Discontinued Operations

12 Months Ended

Dec. 31, 2016

Discontinued Operations [Abstract]

DISCONTINUED OPERATIONS

NOTE 3 – DISCONTINUED OPERATIONS

Pursuant to an agreement dated December 23, 2016, the Company, through its wholly-owned subsidiary Fulland, sold the stock of Fulland Wind to a third party for a sales price of RMB48 million (approximately $6.9 million). The Company’s forging and related components business was conducted through Fulland Wind. The purchase price is payable in three installments. The Company received the first installment of RMB 14,400,000 (approximately $2.1 million) on December 28, 2016. The Company delivered Fulland Wind’s business license, seals, books and records, business contracts and personnel roster to the third party buyer on December 30, 2016, effectively the sale date. A second installment of RMB 14,400,000 (approximately $2.1 million) is due within six months after the transfer registration formalities are completed and, if the equity transfer registration formalities are completed within one year without any third party claims on the equity transfer, a final payment of RMB 19,200,000 (approximately $2.7 million) is due 25 working days after the expiration of such period. The Company expects the final payment to be received within one year. As a result of the sale, the forged rolled rings and related components business is treated as a discontinued operation.

Additionally, in December 2016, the Company’s management decided to discontinue its petroleum and chemical equipment segment due to significant decline in revenues and the loss of its major customer. Accordingly, the petroleum and chemical equipment segment business is treated as a discontinued operation.

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the business of the forging and related components segment and petroleum and chemical equipment segment are considered discontinued operations because: (a) the operations and cash flows of the forging and related components segment and petroleum and chemical equipment segment were eliminated from the Company’s operations; and (b) the Company has no interest in the divested operations.

As of December 31, 2016, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967) which are still guaranteed by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2016, the buyer of Fulland Wind has not obtained the release by Dyeing, the Company’s chief executive officer and his wife of their guarantees.

The sale of Fulland Wind resulted in a loss on disposal of discontinued operations of $6,459,407. This loss plus the results of operations from Fulland Wind and petroleum and chemical equipment segment for the years ended December 31, 2016 and 2015 have been reclassified to the loss from discontinued operations line on the accompanying consolidated statements of operations and comprehensive loss presented herein. In addition, the historical consolidated balance sheet and consolidated statement of cash flow amounts have also been reclassified to reflect the forging and related components segment and petroleum and chemical equipment segment businesses as discontinued operations.

Contemporaneously with the sale of the Fulland Wind stock, pursuant to an agreement dated December 23, 2016, Heavy Industry entered into a lease with Wang Jiahong for a factory building owned by Heavy Industry at an annual rental of RMB 680,566 (approximately $98,000). The lease has a ten-year term, commencing January 1, 2017. The first year’s rent is payable in two installments, the first installment, equals to 30% of the annual rental, being due on signing the lease, which has been paid as of December 31, 2016.

The assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2016 and 2015 is set forth below.

	December 31, 2016		December 31, 2015
Assets:
Current assets:
Accounts receivable, net	$	78,407	$	4,151,958
Inventories, net of reserve for obsolete inventories		31,019		160,036
Advances to suppliers		200,275		604,474
Equipment held for sale (1)		1,147,035		-
Prepaid expenses and other		302,250		981,770
Total current assets		1,758,986		5,898,238
Equipment held for sale (1)		-		3,338,002
Property and equipment, net		-		13,781,006
Total assets	$	1,758,986	$	23,017,246
Liabilities:
Current liabilities:
Short-term bank loans	$	-	$	693,300
Accounts payable		458,433		1,599,340
Accrued expenses and other liabilities		45,280		270,471
Accrued liability for claimed sale contract dispute (2)		-		5,562,365
Advances from customers		54,948		29,273
Total current liabilities		558,661		8,154,749
Total liabilities	$	558,661	$	8,154,749

(1) The Company committed to a plan to sell the manufacturing equipment that was previously used in petroleum and chemical equipment segment and reflected this equipment in discontinued operations as equipment held for sale. In connection with the Company’s analysis of the equipment held for sale, for the year ended December 31, 2016, the Company recorded an impairment charge of $1,660,305 which is included on the consolidated statements of operations in loss from discontinued operations. The Company subsequently sold the equipment in March 2017 to a third party (See Note 19).

(2) In December 2015, the Company received a notice of contract termination in writing from its largest customer, which was a customer in the petroleum and chemical equipment segment, alleging breach of contract for late delivery of product and for delivery of product with quality defects. As a result of the claimed breach of contract, the customer demanded payment of a penalty of 20% of the contract price plus penalties for late delivery and damages in the amounts of RMB 36,103,640 ($5,562,365 at December 31, 2015). In the third quarter of 2016, the claimed sale contract dispute was resolved, and the Company made the payment of RMB 36,103,640 RMB to this customer in full satisfaction of the customer’s claims against the Company.

The summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is as follows:

	Years Ended December 31,
	2016			2015
Revenues	$	595,855		$	20,554,626
Cost of revenues		1,562,774			19,701,621
Gross (loss) profit		(966,919	)		853,005
Operating expenses:
Impairment losses		1,660,305			7,016,658
Loss from sales contract dispute		-			5,806,778
Other operating expenses		1,124,304			3,592,743
Total operating expenses		2,784,609			16,416,179
Loss from operations		(3,751,528	)		(15,563,174	)
Other expense, net		(74,997	)		(77,857	)
Loss from discontinued operations before income taxes		(3,826,525	)		(15,641,031	)
Income taxes		-			127,345
Loss from discontinued operations, net of income taxes		(3,826,525	)		(15,768,376	)
Loss on sale / disposal of discontinued operations, net of income taxes		(6,459,407	)		-
Loss from discontinued operations, net of income taxes	$	(10,285,932	)	$	(15,768,376	)