Quarterly Report (10-q)

Date : 08/14/2019 @ 4:23PM
Source : Edgar (US Regulatory)
Stock : TMSR Holding Company Ltd (TMSR)
Quote : 0.88  -0.0501 (-5.39%) @ 8:34PM
TMSR share price Chart

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 001-37513

 

TMSR HOLDING COMPANY LIMITED

(Exact name of registrant as specified in its charter)

 

N eva da   47-3709051
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification Number)

   

A101 Hanzheng Street City Industry Park,

No.21 Jiefang Avenue, Qiaokou District

Wuhan, Hubei, China

  430000
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: +86 022-5982-4800

 

Not applicable

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of August 14, 2019, there were 21,768,698 shares of the Company’s common stock issued and outstanding.

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001   TMSR   Nasdaq Capital Market
Warrants to purchase one-half of one share of Common Stock   TMSRW   OTC Pink

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page 
PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 1
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 48
     
ITEM 4. CONTROLS AND PROCEDURES 49
     
PART II. OTHER INFORMATION 50
     
ITEM 1. LEGAL PROCEEDINGS 50
     
ITEM 1A. RISK FACTORS 50
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 50
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 50
     
ITEM 4. MINE SAFETY DISCLOSURES 50
     
ITEM 5. OTHER INFORMATION 50
     
ITEM 6. EXHIBITS 50

 

i

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
ASSETS            
             
CURRENT ASSETS            
Cash and cash equivalents   $ 1,336,465     $ 726,737  
Notes receivable     884,180       251,513  
Accounts receivable, net     6,793,918       4,191,246  
Other receivables, net     465,877       265,833  
Other receivable - related party     -       40,707  
Inventories     1,338,979       1,965,433  
Prepayments     2,564,855       2,218,148  
Total current assets     13,384,274       9,659,617  
                 
PLANT AND EQUIPMENT, NET     5,592,067       5,761,332  
                 
RIGHT-OF-USE ASSETS     266,049       -  
                 
OTHER ASSETS                
Goodwill     14,365,992       14,339,050  
Intangible assets, net     2,688,458       2,790,095  
Other assets     4,370       97,020  
Deferred tax assets     214,377       205,863  
Total other assets     17,273,197       17,432,028  
                 
Total assets   $ 36,515,587     $ 32,852,977  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Short term loans - bank   $ 509,788     $ 508,832  
Third party loan     -       144,841  
Accounts payable     2,132,655       1,448,623  
Other payables and accrued liabilities     2,283,473       2,755,126  
Other payables - related parties     4,369,839       6,092,286  
Customer deposits     2,843,020       2,338,336  
Lease liabilities - current     128,351       -  
Taxes payable     432,744       55,749  
Total current liabilities     12,699,870       13,343,793  
                 
OTHER LIABILITIES                
Third party loan - noncurrent     145,654       145,381  
Lease liabilities - noncurrent     188,998       -  
Total other liabilities     334,652       145,381  
                 
Total liabilities     13,034,522       13,489,174  
                 
COMMITMENTS AND CONTINGENCIES                
                 
SHAREHOLDERS’ EQUITY                
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively     -       -  
Common stock, $0.0001 par value, 200,000,000 shares authorized, 21,768,698 and 19,895,935 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively*     2,177       1,990  
Additional paid-in capital     8,350,766       4,814,846  
Statutory reserves     -       -  
Retained earnings     15,896,220       15,267,660  
Accumulated other comprehensive loss     (768,098 )     (720,693 )
Total shareholders’ equity     23,481,065       19,363,803  
                 
Total liabilities and shareholders’ equity   $ 36,515,587     $ 32,852,977  

 

* Giving retroactive effect to the 2 for 1 split effected on June 20, 2018

1

 

 

TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

   

For the

Three Months Ended

June 30,

   

For the

Six Months Ended

June 30,

 
    2019     2018     2019     2018  
REVENUES                        
Equipment and systems   $ 2,971,542     $ 7,804,856     $ 2,971,542     $ 14,886,639  
Trading and others     473,468       413,895       639,297       829,995  
Coating and fuel materials     9,348,659       1,108,721       16,449,172       1,108,721  
TOTAL REVENUES     12,793,669       9,327,472       20,060,011       16,825,355  
                                 
COST OF REVENUES                                
Equipment and systems     1,208,838       6,618,791       1,208,838       13,062,476  
Trading and others     256,787       295,640       316,063       592,390  
Coating and fuel materials     9,036,575       669,067       15,978,210       669,067  
TOTAL COST OF REVENUES     10,502,200       7,583,498       17,503,111       14,323,933  
                                 
GROSS PROFIT     2,291,469       1,743,974       2,556,900       2,501,422  
                                 
OPERATING EXPENSES (INCOME)                                
Selling, general and administrative     317,130       902,869       1,410,933       1,830,919  
Provision for (recovery of) doubtful accounts     405,022       (1,452,118 )     289,873       (2,853,531 )
TOTAL OPERATING EXPENSES (INCOME)     722,152       (549,249 )     1,700,806       (1,022,612 )
                                 
INCOME FROM OPERATIONS     1,569,317       2,293,223       856,094       3,524,034  
                                 
OTHER INCOME (EXPENSE)                                
Interest income     175       752       869       919  
Interest expense     (9,764 )     (47,762 )     (17,606 )     (94,734 )
Other income (expense), net     (3,478 )     (25,314 )     36,275       20,219  
Total other income (expense), net     (13,067 )     (72,324 )     19,538       (73,596 )
                                 
INCOME BEFORE INCOME TAXES     1,556,250       2,220,899       875,632       3,450,438  
                                 
PROVISION FOR INCOME TAXES     196,244       376,005       247,072       681,930  
                                 
NET INCOME     1,360,006       1,844,894       628,560       2,768,508  
                                 
OTHER COMPREHENSIVE INCOME                                
Foreign currency translation adjustment     (558,490 )     (2,117,020 )     (47,405 )     (1,120,721 )
                                 
COMPREHENSIVE INCOME (LOSS)   $ 801,516     $ (272,126 )   $ 581,155     $ 1,647,787  
                                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                                
Basic and diluted*     21,735,542       23,634,847       20,867,311       22,248,187  
                                 
EARNINGS PER SHARE                                
Basic and diluted*   $ 0.06     $ 0.08     $ 0.03     $ 0.12  

 

* Giving retroactive effect to the 2 for 1 split effected on June 20, 2018

 

2

 

 

TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES

 

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

    For the Six Ended June  30, 2018  
    Preferred Stock     Common Stock     Additional     Retained Earnings     Accumulated
Other
       
    Shares     Amount     Shares     Amount     Paid-in
Capital
    Statutory
Reserves
    Unrestricted     Comprehensive
Income (Loss)
    Total  
BALANCE, January 1, 2018         -     $ -       17,990,856     $ 1,799     $ 10,591,492     $ 2,137,815     $ 13,817,668     $ 701,217     $ 27,249,991  
Reverse capitalization     -       -       4,758,774       476       7,453,773       -       -       -       7,454,249  
Net income     -       -       -       -       -       -       2,768,508       -       2,768,508  
Issuance of common stock for cash     -       -       26,693       3       133,332       -       -       -       133,335  
Issuance of common stock for acquisition     -       -       1,293,104       129       5,999,871       -       -       -       6,000,000  
Statutory reserve     -       -       -       -       -       124,370       (124,370 )     -       -  
Foreign currency translation     -       -       -       -       -       -       -       (1,120,721 )     (1,120,721 )
BALANCE, June 30, 2018 (Unaudited)     -     $ -       24,069,427     $ 2,407     $ 24,178,468     $ 2,262,185     $ 16,461,806     $ (419,504 )   $ 42,485,362  

 

    For the Six Ended June 30, 2019  
    Preferred Stock     Common Stock     Additional     Retained Earnings     Accumulated
Other
       
                            Paid-in     Statutory           Comprehensive        
    Shares     Amount     Shares     Amount     Capital     Reserves     Unrestricted     Income (Loss)     Total  
BALANCE, January 1, 2019     -       -       19,895,935       1,990       4,814,846       -       15,267,660       (720,693 )     19,363,803  
Net income     -       -       -       -       -       -       628,560       -       628,560  
Conversion of warrants into common stock     -       -       106,903       11       (11 )     -       -       -       -  
Issuance of common stock for debt settlement     -       -       131,330       13       261,334       -       -       -       261,347  
Issuance of common stock for debt settlement     -       -       142,530       14       290,747       -       -       -       290,761  
Issuance of common stock for cash     -       -       1,492,000       149       2,983,850       -       -       -       2,983,999  
Foreign currency translation     -       -       -       -       -       -       -       (47,405 )     (47,405 )
BALANCE, June 30, 2019 (Unaudited)     -     $ -       21,768,698     $ 2,177     $ 8,350,766     $ -     $ 15,896,220     $ (768,098 )   $ 23,481,065  

 

3

 

 

TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the
Six Months Ended
June 30,
 
    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income   $ 628,560     $ 2,768,508  
Adjustments to reconcile net income to net cash used in operating activities:                
Depreciation of plant and equipment     198,570       140,523  
Amortization of intangible assets     108,082       145,146  
Recovery of doubtful accounts     -       (2,851,868 )
Amortization of right-of-use assets     -       -  
Deferred tax provision     (8,229 )     428,571  
Loss on deconsolidation of subsidiaries             14,874  
Change in operating assets and liabilities                
Notes receivable     (640,167 )     (158,553 )
Accounts receivables     (2,627,521 )     (2,245,400 )
Accounts receivable - related party, net     -       3,100,658  
Other receivables     (202,197 )     5,072  
Other receivable - related party     41,297       -  
Inventories     638,092       7,197,995  
Prepayments     (346,858 )     (12,500,695 )
Deferred revenue     -       402,008  
Accounts payable     648,537       (103,399 )
Other payables and accrued liabilities     (1,764,652 )     308,333  
Customer deposits     506,600       (1,205,476 )
Lease liabilities     51,948       -  
Taxes payable     475,649       3,667,694  
Net cash used in operating activities     (2,292,289 )     (886,009 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Cash (disposed from deconsolidation) received from acquisition of TJComex International Group Corp.     -       (10,070 )
Cash received from JM Global Holding Company through reverse capitalization     -       7,987,474  
Cash payment for acquisition of Wuhan HOST Coating Materials Co. Ltd., net     -       (4,924,973 )
Purchase of equipment     (16,796 )     (328 )
Net cash (used in) provided by investing activities     (16,796 )     3,052,103  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from issuance of common stock     2,984,000       133,335  
Proceeds from third party loan     -       20,554  
(Repayments of) proceeds from other payable - related parties     -       1,414,135  
Net cash  provided by financing activities     2,984,000       1,568,024  
                 
EFFECT OF EXCHANGE RATE ON CASH     (65,187 )     (93,784 )
                 
INCREASE IN CASH     609,728       3,640,334  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     726,737       461,883  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 1,336,465     $ 4,102,217  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:                
Cash paid for income tax   $ -     $ 78,492  
Cash paid for interest   $ 17,606     $ 87,499  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES                
Issuance of common stock for warrants conversion   $ 11     $ -  
Issuance of common stock for debts settlement   $ 552,108     $ -  
Reverse capitalization with JM Global Holding Company   $ -     $ 7,454,249  
Issuance of common stock for the acquisition of Wuhan HOST Coating Materials Co. Ltd.   $ -     $ 6,000,000  
Initial recognition of right-of-use assets and lease liabilities   $ 317,349     $ -  

 

4

 

  

TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES

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. The financial statements of China Sunlong prior to February 6, 2018 are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements of JM Global.

 

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.

 

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.

 

5

 

 

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 consolidated financial statements for the period ending December 31, 2018. As TJComex BVI 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 BVI 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 Shengrong WFOE did not provide any cash contribution to Fujian Shengrong or technology services, the investment balance under the cost method investment on March 31, 2019 is $0.

 

6

 

 

On November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the Purchase Agreement, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide Shengrong WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018. Starting on November 30, 2018, the Company’s business activities added coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap, of which business activities are carried out in Nantong, Jiang Su Province, PRC.

 

On December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the “Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, this restructuring did not constitute a strategic shift that will have a major effect on the Company’s operations and financial results. Therefore, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

7

 

 

The accompanying consolidated financial statements reflect the activities of TMSR 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

Purchase and sales of high efficiency permanent magnetic separator and comprehensive utilization system

Trading of processed industrial waste materials

   
Hubei Shengrong 2  

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.

Trading of processed industrial waste materials

   
Wuhan HOST  

A PRC limited liability company

Incorporated on October 27, 2010

Registered capital of USD 750,075 (RMB 5,000,000), fully funded

  100% owned by Shengrong WFOE
    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

   
    No operations and no capital contribution has been made as of December 31, 2018   80% owned by Wuhan HOST
           
Wuhan HOST Coating Materials Xiaogan Co., Ltd. (“Xiaogan HOST”)  

 

A PRC limited liability company

Incorporated on December 25, 2018

Registered capital of USD 11,595,379 (RMB 80,000,000), to be fully funded by December 2028

No operations and no capital contribution has been made as of December 31, 2018

  90% owned by Wuhan HOST
Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”)  

● 

A PRC limited liability company

Incorporated on May 20, 2009

Registered capital of USD 3,171,655 (RMB 20,180,000), fully funded

Coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap

  VIE of Shengrong WFOE
TJComex BVI 1  

A British Virgin Island company

Incorporated on March 8, 2016 

  100% owned by China Sunlong
TJComex HK 1  

A Hong Kong company

Incorporated on March 19, 2014 

  100% owned by TJComex BVI
TJComex WFOE 1   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 1  

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

   

 

1 Disposed on April 2, 2018
2 Disposed on December 27, 2018

 

8

 

 

Contractual Arrangements

 

Rong Hai is controlled through contractual agreements in lieu of direct equity ownership by the Company or any of its subsidiaries. Such contractual arrangements consist of a series of five agreements, consulting services agreement, equity pledge agreement, call option agreement, voting rights proxy agreement, and operating agreement (collectively the “Contractual Arrangements”, which were signed on November 30, 2018).

 

Material terms of each of the Rong Hai VIE Agreements are described below:

 

Consulting Services Agreement   

 

Pursuant to the consulting services agreement between Rong Hai and Shengrong WFOE dated November 30, 2018, Shengrong WFOE has the exclusive right to provide consulting services to Rong Hai relating to Rong Hai’s business, including but not limited to business consulting services, human resources development, and business development. Shengrong WFOE exclusively owns any intellectual property rights arising from the performance of this agreement. Shengrong WFOE has the right to determine the service fees based on Rong Hai’s actual operation on a quarterly basis.

 

This consulting services agreement shall take effect on the date of execution of this consulting services agreement and this consulting services agreement shall be in full force and effective until Rong Hai’s valid operation term expires. Shengrong WFOE may, at its discretion, decide to renew or terminate this consulting services agreement. 

 

Equity Pledge Agreement.     

 

Under the equity pledge agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, the shareholders pledged all of their equity interests in Rong Hai to Shengrong WFOE to guarantee Rong Hai’s performance of relevant obligations and indebtedness under the consulting services agreement. In addition, the shareholders of Rong Hai have completed the registration of the equity pledge under the agreement with the competent local authority. If Rong Hai breaches its obligation under the consulting services agreement, Shengrong WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.

 

This equity pledge agreement shall take effect on the date of execution of this equity pledge agreement and this equity pledge agreement shall be in full force and effective until Rong Hai and Shengrong WFOE’s satisfaction of all contractual obligations and settlement of all secured indebtedness. Upon Shengrong WFOE’s request, Rong Hai shall extend its operation period to sustain the effectiveness of this equity pledge agreement.

 

Call Option Agreement     

 

Under the call option agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, each of the shareholders of Rong Hai irrevocably granted to WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his equity interests in Rong Hai. Also, Shengrong WFOE or its designee has the right to acquire any and all of its assets of Rong Hai. Without Shengrong WFOE’s prior written consent, Rong Hai’s shareholders cannot transfer their equity interests in Rong Hai, and Rong Hai cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option.

 

This call option agreement shall take effect on the date of execution of this call option agreement. Rong Hai and Shengrong WFOE shall not terminate this call option agreement under any circumstances for any reason unless it is early terminated by Shengrong WFOE or by the requirements under the applicable laws. This call option agreement shall be terminated provided that all equity interest or assets under this option is transferred to Shengrong WFOE or its designee.

 

Voting Rights Proxy Agreement     

 

Under the voting rights proxy agreement among Shengrong WFOE and the shareholders of Rong Hai dated November 30, 2018, each shareholder of Rong Hai irrevocably appointed Shengrong WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of his equity interests in Rong Hai, including but limited to the power to vote on its behalf on all matters of Rong Hai requiring shareholder approval in accordance with the articles of association of Rong Hai.

 

9

 

 

The voting rights proxy agreement shall take effect on the date of execution of this voting rights proxy agreement and remain in effect indefinitely for the maximum period of time permitted by law in consideration of Shengrong WFOE.

 

Operating Agreement     

 

Pursuant to the operating agreement among Shengrong WFOE, Rong Hai and the shareholders of Rong Hai dated November 30, 2018, Rong Hai and the shareholders of Rong Hai agreed not to enter into any transaction that could materially affect Rong Hai’s assets, obligations, rights or operations without prior written consent from Shengrong WFOE, including but not limited to the amendment of the articles of association of Rong Hai. Rong Hai and its shareholders agree to accept and follow our corporate policies provided by Shengrong WFOE in connection with Rong Hai’s daily operations, financial management and the employment and dismissal of Rong Hai’s employees. Rong Hai agreed that it should seek guarantee from Shengrong WFOE first if any guarantee is needed for Rong Hai’s performance of any contract or loan in the course of its business operation.

 

This operating agreement shall take effect on the date of execution of this operating agreement and this operating agreement shall be in full force and effective until Rong Hai’s valid operation term expires. Either party of Shengrong WFOE and Rong Hai shall complete approval or registration procedures for the extension of its business term three months prior to the expiration of its business term, for the purpose of the maintenance of the effectiveness of this operating agreement. 

 

All the Rong Hai VIE Agreements became effective immediately upon their execution.

 

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”). These unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Certain disclosures included in the annual financial statements have been condensed or omitted from these financial statements as they are not required for interim financial statements under U.S. GAAP and the rules of the Securities and Exchange Commission. 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 annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1, 2019.

 

Principles of consolidation

 

The unaudited condensed financial statements of the Company include the accounts of TMSR and its wholly owned subsidiaries and VIE. All intercompany transactions and balances are eliminated upon consolidation.

 

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, deferred revenues and plant and equipment, impairment of long-lived assets, collectability of receivables, inventory valuation allowance, present value of lease liabilities 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.

 

10

 

 

Translation adjustments included in accumulated other comprehensive loss amounted to $768,098 and $720,693 as of June 30, 2019 and December 31, 2018, respectively. The balance sheet amounts, with the exception of shareholders’ equity at June 30, 2019 and December 31, 2018 were translated at 6.87 RMB and 6.88 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 six months ended June 30, 2019 and 2018 were 6.78 RMB and 6.37 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 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

 

Accounts receivable 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. As of June 30, 2019 and December 31, 2018, $776,445 and $732,846 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 Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. 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 June 30, 2019 and December 31, 2018, 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.

  

Plant and equipment, net

 

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 %

 

11

 

 

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 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.

 

Right-of-use assets and lease liabilities

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The impact of the adoption on January 1, 2019 increased the right-of-use assets and lease liabilities by approximately $317,000.

 

Intangible assets, net

 

Intangible assets represent land use rights and patents, 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. 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 and patents, 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

 

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. As of June 30, 2019 and December 31, 2018, no impairment of goodwill was recognized.

 

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 June 30, 2019 and December 31, 2018, no impairment of long-lived assets was recognized.

 

12

 

 

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 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 Shengrong WFOE, 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.

 

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.

 

13

 

 

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, revenue from coating and fuel materials, 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 under the new five-step model. 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 six months ended June 30, 2019, 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 statements of income and comprehensive income.

 

Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

 

The Company’s disaggregate revenue streams are summarized as follows:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2019     2018     2019     2018  
Revenues – Equipment and systems   $ 2,971,542     $ 7,804,856     $ 2,971,542     $ 14,886,639  
Revenues – Trading and others     473,468       413,895       639,297       829,995  
Revenues –Coating and fuel materials     9,348,659       1,108,721       16,449,172       1,108,721  
Total revenues   $ 12,793,669     $ 9,327,472     $ 20,060,011     $ 16,825,355  

 

14

 

 

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.

 

Research and Development (“R&D”) Expenses

 

Research and development expenses include salaries and other compensation-related expenses paid to the Company’s research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the selling, general and administrative expenses and totaled $219,675 and $129,821 for the six months ended June 30, 2019 and 2018, respectively.

 

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 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 six months ended June 30, 2019 and 2018. As of June 30, 2019, the Company’s PRC tax returns filed for 2015, 2016 and 2017 remain subject to examination by any applicable tax authorities.

 

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. 9,079,348 and 10,500,000 of outstanding warrants which is equivalent to convertible of 4,539,674 and 5,250,000 common shares were excluded from the diluted earnings per share calculation due to its antidilutive effect for the six months ended June 30, 2019 and 2018, respectively. 824,000 of outstanding options were excluded from the diluted earnings per share calculation due to its antidilutive effect for the six months ended June 30, 2019 and 2018.

 

15

 

 

Recently issued accounting pronouncements

 

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.

 

Note 3 – Business combination and restructuring

 

TJ Comex BVI

 

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 consolidated financial statements for the year ended December 31, 2018. As TJComex BVI 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 BVI 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.

 

16

 

 

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.

 

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  

 

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.

 

Rong Hai

 

On November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which Shengrong WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018.

 

17

 

 

The Company’s acquisition of Rong Hai was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of Rong Hai 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 Rong Hai based on a valuation performed by an independent valuation firm engaged by the Company:

 

Total consideration at fair value   $ 9,260,000  

 

    Fair Value  
Cash   $ 717,056  
Other current assets     5,980,230  
Plant and equipment     28,875  
Other noncurrent assets     116,655  
Goodwill     7,307,470  
Total asset     14,150,286  
Total liabilities     (4,890,286 )
Net asset acquired   $ 9,260,000  

 

Approximately $7.3 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of the Company and Rong Hai. None of the goodwill is expected to be deductible for income tax purposes.

 

Hubei Shengrong

 

On December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the “Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the planning mandates of Wuhan Municipal Government 2018 which manufactures should move away from city’s downtown area. Therefore, due to the policy change, Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

18

 

 

Hopeway is jointly owned by Ms. Jiazhen Li, the Company’s chief executive officer, and Mr. Xiaonian Zhang, the Company’s president and director. As Hopeway is a related party under common control with the Company under Ms. Li and Mr. Zhang, no gain or loss are recognized in this disposition and the net consideration of the transaction are recognized as addition to capital as opposed to a gain. Total fair value of the consideration of the cancelled 8,523,320 shares of common stock was determined by using the average closing stock price of the Company held by Hopeway during the period from February 6, 2018 to December 27, 2018 at $3.56 per share.

 

As of December 27, 2018, the net assets of Hubei Shengrong and reconciliation of reduction of capital are as follows:

 

    December 27, 2018  
CURRENT ASSETS      
Cash and cash equivalents   $ 47,994  
Accounts receivable, net     9,410,436  
Accounts receivable - related party, net     761,794  
Other receivables     48,718  
Other receivable - related party     2,158  
Inventories     5,332,990  
Prepayments     31,793,810  
Total current assets     47,397,900  
         
PLANT AND EQUIPMENT, NET     203,992  
         
OTHER ASSETS        
Other assets     7,269  
Deferred tax assets     780,550  
Total other assets     787,819  
         
Total assets   $ 48,389,711  
         
CURRENT LIABILITIES        
Short term loans - bank   $ 2,180,708  
Accounts payable     95,854  
Other payables and accrued liabilities     156,498  
Other payables - related parties     507,183  
Customer deposits     347,853  
Taxes payable     16,602,841  
Total current liabilities     19,890,937  
         
OTHER LIABILITIES        
Deferred rent liabilities     30,763  
Total other liabilities     30,763  
         
Total liabilities   $ 19,921,700  
         
Total net assets   $ 28,468,011  
Total consideration     (30,362,135 )
Currency translation adjustment     900,281  
Total addition to paid-in-capital   $ 993,843  

 

19

 

 

Note 4 – Variable interest entity

 

On November 30, 2018, Shengrong WFOE entered into Contractual Arrangements with Rong Hai and its shareholders upon executing of the “Purchase Agreement”. The significant terms of these Contractual Arrangements are summarized in “Note 1 - Nature of business and organization” above. As a result, the Company classifies Rong Hai as VIE.

 

A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. Shengrong WFOE is deemed to have a controlling financial interest and be the primary beneficiary of Rong Hai because it has both of the following characteristics:

 

(1) The power to direct activities at Hong Hai that most significantly impact such entity’s economic performance, and

 

(2) The obligation to absorb losses of, and the right to receive benefits from Hong Hai that could potentially be significant to such entity.

 

Accordingly, the accounts of Hong Hai are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s consolidated financial statements beginning on November 30, 2018.

 

The carrying amount of the VIE’s assets and liabilities are as follows: 

 

    June 30,     December 31,  
    2019     2018  
             
Current assets   $ 7,674,358     $ 6,321,261  
Property, plants and equipment     22,106       27,693  
Other noncurrent assets     231,567       118,020  
Goodwill     7,406,882       7,392,991  
Total assets     15,334,913       13,859,965  
                 
Current liabilities     5,452,842       4,188,340  
Non-current liabilities     91,704       -  
Total liabilities     5,544,546       4,188,340  
Net assets   $ 9,790,367     $ 9,671,625  

 

    June 30,     December 31,  
    2019     2018  
             
Short-term loan   $ 509,788     $ 508,832  
Accounts payable     499,079       821,289  
Other payables and accrued liabilities     720,207       559,984  
Other payables – related party     3,666,599       2,285,701  
Tax payables     26,683       12,534  
Lease liabilities     30,486       -  
Total current liabilities     5,452,842       4,188,340  
Lease liabilities - noncurrent     91,704       -  
Total liabilities   $ 5,544,546     $ 4,188,340  

 

20

 

 

The summarized operating results of the VIE’s are as follows:

 

   

For the

six months ended

June 30,

 
    2019  
       
Operating revenues   $ 12,924,550  
Gross profit     323,172  
Income from operations     144,072  
Net income   $ 101,833  

 

Note 5 – Accounts receivable, net

 

Accounts receivable consist of the following:

 

    June 30,
2019
    December 31,
2018
 
             
Accounts receivable   $ 7,570,363     $ 4,924,092  
Less: Allowance for doubtful accounts     (776,445 )     (732,846 )
Total accounts receivable, net   $ 6,793,918     $ 4,191,246  

 

Movement of allowance for doubtful accounts is as follows:

 

    June 30,
2019
    December 31,
2018
 
             
Beginning balance   $ 732,846     $ 6,674,834  
Beginning balance from Wuhan HOST     -       218,152  
Beginning balance from Rong Hai     -       469,000  
Depositing ending balance of Hubei Shengrong     -       (5,203,666 )
Addition     42,755       411,261  
Recovery     -       (1,020,125 )
Exchange rate effect     844       (816,610 )
Ending balance   $ 776,445     $ 732,846  

 

Note 6 – Inventories

 

Inventories consist of the following:

 

    June 30,
2019
    December 31,
2018
 
             
Raw materials   $ 338,089     $ 1,965,175  
Work in progress     1,000,890       258  
Total inventories   $ 1,338,979     $ 1,965,433  

 

21

 

 

Note 7 – Plant and equipment, net

 

Plant and equipment consist of the following:

 

    June 30,
2019
    December 31, 2018  
             
Building   $ 5,636,641     $ 5,626,071  
Production equipment     973,226       954,845  
Office equipment and furniture     59,214       59,102  
Automobile     209,450       209,057  
Subtotal     6,878,531       6,849,075  
Less: accumulated depreciation and amortization     (1,286,464 )     (1,087,743 )
Total   $ 5,592,067     $ 5,761,332  

 

Depreciation expense for the six months ended June 30, 2019 and 2018 amounted to $ 198,570 and $51,133, respectively.

 

Note 8 – Intangible assets, net

 

Intangible assets consist of the following:

 

    June 30,
2019
    December 31, 2018  
             
Land use rights   $ 1,483,914     $ 1,481,130  
Patents     3,623,777       3,616,981  
Software     10,243       10,224  
Less: accumulated amortization     (2,429,476 )     (2,318,240 )
Net intangible assets   $ 2,688,458     $ 2,790,095  

 

Amortization expense for the three months ended June 30, 2019 and 2018 amounted to $ 108,082 and $68,724, respectively.

 

The Company has one patent that expires in 2019.  In the event that the Company is unable to renew the patent, its’ future results of operations may be materially adversely affected.

 

The estimated amortization is as follows:

 

Twelve months ending June 30,   Estimated
amortization expense
 
       
2020   $ 176,169  
2021     173,292  
2022     173,118  
2023     173,118  
2024     172,717  
Thereafter     1,820,044  
Total   $ 2,688,458  

 

22

 

 

Note 9 – Goodwill

 

The changes in the carrying amount of goodwill by business units are as follows

 

    Wuhan HOST     Rong Hai     Total  
Balance as of December 31, 2018   $ 6,946,059     $ 7,392,991     $ 14,339,050  
Foreign currency translation adjustment     13,051       13,891       26,942  
Balance as of June 30, 2019   $ 6,959,110     $ 7,406,882     $ 14,365,992  

 

Note 10 – Related party balances and transactions

 

Related party balances

 

  a. Other receivable – related party:

 

Name of related party   Relationship  

June 30,

2019

    December 31,
2018
 
                     
Xiaonian Zhang   Shareholder of the Company   $ -     $ 40,707  

 

The Company advanced funds to the related party for daily operating purposes.

 

  b. Other payables – related parties:

 

Name of related party   Relationship   June 30,
2019
    December 31,
2018
 
                 
Jiazhen Li   CEO, Former Co-Chairman   $ 39,091     $ 11,232  
Chuanliu Ni   Co-Chairman     325,907       325,907  
Xiaoyan Shen   CFO             -  
Zhong Hui Holding Limited   Shareholder of the Company     140,500       140,500  
Chunyong Zheng   Spouse of shareholder of the Company     2,548,430       2,543,651  
Long Liao   Shareholder of the Company     72,827       72,690  
Wuhan Modern   Under common control of shareholder of the Company     495,464       712,605  
Qihai Wang   Shareholder of the Company     457,735       1,941,957  
Jirong Huang   Spouse of shareholder of the Company     22,838       77,197  
Yongzheng Wang   Son of shareholder of the Company     23,852       23,808  
Nantong Ronghai Logistics Co., Ltd.   Under common control of shareholder of the Company     243,195       242,739  
Total       $ 4,369,839     $ 6,092,286  

 

The above payables represent interest free loans and advances. These loans and advances are unsecured and due on demand.

 

23

 

 

Note 11 – Debt

 

Short term loan

 

Short term loan due to bank is as follows:

 

Short term loans   Maturities     Weighted average interest rate     Collateral/Guarantee  

June 30,

2019

    December 31, 2018  
Loan from Bank of Jiangsu     September 25, 2019       6.31 %   Guaranteed by Qihai Wang’s personal property   $ 509,788       508,832  

 

Third party loan

 

In January 2018, the Company obtained an unsecured loan from an unrelated third party in the amount of $144,841 (RMB 1,000,000) due on August 21, 2020 with no interest. On March 11, 2019, the Board granted an aggregate of 72,785 shares of restricted common stock, with a fair value of $144,841, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to this unrelated third party.

 

Interest expense for the three months ended June 30, 2019 and 2018 amounted to $9,764 and $47,762, respectively, and for the six months ended June 30, 2019 and 2018 amounted to $ 17,606 and $94,734, respectively.

 

Note 12 – 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’s U.S. net operating loss for the six months ended June 30, 2019 amounted to approximately $651,000. As of June 30, 2019, TMSR’s net operating loss carry forward for United States income taxes was approximately $700,000. 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 six months ended June 30, 2019 and 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.

 

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 is 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 is 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 is exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

24

 

 

PRC

 

Shengrong WFOE, Wuhan HOST and Rong Hai 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
June 30,
2019
    For the
three months ended
June 30,
2018
 
             
Current   $ 234,473     $ 157,896  
Deferred     (38,229 )     218,109  
Total provision for income taxes   $ 196,244     $ 376,005  

 

    For the
six months ended
June 30,
2019
    For the
six months ended
June 30,
2018
 
             
Current   $ 255,301     $ 253,359  
Deferred     (8,229 )     428,571  
Total provision for income taxes   $ 247,072     $ 681,930  

 

Under the Income Tax Laws of the PRC, companies are subject to income tax at a rate of 25%. However, Wuhan Host 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 $15,790 and $102,161 for the three months ended June 30, 2019 and 2018, respectively, and amounted to $18,822 and $165,803 for the six months ended June 30, 2019 and 2018, respectively.  Tax savings resulted from the reduced statutory income tax rate that increased the Company’s earnings per share by $0.00 and $0.00 for the three months ended June 30, 2019 and 2018, respectively, and increased the Company’s earnings per share by $0.00 and $0.01 for the six months ended June 30, 2019 and 2018, respectively.

 

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:

 

    June 30,
2019
    December 31,
2018
 
             
Net operating losses carried forward – U.S.   $ 147,096     $ 10,396  
Net operating losses carried forward – PRC     -       -  
Bad debt allowance     214,377       205,863  
Valuation allowance     (147,096 )     (10,396 )
Deferred tax assets, net   $ 214,377     $ 205,863  

 

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. The VAT standard rates changed to 6% to 13% of the gross sales prices starting in April 2019. 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.

 

25

 

 

Taxes payable consisted of the following:

 

    June 30,
2019
    December 31,
2018
 
             
VAT taxes payable   $ 212,360     $ 24,436  
Income taxes payable     219,453       13,114  
Other taxes payable     931       18,199  
Total   $ 432,744     $ 55,749  

 

Note 13 – Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the package of practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The impact of the adoption on January 1, 2019 increased the right-of-uses and lease liabilities by approximately $310,000.

 

The Company had an office lease agreement with a 5-year lease term starting in December 2016 until December 2021 and another office lease agreement with a 5-year lease term starting in January 2018 until January 2023. Upon adoption of ASU 2016-02, the Company recognized lease labilities of approximately $310,000, with corresponding Right-of-use (“ROU”) assets of the same amount based on the present value of the future minimum rental payments of the new lease, using an effective interest rate of 4.75%, which is determined using an incremental borrowing rate.

 

The weighted average remaining lease term of its existing leases is 3.22 years.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

For the three months ended June 30, 2019 and 2018, rent expenses amounted to $ 24,941 and $ 46,510, respectively.

 

For the six months ended June 30, 2019 and 2018, rent expenses amounted to $51,948 and $ 93,328, respectively.

 

The five-year maturity of the Company’s lease obligations is presented below:

 

Twelve months ended June 30,   Operating lease amount  
2020   $ 128,252  
2021     102,601  
2022     79,354  
2023     24,645  
Total lease payments     334,852  
Less: interest     (17,503 )
Present value of lease liabilities   $ 317,349  

 

26

 

 

Note 14 – 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 June 30, 2019 and December 31, 2018, no cash were deposited with various financial institutions located in the U.S. As of June 30, 2019 and December 31, 2018, $1,328,059 and $680,709 and were deposited with various financial institutions located in the PRC, respectively. As of June 30, 2019 and December 31, 2018, $447 and $7,823 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.

 

Customer and vendor concentration risk

        

For the three months ended June 30, 2019, three customers accounted for 22.2%, 21.8% and 20.0% of the Company’s revenues. For the three months ended June 30, 2018, one customer accounted for 80.5% of the Company’s revenues.

 

For the six months ended June 30, 2019, four customers accounted for 15.0%, 14.3%,14.1% and 12.9% of the Company’s revenues. For the six months ended June 30, 2018, three customers accounted for 44.5%, 29.2% and 11.8% of the Company’s revenues.

 

As of June 30, 2019, two customer accounted for 42.1% and 15.7% of the Company’s accounts receivable; and four customer accounted for 20.7%,17.7%,17.1% and 15.5% of the Company’s Customer Advances. As of December 31, 2018, two customers accounted for 41.1% and 13.4% of the Company’s accounts receivable.

 

For the three months ended June 30, 2019, two suppliers accounted for 26.7% and 13.2% of the Company’s total purchases. For the three months ended June 30, 2018, one supplier accounted for 67.5% of the Company’s total purchases.

 

For the six months ended June 30, 2019, three suppliers accounted for 32.5%, 11.9% and 11.1% of the Company’s total purchases. For the six months ended June 30, 2018, two suppliers accounted for 64.4% and 10.2% of the Company’s total purchases.

 

As of June 30, 2019, three suppliers accounted for 39.6%, 18.7% and 12.4% of the Company’s prepayments; and three suppliers accounted for 28.1%, 21.5% and 16.7% of the Company’s total accounts payable. As of December 31, 2018, three suppliers accounted for 44.2%, 15.5% and 13.9% of the Company’s total prepayments; and four suppliers accounted for 27.4%, 26.5%, 12.5% and 11.9% of the Company’s total accounts payable.

 

Note 15 – 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, Wuhan HOST, Rong Hai 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. Wuhan HOST and Rong Hai 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 June 30, 2019 and December 31, 2018, Shengrong WFOE, Wuhan HOST, and Rong Hai, collectively attributed $0 of retained earnings for their statutory reserves as they have accumulated losses.

 

As a result of the foregoing restrictions, Shengrong WFOE, Wuhan Host and Rong Hai 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, Wuhan Host and Rong Hai from transferring funds to China Sunlong in the form of dividends, loans and advances. As of June 30, 2019 and December 31, 2018, amounts restricted are the net assets of Shengrong WFOE, Wuhan Host and Rong Hai which amounted to $3,148,877 and $2,347,967, 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 consolidated financial statements have been retroactively restated to reflect the stock split.

 

27

 

 

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.

 

On February 12, 2019, the Company’s warrant holders converted 294,971 of the Company’s warrants into 52,077 shares of the Company’s common stock using cashless exercises method.

 

On February 20, 2019, the Company’s warrant holders converted 415,355 of the Company’s warrants into 54,826 shares of the Company’s common stock using cashless exercises method.

 

On March 11, 2019, the Board granted an aggregate of 131,330 shares of restricted common stock, with a fair value of $261,347, determined using the closing price of $1.99 on March 11, 2019, to repay the debt the Company owed to two unrelated third parties. As the carrying value of the debt equaled to the fair value of the 131,330 common shares at $1.99 per share, no gain or loss were recognized upon this debt settlement.

 

On March 15, 2019, the Board granted an aggregate of 142,530 shares of restricted common stock, with a fair value of $290,761, determined using the closing price of $2.04 on March 15, 2019, to repay the debt the Company owed to one unrelated third party. As the carrying value of the debt equaled to the fair value of the 142,530 common shares at $2.04 per share, no gain or loss were recognized upon this debt settlement.

 

On April 4, 2019, the Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the Securities Act of 1933, as amended pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million. 

 

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.

 

28

 

 

The summary of warrant activity is as follows:

 

          Exercisable
Into
    Weighted     Average Remaining  
    Warrants     Number of     Average     Contractual  
    Outstanding     Shares     Exercise Price     Life  
December 31, 2018     10,500,000       5,250,000     $ 5.75       4.41  
Granted/Acquired     -       -     $ -       -  
Forfeited     -       -     $ -       -  
Exercised     (1,420,652 )     (710,326 )   $ -       -  
June 30, 2019     9,079,348       4,539,674     $ 5.75       3.66  

 

The summary of option activity is as follows:

 

                Average  
          Weighted     Remaining  
    Options     Average     Contractual  
    Outstanding     Exercise Price     Life  
December 31, 2018     824,000     $ 5.00       4.41  
Granted/Acquired     -     $ -       -  
Forfeited     -     $ -       -  
Exercised     -     $ -       -  
June 30, 2019     824,000     $ 5.00       3.66  

 

Note 16 – 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.

 

On February 27, 2013, Wuhan HOST entered into a contract to purchase land use rights for a parcel of land in E Zhou City, Hubei, China, for $1,212,478.  The Company has paid to the local government $781,349, a balance of $431,129 has not been paid; however, the government has already issued to the Company all the necessary certificates transferring title of the land use rights for the parcel of land to the Company, and has not taken action to collect any remaining unpaid balance.  If the government determines that it wishes to collect an unpaid balance, the total cost to the Company would be $431,129.

 

Note 17 – Segment reporting

 

The Company follows ASC 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance. The Company’s chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being income from operations of the four operating entities: Shengrong China, Wuhan Host, Rong Hai, and TJComex Tianjin. TJComex Tianjin was disposed in April 2018.

 

The Company’s operations currently encompass three business segments. The Company also has a separate business segments prior to April 2018. Such reportable segments are consistent with the way the Company manages its business, with each segment operating under separate management and producing discrete financial information. The accounting principles applied at the operating division level in determining income from operations is generally the same as those applied at the unaudited condensed consolidated financial statement level. 

 

The operation and products of the three existing segments and one disposed segment are as follow:

 

  1. Hubei Shengrong and Shengrong WFOE: sale of solid waste recycling and comprehensive utilization equipment and trading of processed industrial waste materials; and

 

  2. Wuhan HOST: research, development, production and sale of coating materials; and

 

  3. Rong Hai: Coal wholesales and sale of coke, steels, construction materials, mechanical equipment and steel scrap.
     
  4. TJComex Tianjin: General merchandise trading business and related consulting services (disposed in April 2018).

 

29

 

 

The following represents results of divisional operations :

 

    For the Three Months ended     For the Six Months ended  
    June 30,     June 30,  
    2019     2018     2019     2018  
Revenues:                        
Hubei Shengrong and Shengrong WFOE   $ 2,971,542     $ 8,218,748     $ 2,971,542     $ 15,715,981  
Wuhan HOST     1,930,362       1,108,721       4,163,919       1,108,721  
Rong Hai     7,891,765       -       12,924,550          
TJComex Tianjin     -       3               653  
Consolidated revenues   $ 12,793,669     $ 9,327,472     $ 20,060,011     $ 16,825,355  
                                 
Gross profit:                                
Hubei Shengrong and Shengrong WFOE   $ 1,762,704       1,304,317     $ 1,762,704       2,061,115  
Wuhan HOST     304,279       439,654       471,024       439,654  
Rong Hai     224,487       -       323,172          
TJComex Tianjin     -       3               653  
Consolidated gross profit   $ 2,291,470     $ 1,743,974     $ 2,556,900     $ 2,501,422  
                                 
Income (loss) from operations:                                
Hubei Shengrong and Shengrong WFOE   $ 1,666,289     $ 2,005,096     $ 1,337,086     $ 3,353,863.00  
Wuhan HOST     55,874       277,128       21,480       277,127.60  
Rong Hai     (45,129 )     -       144,072          
TJComex Tianjin     -       74,275               (38,340 )
TMSR, China Sunlong, Shengrong BVI and Shengrong HK     (88,179 )     (136,872 )     (627,006 )     (142,213.00 )
Consolidated (loss) income from operations   $ 1,588,855     $ 2,219,627     $ 875,632     $ 3,450,438  
                                 
Net income (loss):                                
Hubei Shengrong and Shengrong WFOE   $ 1,441,991     $ 1,658,504     $ 1,136,388     $ 2,700,216.00  
Wuhan HOST     38,035       248,845       17,345       248,844.60  
Rong Hai     (31,837 )     -       101,833          
TJComex Tianjin     -       74,386               (38,339.60 )
TMSR, China Sunlong, Shengrong BVI and Shengrong HK     (88,183 )     (136,841 )     (627,006 )     (142,213.00 )
Consolidated net (loss) income   $ 1,360,006     $ 1,844,894     $ 628,560     $ 2,768,508  
                                 
Depreciation and amortization:                                
Hubei Shengrong and Shengrong WFOE   $ 20,501     $ 90,783     $ 85,255     $ 181,566  
Wuhan HOST     144,215       45,955       215,686       45,955  
Rong Hai     2,842       -       5,711          
TJComex Tianjin     -       29,074               58,148  
Consolidated depreciation and amortization   $ 167,558     $ 165,812     $ 306,652     $ 285,669  
                                 
Interest expense:                                
Hubei Shengrong and Shengrong WFOE   $ -     $ 40,527     $     $ 87,499  
Rong Hai     9,764       -       17,606          
Consolidated interest expense   $ 9,764     $ 40,527     $ 17,606     $ 87,499  
                                 
Capital expenditures:                                
Wuhan HOST   $ (80 )   $ 328     $ 16,796     $ 328  
Consolidated capital expenditures   $ (80 )   $ 328.00     $ 16,796     $ 328  

 

30

 

 

The following represents assets by division as of:

 

Total assets as of   June 30,
2019
    December 31,
2018
 
Hubei Shengrong and Shengrong WFOE   $ 4,638,158     $ 2,301,663  
Wuhan HOST     17,218,077       16,612,376  
Rong Hai     14,587,754       13,859,965  
TJComex Tianjin     -       -  
TMSR, China Sunlong, Shengrong BVI and Shengrong HK     71,598       78,973  
Total Assets   $ 36,515,587     $ 32,852,977  

 

Note 18 – Subsequent events

 

The Company has analyzed its operations subsequent to June 30, 2019 to the date these condensed consolidated financial statements were issued, and has determined that it does not have any material events to disclose.

 

31

 

 

ITEM 2. TMSR HOLDING COMPANY LIMITED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with our unaudited condensed financial statements, and the notes to those unaudited condensed financial statements that are included elsewhere in this Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; change in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the risk of foreign currency exchange rate; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Overview

 

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 consummated the reincorporation. As a result, the Company changed its state of incorporation from Delaware to Nevada, and implemented 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 on June 1, 2018 at the Annual Meeting of Shareholders.

 

China Sunlong Environmental Technology Inc. (“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, a business company incorporated in the British Virgin Islands with limited liability on June 30, 2015, is a holding company for Hong Kong Shengrong Environmental Technology Limited, a Hong Kong registered company (“Shengrong HK”) incorporated on September 25, 2015, which in turn owns 100% of the issued and outstanding equity interests in Shengrong Environmental Protection Technology (Wuhan) Co., Ltd., a Wholly Foreign-Owned Enterprise registered in Hubei, China (“Shengrong WFOE”), which in turn, since March 2016, has owned 100% of the issued and outstanding equity interests in Hubei Shengrong Environmental Protection Energy-Saving Science and Technology Co. Ltd., a registered company in Hubei, China (“Hubei Shengrong”). We refer to Shengrong BVI and its consolidated subsidiaries collectively as “China Sunlong” or the “Company”.

 

Hubei Shengrong was formed in 2009. Since inception, the company has been focused on the research, development, production and sale of an array of solid waste recycling systems for the mining and industrial sectors in the PRC. Hubei Shengrong’s waste recycling systems provide end users in these markets with a cleaner alternative to traditional waste disposal by significantly reducing solid waste disposed into the environment, and enables end users to extract value from valuable metals and other industrial waste materials in waste disposals. 

 

32

 

 

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 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 was 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 8,995,428 newly-issued shares of common stock of JM Global to the Sellers. The 899,544 shares of these newly-issued shares would be 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 was accounted for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders of China Sunlong owned the majority of the outstanding shares of JM Global immediately following the completion of the transaction and JM Global’s operations became 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.

 

On October 10, 2017, Hubei Shengrong established a fully owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving Science and Technology Ltd. (“Fujian Shengrong”), with registered capital of approximately USD 1,518,120 (RMB 10,000,000), to be fully funded by October 10, 2019. Prior to the Company executing the ownership transfer and capital contribution agreement (“Agreement”) on May 30, 2018, Fujian Shengrong had no operations prior to May 30, 2018. Fujian Shengrong was a shell company. On May 30, 2018, Hubei Shengrong signed an Agreement with two unrelated entities for which Hubei Shengrong transferred 80% ownership interest in Fujian Shengrong to these two entities. In return, these two entities were required to contribute cash of approximately USD 5.0 million (RMB 32.0 million) into Fujian Shengrong to acquire the 80% ownership interest and Hubei Shengrong was required to provide approximately USD 1.3 million (RMB 8.0 million) worth of technology services for the Company as a contribution, or 20% of investment, for a total of USD 6.3 million (RMB 40.0 million). As a result, the total investment was changed to 20%, the Company accounted for the investment in Fujian Shengrong using the cost method. Due to that Hubei Shengrong did not provide any cash contribution or technology services to Fujian Shengrong, the investment balance under the cost method investment on December 31, 2018 was $0.

 

On April 2, 2018, the Company disposed of its subsidiary, TJComex International Group Corporation (“TJComex BVI”), a British Virgin Islands corporation, 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 made the decision to dispose TJComex BVI 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 transferred 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 valued at $16,598, which was recorded as a loss from the disposal of a subsidiary in the December 31, 2018 consolidated financial statements. As TJComex BVI’s operating revenue was less than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that would have a major effect on the Company’s operations and financial results, the results of operations for TJComex BVI were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

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 engaged in the research and 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 paid a total consideration of $11.2 million (“Total Consideration”), of which $ 5.2 million or RMB equivalent was paid in cash (“Cash Consideration”) and $6.0 million was paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”). The Parties agreed the Share Consideration was 1,293,104 shares of common stock based on the closing price of US$4.64 on March 27, 2018. The Share Consideration would be issued in three equal installments, and subject to lock-ups of 12, 24 and 36 months, respectively. The acquisition was closed on May 1, 2018, since when the Company’s business activities added research, development, production and sale of coating materials. 

 

On August 16, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries (collectively “Purchasers”), and Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd. and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”) (collectively “Sellers” ), entered into a supplement agreement (“Supplement Agreement”), which modified the terms of consideration set forth in the Share 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.

 

33

 

 

On November 30, 2018, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Jirong Huang and Qihuang Wang (collectively “Sellers”) and Jiangsu Rong Hai Electric Power Fuel Co., Ltd. (“Rong Hai”), a company incorporated in China engaging in the sale of fuel materials and harbor cargo handling services. Pursuant to the SPA, TMSR shall issue an aggregate of 4,630,000 shares of TMSR’s common stock to the Rong Hai Shareholders, in exchange for Rong Hai Shareholders’ agreement to enter into, and their agreement to cause Rong Hai to enter into, certain VIE Agreements (the “Rong Hai VIE Agreements”) with Shengrong WFOE, through which WFOE shall have the right to control, manage and operate Rong Hai in return for a service fee approximately equal to 100% of Rong Hai’s net income (“Acquisition”). On November 30, 2018, Shengrong WFOE, the Company’s indirectly owned subsidiary, entered into a series of VIE Agreements with Rong Hai and the Rong Hai Shareholders. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Rong Hai, including absolute rights to control the management, operations, assets, property and revenue of Rong Hai. Rong Hai has the necessary license to carry out coal trading business in China. The Acquisition closed on November 30, 2018. Starting on November 30, 2018, the Company’s business activities added coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap, of which business activities are carried out in Nantong, Jiang Su Province, PRC.

 

On December 27, 2018, the Company, entered into an Equity Purchase Agreement (the “EPA”) with Hopeway International Enterprises Limited., a private limited company duly organized under the laws of British Virgin Islands (the “Hopeway” or “Purchaser”). Pursuant to the EPA, Shengrong WOFE shall sell 100% equity interests in Hubei Shengrong to the Purchaser in exchange for the Purchaser’s agreement (“Consideration”) to irrevocably forfeit and cancel 8,523,320 shares of common stock of the Company (the “Shares”), constituting all the shares owned by the Purchaser. The transaction contemplated by the EPA is hereby referred as Disposition. The Company’s decision to dispose of Hubei Shengrong is due to the Wuhan Municipal Government’s policy change that Hubei Shengrong is forced to close the existing facility, relocate and build a new facility, which is expected to take approximately 7-8 years. As a result, Hubei Shengrong will not be able to keep the production running and will generate no income in the foreseeable future. Management believed it is very difficult, if possible at all, to continue manufacturing of solid waste recycling systems. As such, the Company has been actively seeking to dispose Hubei Shengrong while retaining the research and development and sale of solid waste recycling systems business. Upon closing of the Disposition, the Purchaser will become the sole shareholder of Hubei Shengrong and as a result, assume all assets and obligations of Hubei Shengrong except the research and development team and intellectual property rights in connection with the solid waste recycling systems business shall be assigned to Shengrong WFOE as part of the Disposition. As Shengrong WFOE has significant continuing involvement in the sale of solid waste recycling systems business and the processed industrial waste materials trading business, the results of operations for Hubei Shengrong were not reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

Key Factors that Affect Operating Results

 

Management has observed the trends and uncertainties of government efforts to control the industrial solid wastes discharge, which we believe may have a direct impact on our operations in the near future.

 

Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. According to the National Bureau of Statistics in China (“NBS”), the annual rate of growth in the PRC declined from 7.7% in 2013 to 7.4% in 2014, 6.9% in 2015, 6.7% in 2016, and 6.9% in 2017 and dropped to 6.6% in 2018. The expected growth rate in 2019 will be 6.2%. A further slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for the combined company’s selling of coating and fuel materials and may have a materially adverse effect on its business.

  

Our operating subsidiaries are incorporated, and our operations and assets are primarily located, in China. Accordingly, our results of operations, financial condition and prospects are affected by China’s economic and regulation conditions in the following factors: (a) an economic downturn in China or any regional market in China; (b) economic policies and initiatives undertaken by the Chinese government; (c) changes in the Chinese or regional business or regulatory environment affecting our customers; and (e) Changes in the Chinese government policy on industrial solid waste. Unfavorable changes could affect demand for services that we provide and could materially and adversely affect the results of operations. Although the Company has generally benefited from China’s economic growth and the policies to encourage the improvement of reducing of solid waste discharge, the Company is also affected by the complexity, uncertainties and changes in the Chinese economic conditions and regulations governing the mining industry.

 

Our recycling systems and equipment operations are largely affected by the testing result of installed solid waste recycling systems and equipment. If an installed solid waste recycling system or equipment cannot meet the acceptance standards stated on the sales contract, which usually include the outlook of the systems and equipment, the recycled rate of low magnetic catalysts and the physical and chemical index of low magnetic catalysts, then we need to adjust the systems and equipment until their performance meets the acceptance standards. Only after the testing results meet the standards, the products can be considered delivered and title passed to customers, and we can recognize sales.

 

34

 

 

Our fuel materials, mainly coal, operations are largely affected by the following aspects. First, the PRC’s macroeconomic growth is not as fast as expected; the slowdown of economic growth will affect the demand of the market, and the reduction of coal consumption by enterprises will affect the sales of coal and directly affect our earnings. Second, the coal market price fluctuation will also affect our sales revenue; because Jiangsu Rong Hai has long-term and stable customers, the price fluctuations will affect the cost of purchasing coal and thus affect our revenue. Third, the risk of price fluctuation in the shipping industry. The fluctuation of shipping price will also directly affect the fluctuation of coal market price, thus affecting our income. Fourth, we have long-term and stable customers and continues to rely on a small number of customers from 2009 to 2018. Losing our major customers will have a significant impact on our results of operations. In addition, the payment situation of these customers will be affected by abnormal market changes, which will have a negative impact on our business recovery accounts and cash flow.

 

Results of Operations

 

Three Months Ended June 30, 2019 vs. June 30, 2018

 

                      Percentage  
    2019     2018     Change     Change  
Revenues – Equipment and systems   $ 2,971,542     $ 7,804,856     $ (4,833,314 )     (61.9 )%
Revenues – Coating and fuel materials     9,348,659       1,108,721       8,239,938       743.2 %
Revenues – Trading and others     473,468       413,895       59,573       14.4 %
Total revenues     12,793,669       9,327,472       3,466,197       37.2 %
Cost of Revenues – Equipment and systems     1,208,838       6,618,791       (5,409,953 )     (81.7 )%
Cost of Revenues – Coating and fuel materials     9,036,575       669,067       8,367,508       1250.6 %
Cost of Revenues – Trading and others     256,787       295,640       (38,853 )     (13.1 )%
Total cost of revenues     10,502,200       7,583,498       2,918,702       38.5 %
Gross profit     2,291,469       1,743,974       547,495       31.4 %
Operating expenses (income)     722,152       (549,249 )     1,271,401       231.5 %
(Loss) Income from operations     1,569,317       2,293,223       (723,906 )     (31.6 )%
Other expense, net     (13,067 )     (72,324 )     59,257       81.9 %
Provision for income taxes     196,244       376,005       (179,761 )     (47.8 )%
Net (loss) income   $ 1,360,006     $ 1,844,894     $ (484,888 )     (26.3 )%

 

Revenues

 

The Company’s revenue consists of solid waste recycling systems and equipment revenue, coating and fuel materials revenue, and trading and others revenue. Total revenues increased by approximately $3.5 million, or approximately 37.2%, to approximately $12.8 million for the three months ended June 30, 2019, compared to approximately $9.3 million for the three months ended June 30, 2018. The overall increase in total revenue was attributable to the increased sales of coating materials after the acquisition of Wuhan HOST and increased sales of fuel materials after the acquisition of Rong Hai and offset by the decreased sales of solid waste recycling systems and equipment and trading industrial waste materials.

 

Equipment and Systems Revenue

 

Revenue of solid waste recycling systems and equipment decreased by approximately $4.8 million, or 61.9%, to $3.0 million for the three months ended June 30, 2019, compared to approximately $7.8 million for the three months ended June 30, 2018. The decrease in revenues was due to the decrease of solid waste recycling equipment and systems orders. As we restructured Shengrong WFOE, we were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business. As a result, Shengrong WFOE did not generate any new equipment and systems revenue in the first two quarters of 2019. Once the suitable vendors are located, we expect our revenues will be on a rise again. Our revenues from solid waste recycling systems and equipment on numbers of units sold and built and its average selling price are summarized as follows:

 

   

For the

three months ended June 30,
2019

    For the
three months ended
June 30,
2018
    Change     Change (%)  
                         
Solid waste recycling equipment sold     5       4       1       25.0  
Average selling price   $ 594,308     $ 522,915     $ 71,393       13.7  
Solid waste recycling system infrastructure sold     -       1       (1 )     (100.0 )
Average selling price   $ -     $ 5,713,196     $ (5,713,196 )     (100.0 )

 

35

 

 

During the three months ended June 30, 2019, we sold 5 units of solid waste recycling equipment with an average selling price of $ 594,308 per unit as compared to 4 units sold with an average selling price of $522,915 during the three months ended June 30, 2018. The increase in units sold of 1 units or 25.0% during the three months ended June 30, 2019 as compared to the same period in 2018 were mainly due to that Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan.

  

During the three months ended June 30, 2019, we did not sell any solid waste recycling system infrastructure as compared to 1 units sold with an average selling price of $5,713,196 during the three months ended June 30, 2018. The decrease in units sold of 1 units or 100.0% during the three months ended June 30, 2019 as compared to the same period in 2018 were mainly due to that Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan.

 

Coating and Fuel Revenue

 

During the three months ended June 30, 2019, we sold 774,747 kilograms of coating materials with an average selling price of approximately $2.49 per kilogram and sold 88,960 tons of coal with an average selling price of approximately $ 88.71 per ton. During the three months ended June 30, 2018, we sold 490,535 kilograms of coating materials with an average selling price of approximately $2.26 per kilogram .We had not yet acquired Rong Hai by June 30, 2018, so no coal business operations during the second quarter in 2018.

 

Trading and Others Revenue

 

Revenues of trading of industrial waste materials and other general merchandises increased by approximately $60,000 or 14.4%, to approximately $473,000 for the three months ended June 30, 2019, compared to approximately $413,000 for the three months ended June 30, 2018. The increase in revenues was attributable to the increased amount of industrial waste materials traded and we included three month harbor cargo handling revenue after the acquisition of Rong Hai during the three months ended June 30, 2019 as compared to the same period in 2018. Our revenues from trading of industrial waste materials and others revenues are summarized as follows:

 

    For the
three months
ended
June 30,
2019
   

For the

three months ended

June 30,
2018

    Change     Change (%)  
                         
Ilmenite Tailings   $     $ 177,384     $ (177,384 )     (100.0 )
Copper Smelting Tailings             236,511       (236,511 )     (100.0 )
Others revenues     473,468               473,468       100.0  
Total   $ 473,468     $ 413,895     $ 59,573       14.4  

 

Our total sold quantity of each kind of industrial waste materials and their average selling price are summarized as follows:

 

   

For the

three months ended

June 30,
2019

    For the
three months ended
June 30,
2018
    Change     Change (%)  
                         
Ilmenite Tailings (quantity in tons)     -       200       (200 )     (100.0 )
Average selling price   $ -     $ 887     $ (887 )     (100.0 )
Copper Smelting Tailings (quantity in tons)     -       200       (200 )     (100.0 )
Average selling price   $ -     $ 1,183     $ (1,183 )     (100.0 )

 

36

 

 

Starting from July 2016, we commenced our industrial waste materials trading business, pursuant to which we directly order the processed industrial waste materials from our suppliers of industrial waste materials, then under our specifications per contract, drop ship the processed industrial waste materials directly to our customers. We inspect the materials at our industrial waste materials customers’ site, during which inspection we temporarily assume legal title to the materials, and after which inspection legal title is transferred to the customers. In these situations, we generally collect the sales proceed directly from our customers and pay for the inventory purchases to our suppliers separately.

  

We started our trading of industrial waste materials business mainly due to the opportunity that existed in the marketplace, as the end users of our solid waste recycling equipment, also referred to as our equipment end users, while in the process of using our solid waste recycling equipment to clean and extract waste from mines and job sites, may also extract and separate certain valuable metals from other industrial waste materials. We recognize that there is a market for these metals and waste materials and as a result, we connect our equipment end users who sell the byproduct of materials they produce to our industrial waste materials suppliers who have the capability of processing such solid waste materials into powder and directly ship such products to our industrial waste materials customers. This type of trading business is related to our solid waste recycling systems and equipment business because the end users of our solid waste recycling equipment only use our equipment to extract the valuable metals and chemicals for their needs. These end users do not need the residual materials generated as a byproduct of extraction and considered to be industrial waste materials. As a result, we believe our industrial waste material trading business is sustainable as long as our solid waste recycling system and equipment business is sustainable. We strongly believe our solid waste recycling system and equipment business is sustainable because of upcoming favorable energy conservation and emission reduction target-setting policies mandated by the PRC government. Notwithstanding the foregoing, this is a new line of our business that is still in the development stage.

 

Approximately two to three weeks prior to shipment, our suppliers of industrial waste materials will physically process the industrial waste materials at the locations of the equipment end users. These end users are located in different provinces of China, such as Hubei, Sichuan, Jiangsu and Zhejiang. After our industrial waste material suppliers have processed the industrial waste materials per our specifications, they will drop ship the materials by truck, which takes approximately 1 to 5 days, directly to our industrial waste materials customers in the city of Wuhan, Hubei province, for our inspection before being inspected and accepted by our customers.

  

During the three months ended June 30, 2019, the decrease of revenues from trading industrial waste materials was due to the fact that we did not generate any revenues from trading industrial waste materials as compared to an aggregate of 400 tons of Ilmenite Tailings and Copper Smelting Tailings during the same period in 2018. Our trading of industrial waste materials are dependent on the progress of our recycling equipment end users and when they are able to sell those industrial waste materials to our suppliers to process the waste. During the three months ended June 30, 2019, we had less resources to trade the aforementioned industrial waste materials as compared to the same period in 2018 as the enterprises who has the resources of the industrial waste materials were closed for production during the year ended December 31, 2018 and during the three months ended June 30, 2019 due to inspection from the environment group of the Chinese government until the enterprises were able to pass the environmental inspection, which reduced the resource for our trading of industrial waste material. In addition, Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan, which we currently do not have new resource to acquire the industrial waste material. . As a result, we did not generate any trading revenue in the second quarter of 2019. Once the suitable vendors are located, we expect our revenues will be on a rise again.

 

We do not believe that we have any competitors to compete with us in the trading of industrial waste materials as their equipment are not as sophisticated as our equipment to extract value from valuable metals and other industrial waste materials. As a result, we do not believe that other potential competitors will have the source of obtaining the industrial waste materials to compete in this business.

 

Our customers who order the industrial waste materials from us are able to manufacture from these processed industrial waste materials and turned them into variety of materials used for decoration, such as plastic wood, interior wall decorative panels and stone plastic imitation wood flooring. The decoration materials made from these processed industrial waste materials are much cheaper than using other environmental friendly raw materials, and generally have better qualities. We evaluate prices of similar raw materials for construction and then set a price with these two customers. We believe our customers might be able to obtain government support and grant for using these industrial waste materials products.

 

In addition, environment risk does not appears to be applied to us since we are assisting the end users of our solid waste recycling equipment to reduce their solid waste discharge and we did not create any environment effect or risk.

 

Our other revenues increased by approximately $473,468, or 100.0%, to approximately $473,468 for the three months ended June 30, 2019 as compared to $0 for the three months ended June 30, 2018. The increase was mainly due to the fact that we included three month harbor cargo handling revenue after the acquisition of Rong Hai and the revenue is more than TJComex’s other revenue made during the three months ended June 30, 2018.

 

37

 

 

Cost of Revenues

 

The Company’s cost of revenues consists of cost of solid waste recycling systems and equipment revenue, cost of coating and fuel materials revenue, and cost of trading and others revenue. Total cost of revenues increased by approximately $2.9 million, or approximately 38.5% to approximately $10.5 million for the three months ended June 30, 2019, compared to approximately $7.6 million for the same period in 2018. Our total cost of revenues increased was because coating and fuel materials generally have a lower profit margin than solid waste recycling equipment and systems.

 

Cost of Equipment and Systems Revenue

 

Cost of solid waste recycling systems and equipment revenue decreased by approximately $5.4 million, or 81.7% to $1.2 million for the three months ended June 30, 2019, compared to approximately $6.6 million for the same period in 2018. The decrease in cost of solid waste recycling systems and equipment revenue was in line with the decreased sales volume of solid waste recycling equipment and systems. Shengrong WFOE did not generate any equipment and systems revenue in the first quarter of 2019, which reduced the cost of such revenue to $0.

 

Cost of Coating and Fuel Materials Revenue

 

During the three months ended June 30, 2019, we sold 774,747 kilograms of coating materials with an average unit cost of approximately $2.1 per kilogram and sold 88,960 tons of coal with an average unit cost of approximately $83.3 per ton. During the three months ended June 30, 2018, we sold 490,535 kilograms of coating materials with an average unit cost of approximately $1.36 per kilogram .We had not yet acquired Rong Hai by June 30, 2018, as a result, no coal business operations during the second quarter in 2018.

 

Cost of Trading and Others Revenue

 

Cost of trading of industrial waste materials and others revenue decreased by approximately $39,000 or 13.1%, to approximately $257,000 for the three months ended June 30, 2019, compared to $296,000 for the same period in 2018. The decrease was in line with the decrease in revenues of trading of industrial waste materials and other general merchandises. Our cost of revenues from trading of industrial waste materials and others revenues are summarized as follows:

 

    For the
three months ended
June 30,
2019
    For the
three months ended
June 30,
2018
    Change     Change (%)  
Industrial waste materials trading                        
Ilmenite Tailings   $ -     $ 118,256     $ (118,256 )     (100.0 )
Copper Smelting Tailings     -       177,384       (177,384 )     (100.0 )
Others cost of revenues     256,787       -       256,787       100.0  
Total   $ 256,787     $ 295,640     $ (38,853 )     (13.1 )

 

38

 

 

Our total sold quantity of each kind of industrial waste materials and their average purchasing price are summarized as follows:

 

   

For the

three months ended

June 30,
2019

   

For the

three months ended

June 30,
2018

    Change     Change (%)  
                         
Ilmenite Tailings (quantity in tons)     -       200       (200 )     (100.0 )
Average unit cost   $ -     $ 591     $ (591 )     (100.0 )
Copper Smelting Tailings (quantity in tons)     -       200       (200 )     (100.0 )
Average unit cost   $ -     $ 887     $ (887 )     (100.0 )

  

Gross Profit

 

The Company’s gross profit increased by approximately $0.6 million, or 31.4%, to approximately $2.3 million during the three months ended June 30, 2019, from approximately $1.7 million for the three months ended June 30, 2018. For the three months ended June 30, 2019 and 2018, the Company’s gross margin was approximately 17.9% and 18.7%, respectively. The decrease in gross margin was primarily due to the increase of sales volume of coating and fuel materials as they have a smaller gross margin than solid waste recycling equipment and systems, which in turn, decreased our gross margin percentage from 18.7% for the three months ended June 30, 2018 to 17.9% for the three months ended June 30, 2019. The gross margin of coating and fuel materials was approximately 3.3% for the three months ended June 30, 2019. The decrease in gross margin was offset by the newly added business of harbor cargo handling services after our acquisition of Rong Hai in December 2018 and the gross margin of the services was about45.8%.

 

Operating Expenses (Income)

 

The Company’s operating expenses (income) include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful accounts.

 

SG&A expenses decreased by approximately $0.6 million, by approximately 64.9%, from approximately $0.9 million for the three months ended June 30, 2018 to approximately $0.3 million for the three months ended June 30, 2019. The decrease was attributable to the restructuring of Shengrong Wuhan. 

 

We provided a provision for doubtful accounts of approximately $0.4 million during the three months ended June 30, 2019. At the beginning of 2017, we were trying to expand our trading of industrial waste materials business and gaining market shares by granting a 30 days credit term of the revenue to our customers. We did not collect our accounts receivable per credit term as expected. As a result, we started to assess the potential losses and provide provision of allowances on the accounts receivable during the three months ended June 30, 2019.

 

Income (loss) from Operations

 

As a result of the foregoing, income from operations for the three months ended June 30, 2019 was approximately $1.6 million, a decrease of approximately $0.7 million, or approximately 31.6%, from approximately $2.3 million income from operations for the three months ended June 30, 2018. As a percentage of total revenues, income from operations changed to approximately 12.3% during the three months ended June 30, 2019 from approximately 24.6% income from operations during the same period in 2018. The decrease was mostly driven by the increase of revenues from the lower profit margin products, coating and fuel materials and the decrease of revenues from the higher profit margin products, solid waste recycling equipment and systems as discussed above.

 

Other Expense

 

The Company’s other expense consists of interest income, interest expense and other income expense, net. The Company’s other expense was approximately $13,000 during the three months ended June 30, 2019, an decrease of approximately $59,000, or approximately 81.9%, as compared to other expense of approximately $72,000 during the same period in 2018. The increase of other expense was mainly attributable to the decrease of interest expense of approximately $37,000 during the three months ended June 30, 2019 after the restructuring of Shengrong WFOE where our bank loans were held.

 

39

 

 

Provision for Income Taxes

 

The Company’s provision for income tax was approximately $0.2 million during the three months ended June 30, 2019, compared to approximately $0.4 million for the same period in 2018. The decrease in provision for income taxes is in line with the decrease in income before income taxes. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, the Company’s 100% subsidiary, Wuhan Host obtained the same status in 2016, which reduced their statutory income tax rate to 15%. Wuhan Host’s “high-tech enterprise” status can reduce its statutory income rate to 15% from 2016 to 2019. We have incurred the acquisition of Wuhan Host lowered the income tax rate, as a result the effective tax rate decreased from 16.9% for the three months ended June 30, 2018 to 12.6% for the three months ended June 30, 2019.

 

Net Income (Loss)

 

As a result of the foregoing, net income decreased by approximately $0.5 million, or 26.3%, to approximately $1.3 million net income for the three months ended June 30, 2019, from approximately $1.8 million net income for the same period in 2018.

 

Six Months Ended June 30, 2019 vs. June 30, 2018

 

                      Percentage  
    2019     2018     Change     Change  
Revenues – Equipment and systems   $ 2,971,542     $ 14,886,639     $ (11,915,097 )     (80.0 )%
Revenues – Coating and fuel materials     16,449,172       1,108,721       15,340,451       1383.6 %
Revenues – Trading and others     639,297       829,995       (190,698 )     (23.0 )%
Total revenues     20,060,011       16,825,355       3,234,656       19.2 %
Cost of Revenues – Equipment and systems     1,208,838       13,062,476       (11,853,638 )     (90.7 )%
Cost of Revenues – Coating and fuel materials     15,978,210       669,067       15,309,143       2288.1 %
Cost of Revenues – Trading and others     316,063       592,390       (276,327 )     (46.6 )%
Total cost of revenues     17,503,111       14,323,933       3,179,178       22.2 %
Gross profit     2,556,900       2,501,422       55,478       2.2 %
Operating expenses (income)     1,700,806       (1,022,612 )     2,723,418       266.3 %
(Loss) Income from operations     856,094       3,524,034       (2,667,940 )     (75.7 )%
Other income (expense), net     19,538       (73,596 )     93,134       126.5 %
Provision for income taxes     247,072       681,930       (434,858 )     (63.8 )%
Net  income   $ 628,560     $ 2,768,508     $ (2,139,948 )     (77.3 )%

 

Revenues

 

The Company’s revenue consists of solid waste recycling systems and equipment revenue, coating and fuel materials revenue, and trading and others revenue. Total revenues increased by approximately $3.2 million, or approximately 19.2%, to approximately $20.0 million for the six months ended June 30, 2019, compared to approximately $16.8 million for the six months ended June 30, 2018. The overall increase in total revenue was attributable to the increased sales of coating materials after the acquisition of Wuhan HOST and increased sales of fuel materials after the acquisition of Rong Hai and offset by the decreased sales of solid waste recycling systems and equipment and trading industrial waste materials.

 

Equipment and Systems Revenue

 

Revenue of solid waste recycling systems and equipment decreased by approximately $11.9 million, or 80.0%, to $3.0 million for the six months ended June 30, 2019, compared to approximately $14.9 million for the six months ended June 30, 2018. The decrease in revenues was due to the decrease of solid waste recycling equipment and systems orders. As we restructured Shengrong Wuhan, we were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business. As a result, Shengrong WFOE did not generate any new equipment and systems revenue in the first two quarters of 2019. Our revenues from solid waste recycling systems and equipment on numbers of units sold and built and its average selling price are summarized as follows:

 

   

For the

six months ended

June 30,

2019

    For the
six months ended
June 30,
2018
    Change     Change (%)  
                         
Solid waste recycling equipment sold     5       6       (1 )     (16.7 )
Average selling price   $ 594,308     $ 513,808     $ 80,500       15.7  
Solid waste recycling system infrastructure sold     -       3       (3 )     (100 )
Average selling price   $ -     $ 3,934,597     $ (3,934,597 )     (100 )

 

40

 

 

During the six months ended June 30, 2019, we sold 5 units of solid waste recycling equipment with an average selling price of $ 594,308 per unit as compared to 6 units sold with an average selling price of $513,808 during the six months ended June 30, 2018. The decrease in units sold of 1 units or 16.7% during the six months ended June 30, 2019 as compared to the same period in 2018 were mainly due to that Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan.

  

During the six months ended June 30, 2019, we did not sell any solid waste recycling system infrastructure as compared to 3 units sold with an average selling price of $3,934,597 during the six months ended June 30, 2018. The decrease in units sold of 3 units or 100.0% during the six months ended June 30, 2019 as compared to the same period in 2018 were mainly due to that Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan.

 

Coating and Fuel Revenue

 

During the six months ended June 30, 2019, we sold 1,675,268 kilograms of coating materials with an average selling price of approximately $2.49 per kilogram and sold 150,734 tons of coal with an average selling price of approximately $81.50 per ton. During the six months ended June 30, 2018, we sold 490,535 kilograms of coating materials with an average selling price of approximately $2.26 per kilogram. We had not yet acquired Rong Hai by June 30, 2018, so no coal business operations during the second quarter in 2018.

 

Trading and Others Revenue

 

Revenues of trading of industrial waste materials and other general merchandises decreased by approximately $191,000 or 23.0%, to approximately $639,000 for the six months ended June 30, 2019, compared to approximately $830,000 for the six months ended June 30, 2018. The decrease in revenues was attributable to the decreased amount of industrial waste materials traded during the six months ended June 30, 2019 as compared to the same period in 2018. Our revenues from trading of industrial waste materials and others revenues are summarized as follows:

 

   

For the

six months ended
June 30,
2019

   

For the

six months ended

June 30,
2018

    Change     Change (%)  
                         
Ilmenite Tailings   $ -     $ 355,434     $ (355,434 )     (100.0 )
Copper Smelting Tailings     -       473,911       (473,911 )     (100.0 )
Others revenues     639,297       650       638,647       98253.4  
Total   $ 639,297     $ 829,995     $ (190,698 )     (23.0 )

 

Our total sold quantity of each kind of industrial waste materials and their average selling price are summarized as follows:

 

   

For the

six months ended

June 30,
2019

   

For the
six months ended
June 30,
2018

    Change     Change (%)  
                         
Ilmenite Tailings (quantity in tons)       -       400       (400 )     (100.0 )
Average selling price   $ -     $ 889     $ (889 )     (100.0 )
Copper Smelting Tailings (quantity in tons)     -       400       (400 )     (100.0 )
Average selling price   $ -     $ 1,185     $ (1,185 )     (100.0 )

 

41

 

 

Starting from July 2016, we commenced our industrial waste materials trading business, pursuant to which we directly order the processed industrial waste materials from our suppliers of industrial waste materials, then under our specifications per contract, drop ship the processed industrial waste materials directly to our customers. We inspect the materials at our industrial waste materials customers’ site, during which inspection we temporarily assume legal title to the materials, and after which inspection legal title is transferred to the customers. In these situations, we generally collect the sales proceed directly from our customers and pay for the inventory purchases to our suppliers separately.

  

We started our trading of industrial waste materials business mainly due to the opportunity that existed in the marketplace, as the end users of our solid waste recycling equipment, also referred to as our equipment end users, while in the process of using our solid waste recycling equipment to clean and extract waste from mines and job sites, may also extract and separate certain valuable metals from other industrial waste materials. We recognize that there is a market for these metals and waste materials and as a result, we connect our equipment end users who sell the byproduct of materials they produce to our industrial waste materials suppliers who have the capability of processing such solid waste materials into powder and directly ship such products to our industrial waste materials customers. This type of trading business is related to our solid waste recycling systems and equipment business because the end users of our solid waste recycling equipment only use our equipment to extract the valuable metals and chemicals for their needs. These end users do not need the residual materials generated as a byproduct of extraction and considered to be industrial waste materials. As a result, we believe our industrial waste material trading business is sustainable as long as our solid waste recycling system and equipment business is sustainable. We strongly believe our solid waste recycling system and equipment business is sustainable because of upcoming favorable energy conservation and emission reduction target-setting policies mandated by the PRC government. Notwithstanding the foregoing, this is a new line of our business that is still in the development stage.

 

Approximately two to three weeks prior to shipment, our suppliers of industrial waste materials will physically process the industrial waste materials at the locations of the equipment end users. These end users are located in different provinces of China, such as Hubei, Sichuan, Jiangsu and Zhejiang. After our industrial waste material suppliers have processed the industrial waste materials per our specifications, they will drop ship the materials by truck, which takes approximately 1 to 5 days, directly to our industrial waste materials customers in the city of Wuhan, Hubei province, for our inspection before being inspected and accepted by our customers.

  

During the six months ended June 30, 2019, the decrease of revenues from trading industrial waste materials was due to the fact that we did not generate any revenues from trading industrial waste materials as compared to an aggregate of 800 tons of Ilmenite Tailings and Copper Smelting Tailings during the same period in 2018. Our trading of industrial waste materials are dependent on the progress of our recycling equipment end users and when they are able to sell those industrial waste materials to our suppliers to process the waste. During the six months ended June 30, 2019, we had less resources to trade the aforementioned industrial waste materials as compared to the same period in 2018 as the enterprises who has the resources of the industrial waste materials were closed for production during the year ended December 31, 2018 and during the six months ended June 30, 2019 due to inspection from the environment group of the Chinese government until the enterprises were able to pass the environmental inspection, which reduced the resource for our trading of industrial waste material. In addition, Shengrong WFOE were in the process of searching for the suitable vendors to produce our products in 2019 and to continue on our solid waste recycling equipment and systems business after the restructuring of Shengrong Wuhan, which we currently do not have new resource to acquire the industrial waste material. As a result, we did not generate any trading revenue in the second quarter of 2019. Once the suitable vendors are located, we expect our revenues will be on a rise again.

 

We do not believe that we have any competitors to compete with us in the trading of industrial waste materials as their equipment are not as sophisticated as our equipment to extract value from valuable metals and other industrial waste materials. As a result, we do not believe that other potential competitors will have the source of obtaining the industrial waste materials to compete in this business.

 

Our customers who order the industrial waste materials from us are able to manufacture from these processed industrial waste materials and turned them into variety of materials used for decoration, such as plastic wood, interior wall decorative panels and stone plastic imitation wood flooring. The decoration materials made from these processed industrial waste materials are much cheaper than using other environmental friendly raw materials, and generally have better qualities. We evaluate prices of similar raw materials for construction and then set a price with these two customers. We believe our customers might be able to obtain government support and grant for using these industrial waste materials products.

 

In addition, environment risk does not appears to be applied to us since we are assisting the end users of our solid waste recycling equipment to reduce their solid waste discharge and we did not create any environment effect or risk.

 

Our other revenues increased by approximately $638,647, or 98,253.4%, to approximately $639,297 for the six months ended June 30, 2019 as compared to $650 for the six months ended June 30, 2018. The increase was mainly due to the fact that we included six month harbor cargo handling revenue after the acquisition of Rong Hai and the revenue is more than TJComex’s other revenue made during the six months ended June 30, 2018.

 

42

 

  

Cost of Revenues

 

The Company’s cost of revenues consists of cost of solid waste recycling systems and equipment revenue, cost of coating and fuel materials revenue, and cost of trading and others revenue. Total cost of revenues increased by approximately $3.2 million, or approximately 22.2% to approximately $17.5 million for the six months ended June 30, 2019, compared to approximately $14.3 million for the same period in 2018. Our total cost of revenues increased was because coating and fuel materials generally have a lower profit margin than solid waste recycling equipment and systems.

 

Cost of Equipment and Systems Revenue

 

Cost of solid waste recycling systems and equipment revenue decreased by approximately $11.9 million, or 90.7% to $1.2 million for the six months ended June 30, 2019, compared to approximately $13.1 million for the same period in 2018. The decrease in cost of solid waste recycling systems and equipment revenue was in line with the decreased sales volume of solid waste recycling equipment and systems.

 

Cost of Coating and Fuel Materials Revenue

 

During the six months ended June 30, 2019, we sold 1,675,268 kilograms of coating materials with an average unit cost of approximately $2.19 per kilogram and sold 150,734 tons of coal with an average unit cost of approximately $81.5 per ton. The average unit cost of coal higher than the selling price during the six months ended June 30, 2019 was because that many coal trading companies stored more coal before the New Year and caused the supply to be more than the demand of coal, so the market selling price of coal dropped sharply in January. We had to sell off our inventory immediately to prevent us from a bigger loss as we are foreseeing a further price drop in the near future. During the six months ended June 30, 2018, we sold 490,535 kilograms of coating materials with an average unit cost of approximately $1.36 per kilogram . We had not yet acquired Rong Hai by June 30, 2018, as a result, no coal business operations during the second quarter in 2018.

 

Cost of Trading and Others Revenue

 

Cost of trading of industrial waste materials and others revenue decreased by approximately $276,000 or 46.6%, to approximately $316,000 for the six months ended June 30, 2019, compared to $592,000 for the same period in 2018. The decrease was in line with the decrease in revenues of trading of industrial waste materials and other general merchandises. Our cost of revenues from trading of industrial waste materials and others revenues are summarized as follows:

 

    For the
six months ended
June 30,
2019
    For the
six months ended
June 30,
2018
    Change     Change (%)  
Industrial waste materials trading                        
Ilmenite Tailings   $ -     $ 236,956     $ (236,956 )     (100.0 )
Copper Smelting Tailings     -       355,434       (355,434 )     (100.0 )
Others cost of revenues     316,063       -       316,063       100.0  
Total   $ 316,063     $ 592,390     $ (276,327 )     (46.6 )

 

43

 

 

Our total sold quantity of each kind of industrial waste materials and their average purchasing price are summarized as follows:

 

   

For the

six months
ended
June 30,
2019

   

For the

six months ended

June 30,
2018

    Change     Change (%)  
                         
Ilmenite Tailings (quantity in tons)     -       400       (400 )     (100.0 )
Average unit cost   $ -     $ 592     $ (592 )     (100.0 )
Copper Smelting Tailings (quantity in tons)     -       400       (400 )     (100.0 )
Average unit cost   $ -     $ 889     $ (889 )     (100.0 )

  

Gross Profit

 

The Company’s gross profit increased by approximately $55,000, or 2.2%, to approximately $2.6 million during the six months ended June 30, 2019, from approximately $2.5 million for the six months ended June 30, 2018. For the six months ended June 30, 2019 and 2018, the Company’s gross margin was approximately 12.7% and 14.9%, respectively. The decrease in gross margin was primarily due to the increase of sales volume of coating and fuel materials as they have a smaller gross margin than solid waste recycling equipment and systems, which in turn, decreased our gross margin percentage from 14.9% for the six months ended June 30, 2018 to 12.7% for the six months ended June 30, 2019. The gross margin of coating and fuel materials was approximately 2.9% for the six months ended June 30, 2019. The decrease in gross margin was offset by the newly added business of harbor cargo handling services after our acquisition of Rong Hai in December 2018 and the gross margin of the services was about 50.6%.

 

Operating Expenses (Income)

 

The Company’s operating expenses (income) include selling, general and administrative (“SG&A”) expenses, and recovery of doubtful accounts.

 

SG&A expenses decreased by approximately $0.4 million, by approximately 22.9%, from approximately $1.8 million for the six months ended June 30, 2018 to approximately $1.4 million for the six months ended June 30, 2019. The decrease was attributable to the restructuring of Shengrong Wuhan.

 

We provided a provision for doubtful accounts of approximately $0.3 million during the six months ended June 30, 2019. At the beginning of 2017, we were trying to expand our trading of industrial waste materials business and gaining market shares by granting a 30 days credit term of the revenue to our customers. We did not collect our accounts receivable per credit term as expected. As a result, we started to assess the potential losses and provide provision of allowances on the accounts receivable during the six months ended June 30, 2019.

   

Income (loss) from Operations

 

As a result of the foregoing, income from operations for the six months ended June 30, 2019 was approximately $0.9 million, a decrease of approximately $2.6 million, or approximately 75.7%, from approximately $3.5 million income from operations for the six months ended June 30, 2018. As a percentage of total revenues, income from operations changed to approximately 4.3% during the six months ended June 30, 2019 from approximately 20.9% income from operations during the same period in 2018. The decrease was mostly driven by the increase of revenues from the lower profit margin products, coating and fuel materials and the decrease of revenues from the higher profit margin products, solid waste recycling equipment and systems as discussed above.

 

44

 

 

Other Income (Expense)

 

The Company’s other income (expense) consists of interest income, interest expense and other income (expense), net. The Company’s other income was approximately $20,000 during the six months ended June 30, 2019, an increase of approximately $93,000, or approximately 126.5%, as compared to other expense of approximately $73,000 during the same period in 2018. The increase of other income was mainly attributable to the decrease of interest expense of approximately $77,000 during the six months ended June 30, 2019 after the restructuring of Shengrong WFOE where our bank loans were held.

 

Provision for Income Taxes

 

The Company’s provision for income tax was approximately $0.2 million during the six months ended June 30, 2019, compared to approximately $0.6 million for the same period in 2018. The decrease in provision for income taxes is in line with the decrease in income before income taxes. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, the Company’s 100% subsidiary, Wuhan Host obtained the same status in 2016, which reduced their statutory income tax rate to 15%. Wuhan Host’s “high-tech enterprise” status can reduce its statutory income rate to 15% from 2016 to 2019. However, we have incurred approximately $0.7 million of non-deductible expenses for income tax purpose, as a result the effective tax rate increased from 19.8% for the six months ended June 30, 2018 to 28.2% for the six months ended June 30, 2019.

 

Net Income

 

As a result of the foregoing, net income decreased by approximately $2.1 million, or 77.3%, to approximately $0.6 million net income for the six months ended June 30, 2019, from approximately $2.7 million net income for the same period in 2018.

 

Critical Accounting Policies and Estimates

 

The preparation of the unaudited condensed financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our unaudited condensed consolidated financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements.

 

Accounts receivable, net

 

Accounts receivable 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.

  

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 Shengrong WFOE and weighted average method in Wuhan HOST and Rong Hai. 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.

 

Prepayments

 

Prepayments are funds deposited or advanced to outside vendors for future inventory 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.

 

45

 

 

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 us. 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 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.

 

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 warranty 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 warranty revenue was not material as of the date of adoption, and as a result, did not result in an adjustment.

 

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 warranty revenues where the warranty periods are recognized over the warranty 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 warranty 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, revenue from coating and fuel materials, 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 under the new five-step model. 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. 

 

46

 

 

Prior to January 1, 2018, the Company allowed its customers to retain 5% to 10% of the contract price as retainage during the warranty 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 claims historically. Due to the infrequent and insignificant amount of warranty 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 are recognized over the warranty period over 12 months.

 

Payments received before all of the relevant criteria for revenue recognition are recorded as customer deposits.

 

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.

  

Recently Issue Accounting Pronouncements

  

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. We do not believe the adoption of this ASU would have a material effect on our consolidated financial statements.

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.

 

Liquidity and Capital Resources

 

The Company has funded working capital and other capital requirements primarily by equity contributions, loans from shareholders, cash flow from operations, short term bank loans, loans from third parties and cash received from JM Global Holding Company through the reverse capitalization. Cash is required to repay debts and pay salaries, office expenses, income taxes and other operating expenses. As of June 30, 2019, our net working capital was approximately $0.7 million, over 34% of the Company’s current liabilities was from other payables – related parties due to major shareholders. Removing these liabilities, the Company had net working capital of $5.1 million and is expected to continuing generate cash flow from operations in the twelve months period.

 

We believe that current levels of cash and cash flows from operations will be sufficient to meet its anticipated cash needs for at least the next twelve months from the date the consolidated financial statements to be issued. However, it may need additional cash resources in the future if it experiences changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed the Company’s amounts of cash and cash equivalents on hand, the Company may seek to issue debt or equity securities or obtain additional credit facility. 

 

47

 

 

The following summarizes the key components of the Company’s cash flows for the six months ended June 30, 2019 and 2018.

 

   

For the

Six Months ended

June 30,

 
    2019     2018  
             
Net cash used in operating activities   $ (2,292,289 )   $ (886,009 )
Net cash (used in) provided by investing activities     (16,796 )     3,052,103  
Net cash  provided by provided by financing activities     2,984,000       1,568,024  
Effect of exchange rate change on cash     (65,187 )     (93,784 )
Net change in cash   $ 609,728     $ 3,640,334  

 

As of June 30, 2019 and December 31, 2018, the Company had cash in the amount of $ 1,336,465 and $726,737, respectively. As of June 30, 2019 and December 31, 2018, $1,328,059 and $680,709 and were deposited with various financial institutions located in the PRC, respectively. As of June 30, 2019 and December 31, 2018, $ 447 and $7,823 were deposited with one financial institution located in Hong Kong, respectively.

 

Operating activities

 

Net cash used in operating activities was approximately $2.3 million for the six months ended June 30, 2019, as compared to approximately $0.9 million net cash used in operating activities for the six months ended June 30, 2018.  Net cash used in operating activities was mainly due to approximately $0.3 million of depreciation expense of plant and equipment and amortization expense of intangible assets, the increase of approximately $0.6 million accounts payable, the increase of approximately $0.5 million taxes payable, the decrease of approximately $1.8 million other payables and accrued liabilities, and the increase of approximately $0.5 million of customer deposits. Net cash used in operating activities for the six months ended June 30, 2019 was mainly offset by approximately $0.6 million of net income from our operations, the increase of approximately $0.6 million of notes receivable as our customers used more notes receivable for payment which we needs to wait approximately 3 to 6 months to deposit the notes, the increase of approximately $2.6 million of accounts receivable as we granted more receivables to customers with good credit history, the increase of approximately $0.2 million of other receivables, the increase of approximately $0.3 million of prepayments , and the decrease of approximately $0.6 million of inventories.

 

Investing activities

 

Net cash used in investing activities was approximately $17,000 for the six months ended June 30, 2019, as compared to approximately $3.1 million net cash provided by investing activities for the six months ended June 30, 2018. Net cash used in investing activities for the six months ended June 30, 2019 was due to approximately $17,000 spending on purchase of equipment.

 

Financing activities

 

Net cash provided by financing activities was approximately $3.0 million for the six months ended June 30, 2019, as compared to approximately $1.6 million net cash provided by financing activities for the six months ended June 30, 2018. Net cash provided by financing activities for the six months ended June 30, 2019 was due to approximately $3.0 million proceeds from issuance of common stock.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Credit Risk

 

Credit risk is one of the most significant risks for the Company’s business.

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While we believe 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. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.

 

48

 

 

In measuring the credit risk of our sales to our customers, the Company mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.

 

Liquidity Risk

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.

 

Inflation Risk

 

The Company is also exposed to inflation risk. Inflationary factors, such as increases in raw material and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact 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 margin and operating expenses as a percentage of sales revenue if the selling prices of our products do not increase with such increased costs.

 

Foreign Currency Risk

 

A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. 

  

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective. 

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

49

 

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None. 

 

ITEM 1A. RISK FACTORS

 

Not applicable for smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On April 4, 2019, the Company entered into certain securities purchase agreement (the “SPA”) with certain “non-U.S. Persons” (the “Purchasers”) as defined in Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to which the Company agreed to sell 1,492,000 shares of its common stock, par value $0.0001 per share, at a per share purchase price of $2.00. The net proceeds to the Company from this offering were approximately $2.9 million.

 

The shares issued in the SPA are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation S promulgated thereunder. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

  

ITEM 6. EXHIBITS

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

Exhibit Number   Description
10.1   Form of Securities Purchase Agreement (Incorporated by references to the Company’s Current Report on Form 8-K filed with the SEC on April 8, 2019.
31.1   Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2   Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1   Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2   Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

50

 

 

SIGNATURES

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TMSR HOLDING COMPANY LIMITED
     
Date: August 14, 2019  By: /s/ Yimin Jin
  Name: Yimin Jin
  Title: Chief Executive Officer and
Co-Chairman of the Board
    (Principal Executive Officer)

 

 

51 

 

 

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