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: 8,491,177 Class A Common Shares and 7,778,400 Class B Common Shares
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).
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.
|
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, 2018, 2017 and 2016, and the selected consolidated balance
sheets data as of December 31, 2018, 2017 and 2016 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:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
25,290,060
|
|
|
$
|
29,200,445
|
|
|
$
|
27,097,836
|
|
Cost of revenue
|
|
|
17,712,108
|
|
|
|
18,756,284
|
|
|
|
16,636,258
|
|
Gross profit
|
|
|
7,577,952
|
|
|
|
10,444,161
|
|
|
|
10,461,578
|
|
General and administrative
|
|
|
3,298,188
|
|
|
|
3,683,594
|
|
|
|
932,911
|
|
Selling expenses
|
|
|
1,337,321
|
|
|
|
2,187,253
|
|
|
|
1,742,147
|
|
Bad debt expenses (recovery)
|
|
|
7,913,442
|
|
|
|
187,715
|
|
|
|
(227,873
|
)
|
Research and development expenses
|
|
|
358,411
|
|
|
|
508,282
|
|
|
|
33,847
|
|
(Loss) income from operations
|
|
|
(5,329,410
|
)
|
|
|
3,877,317
|
|
|
|
7,980,546
|
|
Other income, net
|
|
|
(426,585
|
)
|
|
|
377,174
|
|
|
|
6,431
|
|
Interest expense
|
|
|
(208,306
|
)
|
|
|
(56,953
|
)
|
|
|
(49,625
|
)
|
Income from investment
|
|
|
168,534
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) income before income taxes
|
|
|
(5,795,767
|
)
|
|
|
4,197,538
|
|
|
|
7,937,352
|
|
Income taxes provision (recovery)
|
|
|
(651,052
|
)
|
|
|
(2,938,849
|
)
|
|
|
2,002,467
|
|
Net income (loss)
|
|
|
(5,144,715
|
)
|
|
|
7,136,387
|
|
|
|
5,934,885
|
|
Foreign currency translation (loss)
|
|
|
1,755,528
|
|
|
|
2,249,081
|
|
|
|
(1,401,124
|
)
|
Comprehensive income
|
|
$
|
(6,900,243
|
)
|
|
$
|
9,385,468
|
|
|
$
|
4,533,761
|
|
Balance
sheet data:
|
|
As December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current assets
|
|
$
|
38,421,753
|
|
|
$
|
38,580,847
|
|
|
$
|
34,579,071
|
|
Total assets
|
|
$
|
56,653,676
|
|
|
$
|
54,548,682
|
|
|
$
|
47,079,357
|
|
Current liabilities
|
|
$
|
19,683,974
|
|
|
$
|
13,189,549
|
|
|
$
|
15,399,512
|
|
Total liabilities
|
|
$
|
19,896,325
|
|
|
$
|
14,016,144
|
|
|
$
|
15,932,287
|
|
Total shareholders’ equity
|
|
$
|
36,757,351
|
|
|
$
|
40,532,538
|
|
|
$
|
31,147,070
|
|
Shares outstanding
|
|
|
16,269,577
|
|
|
|
14,695,347
|
|
|
|
14,695,347
|
|
Exchange
Rate Information
Our
financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the
PRC. Transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the
People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated
in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our
financial statements have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”.
The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to
assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as
a component of accumulated other comprehensive income (loss) in shareholders’ equity.
We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part
through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not
currently engage in currency hedging transactions.
The following table
sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated (
www.oanda.com
).
|
|
Midpoint of Buy and Sell
Prices
for U.S. Dollar per RMB
|
|
Period
|
|
Period-End
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
2009
|
|
|
6.8272
|
|
|
|
6.8310
|
|
|
|
6.8483
|
|
|
|
6.8130
|
|
2010
|
|
|
6.6018
|
|
|
|
6.7696
|
|
|
|
6.8344
|
|
|
|
6.6018
|
|
2011
|
|
|
6.3585
|
|
|
|
6.4640
|
|
|
|
6.6357
|
|
|
|
6.3318
|
|
2012
|
|
|
6.3086
|
|
|
|
6.3116
|
|
|
|
6.3862
|
|
|
|
6.2289
|
|
2013
|
|
|
6.0220
|
|
|
|
6.0720
|
|
|
|
6.2195
|
|
|
|
5.9778
|
|
2014
|
|
|
6.1411
|
|
|
|
6.1463
|
|
|
|
6.1758
|
|
|
|
6.0924
|
|
2015
|
|
|
6.4917
|
|
|
|
6.2288
|
|
|
|
6.4917
|
|
|
|
6.0933
|
|
2016
|
|
|
6.9448
|
|
|
|
6.6441
|
|
|
|
7.0672
|
|
|
|
6.4494
|
|
2017
|
|
|
6.5063
|
|
|
|
6.7569
|
|
|
|
6.9575
|
|
|
|
6.4773
|
|
2018
|
|
|
6.6090
|
|
|
|
6.8755
|
|
|
|
6.9737
|
|
|
|
6,2649
|
|
2019 (through May 10, 2019)
|
|
|
6.8193
|
|
|
|
6.7419
|
|
|
|
6.8772
|
|
|
|
6.6868
|
|
January
|
|
|
6.7035
|
|
|
|
6.7917
|
|
|
|
6.8772
|
|
|
|
6.7035
|
|
February
|
|
|
6.6876
|
|
|
|
6.7401
|
|
|
|
6.7790
|
|
|
|
6.6868
|
|
March
|
|
|
6.7119
|
|
|
|
6.7129
|
|
|
|
6.7342
|
|
|
|
6.6912
|
|
April
|
|
|
6.7357
|
|
|
|
6.7157
|
|
|
|
6.7380
|
|
|
|
6.6931
|
|
May (through May 10, 2019)
|
|
|
6.8193
|
|
|
|
6.7616
|
|
|
|
6.8193
|
|
|
|
6.7346
|
|
|
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.
Risks
Related to Our Business and Industry
We
may incur liability for unpaid taxes, including penalties.
In
the normal course of its business, our Company, including in particular 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 recorded a tax liability of $9,085,746 and $7,067,593 as of December 31, 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
those 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 tax liability lower than the amount currently accrued before the end of fiscal 2019, 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.
Our
industry 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 will decrease if the industries in which our customers operate experience a protracted slowdown.
Our
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.
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 very small
part of our business, inability to produce certain products could result in a decrease in profit 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 have 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. See “Exchange Rate Information.”
Outstanding
bank loans may reduce our available funds.
We
have approximately $1.7 million and $0.9 million in bank loans outstanding as of December 31, 2018 and December 31, 2017, respectively.
The loans 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 a guarantee obligation, 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.
We
may have liability under our contract with Zhejiang University.
We
signed a Research and Collaboration Agreement with Zhejiang University on January 20, 2011. Pursuant to the agreement, Zhejiang
University was responsible for conducting the research and development work of intelligent process control valve on behalf of
us, and we were obligated to pay Zhejiang University a total of RMB 1 million (approximately $0.15 million) in several installments.
We made payments to Zhejiang University in accordance with the specific milestones stipulated in the agreement and a total of
RMB 0.65 million (approximately $0.10 million) as required by the agreement was paid as of December 31, 2018.
In
addition, the agreement requires us to pay a total amount of RMB 0.35 million to Zhejiang University depending on the sales of
the products, which consists of RMB 0.07 million per year for 5 years starting from May 31, 2012. As of December 31, 2018, RMB
0.15 million remains outstanding because we have not put any such products from the research into market for sales, and Zhejiang
University has never required us to pay for any balance by sending us any invoice. Based on the terms of the agreement,
we consider that this payment is not due. However, we plan to pay the required amount according to the terms in the Research and
Collaboration Agreement in the future once we start selling the products. We do not intend to make payment until the conditions
in the agreement are met. Zhejiang University could file a lawsuit against us claiming the balance and damages if we refuse to
pay on its demand. Such a lawsuit, whether or not successful, may cost us considerable time and expense.
The
loss of any of our key customers could reduce our revenues and our profitability.
For the year ended
December 31, 2018, four customers accounted for approximately 13%, 12%, 11% and 10% of the Company’s total revenue, respectively.
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, 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 for the Company’s installation projects accounted for approximately
58% and 42% of the Company’s total contracts receivable balance, respectively.
For
the year ended December 31, 2016, two major customers each accounted for approximately 10% of the Company’s total revenue.
As of December 31, 2016, two general contractors for the Company’s installation projects accounted for approximately 51%
and 45% 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 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.
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, 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.
For
the year ended December 31, 2016, three major sub-contractors accounted for approximately 44%, 22% and 15% of subcontract costs,
respectively. For the year ended December 31, 2016, only one supplier accounted for 10% of the Company’s accounts payable
balance.
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 on 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 and our products could adversely impact our ability to produce and deliver products.
As
to the products we manufacture, 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, 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.
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 is no additional service 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 for a period of one year 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, 2018, 2017 and 2016 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 products 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.
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. 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, 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.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various banks and trust companies located in the PRC. Our cash accounts are not insured or otherwise protected.
While China is currently considering implementation of banking insurance policies, it has not yet done so. Should any bank or
trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash
on deposit with that particular bank or trust company.
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. 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, Steven Fu, 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 his 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.”
We
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 those 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 license 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, there are possibilities that Mr. Sun may require us to pay royalties
in future. If so, it will certainly increase our operational costs and adversely affect our business profitability.
Likewise,
two of four trademarks and one copyright 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. Fortunately, we successfully applied on our own name two trademarks in 2015, for both of which
we have obtained the certificate issued by the authority (SAIC).
As
to the licenses on 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 shares for our products which are manufactured and
sold with these licensed intellectual property rights will certainly be shrunk 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.
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:
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seek
licenses from third parties;
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redesign
our branded products; or
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be
restricted by injunctions,
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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 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 expand 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.
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. These government involvements have 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, 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 comparative
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 currency, 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.
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 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.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
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 the 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 law.
However,
our existing safeguards and any future improvements may prove to be less than effective, and the 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
law 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 to PRC entities may delay or prevent us from using the
proceeds of our recent initial public offering 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 the proceeds of our recent initial public offering in the manner described in the section titled “Use of Proceeds”
in our initial public offering registration statement, we may make loans to our PRC subsidiaries, or we may make additional capital
contributions to our PRC subsidiaries.
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 tolerate attitude toward FIEs. More open rules and regulations are
published in recent years to replace previous ones which are more restrictive. On March 30
th
, 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:
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(1)
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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 operation 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.
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(2)
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Foreign
currency-denominated capital no longer needs to be verified by an accounting firm before converting into RMB.
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(3)
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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:
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a)
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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;
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b)
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it
shall not be directly or indirectly used for investment in securities unless otherwise provided by laws and regulations;
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c)
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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
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d)
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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.
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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, Circulars mentioned above may still have some limit our ability to convert,
transfer and use the net proceeds from our initial public offering 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 initial public offering and capitalize our PRC operations, which
could adversely affect our liquidity and our ability to fund and expand our business.
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
is primarily 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 initial public offering 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.
The
RMB depreciated from 2014 through the end of 2016, appreciated in 2017, and has depreciated since the beginning of 2018.
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, 2018, 2017 and 2016, we had foreign currency translation
gain (loss) adjustments of -$1.8 million, $2.2 million and -$1.4 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 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.
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 the initial public offering 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 cause negative effect to 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 industry. 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 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
Our
dual class structure concentrates a majority of voting power in our Chief Executive Officer, who is the only owner of our Class
B common shares.
On
March 7, 2018, we 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. Our Class B common shares
have five votes per share, and our Class A common shares have one vote per share. Because of the five-to-one voting ratio between
our Class B and Class A common shares, the holders of our Class B common shares collectively continue to control a majority of
the combined voting power of our Common Shares and therefore are able to control all matters submitted to our shareholders for
approval. The sole beneficial owner of such Class B common shares is our Chief Executive Officer, Mr. Anyuan Sun, who beneficially
owns 1,800,000 Class B common shares through Wise Metro Development Co., Ltd. and 5,978,400 Class B common shares through Mr.
Zuoqiao Sun Zhang. Mr. Sun holds in the aggregate 82.1% of the voting power of our capital stock. This concentrated control may
limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors,
amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or
other major corporate transaction requiring shareholder approval. In addition, this may prevent or discourage unsolicited acquisition
proposals or offers for our capital stock that you may feel are in your best interest as one of our shareholders.
Future
transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject
to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common shares
to Class A common shares will have the effect, over time, of increasing the relative voting power of those holders of Class B
common shares who retain their shares in the long term.
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.
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 in construction 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.
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. We have irrevocably elected not to avail our company of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not
emerging growth companies.
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.
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 common shares (or Class A common shares since March 19, 2018) has fluctuated since we first listed our common shares.
Since our common shares became listed on the Nasdaq on December 27, 2016, the trading price of our common shares (or Class A common
shares since March 19, 2018) has ranged from US $0.5 to US $7.02 per common share, and the last reported trading price on May
10, 2019 was $0.88 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:
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actual
or anticipated fluctuations in our revenue and other operating results;
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the
financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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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;
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announcements
by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships,
joint ventures, or capital commitments;
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price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits
threatened or filed against us; and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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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.
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
2019,
2020 and 2021. 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.
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.
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Item
4.
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Information
on the Company
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A.
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History
and Development of the Company
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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:
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.
The
Company 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 21
st
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.
Principal
Activities
Below
is a brief summary of principal activities of our Company since its formation.
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January
25, 2005, Xibolun Equipment was incorporated.
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June
14, 2011, HK Xibolun is formed in accordance with laws and regulations of Hong Kong.
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July
21, 2011, HK Xibolun acquired 30% ownership interest of Xibolun Equipment.
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May
29, 2012, Hebron Technology is established under the laws of the British Virgin Islands as a holding company.
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September
24, 2012, Xibolun Automation is incorporated.
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December
5, 2012, HK Xibolun acquired 100% ownership interest of Xibolun Automation from Hebron Technology, Xibolun Equipment, and
Zhejiang Xibolun.
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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.
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July
29, 2013, Mr. Anyuan Sun transferred his 70% ownership interest in Xibolun Equipment to Xibolun Automation.
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April
11, 2018, Hebron Technology acquired a 49% equity interest in Xuzhou Weijia Bio-Tech Co., Ltd.
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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”) pursuant to which NiSun would acquire 7,778,400
Class B Common Shares from the Sellers.
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On
December 27, 2016, we 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.
On
March 7, 2018, we 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.
On
March 10, 2018, we 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 are 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.
On 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”) pursuant to which NiSun would acquire 7,778,400 Class B Common Shares from the Sellers.
Simultaneously, the
Company and its subsidiaries will enter into a series of contracts to acquire effective control over Fintech (shanghai) Investment
Holding Co., Ltd (“Fintech”), a Chinese company focused on the provision of financial services and an affiliate of
NiSun, in return for cash or cash equivalents to be determined based on an assessment by an independent third party business valuation
firm (the “Fintech Acquisition”).
Also
as part of the transaction, the Company will grant to Sellers the option (the “Option”) to purchase the Company’s
equity interest in Zhejiang Xibolun Automation Project Technology Co., Ltd., the Company’s 49% equity interest in Xuzhou
Weijia Biotechnology Co., Ltd. and the Company’s equity interest in Wenzhou Xibolun Fluid Equipment Co., Limited, Chinese
operating subsidiaries of the Company. The purchase price will be based on assessment by an independent third party business valuation
firm at the time the Option is exercised. The Option may be exercised beginning six (6) months following the Closing Date and
expires if not exercised prior to the second anniversary of the closing date of the transactions. These above mentioned transactions
will be the subject of a shareholder vote to be held at a special meeting of shareholders in May 2019.
Main
Categories of Products and Services
We
provided installation services and fluid equipment sales for the years ended December 31, 2018, 2017 and 2016. We also provided
a one-time fluid equipment control system sales for the year ended December 31, 2013. We did not provide fluid equipment control
system sales for the years ended December 31, 2018, 2017 and 2016.
New
Products and Services
We
have developed an intelligent process control valve which can be wholly produced by ourselves through our collaboration with Zhejiang
University. We provided a limited number of these products to existing customers for trial use in December 2013 in order to collect
quality and reliability data for the product. The customers can pay us after 2 years of use if they are satisfied with the product,
or return it to us otherwise. Once we are satisfied with the feedback from the customers and decide that the product is stable
enough to be distributed more widely, we will start to produce it and sell it on a large scale. Currently we are still collecting
data from our customers who use it. It may take more than 2 years to collect sufficient data to make this determination.
We started the business
of repair and maintenance services in 2015. It is provided to pharmaceutical manufacturers after the expiration of warranty about
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). Over the next 2 years, we plan to establish five additional repair and maintenance centers in Shanghai, Beijing, Nanjing,
Chengdu and Linyi respectively to cover Central China, Northeastern China, Northern China, Southern China, and Northwestern China,
with Shanghai being the center.
Our
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 industry. 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 68%, 81% and 90% of our total revenues for the years ended
December 31, 2018 and 2017 and 2016, respectively.
We
started the business of repair and maintenance service in 2015. It is provided to pharmaceutical manufacturers after the expiration
of warranty about 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). Over the next 2 years, we plan to establish five additional repair and maintenance centers in Shanghai,
Beijing, Nanjing, Chengdu and Linyi respectively to cover Central China, Northeastern China, Northern China, Southern China, and
Northwestern China, with Shanghai being the center.
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.
|
|
(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.
|
|
(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.
|
Our
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 32%, 19% and 10% of our total revenues for the years ended December 31, 2018, 2017
and 2016, 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, 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.
Intelligent
Process Control Valve
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
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, 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.
For
the year ended December 31, 2016, three major sub-contractors accounted for approximately 44%, 22% and 15% of subcontract costs,
respectively. For the year ended December 31, 2016, only one supplier accounted for 10% of the Company’s accounts payable
balance.
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, 2018, 2017 and 2016, respectively.
|
|
Fiscal 2018
|
|
|
Fiscal 2017
|
|
|
Fiscal 2016
|
|
Installation services
|
|
|
68
|
%
|
|
|
81
|
%
|
|
|
90
|
%
|
Fluid equipment
|
|
|
32
|
%
|
|
|
19
|
%
|
|
|
10
|
%
|
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 year ended December 31, 2018, seven major customers accounted for approximately 14%, 13%, 12%, 11%, 11%, 10% and 10% of the
Company’s total revenue. As of December 31, 2018, two general contractors for the Company’s installation projects
accounted for approximately 69% and 10% of the Company’s total contracts receivable balance, 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.
For
the year ended December 31, 2016, two major customers each accounted for approximately 10% of the Company’s total revenue.
As of December 31, 2016, two general contractors (“Contractor A” and “Contractor B”) for the Company’s
installation projects accounted for approximately 51% and 45% of the Company’s total contracts receivable balance, respectively.
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.
The
5% to 10% of the contract price is considered a quality guaranty, which is paid shortly after the end of the one year period beginning
on customer acceptance of delivery or installation. During this one year 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.
Methods
of Competition
We
plan to compete domestically by establishing new branch offices in more cities in China. Currently, we plan to add three more
branch offices in Linyi, Chengdu and Nanjing. We will also develop our online store, 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.
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, which is an industry with 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 this industry for over 10 years.
In
addition, 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 low price. We are able to reduce the overall price of the projects
we perform by producing some of the components. Because we produce lots of components and we stock different products in a proper
proportion based on experience with market demand, it normally takes us only a short time to complete the projects with less likelihood
of delay due to shortages of components from other suppliers. Also, our products and pricing can be easily tailored to the customers’
needs, and we price our products aggressively. We have short cycles in providing products. On average it takes only one week from
receiving orders to delivery to the customer. 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.
Our
Competitive Position
Our
primary competitors are the following companies. We have set forth our assessment of our companies’ relative strengths and
challenges. This table represents 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.
However,
we compete with them in different areas. Currently there is no competitor that competes with us on all areas.
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.
|
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.
|
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 strongcredit 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.
|
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.
|
|
|
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2018
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High-tech
Enterprise Certificate
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Zhejiang
Science and Technology Bureau & Zhejiang Finance Bureau
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This
certificate reflects that the company is a high-tech enterprise, and its products have innovative competitiveness.
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Safety
production standardization certificate
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Wenzhou
Safety Production Supervision Bureau
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Indicates
that the company’s production meets the requirements for safe production.
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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, 2018, 2017 and 2016, we spent $358,411, $508,282 and $33,847, respectively, on R&D. The
decrease in R&D expense in fiscal 2018 was due to less R&D projects. However, 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.
Our
Research Projects
We
have participated in following numerous scientific projects.
Project
Description
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Time
Period
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Government
Agency
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Subsidy
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Pneumatic
Diaphragm Valve Device
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2007 – 2009
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Bureau
of Science and Technology of Longwan District of Wenzhou City
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RMB 100,000
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Butterfly
Valve Pneumatic Actuator
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2008 – 2010
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Bureau
of Science and Technology of Wenzhou City
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RMB 250,000
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Intelligent
Control Valve
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2009 – 2012
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Chinese
Ministry of Science and Technology and Zhejiang Bureau of Science and Technology
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RMB 1,050,000
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Aseptic
Diaphragm Remote Control
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2011 – 2012
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Bureau
of Science and Technology of Longwan District of Wenzhou City
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RMB 170,000
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Intelligent
and Efficient Development of Multi-Process Valve
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2012 – 2013
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Bureau
of Economic Development of Economic-Technological Development District of Wenzhou City
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RMB 100,000
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In
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.
We
have collaborated with Zhejiang University on R&D. We signed a Research and Collaboration Agreement with Zhejiang University
on January 20, 2011. Pursuant to the agreement, Zhejiang University was responsible for conducting the research and development
work of intelligent process control valve on behalf of the Company, and the company was obligated to pay Zhejiang University a
total of RMB 1 million (approximately $0.15 million) in several installments. The Company made payments to Zhejiang University
in accordance with the specific milestones stipulated in the agreement and a total of RMB 0.65 million (approximately $0.1 million)
as required by the agreement was paid as of December 31, 2018. The Company accounted for the payments as R&D expenses in accordance
with ASC 730-20 for the related periods.
This
agreement has been performing in material aspects. One of the most important results is the development of the intelligent process
control valve which can be wholly produced by ourselves. In addition, the agreement requires us to pay a total amount of RMB 0.35
million to Zhejiang University depending on the sales of the products, which consists of RMB 0.07 million per year for 5 years
starting from May 31, 2012. As of December 31, 2018, RMB 0.15 million remains outstanding because we have not put any such products
into market for sales, and Zhejiang University has never required us to pay for any balance by sending us any invoice. Based on
the terms of the agreement, we consider that this payment is not due. However, we plan to pay the required amount according to
the terms in the Research and Collaboration Agreement in the future once we start selling the products. We do not intend to make
the payment until the conditions in the agreement are met. If Zhejiang University were to demand payment at some time in the future
prior to our determination that the payment was due, we would need to decide whether to contest such demand or to pay. For more
details, please see “Risk Factors –We may have liability under our contract with Zhejiang University.”
Although
we have created our own research and development department, we plan to continue the collaboration with Zhejiang University. Because
of its rich academic resources, the collaboration with Zhejiang University helps our operations by improving our R&D.
In
2015, we began developing intelligent remote control service. 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.
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
|
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Patent
No.
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|
Patent
Type
|
|
Application
Date
|
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Issuance
Date
|
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Expiration
Date
|
|
Owner
|
Valve
pneumatic actuator with prompting switch
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|
ZL
2010 2 0668775.3
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Utility
model
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12/20/2010
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7/20/2011
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12/19/2020
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Xibolun
Automation
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Sampling
valves
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ZL
2010 2 0668776.8
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Utility
model
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12/20/2010
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7/20/2011
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12/19/2020
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Xibolun
Automation
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Three-way
diaphragm valves
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ZL
2010 2 0668430.8
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Utility
model
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12/20/2010
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7/20/2011
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12/19/2020
|
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Xibolun
Automation
|
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|
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Microporous
membrane filters
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ZL
2010 2 0668429.5
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Utility
model
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12/20/2010
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7/20/2011
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12/19/2020
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Xibolun
Automation
|
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Tank
bottom valve
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ZL
2010 2 0668772. X
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Utility
model
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12/20/2010
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7/20/2011
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12/19/2020
|
|
Xibolun
Automation
|
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Angle
seat valve
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ZL
2011 2 0513124.1
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Utility
model
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12/9/2011
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8/22/2012
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12/8/2021
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Xibolun
Automation
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Diaphragm
valve body
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ZL
2011 2 0512271.7
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Utility
model
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12/9/2011
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8/22/2012
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12/8/2021
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Xibolun
Automation
|
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Diaphragm
valve
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ZL
2011 2 0512279.3
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Utility
model
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12/9/2011
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8/29/2012
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12/8/2021
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Xibolun
Automation
|
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Angle
seat valve
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ZL
2011 2 0510956.8
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Utility
model
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12/9/2011
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8/22/2012
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12/8/2021
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Xibolun
Automation
|
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A
type of valve stem of sterile respondent valve
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ZL
2014 2 0616427. X
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Utility
model
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10/23/2014
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2/25/2015
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10/22/2024
|
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Xibolun
Automation
|
|
|
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A
type of sterile respondent valve
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ZL
2014 2 0616627.5
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Utility
model
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10/23/2014
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4/1/2015
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10/22/2024
|
|
Xibolun
Automation
|
|
|
|
|
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A
type of diaphragm valve with double diaphragms
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ZL
2013 2 0890760.5
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Utility
model
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12/30/2013
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6/18/2014
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12/29/2023
|
|
Anyuan
Sun
|
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A
type of valve terminal on valve controller
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|
ZL
2014 2 0617591.2
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Utility
model
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10/23/2014
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2/25/2015
|
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10/22/2024
|
|
Xibolun
Automation
|
|
|
|
|
|
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A
type of blow-down valve
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ZL
2014 2 0616636.4
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Utility
model
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10/23/2014
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3/11/2015
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10/22/2024
|
|
Xibolun
Automation
|
|
|
|
|
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A
type of valve pneumatic actuator
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ZL
2014 2 0617900.6
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Utility
model
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10/23/2014
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2/25/2015
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10/22/2024
|
|
Xibolun
Automation
|
|
|
|
|
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A
type of sanitary grade ball valve
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ZL
2014 2 0616568.1
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Utility
model
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10/23/2014
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2/25/2015
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10/22/2024
|
|
Xibolun
Automation
|
|
|
|
|
|
|
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|
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A
type of manual and pneumatic combine sterile sampling valve
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ZL
2014 2 0027096.6
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Utility
model
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1/16/2014
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6/25/2014
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1/15/2024
|
|
Anyuan
Sun
|
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
|
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|
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|
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|
|
|
|
|
|
5610464
|
|
12/7/2009
|
|
12/6/2019
|
|
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
|
|
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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
|
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.
Also,
Mr. Anyuan Sun holds the copyright of a computer software below:
Copyright
Name
|
|
Reg.
No.
|
|
Completion
Date
|
|
Owner
|
Proportioning
locator control system V1.0
|
|
2013SR072143
|
|
9/1/2012
|
|
Anyuan
Sun
|
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, 2018, we employed total of 88 full-time and no part-time employees in the following
functions:
Department
|
|
December 31,
2018
|
|
December 31,
2017
|
|
December 31,
2016
|
|
December 31,
2015
|
Senior Management
|
|
10
|
|
11
|
|
11
|
|
11
|
Research and Development
|
|
10
|
|
9
|
|
10
|
|
10
|
Production
|
|
56
|
|
54
|
|
50
|
|
50
|
Sales
|
|
12
|
|
15
|
|
16
|
|
16
|
Total
|
|
88
|
|
89
|
|
87
|
|
87
|
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 in
recent months. However, the licenses have to be 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 subsequences 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 subsequences could be indemnifying the damages and paying penalty which could be ranging from five hundred
thousand up to one million RMB.
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
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 Renminbi depreciated.
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.
While
the application of the M&A Rules remains unclear, our prior PRC counsel, Yunnan Tianwaitian Law Firm, 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.
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 China 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).
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.
|
C.
|
Organizational
structure
|
Corporate
Structure
Below
is a chart illustrating our current corporate structure:
Organization
and description of business
Hebron
Technology
Hebron
Technology Co., Ltd. (“Hebron Technology” or the “Company”), through its subsidiaries, is engaged in the
manufacture of fluid equipment and installation service for pharmaceutical engineering construction in the People’s Republic
of China. Beginning with the commencement of its installation services business in 2012, the Company has transformed from a manufacturing
oriented products company into a services oriented company.
Hebron
Technology is a limited company established under the laws of the British Virgin Islands on May 29, 2012 as a holding company.
Mr. Anyuan Sun, the Chairman of the Board and CEO of the Company, is the ultimate controlling shareholder (the “Controlling
Shareholder”) of the Company. The Company has an indefinite term. The agent of the Company in the United States is Mr. Yung
Kong Chin, 136-40 39
th
Avenue, 602B Garden Plaza, Flushing New York, 11354.
As
part of the reorganization as described below (the “Reorganization”), the Company became the ultimate parent company
of (i) Hong Kong Xibolun Technology Limited (“HK Xibolun”), (ii) Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun
Equipment”) and (iii) Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”), which
were all controlled by the Controlling Shareholder before the Reorganization.
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 Controlling Shareholder 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 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
transfer agreement entry date.
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.
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 the ultimate controlling shareholder of the Company in control of a total of approximately 68% of the Company’s
issued and outstanding shares. Based on the above, before and after the reorganization, Hebron Technology, HK Xibolun, Xibolun
Equipment and Xibolun Automation are 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.
|
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
m
2
|
|
|
|
|
|
|
|
Room
332 (self-assigned number), No. 1192, Third floor, Husong Highway, Songjiang District, Shanghai, China
|
|
July
1, 2016 – June 30, 2019
|
|
|
|
82
m
2
|
|
|
|
|
|
|
|
Airport
Xiaowei Beiyuan, Shacheng standard facility, Wenzhou, Zhejiang Province, China
|
|
January
20, 2017 – May 30, 2037
|
|
1,860
m
2
|
|
|
Our
property in No.936 Jinhai 2
nd
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 is a sales offices and contain typical office equipment. 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.
|
I
tem
5.
|
O
perating
and
F
inancial
R
eview
and
P
rospects
|
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.”
Overview
We
are engaged in the manufacture 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. Our products and services are primarily used in pharmaceutical engineering construction.
In
addition to selling our products to third parties for installation, we also provide installation services for our customers in
China. 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.
|
(1)
|
Installation
services
. We specialize in installing valves and pipes with skilled and experienced workers and professional equipment.
Revenues from installation services were approximately 68%, 81% 90% of our total revenues for the years ended December 31,
2018, 2017 and 2016, 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 32%, 19% and 10% of our total revenues for the years ended December 31, 2018, 2017 and 2016, respectively.
|
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
|
|
|
|
-
|
|
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
|
|
|
|
(1,6285,711
|
)
|
|
|
(174
|
)%
|
The
following table presents an overview of our results of operations for the year ended December 31, 2017 and 2016:
|
|
Year ended December 31,
|
|
|
Changes
|
|
|
|
2017
|
|
|
2016
|
|
|
($)
|
|
|
(%)
|
|
Revenue
|
|
$
|
29,200,445
|
|
|
$
|
27,097,836
|
|
|
|
2,102,609
|
|
|
|
8
|
%
|
Cost of revenue
|
|
|
18,756,284
|
|
|
|
16,636,258
|
|
|
|
2,120,026
|
|
|
|
13
|
%
|
Gross profit
|
|
|
10,444,161
|
|
|
|
10,461,578
|
|
|
|
(17,417
|
)
|
|
|
0
|
%
|
General and administrative
|
|
|
3,683,594
|
|
|
|
932,911
|
|
|
|
2,750,683
|
|
|
|
295
|
%
|
Selling expenses
|
|
|
2,187,253
|
|
|
|
1,742,147
|
|
|
|
445,106
|
|
|
|
26
|
%
|
Bad debt expenses (recovery)
|
|
|
187,715
|
|
|
|
(227,873
|
)
|
|
|
415,588
|
|
|
|
(182
|
)%
|
Research and development expenses
|
|
|
508,282
|
|
|
|
33,847
|
|
|
|
474,435
|
|
|
|
1,402
|
%
|
Total operating expenses
|
|
|
6,566,844
|
|
|
|
2,481,032
|
|
|
|
4,085,812
|
|
|
|
165
|
%
|
Income from operations
|
|
|
3,877,317
|
|
|
|
7,980,546
|
|
|
|
(4,103,229
|
)
|
|
|
(51
|
)%
|
Other income, net
|
|
|
377,174
|
|
|
|
6,431
|
|
|
|
370,743
|
|
|
|
5,765
|
%
|
Interest expense
|
|
|
(56,953
|
)
|
|
|
(49,625
|
)
|
|
|
(7,328
|
)
|
|
|
15
|
%
|
Total other (expense) income, net
|
|
|
320,221
|
|
|
|
(43,194
|
)
|
|
|
363,415
|
|
|
|
(841
|
)%
|
Income before income taxes
|
|
|
4,197,538
|
|
|
|
7,937,352
|
|
|
|
(3,739,814
|
)
|
|
|
(47
|
)%
|
Income taxes provision (recovery)
|
|
|
(2,938,849
|
)
|
|
|
2,002,467
|
|
|
|
(4,941,316
|
)
|
|
|
(247
|
)%
|
Net income
|
|
|
7,136,387
|
|
|
|
5,934,885
|
|
|
|
1,201,502
|
|
|
|
20
|
%
|
Foreign currency translation (loss)
|
|
|
2,249,081
|
|
|
|
(1,401,124
|
)
|
|
|
3,650,205
|
|
|
|
(261
|
)%
|
Comprehensive income
|
|
$
|
9,385,468
|
|
|
$
|
4,533,761
|
|
|
|
4,851,707
|
|
|
|
107
|
%
|
Revenue
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
|
|
|
|
|
|
|
$
|
29,200,445
|
|
|
|
|
|
|
|
(3,910,385
|
)
|
|
|
(13
|
)%
|
The
following table sets forth the breakdown of our revenue for the year ended December 31, 2017 and 2016:
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
Installation service
|
|
$
|
23,748,141
|
|
|
|
81
|
%
|
|
$
|
24,299,062
|
|
|
|
90
|
%
|
|
|
(550,921
|
)
|
|
|
(2
|
)%
|
Fluid equipment sales
|
|
|
5,452,304
|
|
|
|
19
|
%
|
|
|
2,798,774
|
|
|
|
10
|
%
|
|
|
2,653,530
|
|
|
|
95
|
%
|
Total revenue
|
|
$
|
29,200,445
|
|
|
|
|
|
|
$
|
27,097,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.6 million in fiscal 2018. Revenue from installation service was $23.7 million and $24.3
million for the years ended December 31, 2017, and 2016, respectively, representing a decrease of approximately of $0.55 million,
due to a decrease in contract amount during fiscal 2017. The details are illustrated in the table below:
|
|
Number of
Major Projects
|
|
Average Project
Revenue (USD)
|
|
2018
|
|
6
|
|
|
$ 2.6 million
|
|
2017
|
|
12
|
|
|
$ 2.0 million
|
|
2016
|
|
10
|
|
|
$ 2.4 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 $2.54 million primarily due to the increase of valve
demand resulting from our efforts to expand our sales network and increase marketing activities. For the years ended December 31,
2017 and 2016, revenue from sales of our fluid equipment was $5.5 million and $2.8 million, respectively, representing an increase
of approximately $2.65 million primarily due to the increase of Valve demand resulting from our efforts to expand our sales network
and increase marketing activities.
Cost
of revenue
The
following table presents a breakdown of our cost of revenue for the year ended December 31, 2018 and 2017.
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
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
|
|
|
|
|
|
|
|
18,756,284
|
|
|
|
|
|
|
|
(1,044,176
|
)
|
|
|
|
|
The
following table presents a breakdown of our cost of revenue for the year ended December 31, 2017 and 2016.
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
Installation service
|
|
|
14,278,067
|
|
|
|
76
|
%
|
|
|
14,363,420
|
|
|
|
86
|
%
|
|
|
(85,352
|
)
|
|
|
(1
|
)%
|
Fluid equipment sales
|
|
|
4,478,217
|
|
|
|
24
|
%
|
|
|
2,272,838
|
|
|
|
14
|
%
|
|
|
2,025,379
|
|
|
|
97
|
%
|
Total cost of revenue
|
|
|
18,756,284
|
|
|
|
|
|
|
|
16,636,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 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 fiscal 2018. For fiscal 2017 and 2016, cost of installation
services were $14.3 million and $14.4 million, respectively, representing a decrease of $0.08 million, which was in line with the
decrease in the installation revenue in fiscal 2017.
For fiscal 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 fiscal 2018. For fiscal 2017 and 2016, cost of our fluid equipment sales were $4.5 million and $2.3 million, respectively,
representing an approximate increase of $2.0 million, which was consistent with the 95% increase in the fluid equipment sales in
fiscal 2017.
Gross
profit
The
following table presents the gross profit of our businesses for the year ended December 31, 2018 and 2017:
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
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
following table presents the gross profit of our businesses for the year ended December 31, 2017 and 2016:
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
Installation service
|
|
|
9,470,074
|
|
|
|
40
|
%
|
|
|
9,935,642
|
|
|
|
41
|
%
|
|
|
(465,568
|
)
|
|
|
(5
|
)%
|
Fluid equipment sales
|
|
|
974,087
|
|
|
|
18
|
%
|
|
|
525,936
|
|
|
|
19
|
%
|
|
|
448,151
|
|
|
|
85
|
%
|
Gross profit
|
|
|
10,444,161
|
|
|
|
36
|
%
|
|
|
10,461,578
|
|
|
|
39
|
%
|
|
|
(17,417
|
)
|
|
|
(0.2
|
)%
|
The
gross profit percentage for fiscal 2018 decreased 6% from fiscal 2017, primarily because the gross profit from installation sales
decreased for fiscal 2018 as compared to fiscal 2017. Gross profit from installation service for fiscal 2018 decreased approximately
$3.1 million or 33% as compared to fiscal 2017.
The
gross profit percentage for fiscal 2017 decreased 3% from fiscal 2016, primarily because the gross profit from installation sales
decreased for fiscal 2017 as compared to fiscal 2016. Gross profit from installation service for fiscal 2017 decreased approximately
$0.5 million or 5% or as compared to fiscal 2016.
Gross
profit from our fluid equipment sales increased 25% in fiscal 2018 as compared to fiscal 2017. The gross profit percentage from
fluid equipment sales sight decreased from 18% in fiscal 2017 to 15% in fiscal 2018.
Gross
profit from our fluid equipment sales increased 85% in fiscal 2017 as compared to fiscal 2016. The gross profit percentage from
fluid equipment sales sight decreased from 19% in fiscal 2016 to 18% in fiscal 2017.
Expenses
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
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
|
|
|
|
|
|
|
|
6,566,844
|
|
|
|
|
|
|
|
6,340,518
|
|
|
|
97
|
%
|
|
|
Years ended December 31,
|
|
|
Changes
|
|
|
Changes
|
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
($)
|
|
|
(%)
|
|
General and administrative expenses
|
|
|
3,683,594
|
|
|
|
56
|
%
|
|
|
932,911
|
|
|
|
38
|
%
|
|
|
2,750,683
|
|
|
|
295
|
%
|
Selling expense
|
|
|
2,187,253
|
|
|
|
33
|
%
|
|
|
1,742,147
|
|
|
|
70
|
%
|
|
|
445,106
|
|
|
|
26
|
%
|
Bad debt expenses (recovery)
|
|
|
187,715
|
|
|
|
3
|
%
|
|
|
(227,873
|
)
|
|
|
(9
|
)%
|
|
|
415,588
|
|
|
|
(182
|
)%
|
Research development expenses
|
|
|
508,282
|
|
|
|
8
|
%
|
|
|
33,847
|
|
|
|
1
|
%
|
|
|
474,435
|
|
|
|
1,402
|
%
|
Total operating expense
|
|
|
6,566,844
|
|
|
|
|
|
|
|
2,481,032
|
|
|
|
|
|
|
|
4,085,812
|
|
|
|
165
|
%
|
General
and administrative expenses
For fiscal 2018, our
general and administrative expenses were $3.3 million, representing an approximate decrease of $0.4 million compared to fiscal
2017. The decrease in general and administrative expenses was mainly due to the Company spent less professional fees in fiscal
2018. In fiscal 2017, the Company had more consulting and professional services related to acquire new technology and mergers and
acquisitions (M&A).
For fiscal 2017, our
general and administrative expenses were $3.7 million, representing an approximate increase of $2.8 million compared to fiscal
2016. The increase in general and administrative expenses was mainly due to the Company incurring approximately $0.8 million in
expenses for consulting related to acquire new technology for improving its manufacturing and installation processes, approximately
$0.8 million in expenses for consulting related to mergers and acquisitions (M&A). In addition, investor’s relations
and NASDAQ fees increased $0.13 million due to the Company’s listing on NASDAQ in December 2016. In addition, conference
expenses increased $0.22 million due to the Company’s personnel attending oversea exhibitions.
Selling expense
For the fiscal 2018,
our selling expenses were $1.3 million, representing a 39% decrease from fiscal 2017. The decrease was mainly due to less marketing
activities related to Company listing in fiscal 2018.
For the fiscal 2017,
our selling expenses were $2.2 million, representing a 26% increase from fiscal 2016. The increase was mainly due to more marketing
activities were incurred after the Company listed in NASDAQ in December 2016.
Bad debt expenses (recovery)
For the fiscal 2018,
we recorded a bad debt expense of approximately $7.9 million. For the fiscal 2017 and 2016, we had a bad debt expense of approximately
$0.2 million and a bad debt recovery of approximately 0.2 million. The increase of bad debt expenses was mainly due to we recorded
approximately $7.6 million bad debt allowance for our prepayments and advances to suppliers in fiscal 2018.
Research
and development expenses
For fiscal 2018, our
research and development (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.
For fiscal 2017, our
research and development (R&D) expenses were $0.5 million, representing an increase of $0.5 million compared to $33,847 in
research and development expenses in fiscal 2016. The increase in R&D expense was due to an increase in the investment on R&D
activities in developing intellectual valve controller system.
Interest
expense
Our
interest expenses for fiscal 2018 were $208,306, representing a 266% increase compared to $56,953 in fiscal 2017 due to higher
loan balance and higher interest rate in fiscal 2018.
Our
interest expenses for fiscal 2017 were $56,953, representing a 15% increase compared to $49,625 in fiscal 2016 due to higher loan
balance and higher interest rate in fiscal 2017.
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, 2018, the Company had a net other income expense of $426,585. For the year ended December 31,
2017 and 2016, the other income, net was $377,174 and $6,431 respectively. The decrease in other income for the year ended December
31, 2018 was due to net loss from disposition of fixed assets.
Income
taxes and other taxes
For years ended December
31, 2018, Xibolun Automation is recognized as a High-technology Company by Chinese government, the revenues generated by Xibolun
Automation were subject to a favorable income tax rate of 15%. The High-technology certificate is valid for three year starting
from November 30, 2018 and is subject to renewal. Xibolun Equipment is subject to corporate income tax at unified rate of 25%.
For the years ended 2017 and 2016, revenues generated in China were subject to corporate income tax at a unified rate of 25%. The
recovery for income taxes benefit was $0.7 million, representing an effective tax rate of negative 11.2%.
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.
The
provision for income taxes decreased by $4,941,316 in fiscal 2017 compared to fiscal 2016, which was mainly because the Company
reversed the accumulated tax liabilities before January 1, 2015 of approximately $5.0 million, as well as the decrease of income
before taxes. The effective tax rate fiscal in 2017 were approximately (70)%, a significant decrease from the effective tax rate
of approximately 25% for fiscal year 2016; the decrease was mainly due to the income tax settlement with the local tax authority.
The
provision for income taxes increased by $384,716 in fiscal 2016 compared to fiscal 2015, which are consistent with the increase
in the income before taxes. The effective tax rate fiscal in 2016 were approximately 25%, slightly decreased from the effective
tax rate of approximately 27% for fiscal year 2015.
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, 2018, 2017 and 2016, the Company had accrued
total tax liabilities of $9.1
million,
$7.1 million and $8.7 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 $1.4 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.
|
B.
|
Liquidity
and Capital Resources
|
Prior
to our initial public offering in December 2016, we financed our operations primarily through cash provided by operating activities.
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
received net proceeds of approximately $10.1 million from our initial public offering. As of December 31, 2017, the Company had
utilized around $9.5 million from the IPO proceeds in purchase of inventory of approximately $5.9 million for production, paid
approximately $3.2 million for consulting fees, and paid approximately $0.4 million in operating expenses related to our Nasdaq
listing. As of December 31, 2017, the balance of IPO proceeds was approximately $0.6 million.
We
expect that we are able to 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 expanding our sales networks.
As
of December 31, 2018, 2017 and 2016, we had cash of $947,588, $3,220,781 and $11,875,893, respectively. On December 26, 2016,
the Company announced the completion of a public offering 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 Company’s common stock began trading on the NASDAQ Capital Market beginning on December 26, 2016 under the symbol “HEBT”.
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.
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.
Since
all of the cash balance reported by us as of the latest balance sheet date, December 31, 2018, is foreign cash (RMB), the amount
of foreign cash we have is the total amount of our cash, which is $947,588.
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. 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.
We
have never declared or paid any cash dividends to our shareholders. We do not plan to pay any dividends out of our retained earnings
for the years ended December 31, 2018, 2017 and 2016. 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, 2018, 2017 and 2016:
Working
Capital
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Current asset
|
|
$
|
38,421,753
|
|
|
$
|
38,580,847
|
|
Current liabilities
|
|
|
19,683,974
|
|
|
|
13,189,549
|
|
Working Capital
|
|
|
18,737,779
|
|
|
|
25,391,298
|
|
Contract and accounts receivable turnover in days
|
|
|
344
|
|
|
|
196
|
|
Contract and accounts receivable turnover ratio
|
|
|
1.06
|
|
|
|
1.86
|
|
Inventory turnover in days
|
|
|
14
|
|
|
|
24
|
|
Our working capital was $18.7 million as of December 31, 2018, a decrease of approximately $6.7 million
from December 31, 2017, mainly due to higher short-term loans, notes payables, accrued liabilities and tax payable balance as of
December 31, 2018.
For
the year ended December 31, 2018 and for the year ended December 31, 2017, our accounts receivable including contract receivable
turnover in days were 344 and 196 days, respectively. The slow in turnover in the fiscal 2018 was due to the high margin installation
contracts were complicated projects, which required longer service time and those customers usually made payments in 3 to 6 months
after the completion of the projects.
As
of December 31, 2018, and December 31, 2017, our net contract receivable balance was $24,669,365 and $16,904,722, respectively,
related to our installation projects. Due to the high value of each installation project, it typically takes about 3 to 6 months
for the customers to pay off the balances for the installation projects. With the increasing collection efforts, we believe we
are able to successfully collect the balance.
As of December 31,
2018, the balances of our net accounts receivable, retainage receivables and net other receivable were $2,655,845, $3,146,986 and
$767,681, respectively. As of December 31, 2017, the balances of our net accounts receivable, retainage receivables and net other
receivable were $1,419,305, $2,564,404 and $240,284, respectively.
Since
the income tax payable balance is due on demand, the income tax payable balance is classified as current liability. We are in
the process of a settlement discussion with Wenzhou tax authority. Therefore, the exact payment date of this local tax liability
is uncertain.
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, 2018, 2017 and 2016:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(725,080
|
)
|
|
$
|
(6,096,784
|
)
|
|
$
|
1,577,301
|
|
Net cash used in investing activities
|
|
|
(115,210
|
)
|
|
|
(3,126,777
|
)
|
|
|
(980,921
|
)
|
Net cash provided by financing activities
|
|
|
730,669
|
|
|
|
916,640
|
|
|
|
10,266,160
|
|
Effect of exchange rate changes on cash
|
|
|
(94,239
|
)
|
|
|
(292,869
|
)
|
|
|
(104,290
|
)
|
Net (decrease) increase in cash
|
|
$
|
(203,860
|
)
|
|
$
|
(8,599,790
|
)
|
|
$
|
10,758,250
|
|
Cash and restricted cash at beginning of year
|
|
|
3,276,103
|
|
|
|
11,875,893
|
|
|
|
1,117,643
|
|
Cash and restricted cash at end of year
|
|
$
|
3,072,243
|
|
|
$
|
3,276,103
|
|
|
$
|
11,875,893
|
|
Operating
Activities
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.
Net
cash provided by operating activities for fiscal 2016 was approximately $1.6 million, which was primarily attributable to a net
profit around $5.9 million, adjusted for non-cash items for approximately $0.6 million and adjustments for changes in working
capital around $4.9 million. The adjustments for changes in working capital mainly included (i) increase in accounts and contract
receivable around $4.97 million from recent completed installation projects, (ii) decrease in accounts payable around $0.3 million
and (iii) increase in advance to suppliers around $2.86 million, which was offset by the decrease in advance from customers about
$0.55 million related to installation service and increase in tax payable around $2.5 million.
Investing
Activities
Net
cash used in investing activities was approximately $0.1 million for fiscal 2018, $3.1 million for fiscal 2017 and $0.98 million
for fiscal 2016 nearly all of which was primarily attributable to amounts spent on constructing the Company’s new office
and manufacturing facility.
Financing
activities
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.
Net
cash used in financing activities was approximately $10.27 million for fiscal 2016. It was primarily attributable to the approximately
$10.78 million proceeds from the Company’s initial public offering, offset by the disbursement of the direct costs related
to the initial public offering of $0.65 million.
Loan
facility
As
of December 31, 2018, we had $1,698,058 in bank loans. These are bank loans with a one to three years maturity and must be paid
in full upon maturity. We have had good credit performance all the time and believe our current creditors will renew their loans
to us after our loans mature as they did in the past. For more details about our debts, please see the Notes to the consolidated
financial statements.
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 Bank Co. Ltd. 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
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(1,698,058
|
)
|
|
|
|
|
|
|
Long term portion
|
|
$
|
-
|
|
|
|
|
|
|
|
Loans
consisted of the following as of December 31, 2017:
Lender
|
|
December 31,
2017
|
|
|
Term
|
|
Effective
Interest Rate
|
|
Bank of China Longwan Branch
|
|
$
|
262,009
|
|
|
April 13, 2016 to April 14, 2019
|
|
|
5.70
|
%
|
Bank of China Longwan Branch
|
|
|
303,501
|
|
|
June 8, 2016 to April 14, 2019
|
|
|
5.70
|
%
|
Longwan Rural Commercial Bank Shacheng Branch
|
|
|
307,342
|
|
|
September 30, 2017 to September 28, 2018
|
|
|
10.45
|
%
|
Total
|
|
$
|
872,852
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
457,940
|
|
|
|
|
|
|
|
Long term portion
|
|
|
414,912
|
|
|
|
|
|
|
|
All
principal of the above loans as of December 31, 2018 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 the Controlling Shareholder’s immediate
family members and unrelated third parties.
On
November 9, 2017, the Company entered into a sale leaseback agreement (the “Agreement”) with Zhongli International
Leasing Co., Ltd (“Zhongli”). Pursuant to the Agreement, the Company sold certain machinery purchased during the year
to Zhongli for approximately $691,520 (RMB 4.5 million). The Company then leased back the machinery from Zhongli for 48 months
with a specified monthly payment over the lease term. The Company has a purchase option at a price of Nil to buy back this equipment
by the end of the lease term. All these machines are currently being used by the Company for production purposes. The Company’s
management has concluded that this transaction does not qualify for sale-leaseback accounting in accordance with ASC 840-40-25-11
and shall record under the financing method. Under the financing method, the assets remain on the Company’s consolidated
balance sheet and the proceeds from the transactions are recorded as a financing liability.
Obligations
under Material Contracts
The Company signed
two lease agreements to rent office and facility for its operations. The office lease has a lease term from July 1. 2017 to June
30, 2019, and the facility lease has a lease term from June 1, 2017 to May 30, 2037. As of December 31, 2018, the Company was
obligated under operating leases for minimum rentals as follows:
For the Year
Ending December 31,
2019
|
|
$
|
213,332
|
|
2020
|
|
|
213,332
|
|
2021
|
|
|
213,332
|
|
2022
|
|
|
213,332
|
|
2023 and thereafter
|
|
|
3,075,536
|
|
|
|
$
|
3,928,864
|
|
Capital
Expenditures
We spent $74,210
on property and equipment and $41,000 on intangible assets in fiscal 2018. We spent approximately $3.1 million during the fiscal
2017 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: 2.1% in 2018, 1.9% in 2017 and 2.3% in 2016.
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,
2018, 2017 and 2016 accounted for less 1% of total revenue and none of revenue priced in the foreign currency.
We
have not had any foreign currency investments hedged by currency borrowings or other hedging instruments. We manage our price
risks through productivity improvements and cost-containment measures.
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
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.
The
consolidated financial statements include the financial statements of Hebron Technology, HK Xibolun, Xibolun Automation and Xibolun
Equipment. All inter-company balances and transactions are eliminated upon consolidation. For the Company’s equity investment
which the Company does not have control and is not the primary beneficiary, but has significant influence in the decision-making
of the ordinary course of business, the equity method is applied.
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 and accruals for income tax
uncertainties.
Revenue
recognition
The
Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified
retrospective approach. Revenues for the year ended December 31, 2018 were presented under ASC 606, and revenues for the years
ended December 31, 2017 and 2016 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There
is no adjustment to the opening balance of retained earnings at January 1, 2018 since there was no 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.
The
Company’s revenues are primarily derived from the following sources:
Sales
of products
: The Company recognizes revenue when the products are delivered and control is transferred. The Company
generally provides a warranty for a period of 12 months after the customers receive the products. The Company determines that
such product warranty is not a separated 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 Company has not sold the
warranty separately. From its past experience, the Company has not experienced any material warranty costs and, therefore, the
Company does not believe an accrual for warranty cost is necessary for the years ended December 31, 2018, 2017 and 2016. The Company’s
sales revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).
Installation
contracts
: The Company 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.
The
Company 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 Company 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 Company when the products are delivered. The Company 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 Company’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 Company determined
there are two sperate performance obligations, and recognizes product sales and installation revenue separately.
Accounts
and Contract Receivables
Accounts
and contract receivables from equipment sales and installation 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 Company 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 Company’s customers to ensure the quality of the installation services and any possible
follow-up maintenance related to the installation. The term of these retainage receivables is typically within one year after
the completion date of the installation project. If there is no dispute regarding the quality of the installation project during
the year, such retainage receivable should be paid by the Company’s customer. Management regularly reviews 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 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
Company’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, 2018, 2017 and 2016. The Company 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.
Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. As of December 31, 2018, 2017 and 2016, no valuation allowance is considered necessary.
The
Company 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 is 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, 2018, 2017 and 2016. As of December 31, 2018, the tax years ended December 31, 2016 through
December 31, 2018 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Under
the Provisional Regulations of 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
Company 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. The Company did not record any penalties associated with those accruals. The Company
did not record any penalties associated with those accruals since management believes that it is not possible to reasonably estimate
the amount of penalties the Company may have to pay, if any. It is the Company’s policy that penalties related to any unpaid
taxes are classified as income tax expense in the period they are assessed or incurred. The Company has had unofficial discussions
with the local tax authority to settle the existing tax liabilities. The tax authority has not made any settlement proposal or
adjustment in the communications with the Company.
|
C.
|
Research
and development, patents and licenses
|
Research
and Development
For
the years ended December 31, 2018, 2017 and 2016, we spent $358,411, $508,282 and $33,847, 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.
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, 2018, December 31, 2017 and December 31, 2016 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, 2018:
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1 – 3
|
|
|
3 – 5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Bank loans
|
|
$
|
1,698,058
|
|
|
$
|
1,698,058
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating lease arrangement
|
|
|
1,438,176
|
|
|
|
81,525
|
|
|
|
77,894
|
|
|
|
77,894
|
|
|
|
1,122,969
|
|
Financing lease arrangement
|
|
|
389,642
|
|
|
|
179,291
|
|
|
|
156,939
|
|
|
|
55,412
|
|
|
|
-
|
|
Total
|
|
$
|
3,525,876
|
|
|
$
|
1,958,874
|
|
|
$
|
234,833
|
|
|
$
|
133,306
|
|
|
$
|
1,122,969
|
|
See
“SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.”
|
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
|
|
41
|
|
Chief
Executive Officer and Chairman of Board
|
Xiaoliang
Xue
|
|
33
|
|
Chief
Technical Officer
|
Steven
Fu
|
|
46
|
|
Chief
Financial Officer
|
Xiao
Jin
|
|
54
|
|
Financial
Controller
|
Zuoqiao
Sun Zhang
|
|
64
|
|
Director
|
Lingmin
Sun
|
|
35
|
|
Director
|
Xuesong
Liu
|
|
45
|
|
Independent
Director
|
Hua
Zhang
|
|
53
|
|
Independent
Director
|
Xianpang
Hu
|
|
50
|
|
Independent
Director
|
Haiying
Xiang
|
|
36
|
|
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 15
th
Road, 3
rd
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.
Steven
Fu
. Mr. Fu is our Chief Financial Officer. Mr. Fu started his employment as CFO with Hebron Technology in January
2014. From 2009 through 2013, Mr. Fu was the Director of Asia Pacific, International Alliance Associates, with chief financial
officer responsibilities. Mr. Fu earned his bachelor’s degree of Accountancy from Nanyang Technological University, Singapore,
in 1996. Mr. Fu is also a Fellow Chartered Accountant of Singapore. He has 20 years of investment and financing experience in
Asia, along with restructuring work experience. Mr. Fu is proficient in managing various aspects of the investment market across
various industries. He has extensive experience in both the private equity market and the stock market.
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.
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.
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 III directors shall
face re-election at our annual general meeting of shareholders in 2019 and every three years thereafter. 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.
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.
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.
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.
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.
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 2018, 2017 and 2016, no employee members of our Board of Directors received compensation in their capacity as directors.
During
the year ended December 31, 2018, we paid each of our four independent directors an annual director fee of $10,000. We also reimburse
all directors for any out-of-pocket expenses incurred by them in connection with their services provided in such capacity. In
addition, we may provide incentive grants of stock, options or other securities convertible into or exchangeable for, our securities.
Prior to our initial public offering, we did not pay any non-employee directors because we did not have any non-employee directors.
Executive
Compensation
We
currently do not have a compensation committee approving our salary and benefit policies. Our board of directors determined the
compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions
made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by
the board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective
parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience,
personal performance and overall corporate performance.
Our
board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid
to our executive officers. The board of directors will make an independent evaluation of appropriate compensation to key employees,
with input from management. The board of directors has oversight of executive compensation plans, policies and programs.
Summary
Compensation Table
The
following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named
executive officers for services rendered to us for the year ended December 31, 2018, 2017 and 2016.
Name and Principal
Position
|
|
Fiscal
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Anyuan Sun
|
|
|
2018
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
60,000
|
|
Chief Executive Officer
|
|
|
2017
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
60,000
|
|
|
|
|
2016
|
|
|
|
30,102
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,102
|
|
Steven Fu
|
|
|
2018
|
|
|
|
45,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
45,000
|
|
Chief Financial Officer
|
|
|
2017
|
|
|
|
45,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
45,000
|
|
|
|
|
2016
|
|
|
|
100,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
100,000
|
|
Xiaoliang Xue
|
|
|
2018
|
|
|
|
30,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,000
|
|
Chief Technical Officer
|
|
|
2017
|
|
|
|
30,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
30,000
|
|
|
|
|
2016
|
|
|
|
18,061
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,061
|
|
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 one provided
an annual salary of $60,000 for the period from January 1, 2019 to December 31, 2019.
Steven
Fu
We entered an employment agreement with our Chief Financial Officer, Mr. Steven Fu, on January 1, 2014 and running through
December 31, 2014 at an annual salary of $100,000. We renewed the employment agreement a few times and the current one provided
an annual salary of $45,000 for the period from January 1, 2019 to December 31, 2019.
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 one provided
an annual salary of $30,000 for the period from January 1, 2019 to December 31, 2019.
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 one provided a salary
of approximately $1,135 per month for the period from January 1, 2019 to December 31, 2019.
|
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 May 15, 2019 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 16,269,577 common shares outstanding as of May 15, 2019. Information with respect to beneficial ownership has been
furnished by each director, officer or beneficial owner of more than 5% 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. Beneficial owners have same voting rights as holders of record. 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 May 15, 2019 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 our Company at c/o Zhejiang Xibolun Automation Project Technology Co.,
Ltd., No. 587-A 15
th
Road, 3
rd
Av. Binhai Ind. Park, Economic & Technology Development Zone,
Wenzhou, Zhejiang, China 325000. As of May 15, 2019, we have 106 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)
|
|
|
7,778,400
|
|
|
|
47.8
|
%
|
|
|
82.1
|
%
|
Xiaoliang Xue, Chief Technical Officer
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Steven Fu, Chief Financial Officer
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Xiao Jin, Financial Controller
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Zuoqiao Sun Zhang,
Director
(4)
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Lingmin Sun, Director
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Xuesong Liu, Director
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Hua Zhang, Director
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Haiying Xiang, Director
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Xianpang Hu, Director
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
All directors and executive officers as a group (10 persons)
|
|
|
7,778,400
|
|
|
|
47.8
|
%
|
|
|
82.1
|
%
|
5% Beneficial Owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wise
Metro Development Co., Ltd.
(5)
|
|
|
1,800,000
|
|
|
|
11.1
|
%
|
|
|
19.0
|
%
|
Yung
Kong Chin
(6)
|
|
|
1,200,000
|
|
|
|
7.4
|
%
|
|
|
2.5
|
%
|
|
(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. Class B common shares have five votes per share.
|
|
(3)
|
Includes the sole power to direct
the voting and disposition of (a) the 1,800,000 Class B common shares held by Wise Metro Development Co., Ltd. (“Wise”),
(b) the 5,978,400 Class B common shares held by Mr. Zuoqiao Sun Zhang (“Sun Zhang”; and together with Wise,
“Sellers”). Due to his ownership of a majority of all outstanding common shares and the fact that his shares
are the only outstanding Class B common shares (which have five votes per share rather than one vote like Class A common
shares), Mr. Anyuan Sun effectively controls our Company.
As noted elsewhere in this report,
on April 16, 2019, Hebron Technology entered into a Securities Purchase Agreement with Sellers and NiSun International
Enterprise Management Group Co., Ltd. (“NiSun”) pursuant to which NiSun would acquire 7,778,400 Class B Common
Shares from the Sellers.
|
|
(4)
|
Mr.
Zuoqiao Sun Zhang, the father of Mr. Anyuan Sun, is nominally holding 5,978,400 Class B common shares of the Company for Mr.
Anyuan Sun. Mr. Zuoqiao Sun Zhang does not, directly or indirectly, exercise or share voting or investment power of any shares
held by him and disclaims beneficial ownership of such shares.
|
|
(5)
|
Wise
Metro Development Co., Ltd., holding 1,800,000 Class B common shares of the Company, is solely owned by Mr. Anyuan Sun, who
has the sole power to direct the voting and disposition of such shares.
|
|
(6)
|
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.
|
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 related party transactions for the year ended December 31, 2018 and 2017, except the transactions mentioned below.
For
the year ended December 31, 2016 and 2015, the Chairman of the Board and CEO of the Company, advanced $68,397 and $920,660, respectively,
to the Company for working capital purpose. The advances were due on demand and non-interest bearing. The Company had outstanding
balance of $68,397 and $0 due to related parties as of December 31, 2016 and 2015, respectively.
For
the year ended December 31, 2014, the Company purchased $298,893 valve parts from its related party, Zhejiang Xibolun, an entity
controlled by the same Controlling Shareholder of the Company, Mr. Anyuan Sun, and sold $81,358 valves to Zhejiang Xibolun. As
of December 31, 2015 and 2014, the Company had $Nil due from related party — Zhejiang Xibolun.
Mr.
Anyuan Sun, the controlling shareholder of the Company, and his wife Ms. Xiaojie Wang jointly provided a guarantee of RMB7,000,000
(approximately $1,076,923) to the loan agreements, trade financing agreements, letters of guarantee, funding agreements and other
credit agreements entered into by and between Xibolun Equipment and Bank of China Longwan Branch on April 1, 2014 and April 1,
2016. Mr. Zhiling Sun, Mr. Anyuan Sun’s cousin, and his wife Mr. Zhenguo Wang jointly provided guarantees of RMB7,000,000
(approximately $1,076,923) to the loan agreements, trade financing agreements, letters of guarantee, funding agreements and other
credit agreements entered into by and between Xibolun Equipment and Bank of China Longwan Branch on April 1, 2014 and April 1,
2016.
Mr.
Anyuan Sun, the controlling shareholder of the Company, provided a real property as collateral for RMB2,190,000 (approximately
$336,923.07) to the loans agreements, trade financing agreements, letters of guarantee, funding agreements and other credit agreements
entered by and between Xibolun Equipment and Bank of China Longwan Branch during October 16, 2014 and January 23, 2016. Mr. Lingmin
Sun, brother of Mr. Anyuan Sun, provided a real property as collateral for RMB2,240,000 (approximately $344,615.38) to the loans
agreements, trade financing agreements, letters of guarantee, funding agreements and other credit agreements entered by and between
Xibolun Equipment and Bank of China Longwan Branch during October 16, 2014 and January 23, 2016.
Mr.
Anyuan Sun, the controlling shareholder of the Company, provided a guarantee of RMB 800,000 (approximately $115,195) to the loan
agreements entered by and between Xibolun Equipment and Wenzhou Bank on November 24, 2016 ending November 24, 2017. The loan was
repaid upon the maturity date.
Mr.
Anyuan Sun, the controlling shareholder of the Company, and his wife Ms. Xiaojie Wang, jointly provided a guarantee of RMB 4,000,000
(approximately $614,653) to the loan agreements entered by and between Xibolun Auto and Bank of China Longwan Branch on April
13, 2016 ending April 14, 2019.
Ms.
Zhiling Sun, Mr. Anyuan Sun’s cousin, and her husband Mr. Zhenguo Wang jointly provided a guarantee of RMB 4,000,000
(approximately $614,653) for the loan agreements entered by and between Xibolun Auto and Bank of China Longwan Branch on
April 13, 2016 ending April 14, 2021.
Ms.
Zhiling Sun, Mr. Anyuan Sun’s cousin, provided a guarantee of RMB 2,000,000 (approximately $307,327) to the loan agreements
entered by and between Xibolun Auto and Longwan Rural Commercial Bank Shacheng Branch on September 30, 2017 ending September 28,
2018.
Mr.
Anyuan Sun, the controlling shareholder of the Company, provided real property as collateral valued at RMB 1,980,000 (approximately
$304,269) for the loan agreements entered into by and between Xibolun Auto and Bank of China Longwan Branch on June 8, 2016 ending
April 14, 2021.
Mr.
Lingmin Sun, brother of Mr. Anyuan Sun, provided real property as collateral valued at RMB2,030,000 (approximately $311,953) for
the loan agreements entered by and between Xibolun Auto and Longwan Rural Commercial Bank Shacheng Branch on September 17, 2017
ending September 28, 2018.
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.
|
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, 2018 and 2017, 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, 2018, 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.
We
have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
|
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 on the Nasdaq Capital Market since December 27,
2016 under the symbol “HEBT.” The table below shows, for the periods indicated, the high and low market prices for
our shares.
|
|
Market Price Per Share
|
|
|
|
High
|
|
|
Low
|
|
Yearly:
|
|
|
|
|
|
|
2016 (from December 27, 2016)
|
|
$
|
5.85
|
|
|
|
4.95
|
|
2017
|
|
$
|
5.93
|
|
|
|
2.53
|
|
2018
|
|
$
|
2.65
|
|
|
|
0.50
|
|
2019 (through May 10, 2019)
|
|
$
|
1.66
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
Fourth quarter 2016 (from December 27, 2016)
|
|
$
|
5.85
|
|
|
|
4.95
|
|
First quarter 2017
|
|
$
|
5.93
|
|
|
|
3.30
|
|
Second quarter 2017
|
|
$
|
4.24
|
|
|
|
2.53
|
|
Third quarter 2017
|
|
$
|
3.90
|
|
|
|
2.54
|
|
Fourth quarter 2017
|
|
$
|
3.57
|
|
|
|
2.63
|
|
First quarter 2018
|
|
$
|
2.61
|
|
|
|
1.45
|
|
Second quarter 2018
|
|
$
|
2.37
|
|
|
|
1.50
|
|
Third quarter 2018
|
|
$
|
2.16
|
|
|
|
1.25
|
|
Fourth quarter 2018
|
|
$
|
1.60
|
|
|
|
0.50
|
|
First quarter 2019
|
|
$
|
1.66
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
Monthly:
|
|
|
|
|
|
|
|
|
December 2018
|
|
$
|
0.99
|
|
|
|
0.50
|
|
January 2019
|
|
$
|
1.01
|
|
|
|
0.72
|
|
February 2019
|
|
$
|
1.06
|
|
|
|
0.80
|
|
March 2019
|
|
$
|
1.66
|
|
|
|
0.79
|
|
April 2019
|
|
$
|
0.96
|
|
|
|
0.68
|
|
May 2019 (through May 10, 2019)
|
|
$
|
0.96
|
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
Not
applicable for annual reports on Form 20-F.
Our
Class A common shares are listed on the Nasdaq Capital Market under the symbol “HEBT.”
Not
applicable for annual reports on Form 20-F.
Not
applicable for annual reports on Form 20-F.
Not
applicable for annual reports on Form 20-F.
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Item
10.
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Additional
Information
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Not
applicable for annual reports on Form 20-F.
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B.
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Memorandum
and articles of association
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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
have not entered into any material contracts other than in the ordinary course of business and otherwise described elsewhere in
this annual report.
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.
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.
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.
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,
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an
individual who is a citizen or resident of the United States;
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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;
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an
estate whose income is subject to U.S. federal income taxation regardless of its source; or
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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.
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Generally
HEBT
is a tax-exempt company incorporated in the British Virgin Islands. HK Xibolun is subject to Hong Kong profits tax rate. Xibolun
Automation and Xibolun Equipment are governed by PRC laws.
Our
company pays PRC enterprise income taxes, value added taxes and business taxes in China for revenues from Xibolun Automation and
Xibolun Equipment and is governed by British Virgin Islands tax laws as to HEBT. (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. 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 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 Xibolun Automation or Xibolun Equipment 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 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.
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 repair and placement services and importation of
goods into China are generally subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate
of 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 is 17%, 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.
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:
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financial
institutions;
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regulated
investment companies;
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real
estate investment trusts;
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traders
that elect to mark-to-market;
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persons
liable for alternative minimum tax;
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persons
holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
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persons
that actually or constructively own 10% or more of our voting shares;
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persons
who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or
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persons
holding our common shares through partnerships or other pass-through entities.
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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.
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.
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:
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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
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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”).
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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, 2018 December 31, 2017 or December 31, 2016. 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, 2018. 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:
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the
excess distribution or gain will be allocated ratably over your holding period for the common shares;
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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
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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.
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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.
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.
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F.
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Dividends
and paying agents
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Not
applicable for annual reports on Form 20-F.
Not
applicable for annual reports on Form 20-F.
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.
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I.
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Subsidiary
Information
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Not
applicable.
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Item
11.
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Quantitative
and Qualitative Disclosures About Market Risk
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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 from 2014 through the end of 2016, but has appreciated approximately 20% against
the U.S. dollar since the beginning of 2017.
Interest
Rate Risk
Our
interest rate risk arises from short and long-term borrowings. As of December 31, 2018 and 2017, 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, 2018 and 2017, 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, 2018, and 2017, $3,063,692 and $3,216,938, respectively,
of the Company’s cash was on deposit at financial institutions in the PRC where there currently is no rule or regulation
requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure. While management
believes that these financial institutions are of high credit quality, it also continually monitors their creditworthiness.
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.
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Item
12.
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Description
of Securities Other than Equity Securities
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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.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
947,588
|
|
|
$
|
3,220,781
|
|
Restricted Cash
|
|
|
2,124,655
|
|
|
|
55,322
|
|
Contracts receivable, net
|
|
|
24,669,365
|
|
|
|
16,904,972
|
|
Accounts receivable, net
|
|
|
2,655,845
|
|
|
|
1,419,305
|
|
Notes receivable
|
|
|
81,611
|
|
|
|
689,171
|
|
Retainage receivables, net
|
|
|
3,146,986
|
|
|
|
2,564,404
|
|
Inventories
|
|
|
365,480
|
|
|
|
1,582,501
|
|
Prepayments and advances to suppliers, net
|
|
|
3,568,003
|
|
|
|
11,904,107
|
|
Other receivables, net
|
|
|
767,681
|
|
|
|
240,284
|
|
Prepaid expenses and other current assets
|
|
|
94,539
|
|
|
|
-
|
|
TOTAL CURRENT ASSETS
|
|
|
38,421,753
|
|
|
|
38,580,847
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost, net of accumulated depreciation
|
|
|
12,515,894
|
|
|
|
14,588,262
|
|
Land use right, net of accumulated amortization
|
|
|
969,339
|
|
|
|
1,086,148
|
|
Deposits for rent
|
|
|
43,633
|
|
|
|
46,101
|
|
Equity investment
|
|
|
3,054,090
|
|
|
|
-
|
|
Deferred tax assets
|
|
|
1,648,967
|
|
|
|
247,324
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
56,653,676
|
|
|
$
|
54,548,682
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
1,698,058
|
|
|
$
|
457,940
|
|
Notes Payable
|
|
|
2,117,382
|
|
|
|
55,322
|
|
Accounts payable
|
|
|
1,361,687
|
|
|
|
1,276,784
|
|
Accrued expenses and other current liabilities
|
|
|
2,112,472
|
|
|
|
1,327,513
|
|
Other loan payable - current
|
|
|
177,291
|
|
|
|
179,182
|
|
Advances from customers
|
|
|
3,131,338
|
|
|
|
2,825,215
|
|
Taxes payable
|
|
|
9,085,746
|
|
|
|
7,067,593
|
|
TOTAL CURRENT LIABILITIES
|
|
|
19,683,974
|
|
|
|
13,189,549
|
|
|
|
|
|
|
|
|
|
|
Other loan payable - long-term
|
|
|
212,351
|
|
|
|
411,683
|
|
Long-term loans
|
|
|
-
|
|
|
|
414,912
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
19,896,325
|
|
|
|
14,016,144
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
Class A common stock, $0.001 par value, 40,000,000 shares authorized, 8,491,177 and 6,916,947 shares issued and outstanding as of December 31, 2018 and 2017, respectively
|
|
|
8,491
|
|
|
|
6,917
|
|
Class B common stock, $0.001 par value, 10,000,000 shares authorized, 7,778,400 shares issued and outstanding as of December 31, 2018 and 2017, respectively.
|
|
|
7,778
|
|
|
|
7,778
|
|
Additional paid-in capital
|
|
|
13,361,447
|
|
|
|
10,237,965
|
|
Retained earnings
|
|
|
24,732,776
|
|
|
|
29,877,491
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,353,141
|
)
|
|
|
402,387
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
36,757,351
|
|
|
|
40,532,538
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
56,653,676
|
|
|
$
|
54,548,682
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
Installation service
|
|
$
|
17,297,212
|
|
|
$
|
23,748,141
|
|
|
$
|
24,299,062
|
|
Fluid equipment sales
|
|
|
7,992,848
|
|
|
|
5,452,304
|
|
|
|
2,798,774
|
|
|
|
|
25,290,060
|
|
|
|
29,200,445
|
|
|
|
27,097,836
|
|
COST OF REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product and services
|
|
|
17,458,252
|
|
|
|
18,080,777
|
|
|
|
16,192,810
|
|
Business and sales related taxes
|
|
|
253,856
|
|
|
|
675,507
|
|
|
|
443,448
|
|
GROSS PROFIT
|
|
|
7,577,952
|
|
|
|
10,444,161
|
|
|
|
10,461,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
3,298,188
|
|
|
|
3,683,594
|
|
|
|
932,911
|
|
Selling expenses
|
|
|
1,337,321
|
|
|
|
2,187,253
|
|
|
|
1,742,147
|
|
Bad debt expenses (recovery)
|
|
|
7,913,442
|
|
|
|
187,715
|
|
|
|
(227,873
|
)
|
Research and development expenses
|
|
|
358,411
|
|
|
|
508,282
|
|
|
|
33,847
|
|
Total operating expenses
|
|
|
12,907,362
|
|
|
|
6,566,844
|
|
|
|
2,481,032
|
|
(LOSS) INCOME FROM OPERATIONS
|
|
|
(5,329,410
|
)
|
|
|
3,877,317
|
|
|
|
7,980,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
(426,585
|
)
|
|
|
377,174
|
|
|
|
6,431
|
|
Interest expense
|
|
|
(208,306
|
)
|
|
|
(56,953
|
)
|
|
|
(49,625
|
)
|
Income from investment
|
|
|
168,534
|
|
|
|
-
|
|
|
|
-
|
|
Total other (expense) income, net
|
|
|
(466,357
|
)
|
|
|
320,221
|
|
|
|
(43,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(5,795,767
|
)
|
|
|
4,197,538
|
|
|
|
7,937,352
|
|
(BENEFIT FROM) PROVISION FOR INCOME TAXES
|
|
|
(651,052
|
)
|
|
|
(2,938,849
|
)
|
|
|
2,002,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(5,144,715
|
)
|
|
$
|
7,136,387
|
|
|
$
|
5,934,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (loss) income
|
|
|
(1,755,528
|
)
|
|
|
2,249,081
|
|
|
|
(1,401,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME
|
|
$
|
(6,900,243
|
)
|
|
$
|
9,385,468
|
|
|
$
|
4,533,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.33
|
)
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
Diluted
|
|
$
|
(0.33
|
)
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,760,633
|
|
|
|
14,695,347
|
|
|
|
12,029,538
|
|
Diluted
|
|
|
15,760,633
|
|
|
|
14,695,347
|
|
|
|
12,046,045
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
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
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance at January 1, 2016*
|
|
|
4,221,600
|
|
|
$
|
4,222
|
|
|
|
7,778,400
|
|
|
$
|
7,778
|
|
|
$
|
108,970
|
|
|
$
|
16,806,219
|
|
|
$
|
(445,570
|
)
|
|
$
|
16,481,619
|
|
Issuance Class A shares - IPO
|
|
|
2,695,347
|
|
|
|
2,695
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,128,995
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,131,690
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,934,885
|
|
|
|
-
|
|
|
|
5,934,885
|
|
Foreign currency translation loss
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,401,124
|
)
|
|
|
(1,401,124
|
)
|
Balance at December 31, 2016
|
|
|
6,916,947
|
|
|
|
6,917
|
|
|
|
7,778,400
|
|
|
|
7,778
|
|
|
|
10,237,965
|
|
|
|
22,741,104
|
|
|
|
(1,846,694
|
)
|
|
|
31,147,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,136,387
|
|
|
|
-
|
|
|
|
7,136,387
|
|
Foreign currency translation income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
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 class A 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
|
|
* Retrospectively adjusted the reclassification of the Company’s
common stock (see Note 14)
The
accompanying notes are an integral part of these consolidated financial statements.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,144,715
|
)
|
|
$
|
7,136,387
|
|
|
$
|
5,934,885
|
|
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,195,161
|
|
|
|
939,995
|
|
|
|
517,402
|
|
Loss on disposition of property and equipment
|
|
|
283,487
|
|
|
|
12,179
|
|
|
|
228,245
|
|
Deferred tax expense (benefit)
|
|
|
(1,471,938
|
)
|
|
|
11,526
|
|
|
|
56,968
|
|
Bad debt expense (recovery)
|
|
|
7,913,442
|
|
|
|
187,715
|
|
|
|
(227,873
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts receivable
|
|
|
(9,019,036
|
)
|
|
|
(2,992,867
|
)
|
|
|
(5,893,527
|
)
|
Accounts receivable
|
|
|
(1,383,452
|
)
|
|
|
(950,850
|
)
|
|
|
922,611
|
|
Notes receivable
|
|
|
593,674
|
|
|
|
(378,205
|
)
|
|
|
(85,107
|
)
|
Retainage receivables
|
|
|
(748,903
|
)
|
|
|
(80,360
|
)
|
|
|
(548,357
|
)
|
Prepayment and advances to suppliers
|
|
|
93,149
|
|
|
|
(7,127,018
|
)
|
|
|
(2,861,600
|
)
|
Inventories
|
|
|
1,177,956
|
|
|
|
788,000
|
|
|
|
427,878
|
|
Other receivables
|
|
|
(598,764
|
)
|
|
|
(156,074
|
)
|
|
|
(1,535
|
)
|
Accounts payable
|
|
|
146,546
|
|
|
|
26,450
|
|
|
|
(290,717
|
)
|
Notes Payable
|
|
|
2,148,292
|
|
|
|
53,272
|
|
|
|
-
|
|
Advances from customers
|
|
|
429,217
|
|
|
|
(370,964
|
)
|
|
|
528,193
|
|
Deferred revenue
|
|
|
-
|
|
|
|
(1,071,355
|
)
|
|
|
3,161
|
|
Taxes payable
|
|
|
2,770,253
|
|
|
|
(2,365,120
|
)
|
|
|
2,484,264
|
|
Accrued expenses and other current liabilities
|
|
|
890,551
|
|
|
|
240,505
|
|
|
|
382,410
|
|
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES
|
|
|
(725,080
|
)
|
|
|
(6,096,784
|
)
|
|
|
1,577,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property and equipment
|
|
|
(74,210
|
)
|
|
|
(3,126,777
|
)
|
|
|
(7,667
|
)
|
Payments for intangible assets
|
|
|
(41,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Payments for construction in progress
|
|
|
-
|
|
|
|
-
|
|
|
|
(973,254
|
)
|
NET CASH (USED IN) INVESTING ACTIVITIES
|
|
|
(115,210
|
)
|
|
|
(3,126,777
|
)
|
|
|
(980,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loans
|
|
|
1,995,763
|
|
|
|
295,954
|
|
|
|
301,019
|
|
Repayment of short-term bank loans
|
|
|
(1,088,667
|
)
|
|
|
-
|
|
|
|
(795,443
|
)
|
Proceeds from long-term loans
|
|
|
-
|
|
|
|
173,873
|
|
|
|
556,885
|
|
Repayment of long-term loans
|
|
|
-
|
|
|
|
(47,353
|
)
|
|
|
-
|
|
Repayment/Proceeds from other loan
|
|
|
(176,427
|
)
|
|
|
582,205
|
|
|
|
-
|
|
Repayment of other loan
|
|
|
-
|
|
|
|
(21,457
|
)
|
|
|
-
|
|
Repayment of (proceeds from) related parties
|
|
|
-
|
|
|
|
(66,582
|
)
|
|
|
72,009
|
|
Proceeds from issuance of shares in IPO
|
|
|
-
|
|
|
|
-
|
|
|
|
10,131,690
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
730,669
|
|
|
|
916,640
|
|
|
|
10,266,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGE ON CASH
|
|
|
(94,239
|
)
|
|
|
(292,869
|
)
|
|
|
(104,290
|
)
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(203,860
|
)
|
|
|
(8,599,790
|
)
|
|
|
10,758,250
|
|
CASH AND RESTRICTED CASH-beginning of year
|
|
|
3,276,103
|
|
|
|
11,875,893
|
|
|
|
1,117,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND RESTRICTED CASH-end of year
|
|
$
|
3,072,243
|
|
|
$
|
3,276,103
|
|
|
$
|
11,875,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
42,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for interest
|
|
$
|
91,917
|
|
|
$
|
75,704
|
|
|
$
|
50,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to placement agent in connection with
the Company’s IPO
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
488,730
|
|
Issuance of shares for consulting services
|
|
$
|
239,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of shares for equity investment
|
|
$
|
2,885,556
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — ORGANIZATION AND BUSINESS DESCRIPTION
Organization
Hebron
Technology Co., Ltd, (“Hebron Technology”) is a limited company established under the laws of the British Virgin Islands
on May 29, 2012 as a holding company. Mr. Anyuan Sun (“Mr. Sun”), the Chairman of the Board and CEO of the Company,
is the ultimate controlling shareholder (“the Controlling Shareholder”) of the Company.
Hong
Kong Xibolun Technology Limited (“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 controlled by the same Controlling Shareholder.
Zhejiang
Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”) was incorporated on September 24, 2012 in the
People’s Republic of China (“China” or “PRC”) and initially owned by Hebron Technology, Xibolun
Equipment, and Zhejiang Xibolun Technology Co., Ltd. (“Zhejiang Xibolun”), a Chinese company also controlled by Mr.
Sun.
Wenzhou
Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) was incorporated in China on January 25, 2005. Prior to
the reorganization described below, Xibolun Equipment was owned by the Controlling shareholder and another foreign shareholder,
Mr. Gongqi Xiang, with each owning 70% and 30% equity interest, respectively. Mr. Gongqi Xiang is holding shares on behalf of
Mr. Sun. Therefore, Xibolun Equipment is considered ultimately controlled by Mr. Sun.
Reorganization
On
October 30, 2012, HK Xibolun entered into separate equity transfer agreements with Hebron Technology, Xibolun Equipment, and Zhejiang
Xibolun, pursuant to which shareholders of Xibolun Automation agreed to transfer all of their equity interests in Xibolun Automation
to HK Xibolun. The transfer became effective on December 5, 2012.
Xibolun
Equipment was incorporated on January 25, 2005. By July 20, 2011, Xibolun Equipment was owned by the Controlling shareholder and
another foreign shareholder, Mr. Gongqi Xiang, by holding shares of 70% and 30%, respectively. On July 21, 2011, HK Xibolun entered
into an equity transfer agreement with Mr. Gongqi Xiang, who owned 30% of Xibolun Equipment’s shares, in which Mr. Gongqi
Xiang agreed to transfer his 30% ownership interest of Xibolun Equipment to Xibolun Automation for RMB 300,000.
On
July 29, 2013, Mr. Sun transferred his 70% ownership interest in Xibolun Equipment to Xibolun Automation as well for RMB 700,000,
which is now a wholly owned subsidiary of HK Xibolun. Subsequent to the transfers, Xibolun Equipment became a wholly owned subsidiary
of HK Xibolun.
On
October 22, 2012, in anticipation of an initial public offering (“IPO”) of its equity securities, the shareholder
of HK Xibolun transferred his shares in HK Xibolun to the Company without any consideration and as a result, HK Xibolun became
a wholly-owned subsidiary of the Company.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — ORGANIZATION AND BUSINESS DESCRIPTION (Continued)
The
above mentioned transactions were accounted for as a recapitalization. Hebron Technology and its wholly-owned subsidiary HK Xibolun,
which owns a 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 was considered under common control.
Hebron
Technology, HK Xibolun, Xibolun Automation and Xibolun Equipment are collectively referred to as the “Company”. The
Company, through its main operational subsidiaries, is engaged in the manufacture of fluid equipment including valves, pumps,
pipe fittings and others, with particular emphasis on the intelligentized valves and installation services for pharmaceutical
engineering construction.
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of consolidation
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.
The
consolidated financial statements include the financial statements of Hebron Technology, HK Xibolun, Xibolun Automation and Xibolun
Equipment. All inter-company balances and transactions are eliminated upon consolidation. For the Company’s equity investment
which the Company does not have control and is not the primary beneficiary, but has significant influence in the decision-making
of the ordinary course of business, the equity method is applied.
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 and accruals for income tax
uncertainties.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
recognition
The
Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 using the modified
retrospective approach. Revenues for the year ended December 31, 2018 were presented under ASC 606, and revenues for the years
ended December 31, 2017 and 2016 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. There
is no adjustment to the opening balance of retained earnings at January 1, 2018 since there was no 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.
The
Company’s revenues are primarily derived from the following sources:
Sales
of products
: The Company recognizes revenue when the products are delivered and control is transferred. The Company
generally provides a warranty for a period of 12 months after the customers receive the products. The Company 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 Company has not sold the
warranty separately. From its past experience, the Company has not experienced any material warranty costs and, therefore, the
Company does not believe an accrual for warranty cost is necessary for the years ended December 31, 2018, 2017 and 2016. The Company’s
sales revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).
Installation
contracts
: The Company 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.
The
Company 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 Company 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 Company when the products are delivered. The Company 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 Company’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 Company determined
there are two sperate performance obligations, and recognizes product sales and installation revenue separately.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash
The
Company maintains cash with financial institutions in China, which are typically not insured or otherwise protected. Should any
of these institutions holding the Company’s cash become insolvent, or if the Company is unable to withdraw funds for any
reason, the Company could lose the cash on deposit with that institution.
Restricted
Cash
Restricted
cash consists of cash equivalents used as collateral to secure bank borrowings. The Company is required to keep certain amounts
on deposit that are subject to withdrawal restrictions. The restricted cash balance is associated with the Company’s short-term
borrowings, thus, classified as a current asset. As of December 31, 2018, and 2017, the Company had restricted cash of $2,124,655
and $55,322, respectively, related to the bank acceptance notes payable.
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 Company adopted the new standard effective January 1, 2018, using the retrospective transition method.
Accounts
and contract receivables
Accounts
and contract receivables from equipment sales and installation 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 Company 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 Company’s customers to ensure the quality of the installation services
and any possible follow-up maintenance related to the installation. The term of these retainage receivables is typically within
one year after the completion date of the installation project. If there is no dispute regarding the quality of the installation
project during the year, such retainage receivable should be paid by the Company’s customer. Management regularly reviews
aging of retainage receivables and changes in payment trends and records an allowance when management believes collection of amounts
due are at risk.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Advances
to suppliers
The
Company 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.
The Company recorded a provision for doubtful accounts of $386,563, $18,717 and $19,284 for the years ended December 31, 2018,
2017 and 2016, respectively.
Property
and equipment
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
|
Leasehold improvements
|
|
Shorter of remaining lease term or life of assets
|
Equity
method of accounting for investments
The
Company evaluates the method of accounting for investments in which it holds an equity interest based on the amount of control
it exercises over the operations of the investee, exposure to losses in excess of its investment, the ability to significantly
influence the investee and whether the Company is the primary beneficiary of the investee. Under the voting interest model, the
Company applies the equity method when the Company owns or controls from 20% to 50% of the voting shares, or below 20% of the
voting shares when significant influence can be exercised over the operating and financial policies of the investee company. Under
the Variable Interest (VIE) Model, the investments are accounted for under the equity method if the Company has determined it
does not have a controlling financial interest and therefore is not the VIE’s primary beneficiary.
On
March 10, 2018, the Company 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 Company 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 Company accounts for its investment
in Weijia under the equity method of accounting. As of December 31, 2018, the investment accounted for was $3,054,090 and is included
in equity investment on the Consolidated Balance Sheets. For the year ended December 31, 2018, the Company recorded income of
$168,534 from its investment in Weijia.
HEBRON
TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Land
use right
The
Company’s land use right is valued at cost. The land use right is amortized on straight line method over the term of the
land use right.
Research
and development costs
Research
and development costs are expensed to operations as incurred and include fees paid to third party contractors.
Long-lived
assets and other acquired intangible assets
The
Company reviews its long-lived assets, including property and equipment and identifiable intangibles, for impairment. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash
flows the assets are expected to generate. If property and equipment and certain identifiable intangibles are considered to be
impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value.
The Company did not record any impairment as of December 31, 2018, 2017 and 2016.
Income
taxes
The
Company’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, 2018, 2017 and 2016. The Company 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.
Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. As of December 31, 2018, 2017 and 2016, no valuation allowance is considered necessary.
The
Company 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 is 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, 2018, 2017 and 2016. As of December 31, 2018, the tax years ended December 31, 2016 through
December 31, 2018 for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
Under
the Provisional Regulations of 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
Company 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 12).
HEBRON TECHNOLOGY
CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Value added tax
Sales revenue represents the invoiced
value of goods, net of a VAT. All of the Company’s products that are sold in the PRC are subject to a Chinese value-added
tax at a rate of 17% of the gross sales price. The value-added tax rate was reduced to 16% from May 1, 2018, and was further reduced
to 13% from April 1 2019. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the
cost of producing their finished product.
Foreign currency translation
Since the Company operates primarily in
the PRC, the Company’s functional currency is the Chinese Yuan (“RMB”). The Company’s financial statements
have been translated into the reporting currency of the United States Dollar. Assets and liabilities of the Company 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.
Fair value of financial instruments
The Company follows the provisions of
Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 820, Fair Value
Measurements and Disclosures. 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:
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair value of financial instruments
(continued)
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, notes receivable, retainage receivables, prepayments and advances
to suppliers, other receivables, accounts payable, advances from customers, deferred revenue, tax payable, due to related parties
and accrued expenses and other current liabilities, approximate their fair value based on the short-term maturity of these instruments.
The Company 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.
Credit Risk
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, 2018 and 2017, $949,578 and $3,216,938 of the Company’s cash was on deposit
at financial institutions in the RMB where there currently is no rule or regulation requiring such financial institutions to maintain
insurance to cover bank deposits in the event of bank failure. While management believes that these financial institutions are
of high credit quality, it also continually monitors their creditworthiness.
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 Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of
outstanding balances.
Earnings (loss) per share
The Company computes earnings (loss)
per share (“EPS”) in accordance with 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 year ended December 31, 2018, since the company had a loss,
basic and dilutive loss per share are the same. For the years ended December 31, 2017 and 2016, 0 and 16,507 unexercised
Public Offering Warrants were dilutive, and were 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 Company 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 Company’s statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance
sheet.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Recent Accounting Pronouncements
The Company considers the applicability
and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards
that are issued.
In February 2016, the Financial Accounting
Standards Board (FASB) issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 specifies the accounting
for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a
single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis.
ASU 2016-02 is effective for public business entities for annual reporting periods and interim periods within those years beginning
after December 15, 2018. The Company does not expect this guidance will have a material impact on its consolidated financial
statements.
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)
which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13
replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition
of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after
December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated
financial statements.
In February 2018, the FASB issued ASU
2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax
effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate
resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act. The Company does not expect this guidance will have a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05
— Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”),
which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”)
that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released
by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related
exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate
internationally. The Company does not believe this guidance will have a material impact on its consolidated financial statements.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recent Accounting Pronouncements
(continued)
On June 20, 2018, the FASB issued ASU
No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which
aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing
employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of
financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards
will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will
be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective
for us on January 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards
granted after the date of adoption. The Company does not expect this guidance will have a material impact on its consolidated
financial statements.
In August 2018, the FASB Accounting Standards
Board 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 Company does not expect this guidance will have a material
impact on its consolidated financial statements.
Except for the above-mentioned pronouncements,
there are no new recent issued accounting standards that will have material impact on the consolidated financial position, statements
of operations and cash flows.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — CONTRACT RECEIVABLES, NET
The contracts receivable consists of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Contract receivables
|
|
$
|
24,669,365
|
|
|
$
|
16,904,972
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
24,669,365
|
|
|
$
|
16,904,972
|
|
The contract receivables are generally
due when the Company completes the related installation project. The Company offers longer credit terms to two of its major general
contractors, who accounted for 100%, 86% and 90% of total contract revenue for the years ended December 31, 2018, 2017 and 2016,
respectively, for the purpose of maintaining our long-term relationship. The Company had not incurred any bad debts with these
two general contractors in the past and considers these contracts receivable fully collectible. Thus, the Company did not provide
any allowance for doubtful accounts for these outstanding contract receivable for the years ended December 31, 2018 and 2017.
Note 4 — ACCOUNTS RECEIVABLE, NET
The accounts receivable consists of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Accounts receivables
|
|
$
|
2,953,585
|
|
|
$
|
1,715,607
|
|
Allowance for doubtful accounts
|
|
|
(297,740
|
)
|
|
|
(296,302
|
)
|
|
|
$
|
2,655,845
|
|
|
$
|
1,419,305
|
|
The movement in the allowance for doubtful accounts can be
reconciled as follows:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Beginning of the year
|
|
$
|
296,302
|
|
|
$
|
494,459
|
|
Recovery
|
|
|
-
|
|
|
|
(222,816
|
)
|
Provision
|
|
|
17,301
|
|
|
|
-
|
|
Foreign exchange effect
|
|
|
(15,863
|
)
|
|
|
24,659
|
|
|
|
$
|
297,740
|
|
|
$
|
296,302
|
|
Note 5 — INVENTORIES
The inventories consist of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Raw materials
|
|
$
|
46,009
|
|
|
$
|
-
|
|
Finished goods
|
|
|
251,869
|
|
|
|
1,309,830
|
|
Installation projects in process
|
|
|
67,602
|
|
|
|
272,671
|
|
|
|
$
|
365,480
|
|
|
$
|
1,582,501
|
|
There were no inventory reserves as of December 31, 2018 and
2017.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — PREPAYMENTS AND ADVANCES TO SUPPLIERS, NET
Prepayments and advances to suppliers consisted of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Advances
made to raw material suppliers
(a)
|
|
$
|
8,010,272
|
|
|
$
|
6,984,783
|
|
Advances made to construction
subcontractors
(b)
|
|
|
2,907,750
|
|
|
|
3,764,954
|
|
Advances made for purchases of equipment
|
|
|
910,872
|
|
|
|
962,396
|
|
Prepaid consulting fees
|
|
|
-
|
|
|
|
841,216
|
|
Others
|
|
|
3,906
|
|
|
|
43,393
|
|
Subtotal
|
|
|
11,832,800
|
|
|
|
12,596,742
|
|
Allowance for doubtful accounts
|
|
|
(8,264,797
|
)
|
|
|
(692,635
|
)
|
|
|
$
|
3,568,003
|
|
|
$
|
11,904,107
|
|
|
(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 Company 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, 2018 and 2017 are as follows:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Beginning balance
|
|
$
|
692,635
|
|
|
$
|
272,858
|
|
Provision
|
|
|
7,609,244
|
|
|
|
386,563
|
|
Foreign exchange effect
|
|
|
(37,082
|
)
|
|
|
33,214
|
|
Ending balance
|
|
$
|
8,264,797
|
|
|
$
|
692,635
|
|
The Company recorded $7,609,244 bad debt
provision related to the prepayment and advances to suppliers for the year ended December 31, 2018 due to slow utilization of those
prepayments and advances in fiscal 2018. For the years ended December 31, 2017 and 2016, the Company recorded $386,563 and $18,717
bad debt provision for the years ended December 31, 2017 and 2016, respectively.
Note 7 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Buildings
|
|
$
|
11,032,207
|
|
|
$
|
11,656,259
|
|
Machinery equipment
|
|
|
2,858,928
|
|
|
|
4,385,129
|
|
Transportation equipment
|
|
|
518,612
|
|
|
|
567,757
|
|
Office equipment
|
|
|
37,518
|
|
|
|
18,963
|
|
Leasehold improvements
|
|
|
551,582
|
|
|
|
334,978
|
|
Subtotal
|
|
|
14,998,846
|
|
|
|
16,963,086
|
|
Less: accumulated depreciation
|
|
|
(2,482,952
|
)
|
|
|
(2,374,824
|
)
|
Property, plant and equipment, net
|
|
$
|
12,515,894
|
|
|
$
|
14,588,262
|
|
Depreciation and amortization expense
was $1,134,136, $884,947 and $461,412 for the years ended December 31, 2018, 2017 and 2016, respectively. For the years ended
December 31, 2018, 2017 and 2016, the Company disposed of certain obsolete machinery equipment for no proceeds and recognized
a loss of $283,487, $12,179 and 228,245 respectively.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — LAND USE RIGHT
The Company 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 Company
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 $61,025, $55,048 and $55,990 for the years ended December 31, 2018, 2017and 2016, respectively.
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Land use right
|
|
$
|
1,352,629
|
|
|
$
|
1,429,142
|
|
Less: accumulated amortization
|
|
|
(383,290
|
)
|
|
|
(342,994
|
)
|
Land use right, net
|
|
$
|
969,339
|
|
|
$
|
1,086,148
|
|
The estimated future amortization expense is as follows:
Year ending December 31,
|
|
|
|
2019
|
|
$
|
57,166
|
|
2020
|
|
|
57,166
|
|
2021
|
|
|
57,166
|
|
2022
|
|
|
57,166
|
|
2023
|
|
|
57,166
|
|
Thereafter
|
|
|
710,051
|
|
Total estimated future amortization expenses
|
|
$
|
995,881
|
|
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — DEBT
Debt consisted of the following loans:
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 Bank Co. Ltd. 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
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(1,698,058
|
)
|
|
|
|
|
|
|
Long term portion
|
|
$
|
-
|
|
|
|
|
|
|
|
|
*
|
both loans from Bank of China Longwan Branch were fully
repaid upon maturity.
|
All principal of the above loans as of
December 31, 2018 are due upon maturity and interest payments are due on a monthly basis. For these loans, the outstanding balances
were guaranteed by the Controlling Shareholder’s immediate family members and unrelated third parties.
Lender
|
|
December
31,
2017
|
|
|
Term
|
|
Effective
Interest Rate
|
|
Bank of China Longwan Branch
|
|
$
|
262,009
|
|
|
April 13, 2016 to April 14, 2019
|
|
|
5.70
|
%
|
Bank of China Longwan Branch
|
|
|
303,501
|
|
|
June 8, 2016 to April 14, 2019
|
|
|
5.70
|
%
|
Longwan Rural Commercial Bank Shacheng Branch
|
|
|
307,342
|
|
|
September 30, 2017 to September 28, 2018
|
|
|
10.45
|
%
|
Total
|
|
|
872,852
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
457,940
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
414,912
|
|
|
|
|
|
|
|
All principal of the above loans as of
December 31, 2017 are due upon maturity and interest payments are due on a monthly basis. For these loans, the outstanding balances
were guaranteed by the Controlling Shareholder’s immediate family members and unrelated third parties.
Interest expense for these loans was $
91,977, $48,730 and $49,625 for the years ended December 31, 2018, 2017 and 2016, respectively.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — BANK ACCEPTANCE NOTES PAYABLE
Bank acceptance notes payable consisted of the following as
of December 31, 2018 and 2017:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Bank acceptance notes payable
|
|
$
|
2,117,382
|
|
|
$
|
55,322
|
|
Total
|
|
$
|
2,117,382
|
|
|
$
|
55,322
|
|
Bank acceptance notes are issued by financial
institutions on the Company’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 January 19, 2018 between the Company and China Zheshang Bank, the Company had bank acceptance notes of $2,117,382 (RMB
14.5 million) with maturity dates of six months after the issuance date. The Company was also required to maintain restricted
cash deposits of $2,124,655 (RMB 14.6 million) to guarantee the bank notes as of December 31, 2018. These notes were fully paid
upon maturity and the restricted deposit was also released upon the payment.
HEBRON TECHNOLOGY
CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 11 — SALES LEASEBACK
On November 9, 2017, the Company
entered into a sale leaseback agreement (the “Agreement”) with Zhongli International Leasing Co., Ltd (“Zhongli”).
Pursuant to the Agreement, the Company sold certain machinery purchased during the year to Zhongli for approximately $691,520
(RMB 4.5 million). The Company then leased back the machinery from Zhongli for 48 months with specified monthly payments over
the lease term. The Company 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 Company for its production purposes. The Company concluded this transaction
does not qualify for sale-leaseback accounting in accordance with ASC 840-40-25-11 and shall record under the lease financing
method. Under the lease financing method, the assets remain on the Company’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. As of December 31, 2018, the lease payments balance
are as follows:
Total lease payment as of December 31, 2017
|
|
$
|
590,865
|
|
Less: foreign exchange effect
|
|
|
(31,634
|
)
|
Less: payments during the year
|
|
|
(168,589
|
)
|
Total loan balance as of December 31, 2018
|
|
|
389,642
|
|
Less: current portion of payment obligation
|
|
|
(177,291
|
)
|
Long term payable as of December 31, 2018
|
|
$
|
212,351
|
|
According to
the agreement, future obligations for payments of the above lease agreement are as below:
Twelve months ended December 31, 2018
|
|
|
|
2019
|
|
$
|
177,291
|
|
2020
|
|
|
156,939
|
|
2021
|
|
|
55,412
|
|
Total
|
|
$
|
389,642
|
|
Interest expense
incurred for the year ended December 31, 2018 and 2017 amounted to $85,186 and $8,223, respectively.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — INCOME TAXES
Taxes payable consisted of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Income tax payable
|
|
$
|
5,763,945
|
|
|
$
|
5,503,770
|
|
Value added tax payable
|
|
|
2,024,902
|
|
|
|
351,098
|
|
Business tax payable
|
|
|
878,133
|
|
|
|
978,130
|
|
Other taxes payable
|
|
|
418,766
|
|
|
|
234,595
|
|
Total taxes payable
|
|
$
|
9,085,746
|
|
|
$
|
7,067,593
|
|
In the
normal course of its business, the Company, including in particular Xibolun Automation, 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, 2017 and 2016, the Company had accrued
(before adjustment) total tax liabilities of $12.0 million and $8.7 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. 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 million to $7 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 $1.4 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.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 12 — INCOME TAXES (Continued)
Hebron Technology was incorporated in
the BVI and is not subject to income taxes under the current laws of the BVI. HK Xibolun is a trading company registered in Hong
Kong and subject to corporate income tax at 17.5% if revenue is generated in Hong Kong.
Starting from the year ended December 31,
2018, Xibolun Automation is recognized as a High-technology Company by Chinese government, the revenues generated by Xibolun Automation
were subject to a favorable income tax rate of 15%. The High-technology certificate is valid for three year starting from November
30, 2018 and is subject to renewal. Xibolun Equipment is subject to corporate income tax at unified rate of 25%. For the years
ended 2017 and 2016, revenues generated in China were subject to corporate income tax at a unified rate of 25%.
|
i)
|
The components
of the income tax provision (benefit) are as follows:
|
|
|
For the
year
ended
December 31,
2018
|
|
|
For the
year
ended
December 31,
2017
|
|
|
For the
year
ended
December 31,
2016
|
|
Current tax provision
|
|
$
|
820,886
|
|
|
$
|
2,024,388
|
|
|
$
|
1,945,499
|
|
Current tax recovery
|
|
|
-
|
|
|
|
(4,974,763
|
)
|
|
|
-
|
|
Deferred tax provision (recovery)
|
|
|
(1,471,938
|
)
|
|
|
11,526
|
|
|
|
56,968
|
|
Total
|
|
$
|
(651,052
|
)
|
|
$
|
(2,938,849
|
)
|
|
$
|
2,002,467
|
|
|
ii)
|
The
following table summarizes deferred tax assets resulting from differences between financial
accounting basis and tax basis of assets and liabilities:
|
|
|
For the year
ended
December 31,
2018
|
|
|
For the year
ended
December 31,
2017
|
|
|
For the year
ended
December 31,
2016
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
1,648,967
|
|
|
$
|
247,324
|
|
|
$
|
191,913
|
|
Depreciation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
51,050
|
|
Total
|
|
$
|
1,648,967
|
|
|
$
|
247,324
|
|
|
$
|
242,963
|
|
No valuation allowance against the deferred
tax assets is considered necessary since the Company believes that it will more likely than not utilize the future benefits. The
following table reconciles the China statutory rates to the Company’s effective tax rate for the years ended December 31,
2018, 2017 and 2016.
|
|
For the
year ended
December 31,
2018
|
|
|
For the
year ended
December 31,
2017
|
|
|
For the
year ended
December 31,
2016
|
|
China Income tax statutory rate
|
|
|
(25.0
|
)%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Effect of favorable income tax rate in certain entity in PRC*
|
|
|
4.0
|
%
|
|
|
-
|
|
|
|
-
|
|
Non-deductible items in China and others
|
|
|
0.1
|
%
|
|
|
2.3
|
%
|
|
|
0.2
|
%
|
Foreign loss not recognized in China
|
|
|
9.7
|
%
|
|
|
69.0
|
%
|
|
|
-
|
|
Effect of tax reversal for previous years
|
|
|
-
|
%
|
|
|
(166.3
|
)%
|
|
|
-
|
|
Effective tax rate
|
|
|
(11.2
|
)%
|
|
|
(70.0
|
)%
|
|
|
25.2
|
%
|
* Xibolun Automation is subject to income
tax rate of 15% starting from fiscal 2018.
The Company continually evaluates expiring
statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. As of December 31, 2018,
the tax years ended December 31, 2016 through December 31, 2018 for the Company’s PRC subsidiaries remain open for statutory
examination by PRC tax authorities.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — CONCENTRATION OF MAJOR
CUSTOMERS AND SUPPLIERS
For the year ended December 31, 2018,
four customers accounted for approximately 13%, 12%, 11% and 10% of the Company’s total revenue. 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.
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, 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,
four major customers accounted for approximately 22%, 21%, 13% and 10%, respectively, of the Company’s total revenue. For
the year ended December 31, 2017, three major sub-contractors accounted for approximately 44%, 18% and 16% of the total subcontract
costs, respectively. As of December 31, 2017, two general contractors who provided for the Company’s installation projects
accounted for approximately 58% and 42% of the Company’s total contracts receivable balance, 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 advance to suppliers balance.
For the year ended December 31, 2016,
two major customers each accounted for approximately 11% and 10% of the Company’s total revenue. For the year ended December
31, 2016, three major sub-contractors accounted for approximately 44%, 22% and 15% of the total subcontract costs, respectively.
As of December 31, 2016, two general contractors (“Contractor A” and “Contractor B”) who provided for
the Company’s installation projects accounted for approximately 51% and 45% of the Company’s total contracts receivable
balance, respectively. For the year ended December 31, 2016, only one supplier accounted for 10% of the Company’s accounts
payable balance.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — SHAREHOLDERS’
EQUITY
On April 6, 2015, the Board of Directors
adopted a consent resolution to effectuate a 1:1000 stock split. Simultaneously on April 6, 2015, the Company also issued additional
15,000,000 common shares for nominal consideration. On April 29, 2015, the Company repurchased 4,000,000 common shares in total
from current shareholders in accordance with their share percentages as treasury stock for a nominal consideration. As a result,
the Company had 50,000,000 authorized common shares, $0.001 par value per share.
All the existing shareholders and directors
of the Company consider this issuance of 15 million common shares and repurchase of 4 million common shares on April 29, 2015
was part of the company’s recapitalization to result in 12,000,000 common shares issued and outstanding prior to completion
of the initial public offering. No cash or other consideration was paid for these stock issuances and repurchase. The Company
believes it is appropriate to reflect the 1:1000 stock split and repurchase that resulted in 12,000,000 shares of our common stock
issued and outstanding on a retroactive basis similar to stock split or dividend pursuant to ASC 260. The Company has retroactively
restated all shares and per share data for all the periods presented.
On December 26, 2016, the Company 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 Company’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 Company’s article 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.
Public Offering Warrants
In connection with the IPO on December
26, 2016, the Company issued warrants equal to five percent (5%) of the shares issued in the IPO, totaling 134,768 units to the
placement agents (the “Public Offering Warrants”). The warrants carry a term of three years, and shall not be exercisable
for a period of six months from the closing of the IPO and shall be 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, 2018, the total number of warrants outstanding was 134,768 with weighted average remaining life of 1 year. No warrants
were exercised as of December 31, 2018.
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.
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — SHAREHOLDERS’ EQUITY (Continued)
Equity Investment in Weijia
On March 10, 2018, the Company 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 Company 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 Company accounts for its investment in Weijia under the equity method of
accounting. As of December 31, 2018, the investment was $3,054,090 and is included in equity investment on the Consolidated Balance
Sheets. For the year ended December 31, 2018, the Company recorded equity income of $116,138 from its investment in Weijia.
Shares Issued for Consulting Services
On January 13, 2016, the Company 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 Company was required to pay Weitian $58,500 (the “Service
Fee”). On March 15, 2018, the Company and Weitian signed a settlement agreement, pursuant to which the Company issued 31,452
unregistered Class A common shares to Weitian to settle the Service Fee on March 13, 2018 and the Company recorded a consulting
fee of $58,500 included in general and administrative expense for the year ended December 31, 2018.
On December 26, 2017, the Company signed
a consulting agreement with Real Miracle Investments Ltd. (“Miracle”), to engage Miracle as its consultant to provide
professional services related to the Company’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 has a term for one year.
Pursuant to the agreement, the Company agreed to pay total of 100,000 shares of the Company’s common stock as compensation
for the services within 90 days after signing of the agreement. The Company 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 Company recorded a consulting fee expense of $181,000 included in the general and administrative expense
for the year ended December 31, 2018.
Note 15 — COMMITMENTS AND CONTINGENCIES
The Company signed several lease agreements
to rent office and a facility for its operations. The lease are from June 1, 2017 to May 30, 2037. As of December 31, 2018, the
Company was obligated under operating leases for minimum rentals as follows:
For the Year Ending December 31,
|
|
|
|
2019
|
|
$
|
213,332
|
|
2020
|
|
|
213,332
|
|
2021
|
|
|
213,332
|
|
2022
|
|
|
213,332
|
|
2023 and thereafter
|
|
|
3,075,536
|
|
|
|
$
|
3,928,864
|
|
HEBRON TECHNOLOGY CO., LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — SUBSEQUENT EVENTS
The Company has analyzed its operations
subsequent to December 31, 2018, through the date the financial statements were available to be issued and have determined that
the Company does not have any material subsequent events to disclose in these consolidated financial statements.
F-29
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