The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of business and organization
TMSR
Holding Company Limited (the “Company” or “TMSR”), formerly known as JM Global Holding Company (“JM
Global”), was a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of
acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction
or other similar business transaction, one or more operating businesses or assets (“Business Combination”). On June
20, 2018, TMSR completed a reincorporation and as a result, the Company changed its state of incorporation from Delaware to Nevada.
The Articles of Incorporation and Bylaws of TMSR Nevada became the governing instruments of the Company, resulting in a 2-for-1
forward stock split of the Company’s common stock (the “Forward Split). The Reincorporation and Forward Split were
approved by shareholders holding the majority of the outstanding shares of common stock of TMSR Delaware on June 1, 2018 at the
Annual Meeting of Shareholders.
On
February 6, 2018, China Sunlong Environmental Technology Inc. (“China Sunlong”) consummated the business combination
(the “Business Combination”) with JM Global pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”)
dated as of August 28, 2017 by and among (i) JM Global; (ii) Zhong Hui Holding Limited; (iii) China Sunlong; (iv) each of the
shareholders of China Sunlong named on Annex I of the Share Exchange Agreement (the “Sellers”); and (v) Chuanliu Ni,
a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, in the capacity as the representative for
the Sellers. Pursuant to the Share Exchange Agreement, JM Global acquired from the Sellers all of the issued and outstanding equity
interests of China Sunlong in exchange for 17,990,856 newly-issued shares of common stock of JM Global to the Sellers. 1,799,088
of these newly-issued shares are held in escrow for 18 months from the closing date of the Business Combination as a security
for China Sunlong and the Sellers’ indemnification obligations under the Share Exchange Agreement. This transaction is accounted
for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders
of China Sunlong owns the majority of the outstanding shares of JM Global immediately following the completion of the transaction
and JM Global’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was
deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong.
China
Sunlong is a holding company incorporated on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive
operations other than holding all of the outstanding share capital of Shengrong Environmental Protection Holding Company Limited
(“Shengrong BVI”). Shengrong BVI is a holding company incorporated on June 30, 2015, under the laws of the British
Virgin Islands. Shengrong BVI has no substantive operations other than holding all of the outstanding share capital of Hong Kong
Shengrong Environmental Technology Limited (“Shengrong HK”). Shengrong HK is also a holding company holding all of
the outstanding equity of Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).
The
Company focuses on the industrial solid waste recycling and comprehensive utilization. The Company’s main products are high
efficiency permanent magnetic separators and comprehensive utilization systems for industrial solid wastes. The Company’s
headquarter is located in Hubei Province, in the People’s Republic of China (the “PRC” or “China”).
All of the Company’s business activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong
Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries
(collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with
Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd.
(collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated
in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement,
the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for
the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total
Consideration”), of which $ 5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0
million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”).
The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing
price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject
to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary
for acquisitions of this type. The Acquisition closed on May 1, 2018. Starting on May 1, 2018, the Company’s business activities
added the research, development, production and sale of coating materials.
On August 16, 2018, The Purchasers and
the Sellers entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration
set forth in the Purchase Agreement entered between Purchasers and Sellers on April 11, 2018. Pursuant to the Supplement Agreement,
in exchange for the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million
(“Total Consideration”), of which $ 6.5 million or RMB equivalent shall be paid in cash (“Cash Consideration”)
and $4.7 million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share
Consideration”). In the Supplement Agreement, both Purchasers and Sellers also agreed to delete the section 3.3 of the Share
Purchase Agreement, a section that stipulates the Share Consideration shall be issued in three equal installments.
On
March 31, 2017, China Sunlong completed its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex
BVI”). At the closing of such acquisition, the selling shareholders of TJComex BVI received 5,935 shares (“Payment
Shares”) of China Sunlong Common Stock valued at $926.71 per share for 100% of their equity in TJComex BVI. TJComex BVI
owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited (“TJComex HK”), a Hong
Kong limited liability company, which owns 100% equity interest of Tianjin Corro Technological Consulting Co., Ltd. (“TJComex
WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC. Pursuant to certain contractual arrangements,
TJComex WFOE controls Tianjin Commodity Exchange Co., Ltd. (“TJComex Tianjin”), a limited liability company incorporated
under the law of the PRC. TJComex Tianjin is engaged in general merchandise trading business and related consulting services,
and its headquarter is located in the city of Tianjin, PRC.
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose of TJComex BVI is
to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the director of China Sunlong.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the
unaudited condensed consolidated financial statements for the period ending September 30, 2018. As TJComex operating revenue was
less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect
on the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued
operations under the guidance of Accounting Standards Codification 205.
On October 10, 2017, Hubei Shengrong established
a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Fujian
Shengrong”), with registered capital of RMB 10,000,000 (approximately USD 1,518,120). Fujian Shengrong has no operations
prior to May 30, 2018. On May 30, 2018, Hubei Shengrong and two unrelated entities entered into certain Capital Transfer and Contribution
Agreement pursuant to which these two entities shall contribute cash of approximately USD 5.0 million (RMB 32.0 million) into
Fujian Shengrong and Hubei Shengrong shall contribute approximately USD 1.3 million (RMB 8.0 million) which is the consideration
for certain technology consulting services to be provided by Hubei Shengrong to the two entities. Upon completion of the contribution,
the total registered capital of Fujian Shengrong increased to RMB 40.0 million (approximately USD 6.3 million) and Hubai Shengrong
owns 20% and the two entities collectively own 80% of the equity interest of Fujian Shengrong. In August, 2018, Hubei Shengrong
transferred 20% equity interest of Fujian Shengrong to Shengrong WFOE. The Company will account for the investment in Fujian Shengrong
using the cost method. Since Hubei Shengrong or Shengrong WFOE did not provide any cash contribution to Fujian Shengrong or technology
services to the two entities, the investment balance under the cost method investment on September 30, 2018 is $0.0.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited condensed consolidated financial statements reflect the activities of China Sunlong and each of the following
entities:
Name
|
|
|
Background
|
|
Ownership
|
China
Sunlong
|
|
●
|
A
Cayman Islands company
|
|
100%
owned by the Company
|
Shengrong
BVI
|
|
●
●
|
A
British Virgin Island company
Incorporated
on June 30, 2015
|
|
100%
owned by China Sunlong
|
Shengrong
HK
|
|
●
●
|
A
Hong Kong company
Incorporated
on September 25, 2015
|
|
100%
owned by Shengrong BVI
|
Shengrong
WFOE
|
|
●
|
A
PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100%
owned by Shengrong HK
|
|
|
●
●
|
Incorporated
on March 1, 2016
Registered
capital of USD 12,946 (HKD100,000), fully funded
|
|
|
Hubei
Shengrong
|
|
●
●
|
A
PRC limited liability company
Incorporated
on January 14, 2009
|
|
100%
owned by Shengrong WFOE
|
|
|
●
|
Registered
capital of USD 4,417,800 (RMB 30,000,000),
fully
funded
|
|
|
|
|
●
|
Production
and sales of high efficiency permanent magnetic
separator
and comprehensive utilization system.
|
|
|
Wuhan
HOST
|
|
●
●
●
|
A
PRC limited liability company
Incorporated
on October 27, 2010
Registered
capital of USD 750,075 (RMB 5,000,000),
fully
funded
|
|
16.7%owned
by Shengrong WFOE and 83.3% owned by Hubei Shengrong
|
|
|
●
|
Research,
development, production and sale of coating materials.
|
|
|
Shanghai
Host Coating Materials Co., Ltd. (“Shanghai HOST”)
|
|
●
●
●
|
A
PRC limited liability company
Incorporated
on December 11, 2014
Registered
capital of USD 3,184,371 (RMB 20,000,000),
to
be fully funded by November 2024
|
|
80%
owned by Wuhan HOST
|
|
|
●
|
No
operations and no capital contribution has been made as of September 30, 2018
|
|
|
TJComex
BVI*
|
|
●
●
|
A
British Virgin Island company
Incorporated
on March 8, 2016
|
|
100%
owned by China Sunlong
|
TJComex
HK*
|
|
●
●
|
A
Hong Kong company
Incorporated
on March 19, 2014
|
|
100%
owned by TJComex BVI
|
TJComex
WFOE*
|
|
●
|
A
PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)
|
|
100%
owned by TJComex HK
|
|
|
●
|
Incorporated
on March 10, 2004
|
|
|
|
|
●
|
Registered
capital of USD 200,000
|
|
|
TJComex
Tianjin*
|
|
●
●
|
A
PRC limited liability company
Incorporated
on November 19, 2007
|
|
100%
owned by TJComex WFOE
|
|
|
●
|
Registered
capital of USD 7,809,165 (RMB 55,000,000)
|
|
|
|
|
●
|
General
merchandise trading business and related
consulting
services
|
|
|
*
|
Disposed
on April 2, 2018
|
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
2 – Summary of significant accounting policies
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations
of the Securities Exchange Commission (“SEC”).
In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation
of the Company’s financial position, its results of operations and its cash flows, as applicable, have been made. Interim results
are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should
be read in conjunction with information included in the Company’s 2017 annual report on Form 10-K filed on April 2, 2018
and the Company’s current report on Form 8-K filed on March 21, 2018.
Principles
of consolidation
The
unaudited condensed consolidated financial statements of the Company include the accounts of TMSR and its wholly owned subsidiaries.
All intercompany transactions and balances are eliminated upon consolidation.
Enterprise
wide disclosure
The
Company’s chief operating decision-makers (i.e. chief executive officer and her direct reports) review financial information
presented on a consolidated basis, accompanied by disaggregated information about revenues by business lines (Equipment and systems
revenues, trading and others revenues, and coating materials revenues) for purposes of allocating resources and evaluating financial
performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or
components below the consolidated unit level. Based on qualitative and quantitative criteria established by Accounting Standards
Codification (“ASC”) 280, “Segment Reporting”, the Company considers itself to be operating within one
reportable segment.
Use
of estimates and assumptions
The
preparation of unaudited condensed 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 disclosures of contingent assets and
liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and
expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated
financial statements include the useful lives of intangible assets, revenues, deferred revenues and plant and equipment, impairment
of long-lived assets, collectability of receivables, inventory valuation allowance, and realization of deferred tax assets. Actual
results could differ from these estimates.
Foreign
currency translation and transaction
The
reporting currency of the Company is the U.S. dollar. The Company in China conducts its businesses in the local currency, Renminbi
(RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s
Bank of China at the end of the period. The statement of income accounts are translated at the average translation rates and the
equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated
other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Translation
adjustments included in accumulated other comprehensive income (loss) amounted to $(1,878,289) and $701,217 as of September 30,
2018 and December 31, 2017, respectively. The balance sheet amounts, with the exception of shareholders’ equity at September
30, 2018 and December 31, 2017 were translated at 6.87 RMB and 6.51 RMB to $1.00, respectively. The shareholders’ equity
accounts were stated at their historical rate. The average translation rates applied to statement of income accounts for the three
months ended September 30, 2018 and 2017 were 6.81 RMB and 6.67 RMB, respectively, and for nine months ended September 30, 2018
and 2017 were 6.52 RMB and 6.80 RMB, respectively. Cash flows are also translated at average translation rates for the periods,
therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances
on the unaudited condensed consolidated balance sheet.
The
PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations.
These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that
are subject to the restrictions.
Accounts
receivable, net and accounts receivable – related party, net
Accounts
receivable and accounts receivable – related party include trade accounts due from customers. An allowance for doubtful
accounts may be established and recorded based on management’s assessment of potential losses based on the credit history
and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance
is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is not probable.
After
the Company evaluated all the above considerations, the Company established a policy to provide a provision of 20% for
accounts receivable outstanding more than 3 months but less than 6 months, 40% for accounts receivable outstanding more than
6 months but less than 9 months, 60% for accounts receivable outstanding more than 9 months but less than 1 year, and 100%
for accounts receivable outstanding more than 1 year. As of September 30, 2018 and December 31, 2017, $4,141,557 and
$6,674,834 were recorded for allowance for doubtful accounts, respectively.
Inventories
Inventories
are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the first-in-first-out
method in Hubei Shengrong and weighted average method in Wuhan HOST. Management reviews inventories for obsolescence and cost
in excess of net realizable value at least annually and records a reserve against the inventory when the carrying value exceeds
net realizable value. As of September 30, 2018 and December 31, 2017, no obsolescence and cost in excess of net realizable value
were recorded for allowance.
Prepayments
Prepayments
are funds deposited or advanced to outside vendors for future inventory or services purchases. As a standard practice in China,
many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete
its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with
its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
In
October of 2017, Hubei Shengrong signed a long-term cooperation agreement with a vendor as part of the plan to ensure a steady
supply of inventory in 2018. In accordance with the cooperation agreement, Hubei Shengrong committed to purchase the majority
of its raw materials from this vendor in 2018 and prepaid the vendor for the estimated total purchase amount in order to secure
the supply source in advance.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Plant
and equipment
Plant
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives
and residual value are as follows:
|
|
Useful Life
|
|
Estimated Residual Value
|
Building
|
|
5 – 20 years
|
|
|
5
|
%
|
Office equipment and furnishing
|
|
5 years
|
|
|
5
|
%
|
Production equipment
|
|
3-10 years
|
|
|
5
|
%
|
Automobile
|
|
5 years
|
|
|
5
|
%
|
Leasehold improvements
|
|
Shorter of the remaining lease terms or estimated useful lives
|
|
|
0
|
%
|
The
cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts
and any gain or loss is included in the unaudited condensed consolidated statements of income and comprehensive income. Expenditures
for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected
to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation and amortization
to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible
assets
Intangible
assets represent land use rights, patents, and software system, and they are stated at cost, less accumulated amortization. Research
and development costs associated with internally developed patents are expensed when incurred. Amortization expense is recognized
on the straight-line basis over the estimated useful lives of the assets. All land in the PRC is owned by the government; however,
the government grants “land use rights.” The Company has obtained the rights to use various parcels of land and the
right to use SAP B1 Cloud system. The patents have finite useful lives and are amortized using a straight-line method that reflects
the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The Company amortizes the cost
of the land use rights, patents, and software system over their useful life using the straight-line method. The Company also re-evaluates
the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The
estimated useful lives are as follows:
|
|
Useful Life
|
Land use rights
|
|
50 years
|
Patents
|
|
10 - 20 years
|
Software
|
|
5 years
|
Goodwill
Goodwill
represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired
subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when
circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment
exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of income.
Impairment losses on goodwill are not reversed.
Impairment
for long-lived assets
Long-lived
assets, including plant, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes
in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate
that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the
undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted
future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any,
are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of
the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable
market values. As of September 30, 2018 and December 31, 2017, no impairment of long-lived assets was recognized.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair
value measurement
The
accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments
and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount
of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities,
customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The
accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement
and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term
of the financial instruments.
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
Financial
instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets
at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of interest.
Customer
deposits
In
Hubei Shengrong, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires
3% to 10% advanced deposits from the customers upon the signing of the sales contracts. At various stages of the sales contract
execution, the Company generally collects certain amounts of advanced deposits from the customers based on the approximate amount
of cash flows needed at each stage. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
In
Wuhan HOST, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 95% to
100% advanced deposits from the customers upon signing of the sales contracts. A few customers with good credit history are not
required to make any deposit. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
Revenue
recognition
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers
(ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did
not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than
retainage revenues, was recognized based on the amount of consideration we expect to receive in exchange for satisfying the performance
obligations. However, the impact of the Company’s retainage revenue was not material as of the date of adoption, and as
a result, did not result in an adjustment.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
core principle underlying the revenue recognition ASU is that the Company will recognize revenue to represent the transfer of
goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such
exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be
recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s
revenue streams are primarily recognized at a point in time except for the retainage revenues where the retainage periods are
recognized over the retainage period, usually is a period of twelve months.
The
ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that
the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will
not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue
when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared
to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption, the
Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards
and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition
except its retainage revenues.
An
entity will also be required to determine if it controls the goods or services prior to the transfer to the customer in order
to determine if it should account for the arrangement as a principal or agent. Principal arrangements, where the entity controls
the goods or services provided, will result in the recognition of the gross amount of consideration expected in the exchange.
Agent arrangements, where the entity simply arranges but does not control the goods or services being transferred to the customer,
will result in the recognition of the net amount the entity is entitled to retain in the exchange.
Revenue
from equipment and systems and revenue from trading and others are recognized at the date of goods delivered and title passed
to customers, when a formal arrangement exists, the price is fixed or determinable, the Company has no other significant obligations
and collectability is reasonably assured. Such revenues are recognized at a point in time after all performance obligations are
satisfied. In addition, training service revenues are recognized when the services are rendered and the Company has no other obligations,
and collectability is reasonably assured. These revenues are recognized at a point in time.
Prior
to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as warranty retainage during the
retainage period of 12 months to guarantee product quality. Retainage is considered as a payment term included as a part of the
contract price, and was recognized as revenue upon the shipment of products. Due to nature of the retainage, the Company’s
policy is to record revenue the full value of the contract without VAT, including any retainage, since the Company has experienced
insignificant warranty retainage claims historically. Due to the infrequent and insignificant amount of warranty retainage claims,
the ability to collect retainage was reasonably assured and was recognized at the time of shipment. On January 1, 2018, upon the
adoption of ASU 2014-09 (ASC 606), revenues from product warranty retainage are recognized over the retainage period over 12 months.
For the three and nine months ended September 30, 2018, less than 5% of our retainage revenues were recognized in our consolidated
revenues and included in the Company’s equipment and systems revenues in the accompanying unaudited condensed statements
of income and comprehensive income.
Payments
received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
As
of September 30, 2018, the Company has six outstanding contracts signed with approximately $7.1 million of revenue for equipment
and systems to be completed within one year.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s disaggregate revenue streams are summarized as follows:
|
|
For the Three Months Ended September 30,
|
|
For the Nine months ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues – Equipment and systems
|
|
$
|
509,186
|
|
|
$
|
5,130,616
|
|
|
$
|
15,395,825
|
|
|
$
|
18,365,058
|
|
Revenues – Trading and others
|
|
|
1,064,493
|
|
|
|
8,417,588
|
|
|
|
1,894,488
|
|
|
|
19,980,554
|
|
Revenues – Coating materials
|
|
|
1,544,466
|
|
|
|
-
|
|
|
|
2,653,187
|
|
|
|
-
|
|
Total revenues
|
|
$
|
3,118,145
|
|
|
$
|
13,548,204
|
|
|
$
|
19,943,500
|
|
|
$
|
38,345,612
|
|
Gross
versus Net Revenue Reporting
Starting
from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly
purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications
and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’
site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred
to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers
and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should
be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the
transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance
for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed
industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting
the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory
loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal
in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
Income
taxes
The
Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results
for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet date.
Deferred
taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the unaudited condensed consolidated financial statements and the corresponding
tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable
temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available
against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to
apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income
statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt
with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities.
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% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax
are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the three
and nine months ended September 30, 2018 and 2017. As of September 30, 2018, the Company’s PRC tax returns filed for 2015,
2016 and 2017 remain subject to examination by any applicable tax authorities.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Earnings
per share
Basic
earnings per share are computed by dividing income available to common shareholders of the Company by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common shares were exercised and converted into common shares.
Recently
issued accounting pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016- 02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating
activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows
arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements
to Topic 842, Leases. The Company has not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s unaudited
condensed consolidated financial statement presentation or disclosures.
In
February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required
to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive
income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this
Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public
business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update
should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption
of this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the Company’s unaudited condensed consolidated balance sheets, statements of income and comprehensive
income and statements of cash flows.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
3 – Business combination
TJ
Comex BVI
On
March 31, 2017, China Sunlong completed its acquisition of 100% equity interest in TJComex BVI through a share exchange to expand
its business on trading certain solid wastes through TJComex BVI’s commodity exchange channels. At the closing of the share
exchange on June 30, 2017, the Selling Shareholders received 5,935 shares (“Payment Shares”) of China Sunlong Common
Stock valued at $926.71 per share for 100% of their equity interests in TJComex BVI, equating to 100% of all outstanding interests
in TJComex BVI. Whereas, TJComex BVI owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited
(“TJComex HK”), a Hong Kong limited liability company, Tianjin Corro Technological Consulting Co., Ltd. (“TJComex
WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC and Tianjin Commodity Exchange Co., Ltd.
(the “TJComex Tianjin”), a limited liability company incorporated under the law of the PRC. The $926.71 per share
price of China Sunlong Common Stock was based on a valuation of approximately $92.7 million of China Sunlong’s enterprise
value determined by an independent third-party appraiser using discounted cash flows projection model. The projected cash flows
are based upon, but not limited to, assumptions such as 1) projected selling units and growth in the industry, 2) projected unit
selling price, 3) projected unit cost of manufactured, 4) selling and general and administrative expenses to be in line with the
growth in the industry, and 5) projected bank borrowings rate or interest rate index.
The
Company’s acquisition of TJComex BVI was accounted for as a business combination in accordance with ASC 805. The Company
has allocated the purchase price of TJComex BVI based upon the fair value of the identifiable assets acquired and liabilities
assumed on the acquisition date. Except for cash, the Company estimated the fair values of the assets acquired and liabilities
assumed at the acquisition date in accordance with the business combination standard issued by FASB with the following valuation
methodologies with level 3 inputs: Other current assets, plant and equipment and current liabilities were valued using the cost
approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and
intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent
appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general
and administrative expense.
The
following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date,
which represents the net purchase price allocation at the date of the acquisition of TJComex BVI based on a valuation performed
by an independent valuation firm engaged by the Company:
Total consideration at fair value
|
|
$
|
5,500,000
|
|
|
|
Fair Value
|
Cash
|
|
$
|
23,451
|
|
Other current assets
|
|
|
794,938
|
|
Plant and equipment
|
|
|
1,866,894
|
|
Other noncurrent assets
|
|
|
609,126
|
|
Goodwill
|
|
|
3,819,354
|
|
Total asset
|
|
|
7,113,763
|
|
Total liabilities
|
|
|
(1,613,763
|
)
|
Net asset acquired
|
|
$
|
5,500,000
|
|
Approximately
$3.8 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of
the Company and TJComex BVI. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2017,
we performed an impairment testing on the goodwill and recorded an impairment loss of approximately $3.8 million on goodwill.
For
the three and nine months ended September 30, 2017, the impact of the acquisition of TJComex BVI to the unaudited condensed consolidated
statements of income and comprehensive income was not material.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI, in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose TJComex BVI is to
(i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, for no consideration.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the
unaudited condensed consolidated financial statements for the period ending September 30, 2018. As TJComex operating revenue was
less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect
on the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued
operations under the guidance of Accounting Standards Codification 205.
Wuhan
HOST
On
April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries
(collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with
Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd.
(collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated
in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement,
the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for
the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total
Consideration”), of which $ 5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0
million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”).
The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing
price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject
to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary
for acquisitions of this type. The Acquisition closed on May 1, 2018.
The
Company’s acquisition of Wuhan HOST was accounted for as a business combination in accordance with ASC 805. The Company
has allocated the purchase price of Wuhan HOST based upon the fair value of the identifiable assets acquired and liabilities assumed
on the acquisition date. Other current assets and current liabilities were valued using the cost approach. Management of the Company
is responsible for determining the fair value of assets acquired, liabilities assumed, plant and equipment, and intangible assets
identified as of the acquisition date and considered a number of factors including valuations from independent appraisers. Acquisition-related
costs incurred for the acquisitions are not material and have been expensed as incurred in general and administrative expense.
The
following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date,
which represents the net purchase price allocation at the date of the acquisition of Wuhan HOST based on a valuation performed
by an independent valuation firm engaged by the Company:
Total consideration at fair value
|
|
$
|
11,200,000
|
|
|
|
Fair Value
|
Cash
|
|
$
|
276,626
|
|
Other current assets
|
|
|
6,763,767
|
|
Plant and equipment
|
|
|
6,499,268
|
|
Other noncurrent assets
|
|
|
2,139,987
|
|
Goodwill
|
|
|
7,544,008
|
|
Total asset
|
|
|
23,223,656
|
|
Total liabilities
|
|
|
(12,023,656
|
)
|
Net asset acquired
|
|
$
|
11,200,000
|
|
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Approximately
$7.5 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of
the Company and Wuhan HOST. None of the goodwill is expected to be deductible for income tax purposes.
For
the three and nine months ended September 30, 2018 and 2017, the impact of the acquisition of Wuhan HOST to the unaudited condensed
consolidated statements of income and comprehensive income was not material.
Note
4 – Accounts receivable and accounts receivable – related party
Accounts
receivable consist of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Accounts receivable
|
|
$
|
15,194,554
|
|
|
$
|
21,187,472
|
|
Accounts receivable – related party
|
|
|
1,106,420
|
|
|
|
-
|
|
Less: Allowance for doubtful accounts
|
|
|
(4,141,557
|
)
|
|
|
(6,674,834
|
)
|
Total accounts receivable, net
|
|
$
|
12,159,417
|
|
|
$
|
14,512,638
|
|
Movement
of allowance for doubtful accounts is as follows:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,674,834
|
|
|
$
|
-
|
|
Beginning balance from Wuhan HOST
|
|
|
218,152
|
|
|
|
-
|
|
Addition
|
|
|
46,368
|
|
|
|
6,428,261
|
|
Recovery
|
|
|
(2,419,118
|
)
|
|
|
-
|
|
Exchange rate effect
|
|
|
(378,679
|
)
|
|
|
246,573
|
|
Ending balance
|
|
$
|
4,141,557
|
|
|
$
|
6,674,834
|
|
Note
5 – Inventories
Inventories
consist of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Raw materials
|
|
$
|
7,416
|
|
|
$
|
-
|
|
Work in progress
|
|
|
5,607,073
|
|
|
|
9,203,623
|
|
Finished goods
|
|
|
-
|
|
|
|
39,865
|
|
Total inventories
|
|
$
|
5,614,489
|
|
|
$
|
9,243,488
|
|
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
6 – Plant and equipment, net
Plant
and equipment consist of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Building
|
|
$
|
5,633,852
|
|
|
$
|
1,545,861
|
|
Production equipment
|
|
|
1,144,297
|
|
|
|
195,735
|
|
Office equipment and furniture
|
|
|
55,330
|
|
|
|
157,286
|
|
Automobile
|
|
|
-
|
|
|
|
39,298
|
|
Leasehold improvement
|
|
|
297,085
|
|
|
|
1,805,521
|
|
Subtotal
|
|
|
7,130,564
|
|
|
|
3,743,701
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,070,261
|
)
|
|
|
(1,555,566
|
)
|
Total
|
|
$
|
6,060,303
|
|
|
$
|
2,188,135
|
|
Depreciation
and amortization expense for the three months ended September 30, 2018 and 2017 amounted to $118,867 and $48,220, respectively,
and for the nine months ended September 30, 2018 and 2017 amounted to $259,390 and $115,695, respectively.
Note
7 – Intangible assets, net
Intangible
assets consist of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Land use rights
|
|
$
|
1,483,180
|
|
|
$
|
-
|
|
Patents
|
|
|
3,621,983
|
|
|
|
3,240,137
|
|
Software
|
|
|
10,238
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
(2,246,496
|
)
|
|
|
(2,037,097
|
)
|
Net intangible assets
|
|
$
|
2,868,905
|
|
|
$
|
1,203,040
|
|
Amortization
expense for the three months ended September 30, 2018 and 2017 amounted to $75,189 and $64,899, respectively, and for the nine
months ended September 30, 2018 and 2017 amounted to $220,335 and $192,702, respectively.
The
estimated amortization is as follows:
Twelve months ending September 30,
|
|
Estimated
amortization expense
|
|
|
|
2019
|
|
$
|
262,234
|
|
2020
|
|
|
176,082
|
|
2021
|
|
|
175,037
|
|
2022
|
|
|
175,037
|
|
2023
|
|
|
172,832
|
|
Thereafter
|
|
|
1,907,683
|
|
Total
|
|
$
|
2,868,905
|
|
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
8 – Related party balances and transactions
Related
party balances
|
a.
|
Accounts
receivable – related party:
|
Name of related party
|
|
Relationship
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Wuhan Modern Industry Technology Research Institution (“Wuhan Modern”)
|
|
Under common control of former CEO
of Wuhan Host and current shareholder of Company
|
|
$
|
1,065,657
|
|
|
$
|
-
|
|
|
b.
|
Other
receivable – related party:
|
Name of related party
|
|
Relationship
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fujian Shengrong
|
|
|
20% subsidiary
|
|
|
$
|
2,161
|
|
|
$
|
-
|
|
The
Company advanced funds to the related cooperative for daily operating purposes, and those funds will be returned to the Company
by the end of 2018.
|
c.
|
Other
payables – related parties:
|
Name of related party
|
|
Relationship
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Jiazhen Li
|
|
CEO, Former Co-Chairman
|
|
$
|
712,265
|
|
|
$
|
304,833
|
|
Chuanliu Ni
|
|
Co-Chairman
|
|
|
325,907
|
|
|
|
848,493
|
|
Xiaoyan Shen
|
|
CFO
|
|
|
-
|
|
|
|
1,408
|
|
Zhong Hui Holding Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
-
|
|
Chunyong Zheng
|
|
Spouse of shareholder of the Company
|
|
|
2,547,168
|
|
|
|
-
|
|
Long Liao
|
|
Shareholder of the Company
|
|
|
72,791
|
|
|
|
-
|
|
Wuhan Modern
|
|
Under common control of shareholder of the Company
|
|
|
931,963
|
|
|
|
-
|
|
TJComex Tianjin
|
|
Former subsidiary and under common control of Chuanliu Ni, Co-Chairman of the Company
|
|
|
72,791
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
4,803,385
|
|
|
$
|
1,154,734
|
|
The
above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 – Debt
Short
term loan
Short
term loan due to bank is as follows:
Short term loans
|
|
Maturities
|
|
Weighted average interest rate
|
|
Collateral/Guarantee
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Wuhan Rural Commercial Bank
|
|
|
July 25, 2019
|
|
|
|
7.35
|
%
|
|
Guaranteed by Hubei Changyang Hongrong Environmental Protection Science and Technology Co. Ltd., a related party and pledged with its patent as a collateral
|
|
$
|
2,183,724
|
|
|
$
|
2,305,316
|
|
Third
party loan
In
April 2017, the Company obtained an unsecured loan from an unrelated third party in the amount of $144,887 (RMB 1,000,000) due
on April 27, 2018 with an annual interest rate of 10%. The due date for this loan has been extended to October 27, 2018.
Interest
expense for the three months ended September 30, 2018 and 2017 amounted to $40,594 and $42,715, respectively, and for the nine
months ended September 30, 2018 and 2017 amounted to $135,328 and $127,551, respectively.
Note
10 – Taxes
Income
tax
United
States
TMSR
was organized in the state of Delaware in April 2015 and re-incorporated in the state of Nevada in June 2018. TMSR had no taxable
income for United States income tax purposes for the three months ended September 30, 2018. TMSR’s U.S. net operating loss
for the nine months ended September 30, 2018 amounted to approximately $50,000. As of September 30, 2018, TMSR’s net operating
loss carry forward for United States income taxes was approximately $10,000. The net operating loss carry forwards are available
to reduce future years’ taxable income through year 2038. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s operating history and continued losses in the United States. Accordingly,
the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. Management reviews
this valuation allowance periodically and makes changes accordingly.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States.
Under the provisions of the Act, the U.S. corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible
low-taxed income tax (“GILTI”), which is a new tax on certain off-shore earnings at an effective rate of 10.5% for
tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial
offset for foreign tax credits. The Company determined that there are no impact of GILTI for the year ended December 31, 2018,
which the Company believes that it will be imposed a minimum tax rate of 10.5% and to the extent foreign tax credits are available
to reduce its US corporate tax, which may result in no additional US federal income tax being due.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cayman
Islands
China
Sunlong is incorporated in the Cayman Islands and are not subject to tax on income or capital gains under current Cayman Islands
law. In addition, upon payments of dividends by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British
Virgin Islands
Shengrong
BVI and TJComex BVI are incorporated in the British Virgin Islands and are not subject to tax on income or capital gains under
current British Virgin Islands law. In addition, upon payments of dividends by these entities to their shareholders, no British
Virgin Islands withholding tax will be imposed.
Hong
Kong
Shengrong
HK and TJComex HK are incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in
its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in
Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or
earned in Hong Kong since inception. Under Hong Kong tax law, Shengrong HK and TJComex HK are exempted from income tax on its
foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.
PRC
Shengrong
WFOE, Hubei Shengrong, Wuhan HOST are governed by the income tax laws of the PRC and the income tax provision in respect to operations
in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations
and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises
are subject to income tax at a rate of 25% after appropriate tax adjustments.
Significant
components of the provision for income taxes are as follows:
|
|
For the three months ended September 30, 2018
|
|
For the three months ended September 30, 2017
|
|
|
|
|
|
Current
|
|
$
|
129,030
|
|
|
$
|
913,286
|
|
Deferred
|
|
|
(71,676
|
)
|
|
|
(434,588
|
)
|
Total provision for income taxes
|
|
$
|
57,354
|
|
|
$
|
478,698
|
|
|
|
For the nine months ended September 30, 2018
|
|
For the nine months ended September 30, 2017
|
|
|
|
|
|
Current
|
|
$
|
382,389
|
|
|
$
|
2,904,702
|
|
Deferred
|
|
|
356,895
|
|
|
|
(434,588
|
)
|
Total provision for income taxes
|
|
$
|
739,284
|
|
|
$
|
2,470,114
|
|
Under
the Income Tax Laws of the PRC, companies are subject to income tax at a rate of 25%. However, Hubei Shengrong obtained the “high-tech
enterprise” tax status in 2014, which reduced its statutory income tax rate to 15% from 2014 to 2016. Hubei Shengrong renewed
its “high-tech enterprise” status in December 2016, which continued to reduce its statutory income rate to 15% from
2017 to 2019. Wuhan Host also obtained the “high-tech enterprise” tax status in 2016, which reduced its statutory
income tax rate to 15% from 2016 to 2019. Tax savings resulted from the reduced statutory income tax rate amounted to $103,481
and $623,883 for the three months ended September 30, 2018 and 2017, respectively, and amounted to $269,284 and $1,934,788 for
the nine months ended September 30, 2018 and 2017, respectively.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred
tax assets
Bad
debt allowances must be approved by the Chinese tax authority prior to being deducted as an expense item on the tax return.
Significant
components of deferred tax assets were as follows:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
10,396
|
|
|
$
|
-
|
|
Net operating losses carried forward – PRC
|
|
|
-
|
|
|
|
418,549
|
*
|
Bad debt allowance
|
|
|
620,032
|
|
|
|
980,840
|
|
Valuation allowance
|
|
|
(10,396
|
)
|
|
|
(418,549
|
)
|
Deferred tax assets, net
|
|
$
|
620,032
|
|
|
$
|
980,840
|
|
*
Represents TJ Comex net operating losses carried forward was disposed on April 2, 2018.
Value
added tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a value
added tax in accordance with PRC laws. The value added tax (“VAT”) standard rates are 6% to 17% of the gross sales
price and changed to 6% to 16% of gross sales starting in May 2018. A credit is available whereby VAT paid on the purchases of
semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset
the VAT due on sales of the finished products and services.
Taxes
payable consisted of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
9,410,599
|
|
|
$
|
7,838,111
|
|
Income taxes payable
|
|
|
6,070,965
|
|
|
|
6,798,803
|
|
Other taxes payable
|
|
|
1,123,389
|
|
|
|
924,489
|
|
Total
|
|
$
|
16,604,953
|
|
|
$
|
15,561,403
|
|
Note
11 – Concentration of risk
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. As of September 30, 2018 and December 31, 2017, no cash were deposited with various financial institutions located
in the U.S. As of September 30, 2018 and December 31, 2017, $866,621 and $457,126 and were deposited with various financial institutions
located in the PRC, respectively. As of September 30, 2018 and December 31, 2017, $7,809 and $3,186 were deposited with one financial
institution located in Hong Kong, respectively. While management believes that these financial institutions are of high credit
quality, it also continually monitors their credit worthiness.
Accounts
receivable 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.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Customer
and vendor concentration risk
For
the three months ended September 30, 2018, three customers accounted for 20.6%, 18.8% and 10.6% of the Company’s revenues.
For the three months ended September 30, 2017, four customers accounted for 29.8%, 29.8%, 26.9% and 13.4% of the Company’s
revenues.
For
the nine months ended September 30, 2018, two customers accounted for 40.2% and 25.1% of the Company’s revenues. For the
nine months ended September 30, 2017, four customers accounted for 25.0%, 24.7%, 14.1% and 14.1% of the Company’s revenues.
As
of September 30, 2018, two customers accounted for 49.9% and 32.9% of the Company’s accounts receivable and accounts receivable
– related party. As of December 31, 2017, two customers, who are related to each other under common management and ownership,
accounted for 45.6% and 43.9% of the Company’s accounts receivable.
For
the three months ended September 30, 2018, one supplier accounted for 70.1% of the Company’s total purchases. For the three months
ended September 30, 2017, three suppliers accounted for 36.3%, 33.8% and 28.7% of the Company’s total purchases, respectively.
For
the nine months ended September 30, 2018, one supplier accounted for 67.9% of the Company’s total purchases. For the nine months
ended September 30, 2017, three suppliers accounted for 39.8%, 33.3% and 25.8% of the Company’s total purchases, respectively.
As
of September 30, 2018, three suppliers accounted for 35.6%, 33.3% and 30.6% of the Company’s total prepayments; and four suppliers
accounted for 21.4%, 17.8%, 16.0% and 10.4% of the Company’s total accounts payable. As of December 31, 2017, three suppliers
accounted for 41.2%, 35.9% and 22.8% of the Company’s prepayments; and two suppliers accounted for 40.0% and 29.1% of the
Company’s total accounts payable.
Note
12 – Equity
Restricted
net assets
The
Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries.
Relevant PRC statutory laws and regulations permit payments of dividends by Shengrong WFOE only out of its retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the
accompanying unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected
in the statutory financial statements of Shengrong WFOE.
Shengrong
WFOE, Hubei Shengrong, Wuhan HOST are required to set aside at least 10% of their after-tax profits each year, if any, to fund
certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, Shengrong WFOE may
allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and
welfare fund at its discretion. Hubei Shengrong and Wuhan HOST may allocate a portion of its after-tax profits based on PRC accounting
standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable
as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks
designated by State Administration of Foreign Exchange.
As
of September 30, 2018 and December 31, 2017, Shengrong WFOE (through Hubei Shengrong and Wuhan HOST) attributed $2,259,332 and
$2,137,815 of retained earnings for their statutory reserves, respectively.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
a result of the foregoing restrictions, Shengrong WFOE are restricted in their ability to transfer their net assets to the Company.
Foreign exchange and other regulation in the PRC may further restrict Shengrong WFOE from transferring funds to China Sunlong
in the form of dividends, loans and advances. As of September 30, 2018 and December 31, 2017, amounts restricted are the net assets
of Shengrong WFOE, which amounted to $28,874,881 and $27,800,814, respectively.
Stock
split
On
June 1, 2018, the Company’s shareholder approved a 2 for 1 stock split of the Company’s common stock at the Annual
Meeting of Shareholders. The stock split was effected on June 20, 2018, pursuant to the completion of the reincorporation from
Delaware to Nevada. All shares and per share amounts used herein and in the accompanying unaudited condensed consolidated financial
statements have been retroactively restated to reflect the stock split.
Common
stock
On
June 23, 2018, the Company issued an aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share,
to certain non-U.S. purchasers at a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to
certain securities purchase agreement dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption
from registration under Regulation S promulgated under the Securities Act of 1933, as amended.
Warrants
and options
On
July 29, 2015, the Company sold 10,000,000 units at a purchase price of $5.00 per unit (“Public Units”) in its initial
public offering. Each Public Unit consists of one share of the Company’s common stock, $0.0001 par value, and one warrant.
Each warrant will entitle the holder to purchase one-half of one share of common stock at an exercise price of $2.88 per half
share ($5.75 per whole share). Warrants may be exercised only for a whole number of shares of common stock. No fractional shares
will be issued upon exercise of the warrants. The warrants will become exercisable on 30 days after the consummation of its initial
Business Combination with China Sunlong on February 6, 2018. The warrants will expire February 5, 2023. The warrants will be redeemable
by the Company at a price of $0.01 per warrant upon 30 days prior written notice after the warrants become exercisable, only in
the event that the last sale price of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading
day period ending on the third business day prior to the date on which notice of redemption is given.
The
sponsor of the Company purchased, simultaneously with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00
per unit in a private placement for an aggregate price of $2,500,000. Each unit purchased is substantially identical to the units
sold in the Public Offering.
The
Company sold to the underwriter (and/or its designees), for $100, as additional compensation, an option to purchase up to a total
of 800,000 units exercisable at $5.00 per unit (or an aggregate exercise price of $4,000,000) upon the closing of the Public Offering.
Since the option is not exercisable until the earliest on the closing the initial Business Combination, the option will effectively
represent the right to purchase up to 800,000 shares of common stock and 800,000 warrants to purchase 400,000 shares at $5.75
per full share for an aggregate maximum amount of $6,300,000. The units issuable upon exercise of this option are identical to
those issued in the Public Offering.
In
July 2016, the board of directors of the Company appointed two new directors. In August 2016, the sponsor of the Company
granted an option to each of the two new directors to acquire 12,000 shares of common stock at a price of $4.90 per share vested
immediately and exercisable commencing six months after closing of the initial Business Combination and expiring five years from
the closing of the initial Business Combination.
The
aforementioned warrants and options are deemed to be effective on February 6, 2018, the date of the consummation of its initial
business combination with China Sunlong, as the Company was deemed to be the accounting acquiree in the transaction and the transaction
was treated as a recapitalization of China Sunlong.
TMSR HOLDING COMPANY
LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
summary of warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercisable
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted/Acquired
|
|
|
10,500,000
|
|
|
|
5,250,000
|
|
|
$
|
5.75
|
|
|
|
4.41
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
September 30, 2018
|
|
|
10,500,000
|
|
|
|
5,250,000
|
|
|
$
|
5.75
|
|
|
|
4.41
|
|
The
summary of option activity is as follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Life
|
|
December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted/Acquired
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.41
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
September 30, 2018
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.41
|
|
Note
13 – Commitments and contingencies
Contingencies
The
Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although
the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will
have a material adverse impact on its financial position, results of operations or liquidity.
Lease
commitments
The
Company has entered into non-cancellable operating lease agreements for one office, one factory space and one dormitory space
for its employees. The office lease is expiring in December 2021 with a monthly rental rate of approximately $4,900. The factory
lease is expiring in December 2018 with a monthly rental rate of approximately $5,800. The dormitory lease expired in July 2017,
and was extended to December 2019, with a monthly rental rate of approximately $390. The office lease payments for the lease expiring
in December 2021 will be paid over three years beginning 2018.
The
Company’s commitments for minimum lease payment under these operating leases as of September 30, 2018 are as follow:
Years ending September 30,
|
|
Minimum lease payment
|
2019
|
|
$
|
114,478
|
|
2020
|
|
|
102,816
|
|
2021
|
|
|
101,657
|
|
Total minimum payments required
|
|
$
|
318,951
|
|
Rent
expense for the three months ended September 30, 2018 and 2017 were $24,395 and $44,399, respectively, and for the nine months
ended September 30, 2018 and 2017 were $117,723 and $135,444, respectively.