs are as follows:

 

   Date of
incorporation/ acquisition		  Place of
incorporation		  Percentage
of direct or
indirect
economic
interest		 
Subsidiaries          
Hong Kong Xibolun Technology Limited (“HK Xibolun”)  June 14, 2011  Hong Kong   100%
NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd.(“NiSun BVI”)  July 12, 2019  BVI   100%
NiSun International Enterprise Management Group (Hong Kong) Co., Limited (NiSun HK)  July 12, 2019  Hong Kong   100%
NingChen (Shanghai) Enterprise Management Co., Ltd.(“NingChen”)  July 12, 2019  PRC   100%
Shandong Taiding International Investment Co., Ltd. (“Taiding”)  November 12, 2019  PRC   80%
Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”)  September 24, 2012  PRC   100%
Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”)  January 25, 2005  PRC   100%
            
VIEs   ,        
Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”)  July 12, 2019  PRC   100%
Beijing Hengtai Puhui Information Services Co., Ltd (“Hengpu”)  December 31, 2019  PRC   100%
            
Subsidiaries of the VIEs           
Khorgos Fintech Network Technology Co., Ltd. (“Khorgos”)  July 12, 2019  PRC   100%
Jilin Lingang Trade Co., Ltd. (“Lingang”)  November 27, 2019  PRC   100%
NiSun Family Office (Guangzhou) Co., Ltd. (“Guangzhou”)  October 29, 2019  PRC   100%
Hangzhou Fengtai Technology Co., Ltd. (“Fengtai”)  December 31, 2019  PRC   92%
Dunhua Midtown Asset Management Registration Center Co., Ltd. (“Midtown”)  December 31, 2019  PRC   100%

 

F-7

 

  

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied.

 

Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and subsidiaries of the VIEs for which the Company or its subsidiary is the primary beneficiary.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of director under a statute or agreement among the shareholders or equity holders.

 

A consolidated VIE is an entity in which the Company, or its subsidiaries, through contractual arrangements, has the power to direct the activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiaries are the primary beneficiary of the entity.

 

All transactions and balances among the Company, its subsidiaries, the VIEs and subsidiaries of the VIEs have been eliminated upon consolidation.

 

VIE companies

 

1)Contractual Agreements with VIE

 

The following is a summary of the VIE agreements between the Company’s PRC subsidiary, NingChen, and the VIEs including Fintech and Hengpu and their nominee shareholders:

 

Management and Consulting Service Agreement.

 

Under the Consulting Services Agreement, NingChen has the exclusive right to provide management and consulting and other services to VIEs for a consulting service fee from VIEs and agrees to authorize VIEs to use the trademarks, technologies and related intellectual property rights held by NingChen. The VIEs agree to pay NingChen or the designated agent of NingChen for the management and consulting services in the amount equivalent to all of the VIEs net profits after tax. The agreement shall be effective as of the date of agreement and shall remain effective until the date when NingChen terminates such agreements and Fintech or Hengpu cease to exist.

 

Equity Interest Pledge Agreements

 

Pursuant to the Equity Pledge Agreements, each shareholder of the VIEs agreed to pledge their equity interest in the VIEs to NingChen to secure nominal loans provided to the shareholders of the VIEs for a loan term of 100 years. Each shareholder of the VIEs agrees that the repayment of loan can only occur on the loan maturity date or NingChen agrees to collect the loan repayment. If the VIEs or their shareholders breach their contractual obligations under these agreements, NingChen, as pledgee, will have the right to dispose of the pledged equity interests and will have priority in receiving the proceeds from the auction or sale of the pledged equity interests. NingChen is entitled to any dividends declared or paid in connection with the pledged equity interests during the term of these agreements. The VIEs and their shareholders have further agreed that they will not transfer or encumber the pledged equity interests without the prior written consent from NingChen during the term of this agreement. The Equity Pledge Agreement remains effective and no provision of this agreement may be amended, modified, supplemented discharged or terminated unless all parties consent thereto in writing.

 

Voting Rights Proxy Agreement.

 

Under the Voting Rights Proxy Agreement, each shareholder of the VIEs irrevocably authorizes NingChen to exercise rights and powers as the shareholders of the VIEs, including but not limited to, convening and attending shareholders’ meetings, voting on all matters of the VIEs requiring shareholder approval and appointing directors and senior management members. The Voting Rights Proxy Agreements will remain in force unless otherwise terminated in writing by NingChen or with the written consent of all parties.

 

F-8

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Exclusive Call Option Agreement.

 

Under the Exclusive Call Option Agreement, the VIEs and their shareholders have irrevocably granted NingChen an exclusive option to purchase, or authorize their designated persons to purchase all or part of each shareholder’s equity interests in the VIEs. The purchase price shall be equal to the minimum price required by the relevant PRC laws. Without prior written consent of NingChen, the VIEs shall not among other things, amend their articles of association, sell or otherwise dispose of their assets or beneficial interests, enter into transactions which may adversely affect their assets, liabilities, business operations, equity interests and other legal interests, or merge with any other entities or make any investments, or distribute dividends. NingChen has right to transfer the rights and obligations pursuant to the Exclusive Call Option Agreement to any third party, which does not require any prior consent of the VIEs and their shareholders. The Exclusive Call Option Agreement will remain effective until NingChen terminates this agreement with 30 days advance notice.

 

2)Risks in relation to the VIE structure

 

The Company believes that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

 

●revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;

 

  ● discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiaries and VIEs;

 

  ● limit the Company’s business expansion in China by way of entering into contractual arrangements;

 

  ● impose fines or other requirements with which the Company’s PRC subsidiaries and VIEs may not be able to comply;

 

  ● require the Company’s PRC subsidiaries and VIEs to restructure the relevant ownership structure or operations; or

 

  ● restrict or prohibit the Company’s use of the proceeds of a public offering to finance the Company’s business and operations in China.

 

The Company’s ability to conduct its financial services business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs – Fintech, Hengpu and their respective shareholders and it may lose the ability to receive economic benefits from the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the NiSun BVI, its PRC subsidiaries and VIEs.

 

The interests of the shareholders of VIEs may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so. The Company cannot assure that when conflicts of interest arise, shareholders of the VIEs will act in the best interests of the Company or that conflicts of interests will be resolved in the Company’s favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest the shareholders of the VIEs may encounter in their capacity as beneficial owners and directors of the VIEs, on the one hand, and as beneficial owners and directors of the Company, on the other hand. The Company believes the shareholders of the VIEs will not act contrary to any of the contractual arrangements and the exclusive option agreements provide the Company with a mechanism to remove the current shareholders of the VIEs should they act to the detriment of the Company. The Company relies on certain current shareholders of the VIEs to fulfill their fiduciary duties and abide by laws of the PRC and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and the shareholders of the VIEs, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there are substantial uncertainties as to the PRC legal system and the outcome of any such legal proceedings.

 

F-9

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

The following table sets forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIE and its subsidiary taken as a whole, which were included in the Group’s consolidated financial statements with intercompany balances and transactions eliminated between the VIE and its subsidiary:

 

   As of
December 31,		 
   2019 
Total current asset  $5,988,899 
Total assets  $9,793,910 
Total current liabilities  $1,295,055 
Total liabilities  $1,295,055 

 

   For the year ended December 31, 
   2019 
Financial service revenue  $2,525,524 
Net income  $1,600,661 

 

   For the year ended December 31, 
   2019 
Net cash provided by operating activities  $824,462 
Net cash (used in) investing activities  $(3,132,684)
Net cash provided by financing activities  $3,044,235 

 

As of December 31 2019, there were no consolidated assets of the VIEs that are collateral for the VIEs’ obligations and can only be used to settle the VIEs’ obligations. There were no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company in the normal course of business. The Company neither provides nor intends to provide additional financial or other support not previously contractually required to the VIEs and subsidiaries of the VIEs. Relevant PRC laws and regulations restrict the VIEs from transferring a portion of its net assets, equivalent to the balance of its paid-in capital, capital reserve and statutory reserves, to the Company in the form of loans and advances or cash dividends. Please refer to Note 22 for disclosure of restricted net assets.

 

Non-controlling interests

 

Non-controlling interests are recognized to reflect the portion of the equity that is not attributable, directly or indirectly, to the Group. Non-controlling interests are presented as a separate component of equity in the consolidated balance sheet and earnings and other comprehensive income are attributed to controlling and non-controlling interests. As of December 31, 2019, the 20% non-controlling shareholder in Taiding has not contributed their capital and Taiding has not commenced operations. As of December 31, 2019, the Group’s non-controlling interest balance represented the non-controlling shareholder shareholders’ 8% equity interest in Fengtai, a subsidiary of Hengpu.

 

Uses of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during each reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include: the allowance for doubtful accounts, the valuation of inventory, realizability of deferred tax assets, costs to complete contracts, estimated useful lives and fair values in connection with the impairment of property and equipment, intangible assets, goodwill and accruals for income tax uncertainties.

  

F-10

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Business combinations

 

The Group accounts for business combinations using the purchase method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic 805, Business Combinations. The purchase method of accounting requires the consideration transferred to be allocated to the assets, including separately identifiable assets and liabilities the Group acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total acquisition cost, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings as a bargain purchase gain.

 

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period. The fair value of the identifiable assets acquired and liabilities assumed at the acquisition date is based on a valuation performed by an independent valuation firm engaged by the Group:

 

Revenue recognition

 

The Group adopted FASB ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified retrospective approach. Revenues for the years ended December 31, 2019 and 2018 were presented under ASC 606, and revenues for the year ended December 31, 2017 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There was no adjustment to the opening balance of retained earnings at January 1, 2018 since there was no significant change to the timing and pattern of revenue recognition upon adoption of ASC 606. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to the Company’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. All of the Company’s contracts with customer do not contain cancelable and refund-type provisions.

 

Under the guidance of ASC 606, the Group is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Group satisfies its performance obligation. In determining the transaction price, the Group has included variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur. Revenues are recorded, net of sales related taxes and surcharges.

 

A.Equipment and engineering

 

Revenues from the equipment and engineering segment are primarily derived from the following sources:

 

Sales of products: The Group is engaged in the manufacture of fluid equipment The Group recognizes revenue when the products are delivered and control is transferred. The transaction price is based on the fixed contractual price with the customer. Billings to the customer for the sale of products occur at the time the products are transferred to the customer. The Group’s sales revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).

 

Installation contracts: The Group is engaged in the installation of intelligent valves used in the pharmaceutical, biological, food and beverage, and other clean industries. The Group recognizes revenue associated with these contracts over time as services are performed and the transfer of control occurs, based on a percentage-of-completion method using cost-to-cost input methods as a measure of progress. When the percentage-of-completion method is used, the Company estimates the costs to complete individual contracts and records as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs (the cost-to-cost approach).

 

Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue includes all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

 

F-11

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

The Group sometimes enters into installation service contracts in connection with product sales. The manufacture of fluid equipment control systems comprises two stages: (a) manufacture; and (b) installation. The Group always enters into separate product and installation contracts with the customer as the customer has the choice to use its own staff or external contractors to install the products based on product installation manuals provided by the Group when the products are delivered. The Group usually sells the product on a standalone basis and also is engaged by customers to install the systems they purchase from other suppliers. It is the Group’s policy to sell its products at the set prices regardless of whether the customer separately enters into an installation contract with the Company. The Company always prices its installation services at market competitive rates regardless of whether the installation service relates to its own products or standalone installation services. Therefore, the Group determined there are two separate performance obligations, and recognizes product sales and installation revenue separately.

 

The Group generally provides a standard warranty for its product and installation service. The warranty period is typically 12-24 months upon delivery of product or the completion of the installation service in accordance with PRC national warranty standard. The Group determines that such warranty is not a separate performance obligation because the nature of warranty is to provide assurance that a product or service will function as expected and in accordance with the customer’s specifications and the Group does not sell the warranty separately. From its past experience, the Group has not experienced any material warranty costs and, therefore, the Group does not believe an accrual for warranty cost is necessary for the years ended December 31, 2019, 2018 and 2017.

 

B.Financial services

 

Underwriting related advisory fees: The Group earns one-time advisory fees from its services provided to underwriters, financial institutions or underlying corporate issuers for offerings on PRC provincial or national asset exchanges or other designated markets. The Group enters into one-time advisory fee agreements with underwriters, financial institutions and issuers, which specifies the key terms and conditions of the arrangement. Such agreements generally do not include rights of return, credits or discounts, rebates, price protection or other similar privileges. The Group earns a one-time advisory fee from its clients upon offerings on the PRC provincial or national asset exchanges or other designated markets. Revenue is calculated as a fixed charge rate with the amount of the offering (prorated by the period length). The Group believes such arrangement represents a performance obligation and is satisfied at point of time, therefore, the underwriting related advisory fees are recognized as revenue upon the closing of the offerings. For the year ended December 31, 2019, the Group’s financial services revenue from underwriting related advisory fees amounted to $2,522,143.

 

Recurring service fees: The Group also provides ongoing user management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products in exchange for a recurring service fee. Recurring service agreements do not include rights of return, credits or discounts, rebates, price protection or other similar privileges. Recurring service fees are calculated as a fixed percentage of the qualified investments made by users during the contractual investment period of the direct banking and other financial products. Payment of recurring service fees by commercial banks and financial institutions are normally on a regular basis (typically quarterly or annually). The Group believes such arrangement requires the Group to provide ongoing user management services, which represents a performance obligation that the Group satisfies over time. Therefore, the recurring service revenue is recognized over the contract term. For the year ended December 31, 2019, the Group’s financial services revenue from recurring service fees amounted to $3,381.

 

Contract liabilities are presented as advances from customers on the consolidated balance sheet. Contract liabilities relate to payments received in advance of completion of performance obligations under a contract. Contract liabilities are recognized as revenue upon the completion of performance obligations. As of December 31, 2019 and 2018, the balance of advances from customers amounted to $1,311,004 and $3,131,338, respectively.

 

Practical expedience

 

The Group has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Group recognizes revenue in proportion to the amount the Group has the right to invoice for services performed.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand, bank deposits and highly liquid investments in banking products placed with large reputable banks in China, which are readily convertible to known amounts of cash and unrestricted from withdrawal or use, and which have original maturities of three months or less when purchased.

 

F-12

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Restricted Cash

 

Restricted cash consists of cash equivalents used as collateral to secure bank borrowings and security deposits related to our financial services. The Group is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The restricted cash balance is associated with The Group’s short-term borrowings, thus, classified as a current asset. As of December 31, 2019 and 2018, the Group had restricted cash of $934,656 and $2,124,655, respectively, related to the bank acceptance notes payable in the equipment and engineering segment. As of December 31, 2019 and 2018, the Group had restricted cash of $25,016 and nil, respectively, related to our financial services segment.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts presented in the statement of cash flows. The Group adopted the new standard effective January 1, 2018, using the retrospective transition method.

 

Fair value of financial instruments

 

The Group follows the provisions of FASB ASC Section 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

  

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2 — Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3 — Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, contracts receivable, accounts receivable, bank acceptance notes receivable, retainage receivables, prepayments and advances to suppliers, other receivables, loans to third parties, accounts payable, advances from customers, tax payable, due to related party and accrued expenses and other current liabilities, approximate their fair value based on the short-term maturity of these instruments. The Group believes that the carrying amount of the short-term and long-term loans approximates fair value based on the terms of the borrowings and current market rates as the rates of the borrowings are reflective of the current market rate.

 

Accounts and contract receivables

 

Accounts and contract receivables from equipment sales, installation services and financial services are stated at net realizable value. An allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. Judgment is required in assessing the realizability of these receivables, including the current credit worthiness of each customer and the related aging analysis. An allowance is provided for accounts when management has determined that the likelihood of collection is doubtful. The Group writes off accounts and contract receivables against the allowance when a balance is determined to be uncollectible.

 

Retainage receivables

 

Retainage receivables represent the amount retained by the Group’s customers to ensure the quality of the installation services and any possible follow-up maintenance related to the installation. If there is no dispute regarding the quality of the installation project during the year, such retainage receivable will be paid by the Group’s customer based on contractual term, which is typically from one year to five years. Management regularly reviews the aging of retainage receivables and changes in payment trends and records an allowance when management believes collection of amounts due are at risk.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Inventories consist of raw materials, finished goods, work in process, low value consumables, and installation projects in process that have not been completed. Provision is made for slow-moving, obsolete or unusable inventory.

 

F-13

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Advances to suppliers

 

The Group advances funds to certain suppliers for purchases of raw materials, plant and equipment. These advances are interest free, unsecured and short-term in nature and are reviewed periodically to determine whether their carrying value has become impaired. For the years ended December 31, 2019, 2018 and 2017, the Group recorded a bad deb recovery of $1,192,142, and bad debt provisions of $7,609,244 and $386,563, respectively.

 

Long term investments

 

FASB ASU 2016-01 (“ASU 2016-01”), Recognition and Measurement of Financial Assets and Financial Liabilities amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The main provisions require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value through earnings, unless they qualify for a measurement alternative. The Group adopted the new financial instruments accounting standard on January 1, 2019. Prior to January 1, 2019, the Company did not have any long-term investments.

 

Equity investments without readily determinable fair values

 

After the adoption of this new accounting standard, the Group elected to record equity investments without readily determinable fair values and not accounted for under the equity method at cost, less impairment, adjusted for subsequent observable price changes on a nonrecurring basis, and report changes in the carrying value of the equity investment in current earnings. Changes in the carrying value of the equity investment are required to be made whenever there are observable price changes in orderly transactions for the identical or similar investment of the same issuer. Reasonable efforts shall be made to identify price changes that are known or that can reasonably be known.

 

Equity investments with readily determinable fair values

 

Equity investments with readily determinable fair values are measured and recorded at fair value using the market approach based on the quoted prices in active markets at the reporting date.

 

Equity investments accounted for using the equity method

 

The Group accounts for its equity investment over which it has significant influence but does not own a majority equity interest or otherwise control, using the equity method. The Group adjusts the carrying amount of the investment and recognizes investment income or loss for its share of the earnings or loss of the investee after the date of investment. The Group assesses its equity investment for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the entity, including current earnings trends and undiscounted cash flows, and other entity-specific information. The fair value determination, particularly for investments in a privately held entity, requires judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investment and determination of whether any identified impairment is other-than-temporary.

 

Investments held by the Group as of December 31, 2019 is comprised of equity investments in two privately-held entities, in which the Company has significant influence. The Group recorded these investments under the equity method. 

 

Property and equipment, net

 

Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight-line method, as follows:

 

    Useful life
Buildings   20 years
Machinery and equipment   3 - 10 years
Transportation equipment   4 years
Office equipment   3 - 5 years
Electronic equipment   3 - 5 years
Leasehold improvements   Shorter of remaining lease term or life of assets

 

The Group charges maintenance, repairs and minor renewals directly to expense as incurred; major additions and betterments to equipment are capitalized.

 

F-14

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Intangible assets, net

 

Intangible assets acquired are recorded at cost less accumulated amortization. Amortization is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight-line method, as follows:

 

    Useful life
Land use right   25 years
Software   3 - 5 years
Trademark   3-5 years
Customer relationships and user list   5 years
Technology   5-10 years

 

The estimated useful lives of amortizable intangible assets are reassessed if circumstances occur that indicate the original estimated useful lives have changed.

 

Impairment of long-lived assets

 

Long-lived assets are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse changes to market conditions that will impact the future use of the assets) indicate that the carrying amount may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. No impairment charge was recognized for the years ended December 31, 2019, 2018 and 2017.

 

Goodwill

 

Goodwill represents the excess of the consideration over the fair value of the identifiable assets and liabilities acquired at the date of acquisition. In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), simplifying the test for goodwill impairment”. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Group’s consolidated financial statements. The Group tests goodwill at least annually for impairment at the reporting unit level. A reporting unit is the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. The Group recognizes an impairment charge if the carrying amount of a reporting unit exceeds its fair value and the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill. When a portion of a reporting unit is disposed, goodwill is allocated to the gain or loss on disposition based on the relative fair values of the business or businesses disposed and the portion of the reporting unit that will be retained. For the years ended December 31, 2019, 2018 and 2017, the Group did not recognize any goodwill impairment charges.

 

Leases

 

The Company adopted FASB ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) on January 1, 2019 by using the modified retrospective method and did not restate the prior periods. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Company also elected the practical expedient not to separate lease and non-lease components of contracts, except for bandwidth services included in internet data center (“IDC”) facilities lease contracts. Lastly, the Company elected the short-term lease exemption for all contracts with lease terms of 12 months or less.

 

The Company determines if an arrangement is a lease or contains a lease at lease inception. For operating leases, the Company recognizes “right of use” asset (“ROU”) and a lease liability based on the present value of the lease payments over the lease term on the consolidated balance sheets at commencement date. For finance leases, assets are included in property and equipment on the consolidated balance sheets. As most of the Company’s leases do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in the economic environment where the leased asset is located. The Company’s leases often include options to extend and lease terms include such extended terms when the Company is reasonably certain to exercise those options. Lease terms also include periods covered by options to terminate the leases when the Company is reasonably certain not to exercise those options. Lease expense is recorded on a straight-line basis over the lease term.

 

F-15

 

  

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

The Company recognized ROU assets of $1,915,577 and total lease liabilities (including current and non-current) $1,958,484 for operating leases as of December 31, 2019. The impact of adopting ASU 2016-02 on the Group’s opening retained earnings and current year’s net income was insignificant.

 

Income taxes

 

The Group’s subsidiaries in China are subject to the income tax laws of the PRC and Hong Kong. No taxable income was generated outside the PRC and Hong Kong for the years ended December 31, 2019, 2018 and 2017. The Group accounts for income tax under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the differences between financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Deferred tax assets are also provided for carryforward losses which can be used to offset future taxable income. Deferred income taxes will be recognized if significant temporary differences between tax and financial statements occur. A valuation allowance is established against net deferred tax assets when it is more likely than not that some portion or all of the net deferred tax asset will not be realized. The Group recorded a valuation allowance of $1,341,877 to reduce the amount of deferred tax assets as of December 31, 2019, and considered no valuation allowance is necessary as of December 31, 2018 and 2017.

 

The Group continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties relating to income taxes have been incurred during the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, the tax years ended December 31, 2017 through December 31, 2019 for the Group’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

Under the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income. The Group believes that it has provided the best estimates of its accrued tax liabilities because those accruals are based on the prevailing tax rates stipulated by the laws (see Note 15).

 

Value added tax (“VAT”)

 

Revenue represents the invoiced value of goods and service, net of VAT. The VAT is based on gross sales price and VAT rates range from 6% to 13%, depending on the type of goods or service provided. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. The net VAT balance between input VAT and output VAT is recorded in tax payable. All of the VAT returns filed by the Company’s subsidiaries in China, have been and remain subject to examination by the tax authorities for five years from the date of filing.

 

Foreign currency translation

 

Since the Group operates primarily in the PRC, The Group’s functional currency is the Chinese Yuan (“RMB”). The Group’s financial statements have been translated into the reporting currency of the United States Dollar. Assets and liabilities of The Group are translated at the exchange rate at each reporting period end date. Equity is translated at historical rates. Income and expense accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are reported under other comprehensive income (loss). Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the results of operations.

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USDs at the rates used in translation.

 

The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:

 

   December 31, 2019  December 31, 2018  December 31, 2017
Balance sheet items, except for equity accounts   US$1=RMB 6.9618  US$1=RMB 6.8755  US$1=RMB 6.5074
Items in the statements of income and cash flows   US$1=RMB 6.9081  US$1=RMB 6.6090  US$1=RMB 6.7578

 

Comprehensive income (loss)

 

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments resulting from the Group not using the U.S. dollar as its functional currencies.

 

F-16

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Segment information

 

The Group uses the management approach to determine operating segments. The management approach considers the internal organization and reporting used by the Group’s chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing performance. The Group’s CODM has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. The Group believes it operates in two reportable segments consisting of (i) equipment and engineering and (ii) financial services.

 

Credit risk and concentration

  

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash, contracts receivable, accounts receivable and retainage receivables. As of December 31, 2019 and 2018, $4,412,319 and $3,072,243 of the Group’s cash and cash equivalents and restricted cash was on deposit at financial institutions in the PRC, which the management believes are of high credit quality. In May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the Group’s accounts, as its aggregate deposits are much higher than the compensation limit. However, the Group believes that the risk of failure of any of these Chinese banks is remote. Bank failure is uncommon in China and the Group believes that those Chinese banks that hold the Group’s cash and cash equivalents, restricted cash and short-term investments are financially sound based on public available information.

 

Contracts receivable, accounts receivable and retainage receivables are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Group’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.

 

Substantially all of the Group’s revenue are derived from customers that are located primarily in China. The Group has a concentration of its revenues with specific customers. For the years ended December 31, 2019, three customers accounting for 24%, 21% and 16% of the Group’s total revenue from the equipment and engineering segment. One customer accounting for approximately 100% of the Group’s total revenue from the financial services segment. For the years ended December 31, 2018, four customers accounting for 13%, 12%, 11% and 10% of the Group’s total revenue from the equipment and engineering segment. For the year ended December 31, 2017, four major customers accounted for approximately 22%, 21%, 13% and 10%, of the Group’s total revenue from the equipment and engineering segment. For the year ended December 31, 2018 and 2017, no revenue was generated from the financial services segment.

 

Earnings (loss) per share

 

The Group computes earnings (loss) per share (“EPS”) in accordance with FASB ASC 260, “Earnings per Share” (“ASC 260”). Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the years ended December 31, 2019, 2018 and 2017, no unexercised Public Offering Warrants were dilutive and included in the computation of diluted EPS.

 

Statements of cash flows

 

In accordance with FASB ASC Topic 230, Statement of Cash Flows, cash flows from the Group are calculated based upon the local currencies and translated at the average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported on the Group’s statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. 

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

F-17

 

 

Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements 

 

The Group considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.

 

In June 2016, the FASB amended guidance related to the impairment of financial instruments as part of ASU2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarified that receivables from operating leases are not within the scope of Topic 326 and instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. The Group is evaluating the impact this ASU will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Group does not expect this guidance will have a material impact on its consolidated financial statements.

 

In October 2018, the FASB issued ASU No. 2018-17 (“ASU 2018-17”), Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The updated guidance requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. The amendments in this update are effective for entities other than private companies for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

Except for the above-mentioned pronouncements, there are no new recently issued accounting standards that will have material impact on the Group’s consolidated financial position, statements of operations and cash flows.

 

F-18

 

 

Note 3 — BUSINESS COMBINATIONS

 

a)Acquisition of NiSun BVI

 

Based on the shareholders’ approval on June 14, 2019, the Group completed the acquisition of 100% of the equity interests of NiSun BVI on July 12, 2019 (the “closing date”). By virtue of NiSun BVI’s 100% ownership of NiSun HK, NiSun HK’s ownership of NingChen and NingChen’s contractual control over Fintech, NiSun BVI effectively controls Fintech, a company that provides financial services to financial institutions in the PRC. The Group believes the acquisition provides an opportunity for the Group to offer comprehensive financial services in the market with significant growth potential.

 

The Group’s acquisition of NiSun BVI was accounted for as a business combination in accordance with ASC 805. The purchase price was $ 7 million in cash, which is expected to be paid by the Group within 12 months (Note 19). Acquisition-related costs incurred for the acquisitions are not material. The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition based on a valuation performed by an independent valuation firm engaged by the Group:

 

   Amount 
Cash acquired  $661,070 
Prepayments and deposits   45,605 
Property and equipment   15,520 
Intangible assets – technology and customer relationships   2,387,970 
Customer advances   (29,070)
Accrued expenses and other current liabilities assumed   (118,520)
Deferred tax liability   (559,626)
Goodwill   4,597,051 
Total consideration  $7,000,000 

 

The goodwill is mainly attributable to the excess of the consideration paid over the fair value of the net assets acquired that cannot be recognized separately as identifiable assets, and comprise (a) the assembled work force with their knowledge and experiences in the industry and (b) the expected but unidentifiable business growth potential as a result of the synergy resulting from the acquisition. None of the goodwill is expected to be deductible for income tax purposes. The operating results of NiSun BVI have been included in the consolidated financial statements since July 12, 2019. For the year ended December 31, 2019, NiSun BVI’s revenue amounted to $2,525,524 and its net income was $1,469,306.

 

b)Acquisition of Hengpu

 

On December 31, 2019, the Group acquired Hengpu from its original shareholders through VIE agreements. Hengpu owns a 92% equity interest in Fengtai and 100% equity interest of Midtown. Upon completion of the acquisition, Hengpu, together with its subsidiaries, became a VIE of the Group. Hengpu and its subsidiaries provide financial advisory services for financial institutions and corporate clients in the PRC. The Group expects to achieve significant synergies from such acquisition which it plans will complement its financial services business.

 

The Group’s acquisition of Hengpu was accounted for as business combination in accordance with ASC 805. The Group is required to issue 1,440,894 Class A common shares to the original shareholders of Hengpu as purchase consideration. The fair value of purchase consideration was approximately $11.4 million based on the weighted average of the closing share price of the Group for five trading days up to the date immediately prior to the signing date of purchase agreement. Acquisition-related costs incurred for the acquisitions are not material. The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, which represents the net purchase price allocation at the date of the acquisition based on a valuation performed by an independent valuation firm engaged by the Group:

  

   Amount 
Cash and cash equivalents acquired  $1,389,911 
Accounts receivable   423,789 
Prepayments and deposits   126,832 
Loan to third party   1,723,692 
Property and equipment   42,359 
Intangible assets – software, technology and customer relationships   2,060,530 
Long term investment – equity method investment   500,715 
Deferred tax assets   20,041 
Accounts payable   (224,044)
Accrued expense and other current liabilities assumed   (871,325)
Deferred tax liability   (308,110)
Non controlling interest   9,807 
Goodwill   6,532,092 
Total consideration  $11,426,289 

 

F-19

 

  

Note 3 — BUSINESS COMBINATIONS - continued

 

The goodwill is mainly attributable to the excess of the consideration paid over the fair value of the net assets acquired that cannot be recognized separately as identifiable assets, and comprise (a) the assembled work force with their knowledge and experiences in the industry and (b) the expected but unidentifiable business growth potential as a result of the synergy resulting from the acquisition. None of the goodwill is expected to be deductible for income tax purposes. The remaining Class A common shares issuable to the original shareholders of Hengpu amount to 1,440,894 as of December 31, 2019.

 

Note 4 — CONTRACT RECEIVABLES, NET

 

The contracts receivable consists of the following:

 

   December 31,
2019		   December 31,
2018		 
Contract receivables  $30,120,533   $24,669,365 
Less: allowance for doubtful accounts   -    - 
   $30,120,533   $24,669,365 

 

The contract receivables are generally due when the Group completes the related installation project. The balance of contract receivables were related to two major general contractors, who accounted for 100%, 100% and 86% of total contract revenue for the years ended December 31, 2019, 2018 and 2017, respectively. The Group has not incurred any collection issues with these two general contractors in the past and considers these contracts receivable to be fully collectible. Thus, the Group did not provide any allowance for doubtful accounts for these outstanding contract receivables as of December 31, 2019 and 2018.

 

Note 5 — ACCOUNTS RECEIVABLES, NET

 

The accounts receivable consists of the following:

 

   December 31, 
2019		   December 31, 
2018		 
Accounts receivables – equipment and engineering  $3,222,350   $2,953,585 
Accounts receivables – financial service   1,307,012    - 
Less: allowance for doubtful accounts   (1,504,831)   (297,740)
   $3,024,531   $2,655,845 

 

The movement in the allowance for doubtful accounts can be reconciled as follows:

 

   December 31, 
2019		   December 31, 
2018		 
Beginning of the year  $297,740   $296,302 
Recovery   (80,859)   - 
Provision   1,301,046    17,301 
Foreign exchange effect   (13,096)   (15,863)
At the end of the year  $1,504,831   $297,740 

 

Note 6 — INVENTORIES

 

The inventories consist of the following:

 

   December 31, 
2019		   December 31, 
2018		 
Raw materials  $-   $46,009 
Finished goods   635,989    251,869 
Installation projects in process   -    67,602 
   $635,989   $365,480 

 

As of December 31, 2019 and 2018, the Group provided no inventory reserves.

 

F-20

 

 

Note 7 — PREPAYMENTS AND ADVANCES TO SUPPLIERS, NET

 

Prepayments and advances to suppliers consisted of the following:

 

   December 31, 
2019		   December 31, 
2018		 
Advances made to raw material suppliers (a)  $5,902,315   $8,010,272 
Advances made to construction subcontractors (b)   2,558,252    2,907,750 
Advances made for purchases of equipment   868,017    910,872 
Prepaid consulting fees   62,410    - 
Others   114,454    3,906 
Subtotal   9,505,448    11,832,800 
Less: allowance for doubtful accounts   (6,979,392)   (8,264,797)
   $2,526,056   $3,568,003 

 

(a)The prepayments and deposits on raw materials are generally required by our suppliers for the purpose of ongoing business relationships. The prepayments and deposits are not directly associated with any specific purchase contract or any specific price but will be used to offset any accounts payable balance resulting from any specific purchase order priced at market.

 

(b)Advances to construction subcontracts represent the prepayments made by the Group to our construction subcontractors at the beginning of our customer projects for the purpose of acquiring necessary construction materials, equipment and required deposits.

 

Changes of allowance for doubtful accounts for the years ended December 31, 2019 and 2018 are as follows:

 

   December 31, 
2019		   December 31, 
2018		 
Beginning balance  $8,264,797   $692,635 
Provision   -    7,609,244 
Recovery   (1,192,142)   - 
Foreign exchange effect   (93,263)   (37,082)
Ending balance  $6,979,392   $8,264,797 

 

For the years ended December 31, 2019, 2018 and 2017, the Group recorded a bad deb recovery of $1,192,142, and bad debt provisions of $7,609,244 and $386,563, respectively.

 

Note 8 — LOANS TO THIRD PARTIES

 

Loans to third parties consist of the following: 

   As of December 31, 
   2019   2018 
Jianuo Finance Lease (Shanghai) Co., Ltd (1)  $1,723,692   $- 
Shandong Daohong Industry and Trade Co., Ltd (2)   711,023    - 
Qingdao Manster Digital Technology Co., Ltd (3)   2,872,820    - 
Total   5,307,535    - 
Less: current portion   (2,434,715)   - 
Loans to third parties – noncurrent portion  $2,872,820   $- 

 

(1) Hengpu, the Group’s newly acquired VIE on December 31, 2019, had a loan receivable of $1,723,692 (or RMB 12 million) from Jianuo Finance Lease (Shanghai) Co., Ltd. The loan earns interest of 1.2% and its principal and interest are due on January 10, 2020. The Group fully collected the loan receivable on January 9, 2020.

 

(2) Taiding, a subsidiary of the Group, made a loan of $711,023 (or RMB 4.95 million) to Shandong Daohong industry and Trade Co., Ltd. (“Daohong”) on December 26, 2019. The loan earns interest of 7% and its principal and interest are due on June 25, 2020.

 

(3) Fintech, the Group’s newly acquired VIE on July 12, 2019, had a loan receivable of $2,872,820 (or RMB 20 million) from Qingdao Manster Digital Technology Co., Ltd (“Manster”) earns interest of 4.8%. The principal of loan is due on December 9, 2024 and the interest is due on annual basis. Manster is a financial software and network services provider, which provides integrated financial management solutions and big data risk analytical systems in the PRC.

 

F-21

 

 

Note 8 – LOANS TO THIRD PARTIES - continued

 

The Group classifies loans to third parties as held-to-maturity investments, because the loans have a stated maturity and normally pay a prospective fixed rate of return. In addition, the Group has the positive intent and ability to hold them until maturity. Held-to-maturity investments are recorded at amortized cost and are classified as long-term or short-term according to their contractual maturity.

 

Note 9 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net, consists of the following:

 

   December 31, 
2019		   December 31, 
2018		 
Buildings  $10,895,449   $11,032,207 
Machinery and equipment   2,833,771    2,858,928 
Transportation equipment   883,577    518,612 
Office equipment   118,985    37,518 
Leasehold improvements   613,717    551,582 
Subtotal   15,345,499    14,998,846 
Less: accumulated depreciation   (3,456,126)   (2,482,952)
Property, plant and equipment, net  $11,889,373   $12,515,894 

 

Depreciation expense was $931,422, $1,134,136 and $884,947 for the years ended December 31, 2019, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, the Group disposed of certain obsolete machinery equipment for no proceeds and recognized a loss of $283,487 and $12,179 respectively.

 

Note 10 — INTANGIBLE ASSETS, NET

 

 The following is a summary of intangible assets as of December 31, 2019 and 2018:

 

   December 31, 
2019		   December 31, 
2018		 
Land use right*  $1,335,861   $1,352,629 
Software   241,730    - 
Technology, customer relationship and user lists acquired through business combinations   4,266,138    - 
Total intangible assets   5,843,729    1,352,629 
Less: accumulated amortization   (719,465)   (383,290)
Intangible assets, net  $5,124,264   $969,339 

 

* The Group carries its land use right at cost less accumulated amortization. All land in China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the “Right”) to use the land. The Group has the Right to use the land for 25 years and amortizes the Right on a straight-line basis over the period of 25 years.

 

The amortization expense was $294,555, $61,025 and $55,048 for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, the expected amortization expense relating to the intangible assets for each of the next five years and thereafter is as follows: 

 

Year ending December 31,   Amount 
2020  $923,550 
2021   923,550 
2022   923,550 
2023   923,550 
2024   700,625 
Thereafter   729,439 
Total estimated future amortization expenses  $5,124,264 

  

F-22

 

 

Note 11 – LONG TERM INVESTMENTS

 

Long term investments consist of the following:

 

  

Equity method investments in Weijia

(a)

   Equity method investments in Jinda
(b)		   Total 
             
Balance as of January 1, 2018  $-   $-   $- 
Additions (a)   2,885,556    -    2,885,556 
Share of profit in equity method investee   168,534    -    168,534 
Balance as of December 31, 2018   3,054,090    -    3,054,090 
Additions through acquisition of Hengpu on December 31, 2019 (b)   -    500,715    500,715 
Share of profit of equity method investee   153,554    -    153,554 
Balance as of December 31, 2019  $3,207,644.   $500,715   $3,708,359 

 

(a)On March 10, 2018, The Group entered into a share acquisition agreement (the “Agreement”) with the sole shareholder of Xuzhou Weijia Biotechnology Co., Ltd. (“Weijia”) to acquire 49% of the equity in Weijia. Pursuant to the Agreement, The Group issued 1,442,778 unregistered Class A common shares (based on an agreed value of $2.00 per share, totalling $2,885,556) as a consideration to the individuals designated by the selling shareholder of Weijia. The Group accounts for its investment in Weijia under the equity method of accounting.

 

(b)Henpu, the Group’s VIE acquired on December 31, 2019, owns 23.08% of the equity interest in Wenzhou Jinda Holding Co., Ltd (“Jinda”). The Group accounts for its investment in Jinda under the equity method of accounting.

 

The Group considers it has significant influence over Weijia and Jinda due to the level of ownership and its participation in their significant business operating and strategic decisions. Accordingly, the Group accounts for these investments using the equity method. For the years ended December 31, 2019, 2018 and 2017, the Group did not receive any dividends from the above two equity method investments.

 

Note 12 — SHORT TERM LOANS

 

Short term loans consisted of the following loans:

 

Lender  December 31,
2019		   Term  Effective
Interest Rate		 
Longwan Rural Commercial Bank Shacheng Branch  $287,282   August 09, 2019 to August 08, 2020   4.50%
Industrial and Commercial Bank of China   574,564   August 15, 2019 to August 15, 2020   4.35%
Total  $861,846         

 

Lender  December 31,
2018		   Term  Effective
Interest Rate		 
Bank of China Longwan Branch  $202,894   April 13, 2016 to April 14, 2019*   5.70%
Bank of China Longwan Branch   186,168   June 8, 2016 to April 14, 2019*   5.70%
Industrial and Commercial Bank of China -Wenzhou Branch   727,220   July 17, 2018 to July 17, 2019   6.04%
Longwan Rural Commercial Bank Shacheng Branch   290,888   July 23, 2018 to July 17, 2019   8.71%
Longwan Rural Commercial Bank Shacheng Branch   290,888   July 25, 2018 to July 17, 2019   8.71%
Total  $1,698,058         

 

All principal of the above loans as of December 31, 2019 are due upon maturity and interest payments are due on a monthly basis. All bank loans as of December 31, 2018 were fully repaid upon maturity. For these loans, the outstanding balances as of December 31, 2019 and 2018 were guaranteed by the Group’s officer’s immediate family members and unrelated third parties. Interest expense for these loans was $106,001, $91,977 and $48,730 for the years ended December 31, 2019, 2018 and 2017, respectively.

 

F-23

 

 

Note 13 — BANK ACCEPTANCE NOTES PAYABLE

 

Bank acceptance notes payable consisted of the following as of December 31, 2019 and 2018:

 

   December 31, 
2019		   December 31, 
2018		 
Bank acceptance notes payable  $929,148   $2,117,382 
Total  $929,148   $2,117,382 

 

Bank acceptance notes are issued by financial institutions on the Group’s behalf to vendors with a specific due date usually for a period within one year. These notes can either be endorsed by the vendor to other third parties as payment or can be factored to other financial institutions before becoming due.

 

Pursuant to the loan facility agreement signed on December 6, 2018 between the Group and China Zheshang Bank, the Group had bank acceptance notes of $929,148 with maturity dates of six or twelve months after the issuance date. The Group was also required to maintain restricted cash deposits of $934,656 to guarantee the bank notes as of December 31, 2019. The balance of bank acceptance notes payable as of December 31, 2018 was fully paid upon maturity and the related restricted deposit was also released upon the repayment. For years ended December 31, 2019 and 2018, the bank fee charge related to bank acceptance notes payable amounted to $464 and 1,059, respectively.

  

Note 14 — SALES LEASEBACK

 

On November 9, 2017, the Group entered into a sale leaseback agreement (the “Agreement”) with Zhongli International Leasing Co., Ltd (“Zhongli”). Pursuant to the Agreement, the Group sold certain machinery purchased during the year to Zhongli for approximately $691,520 (RMB 4.5 million). The Group then leased back the machinery from Zhongli for 48 months with specified monthly payments over the lease term. The Group has a bargain purchase option at a price of Nil to buyback this equipment by the end of the lease term. All these machines are currently being used by the Group for its production purposes. The Group concluded this transaction does not qualify for sale-leaseback accounting and shall record under the lease financing method. Under the lease financing method, the assets remain on the Group’s consolidated balance sheet and the proceeds from the transactions are recorded as a financing liability. The minimum payments of the lease term has 35 months from December 17, 2017 to November 17, 2021. For the years ended December 31, 2019 and 2018, the lease payments balance are as follows:

 

Total lease payment as of January 1, 2018  $590,865 
Less: foreign exchange effect   (32,634)
Less: payments during the year   (168,589)
Other loan balance as of December 31, 2018   389,642 
Less: foreign exchange effect   (3,249)
Less: payments during the year   (175,093)
Loan balance as of December 31, 2019   211,300 
Less: loan payable – current portion   (156,574)
Loan payable – long term portion as of December 31, 2019  $54,726 

  

According to the agreement, future obligations for payments of the above lease agreement are as below:

 

Twelve months ended December 31,  Amount 
2020  $156,574 
2021   54,726 
Total  $211,300 

 

Interest expense incurred for the year ended December 31, 2019, 2018 and 2017 amounted to $52,118, $85,186 and $8,223, respectively.

 

F-24

 

 

Note 15 — INCOME TAXES

 

Taxes payable consisted of the following:

 

   December 31,
2019		   December 31,
2018		 
Income tax payable  $6,550,713   $5,763,945 
Value added tax payable   2,973,549    2,024,902 
Business tax payable   856,220    878,133 
Other taxes payable   535,001    418,766 
Total taxes payable  $10,915,483   $9,085,746 

 

The total amount of unpaid tax liabilities was accrued based on the calculation using the current prevailing tax rates without including potential interest and penalties because management cannot be certain as to how much interest and penalties would be assessed, if any. Those potential interest and penalty liabilities are contingent upon the outcome of tax settlements and management estimates that the potential contingent loss related to potential interest and penalties could be Nil or as high as $2.0 million based on rates stipulated by the tax authority. Due to uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with the interest and penalties on these unpaid tax balances. The final outcome of this tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of the statute of limitations. As the ongoing settlement discussions continue, management believes that it is more likely than not that the Company will not have to pay any interest and penalties associated with the unpaid taxes.

 

BVI

 

Hebron Technology and Nisun BVI were incorporated in the BVI and are not subject to income taxes under the current laws of the BVI.

 

Hong Kong

 

HK Xibolun and Nisun HK are the companies registered in Hong Kong and subject to corporate income tax at 17.5% if revenue is generated in Hong Kong. No revenue was generated in Hong Kong for the years ended December 31, 2019, 2018 and 2017.

 

PRC

 

Under the PRC Enterprise Income Tax Law (the “EIT Law”), the standard enterprise income tax rate for domestic enterprises and foreign invested enterprises is 25%. Starting from the year ended December 31, 2018, Xibolun Automation is recognized as a High-technology Company by the Chinese government and is subject to a favorable income tax rate of 15%. Hengpu is also qualified as a High-technology Company and subject to a favorable income tax rate of 15%. Both Xibolun Automation and Hengpen’s High-technology certificates are valid for three years starting from November 2018 and subject to renewal. In accordance with the implementation rules of the Income Tax Law of the PRC, for the enterprises newly established in the Horgos Development Zone within the scope of "preferential catalogue of income tax for key industries encouraged to develop in Xinjiang's difficult areas", the enterprise income tax shall be exempt for five years from the tax year of the first production and operations income. Khorgos is established in the Horgos Development Zone and its income tax is eligible to be exempt for five years starting from 2019. The rest of the Group’s subsidiaries, VIEs and VIEs’ subsidiaries are subject to corporate income tax at the PRC unified rate of 25%.

 

i)The components of the income tax provision (benefit) are as follows:

 

   For the year
ended
December 31,
2019		   For the year
ended 
December 31,
2018		   For the year
ended 
December 31,
2017		 
Current tax provision  $860,730   $820,886   $2,024,388 
Current tax recovery   -    -    (4,974,763)
Deferred tax provision (benefit)   (418,131)   (1,471,938)   11,526 
Total  $442,599   $(651,052)  $(2,938,849)

 

F-25

 

 

Note 15 — INCOME TAXES - continued

 

ii)The following table summarizes deferred tax assets resulting from differences between financial accounting basis and tax basis of assets and liabilities:

 

   December 31, 
2019		   December 31, 
2018		 
Deferred tax assets        
Provision for doubtful accounts  $1,988,132   $1,648,967 
Operating loss carryforwards   1,361,918    - 
Total deferred tax assets   3,350,050    1,648,967 
Less : valuation allowance   (1,341,877)   - 
Net deferred tax assets  $2,008,173   $1,648,967 

 

   December 31,
2019		   December 31,
2018		 
         
Deferred tax liabilities        
Intangible assets acquired from business combinations  $805,826   $- 
Total deferred tax liabilities  $805,826   $- 

  

The change in valuation allowance for the year ended December 31, 2019, 2018 and 2017 amounted to $1,341,877, nil and nil, respectively.

 

The following table reconciles the China statutory rates to the Group’s effective tax rate for the years ended December 31, 2019, 2018 and 2017.

 

   For the
year ended
December 31,
2019		   For the
year ended 
December 31,
2018		   For the
year ended 
December 31,
2017		 
China Income tax statutory rate   25.0%   25.0%   25.0%
Effect of favorable income tax rates*   (12.9)%   4.0%   - 
Non-deductible items in China and others   0.2%   0.1%   2.3%
Foreign loss not recognized in China   2.9%   9.7%   69.0%
Effect of tax reversal for previous years   -%   --%   (166.3)%
Effective tax rate   13.9%   (11.2)%   (70.0)%

 

* Xibolun Automation is subject to an income tax rate of 15% starting from fiscal 2018 and Khorgos is established in the Horgos Development Zone and its income is exempt from income tax for five years starting from 2019.

 

The Group continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. As of December 31, 2019, the tax years ended December 31, 2017 through December 31, 2019 for the Group’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.

 

Note 16 — CONCENTRATION OF MAJOR CUSTOMERS AND SUPPLIERS

 

For the year ended December 31, 2019, three customers accounted for 24%, 21% and 16% of the Group’s total revenue from the equipment and engineering segment. For the year ended December 31, 2019, two major sub-contractors accounted for approximately 25% and 24% of subcontract costs in the equipment and engineering segment. As of December 31, 2019, two general contractors who engaged the Group in installation projects accounted for approximately 54% and 43% of the Group’s total contracts receivable balance from the equipment and engineering segment. For the year ended December 31, 2019, three suppliers accounted for 22%, 15% and 11% of the Group’s accounts payable balance for the equipment and engineering segment, and no individual supplier accounted for more than 10% of the Group’s advances to suppliers balance.

 

Substantially all the financial services revenues were generated within China. For the year ended December 31, 2019, one customer accounted for approximately 100% of the Group’s total financial services revenue.

 

F-26

 

 

Note 16 — CONCENTRATION OF MAJOR CUSTOMERS AND SUPPLIERS - continued

 

For the year ended December 31, 2018, four customers accounted for approximately 13%, 12%, 11% and 10% of the Group’s revenue from equipment and engineer segment. For the year ended December 31, 2018, six major sub-contractors accounted for approximately 21%, 19%, 18%, 16%, 15% and 11% of subcontract costs in the equipment and engineering segment, respectively. As of December 31, 2018, two general contractors who provided the Group’s installation projects accounted for approximately 58% and 42% of the contracts receivable balance from the equipment and engineering segment. For the year ended December 31, 2018, three suppliers accounted for 34%, 21% and 15% of the Group’s accounts payable balance from the equipment and engineering segment, and no individual supplier accounted for more than 10% of the Group’s advances to suppliers balance.

 

For the year ended December 31, 2017, four major customers accounted for approximately 22%, 21%, 13% and 10%, of the Group’s total revenue from the equipment and engineering segment. For the year ended December 31, 2017, three major sub-contractors accounted for approximately 44%, 18% and 16% of subcontract costs from the equipment and engineering segment. As of December 31, 2017, two general contractors who provided for the Group’s installation projects accounted for approximately 58% and 42% of the Group’s total contracts receivable balance from the equipment and engineering segment. For the year ended December 31, 2017, only one supplier accounted for 18% of the Group’s accounts payable balance for the equipment and engineering segment, and one supplier accounted for 17% of the Group’s advance to suppliers balance.

 

Note 17 — SHAREHOLDERS’ EQUITY

 

On December 26, 2016, The Group completed its initial public offering (“IPO”) of 2,695,347 shares of its common stock at a public offering price of $4.00 per share. The gross proceeds from the offering were approximately $10.8 million before deducting placement agents’ commissions and other offering expenses, resulting in net proceeds of approximately $10.1 million. In connection with the offering, The Group’s common stock began trading on the NASDAQ Capital Market beginning on December 26, 2016 under the symbol “HEBT”.

 

On November 20, 2017, the Board approved an amendment to The Group’s Articles of Association to re-designate their common shares into Class A common shares and Class B common shares. The Class A common shares have one vote per share, and the Class B common shares have five votes per share. The Third Amended and Restated Memorandum of Association was filed with the BVI Registrar of Corporate Affairs on March 7, 2018

 

On June 14, 2019, the Shareholders of the Company approved a share transfer transaction by Wise Metro Development Co., Ltd., a British Virgin Islands company (“Wise”) and Mr. Zuoqiao Sun Zhang, a citizen of Guatemala (“Sun Zhang”; and together with Wise, “Sellers”) of all of such Sellers’ Class B common shares of the Group to NiSun International Enterprise Management Group Co., Ltd., a company organized under the laws of Cayman Islands (“NiSun Cayman”). Upon the close of the transaction, NiSun Cayman purchased (i) Wise’s 1,800,000 Class B common shares of The Group, par value $0.001 per share and (ii) Sun Zhang’s 5,978,400 Class B common shares of The Group, which will together constitute approximately 47.8% of all of The Group’s outstanding common shares at the time of the Closing on a fully diluted basis (Wise’s and Sun Zhang’s Class B common shares are referred to as the “Shares”). The Shares were automatically converted into Class A common shares upon transfer from the Sellers to the Buyer, and upon such transfer the Group had no remaining issued and outstanding Class B common shares. Upon this conversion, the Shares are entitled to one vote per share.

 

The Group had 50,000,000 authorized common shares at $0.001 par value per share, of which 17,710,471 Class A common shares were issued and outstanding as of December 31, 2019.

 

Public Offering Warrants

 

In connection with the IPO on December 26, 2016, The Group issued warrants equal to five percent (5%) of the shares issued in the IPO, totaling 134,768 shares to the placement agents (the “Public Offering Warrants”). The warrants carried a term of three years, and were not be exercisable for a period of six months from the closing of the IPO and were exercisable at $4.80 per share. Management determined that these warrants are equity instruments because the warrants are both a) indexed to its own stock; and b) classified in stockholders’ equity. The warrants were recorded at their fair value on the date of grant as a component of stockholders’ equity. As of December 31, 2019, all the warrants issued were forfeited and the total number of warrants outstanding was nil (December 31, 2018 - 134,768). The fair value of this Public Offering Warrants was $488,730. The fair value has been estimated using the Black-Scholes pricing model with the following weighted-average assumptions: risk free rate of 1.58%; expected term of 3 years; exercise price of the warrants of $4.80; volatility of 90.7%; and expected future dividends of nil.

 

Shares issued for equity investment in Weijia

 

On March 10, 2018, the Group entered into a share acquisition agreement (the “Agreement”) with the sole shareholder of Xuzhou Weijia Biotechnology Co., Ltd. (“Weijia”) to acquire 49% of the equity in Weijia. Pursuant to the Agreement, The Group issued 1,442,778 unregistered Class A common shares (based on an agreed value of $2.00 per share, totaling $2,885,556) as a consideration to the individuals designated by the selling shareholder of Weijia (Note 11).

 

F-27

 

 

Note 17 — SHAREHOLDERS’ EQUITY - continued

 

Shares issued for Consulting Services

 

On January 13, 2016, the Group signed a consulting agreement with Weitian Group LLC (“Weitian”), to engage Weitian to provide certain consulting services. The agreement terminated on March 12, 2018. Pursuant to the agreement, The Group was required to pay Weitian $58,500 (the “Service Fee”). On March 15, 2018, The Group and Weitian signed a settlement agreement, pursuant to which The Group issued 31,452 unregistered Class A common shares to Weitian to settle the Service Fee on March 13, 2018 and The Group recorded a consulting fee of $58,500 included in general and administrative expenses for the year ended December 31, 2018.

 

On December 26, 2017, the Group signed a consulting agreement with Real Miracle Investments Ltd. (“Miracle”), to engage Miracle as its consultant to provide professional services related to The Group’s business strategies, marketing development, business operations, and merger and acquisitions, etc. As of December 31, 2017, the consulting services were not performed. The agreement had a term for one year. Pursuant to the agreement, the Group agreed to pay total of 100,000 shares of the Group’s common stock as compensation for the services within 90 days after signing of the agreement. The Group issued 100,000 unregistered Class A common shares to Miracle on March 12, 2018. The fair value of those shares was assessed at $181,000 based on the stock price of those shares upon issuance and the Group recorded consulting fee expense of $181,000 included in the general and administrative expenses for the year ended December 31, 2018.

 

Additional paid-in capital

 

On November 20, 2019, NiSun International Enterprise Management Group Co., Ltd. (“NiSun Cayman”), the controlling shareholder of the Group, contributed additional capital of $3,582,781 which has been shown as additional paid-in capital.

 

Shares to be issued for acquisition of Hengpu

 

In connection of the acquisition of Hengpu on December 31, 2019, the Group issued 1,440,894 Class A common shares to the original shareholders of Hengpu as purchase consideration. The fair value of the purchase consideration was $11,426,289 based on the weighted average of the closing share price of the Group for five trading days up to the date immediately prior to the signing date of purchase agreement.

 

Share incentive plan

 

The Board of directors approved a 2019 One Million Share Incentive Plan (the “2019 Plan”) on December 20, 2019, which permits the grant of restricted shares and options to the employees, directors, officers and consultants to purchase the Company’s Class A common shares. The maximum aggregate number of Class A common shares, which may be issued pursuant to all awards under the 2019 Plan, is 1 million shares The Plan is valid and effective for a term of ten years commencing from its adoption. As of December 31, 2019, no awards was granted under the Plan.

 

Note 18 — SEGMENT INFORMATION

 

For the years ended December 31, 2018 and 2017, the Group had only operated with one segment –equipment and engineering. Starting in July 2019, the Group’s operations are organized into two segments, consisting of the equipment and engineering and financial services segments. The Group derives the results of the segments directly from its internal management reporting system. The CODM reviews the performance of each segment based on its operating results and uses these results to evaluate the performance of, and to allocate resources to, each of the segments. Because substantially all of the Group’s long-lived assets and revenues are located in and derived from the PRC, geographical segments are not presented.

 

Segment information of the Group for the year ended December 31, 2019 as follows:

 

   Equipment and Engineering   Financial services   Consolidated 
Revenue  $18,577,590   $2,525,524   $21,103,114 
Gross profit   5,550,589    2,506,032    8,056,621 
Interest expenses   (158,119)   -    (158,119)
Depreciation and amortization   (983,567)   (242,410)   (1,225,977)
Capital expenditures   (394,988)   -    (394,998)
Segment profit (loss)   1,270,684    1,469,306    2,739,990 
Goodwill   -    11,074,864    11,074,864 
Segment assets of December 31, 2019  $66,802,900   $17,996,357   $84,799,257 

 

F-28

 

 

Note 19 — RELATED PARTY TRANSACTIONS

 

The table below sets forth major related parties of The Group and their relationships with the Group:

 

Entity or individual name   Relationship with the Group
Shanghai NiSun Enterprise Management Group Co., Ltd (“NiSun Shanghai”) an entity under common control
Mr. Bodang Liu the ultimate controlling shareholder of the Group
Mr. Anyuan Sun   Chief executive officer of the Group

 

(a) The Group entered into the following related party transactions:

 

Starting on July 12, 2019, the Group rented an office from NiSun Shanghai and incurred $63,749 of rent expense for the year ended December 31, 2019. The annual rent from NiSun Shanghai is approximately $113,200.

 

(b) The Group had the following significant related party balances:

 

As of December 31, 2019, the Group had a due to related party balance of $7,345,399 due to Mr. Bodang Liu, the ultimate controlling shareholder of the Group, of which, $7 million was related to the purchase price payable for acquisition of NiSun BVI (Note 3). The due to related party balance is non-interest bearing and due on demand. There was no balance due to Mr. Liu as of December 31, 2018.

 

As of December 31, 2019, the Group had a due to related party balance of $414,044 due to Mr. Anyuan Sun, the chief executive officer of the Group. The due to related party balance is non-interest bearing and due on demand. There was no balance due to Mr. Sun as of December 31, 2018.

 

Note 20 — COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Group may be involved in various legal proceedings, claims and other disputes arising from the commercial operations, projects, employees and other matters which, in general, are subject to uncertainties and in which the outcomes are not predictable. The Group determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. As of December 31, 2019 and 2018, the Group was not aware of any litigation, lawsuits or claims against them.

 

Operating lease

 

Leases are classified as operating leases or finance leases in accordance with FASB ASC 842. The Group’s operating leases mainly related to land and office facilities. For leases with terms greater than 12 months, the Group records the related asset and lease liability at the present value of lease payments over the term. Certain leases include rental escalation clauses, renewal options and/or termination options, which are factored into the Company’s determination of lease payments when appropriate. As of December 31, 2019, the weighted average remaining lease term was 13.8 years and the weighted average discount rate was 4.75% for the Group’s operating leases. The Group’s lease costs are included within selling and administrative expenses on the consolidated statement of operations. For the year ended December 31, 2019, the lease cost amounted to $205,701.

 

The future undiscounted aggregate minimum lease payments under non-cancellable operating leases are as follows as of December 31, 2019:

 

For the Year Ending December 31,    
2020  $275,516 
2021   256,505 
2022   261,676 
2023   225,479 
2014   116,886 
thereafter   1,557,507 
Total undiscounted future minimum lease payments   2,693,569 
Less: Amounts representing interest   (735,085)
Total present value of operation lease liabilities   1,958,484 
Less: current portion of operating lease liabilities   (188,557)
Non-current portion of operating lease liabilities  $1,769,927 

  

F-29

 

 

Note 21 — SUBSEQUENT EVENTS

 

On March 2, 2020, The Group filed Form S-8 under the Securities Act to register its Class A common shares, par value $0.001 per share, issuable pursuant to the 2019 Stock Incentive Plan( the “Plan”). The Plan was approved by the shareholders at the annual shareholder meeting on December 20, 2019 and can issue up to 1,000,000 shares. We expect to incur additional share-based compensation expenses related to share options or restricted shares in the future as we plan to grant share options or restricted shares to our employees and directors.

 

In December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies and, as such, the Group is unable to determine if it will have a material impact to its operations.

 

On December 9, 2019, the Group entered into a definitive share purchase agreement with certain investors for a private placement of approximately 1.05 million Class A common shares at $6.21 per share. The private placement was previously expected to be closed about December 23, 2019. However, due to the business disruptions related to COVID-19 and other matters, the close of the transaction was deferred. Due to uncertainties, the Group expects to close the private placement prior to the end of April 2020.

 

On April 6, 2020 (the “grant date”), the Board approved an aggregate of 300,000 restricted stock awards to three key officers of the Group including the CFO, Vice president of marketing and Vice president of operations with 100,000 restricted stock award for each individual. One-third of the restricted stock issued shall be vest on the grant date, one-third of the restricted stock issued shall vest on the first anniversary of the grant date and the remaining one-third of the restricted stock issued shall vest on the second anniversary of the grant date.

 

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Note 22 — RESTRICTED NET ASSETS

 

The Group’s ability to pay dividends is primarily dependent on the Group receiving distributions of funds from its subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s subsidiaries and VIEs incorporated in the PRC only out of their retained earnings, after required statutory reserves, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Group’s subsidiaries and VIEs.

 

In accordance with the PRC laws and regulations, statutory reserve funds shall be made and can only be used for specific purposes and are not distributable as cash dividends. As a result of these PRC laws and regulations that require annual appropriation of 10% of net after-tax profits determined in accordance with PRC accounting standards and regulations to be set aside prior to payment of dividends as a general reserve fund or statutory surplus fund, The Group’s PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to The Group. For the years ended December 31, 2019 and 2018, the statutory reserve balance for the Group's entities established in the PRC was $516,193 and $15,069, respectively.

 

The Group performed a test on the restricted net assets of its consolidated subsidiaries and VIEs (the “restricted net assets”) in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), “General Notes to Financial Statements”. Such restricted net assets amounted to approximately $12.6 million, or 23.3% of the Group’s total consolidated net assets, as of December 31, 2019.

 

ADDITIONAL FINANCIAL INFORMATION OF PARENT COMPANY

 

a)Condensed balance sheets

 

   December 31,
2019		   December 31,
2018		 
Assets:        
Cash and cash equivalents  $5,213   $607 
Prepayments and advances, net   38,221    - 
Due from intercompany and others   6,147,054    6,224,210 
  TOTAL CURRENT ASSETS   6,190,488    6,224,817 
Investment in subsidiaries, VIE, and VIEs’ subsidiaries   48,218,876    30,532,534 
TOTAL ASSETS  $54,409,364   $36,757,351 
LIABILITIES          
CURRENT LIABILITIES          
Accrued expenses and other current liabilities  $464,044   $- 
TOTAL CURRENT LIABILITIES   464,044    - 
           
Shareholders’ equity          
Class A common stock, $0.001 par value, 40,000,000 shares authorized, 17,710,471 and 8,491,177 shares issued and outstanding as of December 31, 2019 and 2018 respectively.   17,710    8,491 
Class B common stock, $0.001 par value, 10,000,000 shares authorized, nil and 7,778,400 shares issued and outstanding as of December 31, 2019 and 2018 respectively.   -    7,778 
Additional paid-in capital   28,369,076    13,361,447 
Retained earnings   27,472,766    24,732,776 
Accumulated other comprehensive income (loss)   (1,914,232)   (1,353,141)
Total shareholders’ equity   53,945,320    36,757,351 
Total liabilities and shareholders’ equity  $54,409,364   $36,757,351 

 

b)Condensed statements of comprehensive income

 

    For the year ended December 31,  
    2019     2018     2017  
                         
Selling and marketing   $ (15,005 )   $ -     $ (175,523 )
Administrative     (408,656 )     (2,093,307 )     (1,858,689 )
Other income (expense)     (820 )     (686 )     (236,304 )
Share of profit (loss) in subsidiaries, VIEs and VIEs’ subsidiaries     3,164,471     $ (3,050,722 )   $ 9,406,903  
Net income (loss)     2,739,990       (5,144,715 )     7,136,387  
Other comprehensive income                        
Foreign currency translation adjustment     (561,091 )     (1,755,528 )     2,249,081  
Comprehensive income (loss)    $ 2,178,899     $ (6,900,243 )   $ 9,385,468  

 

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Note 22 — RESTRICTED NET ASSETS - continued

 

c)Condensed statement of cash flows

 

   For the years ended December 31, 
   2019   2018   2017 
             
Cash flows from operating activities:            
Net income(loss)  $2,739,990   $(5,144,715)  $7,136,387 
Adjustments to reconcile net income to net cash used in operating activities               
Share of earnings in subsidiaries, VIEs and VIEs’ subsidiaries   (3,164,471)   3,050,722    (9,406,903)
Impairment charge recognized   -    923,094    - 
Due from intercompany and others   (38,561)   1,170,749    2,271,273 
Accrued expenses and other current liabilities   467,648    -    - 
Net cash provided by (used in) operating activities   4,606    (150)   757 
Net (decrease)/increase in cash and cash equivalents   4,606    (150)   757 
Cash and cash equivalents at beginning of the year   607    757    - 
Cash and cash equivalents at end of the year  $5,213   $607   $757 

 

Basis of presentation

 

Condensed financial information is used for the presentation of The Group, or the parent company. The condensed financial information of the parent company has been prepared using the same accounting policies as set out in The Group’s consolidated financial statements except that the parent company used the equity method to account for investment in its subsidiaries and VIEs.

 

The parent company records its investment in its subsidiaries and VIEs under the equity method of accounting as prescribed in FASB ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the condensed balance sheets as “Investment in subsidiaries and VIEs” and their respective profit or loss as “Equity in profits of subsidiaries and VIEs” on the condensed statements of comprehensive income. Equity method accounting ceases when the carrying amount of the investment, including any additional financial support, in a subsidiary and VIE is reduced to zero unless the parent company has guaranteed obligations of the subsidiary and VIE or is otherwise committed to provide further financial support. If the subsidiary and VIE subsequently reports net income, the parent company shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

 

The parent company’s condensed financial statements should be read in conjunction with the Group’s consolidated financial statements.

 

 

F-32