The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of business and organization
TMSR
Holding Company Limited (the “Company” or “TMSR”), formerly known as JM Global Holding Company (“JM
Global”), was a blank check company incorporated in Delaware on April 10, 2015. The Company was formed for the purpose of
acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction
or other similar business transaction, one or more operating businesses or assets (“Business Combination”). On June
20, 2018, TMSR completed a reincorporation and as a result, the Company changed its state of incorporation
from Delaware to Nevada. The Articles of Incorporation and Bylaws of TMSR Nevada became the governing instruments of the Company,
resulting in a 2-for-1 forward stock split of the Company’s common stock (the “Forward Split). The Reincorporation
and Forward Split were approved by shareholders holding the majority of the outstanding shares of common stock of TMSR Delaware
on June 1, 2018 at the Annual Meeting of Shareholders.
On
February 6, 2018, China Sunlong Environmental Technology Inc. (“China Sunlong”) consummated the business combination
(the “Business Combination”) with JM Global pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”)
dated as of August 28, 2017 by and among (i) JM Global; (ii) Zhong Hui Holding Limited; (iii) China Sunlong; (iv) each of the
shareholders of China Sunlong named on Annex I of the Share Exchange Agreement (the “Sellers”); and (v) Chuanliu Ni,
a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, in the capacity as the representative for
the Sellers. Pursuant to the Share Exchange Agreement, JM Global acquired from the Sellers all of the issued and outstanding equity
interests of China Sunlong in exchange for 17,990,856 newly-issued shares of common stock of JM Global to the Sellers. 1,799,088
of these newly-issued shares are held in escrow for 18 months from the closing date of the Business Combination as a security
for China Sunlong and the Sellers’ indemnification obligations under the Share Exchange Agreement. This transaction is accounted
for as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the shareholders
of China Sunlong owns the majority of the outstanding shares of JM Global immediately following the completion of the transaction
and JM Global’s operations was the operations of China Sunlong following the transaction. Accordingly, China Sunlong was
deemed to be the accounting acquirer in the transaction and the transaction was treated as a recapitalization of China Sunlong.
China
Sunlong is a holding company incorporated on August 31, 2015, under the laws of the Cayman Islands. China Sunlong has no substantive
operations other than holding all of the outstanding share capital of Shengrong Environmental Protection Holding Company Limited
(“Shengrong BVI”). Shengrong BVI is a holding company incorporated on June 30, 2015, under the laws of the British
Virgin Islands. Shengrong BVI has no substantive operations other than holding all of the outstanding share capital of Hong Kong
Shengrong Environmental Technology Limited (“Shengrong HK”). Shengrong HK is also a holding company holding all of
the outstanding equity of Shengrong Environmental Protection Technology (Wuhan) Co., Ltd. (“Shengrong WFOE”).
The
Company focuses on the industrial solid waste recycling and comprehensive utilization. The Company’s main products are high
efficiency permanent magnetic separators and comprehensive utilization systems for industrial solid wastes. The Company’s
headquarter is located in Hubei Province, in the People’s Republic of China (the “PRC” or “China”).
All of the Company’s business activities are carried out by the wholly owned operating Chinese company, Hubei Shengrong
Environmental Protection Energy-Saving Science and Technology Ltd. (“Hubei Shengrong”) prior to May 1, 2018.
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.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
March 31, 2017, China Sunlong completed its acquisition of 100% of the equity in TJComex International Group Corporation (“TJComex
BVI”). At the closing of such acquisition, the selling shareholders of TJComex BVI received 5,935 shares (“Payment
Shares”) of China Sunlong Common Stock valued at $926.71 per share for 100% of their equity in TJComex BVI. TJComex BVI
owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited (“TJComex HK”), a Hong
Kong limited liability company, which owns 100% equity interest of Tianjin Corro Technological Consulting Co., Ltd. (“TJComex
WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC. Pursuant to certain contractual arrangements,
TJComex WFOE controls Tianjin Commodity Exchange Co., Ltd. (“TJComex Tianjin”), a limited liability company incorporated
under the law of the PRC. TJComex Tianjin is engaged in general merchandise trading business and related consulting services,
and its headquarter is located in the city of Tianjin, PRC.
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose of TJComex BVI is
to (i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible businesses. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the director of China Sunlong.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and is being recorded as a loss from disposal of subsidiary in the
unaudited condensed consolidated financial statements for the period ending June 30, 2018. As TJComex operating revenue was less
than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on
the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued
operations under the guidance of Accounting Standards Codification 205.
On
October 10, 2017, Hubei Shengrong established a wholly owned subsidiary, Fujian Shengrong Environmental Protection Energy-Saving
Science and Technology Ltd. (“Fujian Shengrong”), with registered capital of RMB 10,000,000 (approximately USD 1,518,120).
Fujian Shengrong has no operations prior to May 30, 2018. On May 30, 2018, Hubei Shengrong and two unrelated entities entered
into certain Capital Transfer and Contribution Agreement pursuant to which these two entities shall contribute cash of approximately
USD 5.0 million (RMB 32.0 million) into Fujian Shengrong and Hubei Shengrong shall contribute approximately USD 1.3 million (RMB
8.0 million) which is the consideration for certain technology consulting services to be provided by Hubei Shengrong to the two
entities. Upon completion of the contribution, the total registered capital of Fujian Shengrong increased to RMB 40.0 million
(approximately USD 6.3 million) and Hubai Shengrong owns 20% and the two entities collectively own 80% of the equity interest
of Fujian Shengrong. The Company will account for the investment in Fujian Shengrong using the cost method. Since Hubei Shengrong
did not provide any cash contribution to Fujian Shengrong or technology services to the two entities, the investment balance under
the cost method investment on June 30, 2018 is $0.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited condensed consolidated financial statements reflect the activities of China Sunlong and each of the following
entities:
Name
|
|
Background
|
|
Ownership
|
China
Sunlong
|
|
●
|
A Cayman Islands
company
|
|
100%
owned by the Company
|
Shengrong BVI
|
|
●
|
A
British Virgin Island company
|
|
100% owned by China Sunlong
|
|
|
●
|
Incorporated
on June 30, 2015
|
|
|
Shengrong HK
|
|
●
|
A
Hong Kong company
|
|
100% owned by Shengrong BVI
|
|
|
●
|
Incorporated
on September 25, 2015
|
|
|
Shengrong WFOE
|
|
●
|
A PRC limited liability company and deemed a
wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by Shengrong HK
|
|
|
●
|
Incorporated
on March 1, 2016
|
|
|
|
|
●
|
Registered capital of USD 12,946 (HKD100,000),
fully funded
|
|
|
Hubei Shengrong
|
|
●
|
A
PRC limited liability company
|
|
100% owned by Shengrong WFOE
|
|
|
●
|
Incorporated
on January 14, 2009
|
|
|
|
|
●
|
Registered capital
of USD 4,417,800 (RMB 30,000,000), fully funded
|
|
|
|
|
●
|
Production and sales
of high efficiency permanent magnetic separator and comprehensive utilization system.
|
|
|
Wuhan HOST
|
|
●
|
A PRC limited liability company
|
|
16.7%owned by Shengrong WFOE
|
|
|
●
|
Incorporated
on October 27, 2010
|
|
and 83.3% owned by Hubei
|
|
|
●
|
Registered capital of USD 750,075 (RMB 5,000,000),
fully funded
|
|
Shengrong
|
|
|
●
|
Research, development, production and sale of
coating materials.
|
|
|
Shanghai Host Coating
|
|
●
|
A
PRC limited liability company
|
|
80% owned by Wuhan HOST
|
Materials Co., Ltd.
|
|
●
|
Incorporated
on December 11, 2014
|
|
|
(“Shanghai HOST”)
|
|
●
|
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 June 30, 2018
|
|
|
TJComex BVI*
|
|
●
|
A British Virgin Island company
|
|
100% owned by China Sunlong
|
|
|
●
|
Incorporated on March 8, 2016
|
|
|
TJComex HK*
|
|
●
|
A
Hong Kong company
|
|
100% owned by TJComex BVI
|
|
|
●
|
Incorporated
on March 19, 2014
|
|
|
TJComex WFOE*
|
|
●
|
A PRC limited liability company and deemed a
wholly foreign owned enterprise (“WFOE”)
|
|
100% owned by TJComex HK
|
|
|
●
|
Incorporated
on March 10, 2004
|
|
|
|
|
●
|
Registered capital of USD 200,000
|
|
|
TJComex Tianjin*
|
|
●
|
A
PRC limited liability company
|
|
100% owned by TJComex WFOE
|
|
|
●
|
Incorporated
on November 19, 2007
|
|
|
|
|
●
|
Registered capital of USD 7,809,165 (RMB 55,000,000)
|
|
|
|
|
●
|
General merchandise
trading business and related consulting services
|
|
|
|
*
|
Disposed
on April 2, 2018
|
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
2 – Summary of significant accounting policies
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations
of the Securities Exchange Commission (“SEC”).
In
the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation
of the Company’s financial position, its results of operations and its cash flows, as applicable, have been made. Interim
results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q
should be read in conjunction with information included in the Company’s 2017 annual report on Form 10-K filed on April
2, 2018 and the Company’s current report on Form 8-K filed on March 21, 2018.
Principles
of consolidation
The
unaudited condensed consolidated financial statements of the Company include the accounts of TMSR and its wholly owned subsidiaries.
All intercompany transactions and balances are eliminated upon consolidation.
Enterprise
wide disclosure
The
Company’s chief operating decision-makers (i.e. chief executive officer and her direct reports) review financial information
presented on a consolidated basis, accompanied by disaggregated information about revenues by business lines (Equipment and systems
revenues, trading and others revenues, and coating materials revenues) for purposes of allocating resources and evaluating financial
performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or
components below the consolidated unit level. Based on qualitative and quantitative criteria established by Accounting Standards
Codification (“ASC”) 280, “Segment Reporting”, the Company considers itself to be operating within one
reportable segment.
Use
of estimates and assumptions
The
preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and
expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated
financial statements include the useful lives of intangible assets, revenues, deferred revenues and plant and equipment, impairment
of long-lived assets, collectability of receivables, inventory valuation allowance, and realization of deferred tax assets. Actual
results could differ from these estimates.
Foreign
currency translation and transaction
The
reporting currency of the Company is the U.S. dollar. The Company in China conducts its businesses in the local currency, Renminbi
(RMB), as its functional currency. Assets and liabilities are translated at the unified exchange rate as quoted by the People’s
Bank of China at the end of the period. The statement of income accounts are translated at the average translation rates and the
equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated
other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred.
Translation
adjustments included in accumulated other comprehensive income (loss) amounted to $(419,504) and $701,217 as of June 30, 2018
and December 31, 2017, respectively. The balance sheet amounts, with the exception of shareholders’ equity at June 30, 2018
and December 31, 2017 were translated at 6.62 RMB and 6.51 RMB to $1.00, respectively. The shareholders’ equity accounts
were stated at their historical rate. The average translation rates applied to statement of income accounts for the three months
ended June 30, 2018 and 2017 were 6.38 RMB and 6.86 RMB, respectively, and for six months ended June 30, 2018 and 2017 were 6.37
RMB and 6.87 RMB, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the unaudited
condensed consolidated balance sheet.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations.
These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that
are subject to the restrictions.
Accounts
receivable, net and accounts receivable – related party, net
Accounts
receivable and accounts receivable – related party include trade accounts due from customers. An allowance for doubtful
accounts may be established and recorded based on management’s assessment of potential losses based on the credit history
and relationships with the customers. Management reviews its receivables on a regular basis to determine if the bad debt allowance
is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is not probable.
After
the Company evaluated all the above considerations, the Company established a policy to provide a provision of 20% for
accounts receivable outstanding more than 3 months but less than 6 months, 40% for accounts receivable outstanding more than
6 months but less than 9 months, 60% for accounts receivable outstanding more than 9 months but less than 1 year, and 100%
for accounts receivable outstanding more than 1 year. As of June 30, 2018 and December 31, 2017, $3,888,442 and $6,674,834
were recorded for allowance for doubtful accounts, respectively.
Inventories
Inventories
are comprised of raw materials and work in progress and are stated at the lower of cost or net realizable value using the first-in-first-out
method in Hubei Shengrong and weighted average method in Wuhan HOST. Management reviews inventories for obsolescence and cost
in excess of net realizable value at least annually and records a reserve against the inventory when the carrying value exceeds
net realizable value. As of June 30, 2018 and December 31, 2017, no obsolescence and cost in excess of net realizable value were
recorded for allowance.
Prepayments
Prepayments
are funds deposited or advanced to outside vendors for future inventory or services purchases. As a standard practice in China,
many of the Company’s vendors require a certain amount to be deposited with them as a guarantee that the Company will complete
its purchases on a timely basis. This amount is refundable and bears no interest. The Company has legally binding contracts with
its vendors, which require any outstanding prepayments to be returned to the Company when the contract ends.
In
October of 2017, Hubei Shengrong signed a long-term cooperation agreement with a vendor as part of the plan to ensure a steady
supply of inventory in 2018. In accordance with the cooperation agreement, Hubei Shengrong committed to purchase the majority
of its raw materials from this vendor in 2018 and prepaid the vendor for the estimated total purchase amount in order to secure
the supply source in advance.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Plant
and equipment
Plant
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method after consideration of the estimated useful lives of the assets and estimated residual value. The estimated useful lives
and residual value are as follows:
|
|
Useful Life
|
|
Estimated
Residual Value
|
|
Building
|
|
5 – 20 years
|
|
|
5%
|
|
Office equipment and furnishing
|
|
5 years
|
|
|
5
%
|
|
Production equipment
|
|
3-10 years
|
|
|
5
%
|
|
Automobile
|
|
5 years
|
|
|
5
%
|
|
Leasehold improvements
|
|
Shorter of the remaining lease terms
or estimated useful lives
|
|
|
0
%
|
|
The
cost and related accumulated depreciation and amortization of assets sold or otherwise retired are eliminated from the accounts
and any gain or loss is included in the unaudited condensed consolidated statements of income and comprehensive income. Expenditures
for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected
to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation and amortization
to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Intangible
assets
Intangible
assets represent land use rights, patents, and software system, and they are stated at cost, less accumulated amortization. Research
and development costs associated with internally developed patents are expensed when incurred. Amortization expense is recognized
on the straight-line basis over the estimated useful lives of the assets. All land in the PRC is owned by the government; however,
the government grants “land use rights.” The Company has obtained the rights to use various parcels of land and the
right to use SAP B1 Cloud system. The patents have finite useful lives and are amortized using a straight-line method that reflects
the estimated pattern in which the economic benefits of the intangible asset are to be consumed. The Company amortizes the cost
of the land use rights, patents, and software system over their useful life using the straight-line method. The Company also re-evaluates
the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. The
estimated useful lives are as follows:
|
|
Useful Life
|
Land use rights
|
|
50 years
|
Patents
|
|
10 - 20 years
|
Software
|
|
5 years
|
Goodwill
Goodwill
represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired
subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when
circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment
exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of income.
Impairment losses on goodwill are not reversed.
Impairment
for long-lived assets
Long-lived
assets, including plant, equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes
in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate
that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the
undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted
future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any,
are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of
the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable
market values. As of June 30, 2018 and December 31, 2017, no impairment of long-lived assets was recognized.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair
value measurement
The
accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments
and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount
of cash, notes receivable, accounts receivable, other receivables, prepayments, accounts payable, other payables and accrued liabilities,
customer deposits, short term loans and taxes payable to approximate their fair values because of their short term nature.
The
accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement
and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term
of the financial instruments.
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
Financial
instruments included in current assets and current liabilities are reported in the unaudited condensed consolidated balance sheets
at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of interest. Long-term third party loan in the unaudited condensed
consolidated balance sheets at carrying value, which approximates fair value as the lender is a friend of the Company’s
CEO and is willing to lend the money to the Company at a zero interest rate
Customer
deposits
In
Hubei Shengrong, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires
3% to 10% advanced deposits from the customers upon the signing of the sales contracts. At various stages of the sales contract
execution, the Company generally collects certain amounts of advanced deposits from the customers based on the approximate amount
of cash flows needed at each stage. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
In
Wuhan HOST, customer deposits represent amounts advanced by customers on product orders. Generally, the Company requires 95% to
100% advanced deposits from the customers upon signing of the sales contracts. A few customers with good credit history are not
required to make any deposit. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s
revenue recognition policy.
Revenue
recognition
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers
(ASC 606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. This did
not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue, other than
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.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. 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 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. For the three and six months ended June
30, 2018, less than 5% of our warranty revenues were recognized in our consolidated revenues and included in the Company’s
equipment and systems revenues in the accompanying unaudited condensed statements of income and comprehensive income.
Payments
received before all of the relevant criteria for revenue recognition are recorded as customer deposits.
As
of June 30, 2018, the Company has four outstanding contracts signed with approximately $7.1 million of revenue for equipment and
systems to be completed within one year.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s disaggregate revenue streams are summarized as follows:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues – Equipment
and systems
|
|
$
|
7,804,856
|
|
|
$
|
9,145,889
|
|
|
$
|
14,886,639
|
|
|
$
|
13,234,442
|
|
Revenues – Trading and others
|
|
|
413,895
|
|
|
|
7,662,442
|
|
|
|
829,995
|
|
|
|
11,562,996
|
|
Revenues –
Coating materials
|
|
|
1,108,721
|
|
|
|
-
|
|
|
|
1,108,721
|
|
|
|
-
|
|
Total revenues
|
|
$
|
9,327,472
|
|
|
$
|
16,808,331
|
|
|
$
|
16,825,355
|
|
|
$
|
24,797,408
|
|
Gross
versus Net Revenue Reporting
Starting
from July 2016, in the normal course of the Company’s trading of industrial waste materials business, the Company directly
purchases the processed industrial waste materials from the Company’s suppliers under the Company’s specifications
and drop ships the materials directly to the Company’s customers. The Company would inspect the materials at its customers’
site, during which inspection it temporarily assumes legal title to the materials, and after which inspection legal title is transferred
to its customers. In these situations, the Company generally collects the sales proceed directly from the Company’s customers
and pay for the inventory purchases to the Company’s suppliers separately. The determination of whether revenues should
be reported on a gross or net basis is based on the Company’s assessment of whether it is the principal or an agent in the
transaction. In determining whether the Company is the principal or an agent, the Company follows the new accounting guidance
for principal-agent considerations. Since the Company is the primary obligor and is responsible for (i) fulfilling the processed
industrial waste materials delivery, (ii) controlling the inventory by temporarily assume legal title to the materials after inspecting
the products from our vendors before passing the materials to our customers, and (iii) bearing the back-end risk of inventory
loss with respect to any product return from the Company’s customers, the Company has concluded that it is the principal
in these arrangements, and therefore report revenues and cost of revenues on a gross basis.
Income
taxes
The
Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results
for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet date.
Deferred
taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the unaudited condensed consolidated financial statements and the corresponding
tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable
temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available
against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to
apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income
statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt
with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities.
An
uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax
are classified as income tax expense in the period incurred. The Company incurred no such penalties and interest for the three
and six months ended June 30, 2018 and 2017. As of June 30, 2018, the Company’s PRC tax returns filed for 2015, 2016 and
2017 remain subject to examination by any applicable tax authorities.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Earnings
per share
Basic
earnings per share are computed by dividing income available to common shareholders of the Company by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common shares were exercised and converted into common shares.
Recently
issued accounting pronouncements
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The
amendments in this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition
of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments
are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December
15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of this ASU did not have a material
effect on the Company’s unaudited condensed consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for
share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment
awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective
for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.
Early adoption is permitted, including adoption in any interim period. The adoption of this ASU did not have a material effect
on the Company’s unaudited condensed consolidated financial statements.
n
September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606),
Leases (Topic 840), and Leases (Topic 842). This Accounting Standards Update adds SEC paragraphs pursuant to an SEC Staff Announcement
made at the July 20, 2017 Emerging Issues Task Force meeting. Management plans to adopt this ASU during the year ending December
2019. The Company does not believe the adoption of this ASU would have a material effect on the Company’s unaudited condensed
consolidated financial statements.
In
November 2017, the FASB issued ASU 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic
605), and Revenue from Contracts with Customers (Topic 606). This Accounting Standards Update supersedes various SEC paragraphs
and amends an SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 116 and SEC Release No.33-10403. Management
plans to adopt this ASU during the year ending December 2019. The Company does not believe the adoption of this ASU would have
a material effect on the Company’s unaudited condensed consolidated financial statements.
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.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
February 2016, the FASB issued ASU 2016-02, Amendments to the Accounting Standards Codification (“ASC”) 842 Leases.
This update requires lessee to recognize the assets and liability (the lease liability) arising from operating leases on the balance
sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments
to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise
an option to terminate the lease. Twelve months or less lease term, a lessee is permitted to make an accounting policy election
not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line
basis over the lease term. In transition, this update will be effective for public entities for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-10, Codification Improvements
to Topic 842, Leases. Management does not believe the adoption of these ASUs 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
TJ
Comex BVI
On
March 31, 2017, China Sunlong completed its acquisition of 100% equity interest in TJComex BVI through a share exchange to expand
its business on trading certain solid wastes through TJComex BVI’s commodity exchange channels. At the closing of the share
exchange on June 30, 2017, the Selling Shareholders received 5,935 shares (“Payment Shares”) of China Sunlong Common
Stock valued at $926.71 per share for 100% of their equity interests in TJComex BVI, equating to 100% of all outstanding interests
in TJComex BVI. Whereas, TJComex BVI owns 100% of the issued and outstanding capital stock of TJComex Hong Kong Company Limited
(“TJComex HK”), a Hong Kong limited liability company, Tianjin Corro Technological Consulting Co., Ltd. (“TJComex
WFOE”), a wholly foreign owned enterprise incorporated under the laws of the PRC and Tianjin Commodity Exchange Co., Ltd.
(the “TJComex Tianjin”), a limited liability company incorporated under the law of the PRC. The $926.71 per share
price of China Sunlong Common Stock was based on a valuation of approximately $92.7 million of China Sunlong’s enterprise
value determined by an independent third-party appraiser using discounted cash flows projection model. The projected cash flows
are based upon, but not limited to, assumptions such as 1) projected selling units and growth in the industry, 2) projected unit
selling price, 3) projected unit cost of manufactured, 4) selling and general and administrative expenses to be in line with the
growth in the industry, and 5) projected bank borrowings rate or interest rate index.
The
Company’s acquisition of TJComex BVI was accounted for as a business combination in accordance with ASC 805. The Company
has allocated the purchase price of TJComex BVI based upon the fair value of the identifiable assets acquired and liabilities
assumed on the acquisition date. Except for cash, the Company estimated the fair values of the assets acquired and liabilities
assumed at the acquisition date in accordance with the business combination standard issued by FASB with the following valuation
methodologies with level 3 inputs: Other current assets, plant and equipment and current liabilities were valued using the cost
approach. Management of the Company is responsible for determining the fair value of assets acquired, liabilities assumed and
intangible assets identified as of the acquisition date and considered a number of factors including valuations from independent
appraisers. Acquisition-related costs incurred for the acquisitions are not material and have been expensed as incurred in general
and administrative expense.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date,
which represents the net purchase price allocation at the date of the acquisition of TJComex BVI based on a valuation performed
by an independent valuation firm engaged by the Company:
Total consideration at fair
value
|
|
$
|
5,500,000
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Cash
|
|
$
|
23,451
|
|
Other current assets
|
|
|
794,938
|
|
Plant and equipment
|
|
|
1,866,894
|
|
Other noncurrent assets
|
|
|
609,126
|
|
Goodwill
|
|
|
3,819,354
|
|
Total asset
|
|
|
7,113,763
|
|
Total liabilities
|
|
|
(1,613,763
|
)
|
Net asset acquired
|
|
$
|
5,500,000
|
|
Approximately
$3.8 million of goodwill arising from the acquisition consists largely of synergies expected from combining the operations of
the Company and TJComex BVI. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2017,
we performed an impairment testing on the goodwill and recorded an impairment loss of approximately $3.8 million on goodwill.
For
the three and six months ended June 30, 2017, the impact of the acquisition of TJComex BVI to the unaudited condensed consolidated
statements of income and comprehensive income was not material.
On
April 2, 2018, the Company disposed of its subsidiary, TJComex BVI, in consideration of (i) its minimum contribution
to the Company’s results of operation and (ii) the unsatisfactory synergy between the TJComex BVI
business and the rest of the Company’s business. The Company’s decision to dispose TJComex BVI is to
(i) improve the Company’s overall financial condition and results of operations, (ii) reduce the complexity
of the Company’s business, (iii) focus the Company’s resources on the solid waste
recycling business as well as developing environmental control business opportunities; and (iv) make it possible for
the Company to pursue acquisition opportunities for more compatible business. TJComex BVI was disposed to Chuanliu
Ni, a Chinese citizen who is the Chief Executive Officer and director of China Sunlong, for no consideration.
As
of April 2, 2018, the net assets of TJComex BVI were $16,598 and will be recorded as a loss from disposal of subsidiary in the
unaudited condensed consolidated financial statements for the period ending June 30, 2018. As TJComex operating revenue was less
than 1% of the Company’s revenue and the disposal did not constitute a strategic shift that will have a major effect on
the Company’s operations and financial results, the results of operations for TJComex were not reported as discontinued
operations under the guidance of Accounting Standards Codification 205.
Wuhan
HOST
On
April 11, 2018, the Company, Shengrong WFOE and Hubei Shengrong, both of which are the Company’s indirectly owned subsidiaries
(collectively “Purchasers”), entered into a Share Purchase Agreement (the “Purchase Agreement”) with
Long Liao, Chunyong Zheng, Wuhan Modern Industrial Technology Research Institute, and Hubei Zhonggong Materials Group Co., Ltd.
(collectively “Sellers” ) and Wuhan HOST Coating Materials Co., Ltd. (“Wuhan HOST”), a company incorporated
in China engaging in the research, development, production and sale of coating materials. Pursuant to the Purchase Agreement,
the Purchasers acquired all of the outstanding equity interests of Wuhan Host (the “Acquisition”). In exchange for
the transfer of 100% equity interest of Wuhan Host, Purchasers shall pay a total consideration of $11.2 million (“Total
Consideration”), of which $ 5.2 million or RMB equivalent shall be paid in cash (“Cash Consideration”) and $6.0
million shall be paid in shares of common stock (“Common Stock”), par value $0.0001, of TMSR (“Share Consideration”).
The Parties agree the Share Consideration shall be an aggregate of 1,293,104 shares of common stock of which is based on the closing
price of US$4.64 on March 27, 2018. The Share Consideration shall be issued in three equal installments, which shall be subject
to lock-up of 12, 24 and 36 months, respectively. The Purchase Agreement contains representations, warranties and covenants customary
for acquisitions of this type. The Acquisition closed on May 1, 2018.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
For
the three and six months ended June 30, 2018 and 2017, the impact of the acquisition of Wuhan HOST to the unaudited condensed
consolidated statements of income and comprehensive income was not material.
Note
4 – Accounts receivable and accounts receivable – related party
Accounts
receivable consist of the following:
|
|
June
30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
17,555,883
|
|
|
$
|
21,187,472
|
|
Accounts receivable – related
party
|
|
|
2,782,122
|
|
|
|
-
|
|
Less: Allowance
for doubtful accounts
|
|
|
(3,888,442
|
)
|
|
|
(6,674,834
|
)
|
Total accounts
receivable, net
|
|
$
|
16,449,563
|
|
|
$
|
14,512,638
|
|
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Movement
of allowance for doubtful accounts is as follows:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,674,834
|
|
|
$
|
-
|
|
Beginning balance
from Wuhan HOST
|
|
|
218,152
|
|
|
|
-
|
|
Addition
|
|
|
52,636
|
|
|
|
6,428,261
|
|
Recovery
|
|
|
(2,904,504
|
)
|
|
|
-
|
|
Exchange rate
effect
|
|
|
(152,676
|
)
|
|
|
246,573
|
|
Ending balance
|
|
$
|
3,888,442
|
|
|
$
|
6,674,834
|
|
Note
5 – Inventories
Inventories
consist of the following:
|
|
June
30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
125,586
|
|
|
$
|
-
|
|
Work in progress
|
|
|
2,237,624
|
|
|
|
9,203,623
|
|
Finished goods
|
|
|
-
|
|
|
|
39,865
|
|
Total inventories
|
|
$
|
2,363,210
|
|
|
$
|
9,243,488
|
|
Note
6 – Plant and equipment, net
Plant
and equipment consist of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
5,843,553
|
|
|
$
|
1,545,861
|
|
Production equipment
|
|
|
1,184,067
|
|
|
|
195,735
|
|
Office equipment and furniture
|
|
|
57,013
|
|
|
|
157,286
|
|
Automobile
|
|
|
-
|
|
|
|
39,298
|
|
Leasehold improvement
|
|
|
308,143
|
|
|
|
1,805,521
|
|
Subtotal
|
|
|
7,392,776
|
|
|
|
3,743,701
|
|
Less: accumulated
depreciation and amortization
|
|
|
(990,911
|
)
|
|
|
(1,555,566
|
)
|
Total
|
|
$
|
6,401,865
|
|
|
$
|
2,188,135
|
|
Depreciation
and amortization expense for the three months ended June 30, 2018 and 2017 amounted to $89,390 and $49,802, respectively, and
for the six months ended June 30, 2018 and 2017 amounted to $140,523 and $67,475, respectively.
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
7 – Intangible assets, net
Intangible
assets consist of the following:
|
|
June
30,
2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
1,538,386
|
|
|
$
|
-
|
|
Patents
|
|
|
3,756,799
|
|
|
|
3,240,137
|
|
Software
|
|
|
10,619
|
|
|
|
-
|
|
Less: accumulated
amortization
|
|
|
(2,252,373
|
)
|
|
|
(2,037,097
|
)
|
Net intangible
assets
|
|
$
|
3,053,431
|
|
|
$
|
1,203,040
|
|
Amortization
expense for the three months ended June 30, 2018 and 2017 amounted to $76,422 and $64,367, respectively, and for the six months
ended June 30, 2018 and 2017 amounted to $145,146 and $127,803, respectively.
The
estimated amortization is as follows:
Twelve
months ending June 30,
|
|
Estimated
amortization expense
|
|
|
|
|
|
2019
|
|
$
|
316,674
|
|
2020
|
|
|
182,636
|
|
2021
|
|
|
181,552
|
|
2022
|
|
|
181,552
|
|
2023
|
|
|
179,265
|
|
Thereafter
|
|
|
2,011,752
|
|
Total
|
|
$
|
3,053,431
|
|
Note
8 – Related party balances and transactions
Related
party balances
|
a.
|
Accounts
receivable – related party:
|
Name
of related party
|
|
Relationship
|
|
June
30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Wuhan Modern Industry
Technology Research Institution (“Wuhan Modern”)
|
|
Under common control of former
CEO of Wuhan Host and current shareholder of Company
|
|
$
|
1,324,250
|
|
|
$
|
-
|
|
TMSR
HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
b.
|
Other
payables – related parties:
|
Name
of related party
|
|
Relationship
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Jiazhen Li
|
|
CEO, Co-Chairman
|
|
$
|
378,125
|
|
|
$
|
304,833
|
|
Chuanliu Ni
|
|
Co-Chairman
|
|
|
325,907
|
|
|
|
848,493
|
|
Xiaoyan Shen
|
|
CFO
|
|
|
-
|
|
|
|
1,408
|
|
Zhong Hui Holding
Limited
|
|
Shareholder of the Company
|
|
|
140,500
|
|
|
|
-
|
|
Fujian Shengrong
|
|
20% subsidiary*
|
|
|
1,205,762
|
|
|
|
-
|
|
Chunyong Zheng
|
|
Spouse of shareholder of the Company
|
|
|
2,641,978
|
|
|
|
-
|
|
Long Liao
|
|
Shareholder of the Company
|
|
|
75,500
|
|
|
|
-
|
|
Wuhan Modern
|
|
Under common control of shareholder
of the Company
|
|
|
966,653
|
|
|
|
-
|
|
TJComex
Tianjin
|
|
Former subsidiary
and under common control of Chuanliu Ni, Co-Chairman of the Company
|
|
|
75,500
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
5,809,925
|
|
|
$
|
1,154,734
|
|
The above other than payable to Fujian Shengrong represents
interest free loans and advances. These loans and advances are unsecured and due on demand.
|
*Fujian
|
Shengrong lend capital contribution fund to Shengrong for
re-investing into Fujian Shengrong as capital contribution.
|
Note 9 – Debt
Short term loan
Short term loan due to bank is as follows:
Short term
loans
|
|
Maturities
|
|
|
Weighted
average
interest rate
|
|
|
Collateral/Guarantee
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Loan from Wuhan Rural Commercial Bank
|
|
|
July 25, 2018 (renewed in July 2018)
|
|
|
|
7.35
|
%
|
|
Guaranteed by Hubei Changyang Hongrong Environmental Protection Science and Technology Co. Ltd., a related party and pledged with its patent as a collateral
|
|
$
|
2,265,006
|
|
|
$
|
2,305,316
|
|
On July 26, 2018, the Company repaid the
loan from Wuhan Rural Commercial Bank in the amount of $2,265,006 (RMB 150,000,000) and on the same date, the Company obtained
a new loan in the same amount with 7.35% interest charge expiring July 25, 2019.
Third party loan
In April 2017, the Company obtained an
unsecured loan from an unrelated third party in the amount of $144,516 (RMB 1,000,000) due on April 27, 2018 with an annual interest
rate of 10%. The due date for this loan has been extended to October 27, 2018.
Interest expense for the three months ended
June 30, 2018 and 2017 amounted to $47,762 and $44,332, respectively, and for the six months ended June 30, 2018 and 2017 amounted
to $94,734 and $84,836, respectively.
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 10 – Taxes
Income tax
United States
TMSR is organized in the state of Delaware
in April 2015 and re-incorporated in the state of Nevada in June 2018.. TMSR had no taxable income for United States income tax
purposes for the three months ended June 30, 2018. TMSR’s U.S. net operating loss for the six months ended June 30, 2018
amounted to approximately $50,000. As of June 30, 2018, TMSR’s net operating loss carry forward for United States income
taxes was approximately $10,000. The net operating loss carry forwards are available to reduce future years’ taxable income
through year 2038. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s
operating history and continued losses in the United States. Accordingly, the Company has provided a 100% valuation allowance on
the deferred tax asset to reduce the asset to zero. Management reviews this valuation allowance periodically and makes changes
accordingly.
On December 22, 2017, the “Tax Cuts
and Jobs Act” (“The 2017 Tax Act”) was enacted in the United States. Under the provisions of the Act, the U.S.
corporate tax rate decreased from 34% to 21%. The 2017 Tax Act imposed a global intangible low-taxed income tax (“GILTI”),
which is a new tax on certain off-shore earnings at an effective rate of 10.5% for tax years beginning after December 31, 2017
(increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset for foreign tax credits. The Company
determined that there are no impact of GILTI for the year ended December 31, 2018, which the Company believes that it will be imposed
a minimum tax rate of 10.5% and to the extent foreign tax credits are available to reduce its US corporate tax, which may result
in no additional US federal income tax being due.
Cayman Islands
China Sunlong is incorporated in the Cayman
Islands and are not subject to tax on income or capital gains under current Cayman Islands law. In addition, upon payments of dividends
by China Sunlong to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Shengrong BVI and TJComex BVI are incorporated
in the British Virgin Islands and are not subject to tax on income or capital gains under current British Virgin Islands law. In
addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be
imposed.
Hong Kong
Shengrong HK and TJComex HK are incorporated
in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted
in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions
for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong
tax law, Shengrong HK and TJComex HK are exempted from income tax on its foreign-derived income and there are no withholding taxes
in Hong Kong on remittance of dividends.
PRC
Shengrong WFOE, Hubei Shengrong, Wuhan
HOST are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated
at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices
in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), Chinese enterprises are subject
to income tax at a rate of 25% after appropriate tax adjustments.
Significant components of the provision for income taxes are
as follows:
|
|
For the three months
ended June 30, 2018
|
|
|
For the three months
ended June 30, 2017
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
157,896
|
|
|
$
|
1,373,275
|
|
Deferred
|
|
|
218,109
|
|
|
|
-
|
|
Total provision for income taxes
|
|
$
|
376,005
|
|
|
$
|
1,373,275
|
|
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
|
For the six months
ended June 30,
2018
|
|
|
For the six months
ended June 30,
2017
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
253,359
|
|
|
$
|
1,991,416
|
|
Deferred
|
|
|
428,571
|
|
|
|
-
|
|
Total provision for income taxes
|
|
$
|
681,930
|
|
|
$
|
1,991,416
|
|
Under the Income Tax Laws of the PRC, companies
are subject to income tax at a rate of 25%. However, Hubei Shengrong obtained the “high-tech enterprise” tax status
in 2014, which reduced its statutory income tax rate to 15% from 2014 to 2016. Hubei Shengrong renewed its “high-tech enterprise”
status in December 2016, which continued to reduce its statutory income rate to 15% from 2017 to 2019. Wuhan Host also obtained
the “high-tech enterprise” tax status in 2016, which reduced its statutory income tax rate to 15% from 2016 to 2019.
Tax savings resulted from the reduced statutory income tax rate amounted to $102,161 and $898,811 for the three months ended June
30, 2018 and 2017, respectively, and amounted to $165,803 and $1,310,905 for the six months ended June 30, 2018 and 2017, 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,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Net operating losses carried forward – U.S.
|
|
$
|
10,387
|
|
|
$
|
-
|
|
Net operating losses carried forward – PRC
|
|
|
-
|
|
|
|
418,549
|
*
|
Bad debt allowance
|
|
|
582,227
|
|
|
|
980,840
|
|
Valuation allowance
|
|
|
(10,387
|
)
|
|
|
(418,549
|
)
|
Deferred tax assets, net
|
|
$
|
582,227
|
|
|
$
|
980,840
|
|
|
*Represents
|
TJ Comex net operating losses carried forward was disposed
on April 2, 2018.
|
Value added tax
Enterprises or individuals who sell commodities,
engage in repair and maintenance or import and export goods in the PRC are subject to a value added tax in accordance with PRC
laws. The value added tax (“VAT”) standard rates are 6% to 17% of the gross sales price and changed to 6% to 16% of
gross sales starting in May 2018. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials
used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products
and services.
Taxes payable consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
VAT taxes payable
|
|
$
|
10,454,338
|
|
|
$
|
7,838,111
|
|
Income taxes payable
|
|
|
6,258,644
|
|
|
|
6,798,803
|
|
Other taxes payable
|
|
|
1,248,990
|
|
|
|
924,489
|
|
Total
|
|
$
|
17,961,972
|
|
|
$
|
15,561,403
|
|
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 11 – Concentration of risk
Credit risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of June
30, 2018 and December 31, 2017, $1,371,795 and $0 and were deposited with various financial institutions located in the U.S., respectively.
As of June 30, 2018 and December 31, 2017, $2,707,921 and $457,126 and were deposited with various financial institutions located
in the PRC, respectively. As of June 30, 2018 and December 31, 2017, $13,209 and $3,186 were deposited with one financial institution
located in Hong Kong, respectively. While management believes that these financial institutions are of high credit quality, it
also continually monitors their credit worthiness.
Accounts receivable are typically unsecured
and derived from revenue earned from customers, thereby exposed to credit risk. The risk is mitigated by the Company’s assessment
of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Customer and vendor concentration risk
For the three months ended June 30, 2018, one customer accounted
for 80.5% of the Company’s revenues For the three months ended June 30, 2017, five customers accounted for 32.1%, 21.4%,
21.4%, 10.7% and 10.7% 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.. For the six months ended June 30, 2017,
four customers accounted for 22.4%, 21.9%, 21.7%, and 14.5% of the Company’s revenues.
As of June 30, 2018, three customers accounted
for 44.6%, 29.5%, and 13.7% of the Company’s accounts receivable and accounts receivable – related party. As of December
31, 2017, two customers, who are related to each other under common management and ownership, accounted for 45.6% and 43.9% of
the Company’s accounts receivable.
For the three months ended June 30, 2018,
one supplier accounted for 67.5% of the Company’s total purchases. For the three months ended June 30, 2017, three suppliers accounted
for 42.8%, 33.4% and 22.3% of the Company’s total purchases, respectively.
For the six months ended June 30, 2018,
two suppliers accounted for 64.4% and 10.2% of the Company’s total purchases. For the six months ended June 30, 2017, three suppliers
accounted for 43.7%, 31.3% and 23.9% of the Company’s total purchases, respectively.
As of June 30, 2018, three suppliers accounted
for 38.2%, 32.9% and 28.4% of the Company’s total prepayments; and three suppliers accounted for 25.4%, 23.3% and 15.1% of the
Company’s total accounts payable. As of December 31, 2017, three suppliers accounted for 41.2%, 35.9% and 22.8% of the Company’s
prepayments; and two suppliers accounted for 40.0% and 29.1% of the Company’s total accounts payable.
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 12 – Equity
Restricted net assets
The Company’s ability to pay dividends
is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations
permit payments of dividends by Shengrong WFOE only out of its retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations. The results of operations reflected in the accompanying unaudited condensed consolidated
financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of
Shengrong WFOE.
Shengrong WFOE, Hubei Shengrong, Wuhan
HOST are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds
until such reserve funds reach 50% of its registered capital. In addition, Shengrong WFOE may allocate a portion of its after-tax
profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Hubei
Shengrong and Wuhan HOST may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus
fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance
of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration
of Foreign Exchange.
As of June 30, 2018 and December 31, 2017,
Shengrong WFOE (through Hubei Shengrong and Wuhan HOST) attributed $2,262,185 and $2,137,815 of retained earnings for their
statutory reserves, respectively.
As a result of the foregoing restrictions,
Shengrong WFOE are restricted in their ability to transfer their net assets to the Company. Foreign exchange and other regulation
in the PRC may further restrict Shengrong WFOE from transferring funds to China Sunlong in the form of dividends, loans and advances.
As of June 30, 2018 and December 31, 2017, amounts restricted are the net assets of Shengrong WFOE, which amounted to $29,462,002
and $27,800,814, respectively.
Stock split
On June 1, 2018, the Company’s shareholder
approved a 2 for 1 stock split of the Company’s common stock at the Annual Meeting of Shareholders. The stock split was effected
on June 20, 2018, pursuant to the completion of the reincorporation from Delaware to Nevada. All shares and per share amounts used
herein and in the accompanying unaudited condensed consolidated financial statements have been retroactively restated to reflect
the stock split.
Common stock
On June 23, 2018, the Company issued an
aggregate of 26,693 shares of the Company’s common stock, par value $0.0001 per share, to certain non-U.S. purchasers at
a purchase price of $5.00 per share for an aggregate offering price of $133,335 pursuant to certain securities purchase agreement
dated April 20, 2018 and June 22, 2018. The issuances were pursuant to the exemption from registration under Regulation S
promulgated under the Securities Act of 1933, as amended.
Warrants and options
On July 29, 2015, the Company sold 10,000,000
units at a purchase price of $5.00 per unit (“Public Units”) in its initial public offering. Each Public Unit consists
of one share of the Company’s common stock, $0.0001 par value, and one warrant. Each warrant will entitle the holder to purchase
one-half of one share of common stock at an exercise price of $2.88 per half share ($5.75 per whole share). Warrants may be exercised
only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The warrants
will become exercisable on 30 days after the consummation of its initial Business Combination with China Sunlong on February 6,
2018. The warrants will expire February 5, 2023. The warrants will be redeemable by the Company at a price of $0.01 per warrant
upon 30 days prior written notice after the warrants become exercisable, only in the event that the last sale price of the common
stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading day period ending on the third business day
prior to the date on which notice of redemption is given.
The sponsor of the Company purchased, simultaneously
with the closing of the Public Offering on July 29, 2015, 500,000 units at $5.00 per unit in a private placement for an aggregate
price of $2,500,000. Each unit purchased is substantially identical to the units sold in the Public Offering.
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
The summary of warrant activity is as follows:
|
|
Warrants
Outstanding
|
|
|
Exercisable
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Average
Remaining
Contractual Life
|
|
December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted/Acquired
|
|
|
10,500,000
|
|
|
|
5,250,000
|
|
|
$
|
5.75
|
|
|
|
4.67
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
June 30, 2018
|
|
|
10,500,000
|
|
|
|
5,250,000
|
|
|
$
|
5.75
|
|
|
|
4.67
|
|
The summary of option activity is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Average
Remaining
Contractual Life
|
|
December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted/Acquired
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.67
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
June 30, 2018
|
|
|
824,000
|
|
|
$
|
5.00
|
|
|
|
4.67
|
|
TMSR HOLDING COMPANY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 13 – Commitments and contingencies
Contingencies
The Company may be subject to certain legal
proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings
cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial
position, results of operations or liquidity.
Lease commitments
The Company has entered into non-cancellable
operating lease agreements for two offices, one factory space and one dormitory space for its employees. The two office leases
are expiring in August 2018 and December 2021 with a monthly rental rate of approximately $2,700 and $5,100, respectively. The
factory lease is expiring in December 2018 with a monthly rental rate of approximately $6,000. The dormitory lease expired in July
2017, and was extended to July 2018, with a monthly rental rate of approximately $400. The office lease payments for the lease
expiring in December 2021 will be paid over three years beginning 2018.
The Company’s commitments for minimum
lease payment under these operating leases as of June 30, 2018 are as follow:
Years ending June 30,
|
|
Minimum lease payment
|
|
2019
|
|
$
|
135,746
|
|
2020
|
|
|
105,441
|
|
2021
|
|
|
105,441
|
|
Total minimum payments required
|
|
$
|
346,628
|
|
Rent expense for the three months ended
June 30, 2018 and 2017 were $46,510 and $48,375, respectively, and for the six months ended June 30, 2018 and 2017 were $93,328
and $91,045, respectively.