UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the Fiscal Year Ended December 31, 2017
OR
☐ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________
For the transition period from _________ to __________
Commission file number 001-38170
NEWATER TECHNOLOGY, INC.
(Exact Name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
c/o Yantai Jinzheng Eco-Technology Co., Ltd.
8 Lande Road, Laishan District, Yantai City
Shandong Province
People’s Republic of China 264000
(Address of principal executive offices)
Yuebiao Li
c/o Yantai Jinzheng Eco-Technology Co., Ltd.
8 Lande Road, Laishan District, Yantai City
Shandong Province
People’s Republic of China 264000
(+86) 535-6212280
Email: market@newater.cc
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $0.001 par value per share
Name of Exchange on which registered
The Nasdaq Capital Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d): None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the
annual report: 10,809,000 outstanding common shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15
(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
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 Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, or an emerging growth
company. See definition of “large accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. ☒
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
By the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
Table of Contents
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other Than Equity Securities
Defaults, Dividends Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Controls and Procedures
[Reserved]
Audit Committee and Financial Expert
Code of Ethics
Audit-Related Fees
Exemptions form the Listing Standards for the Audit Committee
Purchase of Equity Securities by the Issuer and the Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Item 13.
Item 14.
Item 15.
Item 15T.
Item 16.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
PART III
Item 17.
Item 18.
Item 19.
1
1
1
29
52
53
72
78
81
82
83
91
92
93
93
93
93
93
93
93
94
94
94
94
94
94
95
95
95
Except where the context otherwise requires and for purposes of this annual report on Form 20-F only:
Defined Terms and Conventions
● The terms “we,” “us,” “Company” “our company,” and “our” refer to Newater Technology, Inc. and its wholly-owned subsidiaries;
● Newater Technology, Inc., a British Virgin Islands company (“Newater Technology” when referring solely to our British Virgin Islands
listing company);
● Newater HK Limited, a Hong Kong company wholly-owned by Newater Technology (“Newater HK”);
● Yantai Jinzheng Eco-Technology Co., Ltd, a wholly-owned subsidiary of Newater HK (“Jinzheng”);
● “shares” and “common shares” refer to our common shares, $0.001 par value per share;
● “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this annual report only, Macau, Taiwan and
Hong Kong; and
● all references to “RMB,” and “Renminbi” are to the legal currency of China, and all references to “USD,” and “U.S. Dollars” are to the legal
currency of the United States.
We refer to Jinzheng by name in discussing the entity that conducts our day-to-day water filtration business in China and refer to “our company”
when discussing our strategies, business plans, organization and other decision-making focused matters. Because we own Jinzheng by virtue of our
ownership of Newater HK, we believe it would be misleading in most cases to discuss the business decisions of Jinzheng as though Jinzheng were at
arm’s-length from our company.
For the sake of clarity, this annual report follows the English naming convention of first name followed by last name, regardless of whether an
individual’s name is Chinese or English. For example, the name of our chief executive officer will be presented as “Yuebiao Li”, even though, in Chinese,
his name would be presented as “Li Yuebiao”.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. All statements contained in this annual report other than statements of historical fact,
including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future
operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar
expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and
projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-
term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment.
New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this annual report may not occur
and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-
looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable,
we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking
statements after the date of this annual report or to conform these statements to actual results or revised expectations.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable for annual reports on Form 20-F.
Item 2. Offer Statistics and Expected Timetable
Not applicable for annual reports on Form 20-F.
Item 3. Key Information
A.
Selected Financial Data.
In the table below, we provide the summary financial data of our company. The selected consolidated statements of income and comprehensive
income data for the years ended December 31, 2017, 2016 and 2015, and the selected consolidated balance sheets data as of December 31, 2017 and 2016
are derived from our audited consolidated financial statements, which are included elsewhere in this annual report. The selected consolidated statement of
income and comprehensive income data for the year ended December 31, 2014 and the selected consolidated balance sheets data as of December 31, 2015
and 2014 are derived from our audited consolidated financial statements, which are not included in this annual report. Historical results are not necessarily
indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it
along with the historical statements and notes.
Selected Consolidated Statements of Income and Comprehensive Income Data
Total revenues
Cost of revenues
Gross profit
Total operating expenses
Income (loss) from operations
Other income (expenses)
Government grants
Interest income
Interest expense
Other expense
Total other income (expense)
Income (loss) before provision for income taxes
Income tax provisions
Net income (loss)
Earnings (loss) per share
Basic
Diluted
Cash and cash equivalents
Total current assets
Total non-current assets
Total assets
Total current liabilities
Total non-current liabilities
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
Exchange Rate Information
2017
25,339,497
17,077,129
8,262,368
5,575,086
2,687,282
(513,538)
(112,592)
242,707
3,956
(379,467)
3,066,749
475,818
2,590,931
0.26
0.26
$
$
$
$
$
$
$
$
$
For the Years Ended December 31,
2015
6,978,254
3,763,871
3,214,383
1,643,313
1,571,070
2016
12,279,721
7,738,773
4,540,948
3,146,521
1,394,427
2014
1,033,086
670,739
362,347
361,166
1,181
$
$
(1,750,726)
(5,091)
155,553
12,534
(1,587,730)
2,982,157
548,437
2,433,720
0.28
0.28
$
$
$
-
(2,612)
164,613
10,642
172,643
1,398,427
452,850
945,577
0.12
0.10
-
-
-
-
-
1,181
2,774
(1,593) $
(0.00) $
(0.00) $
2013
56,847
40,601
16,246
21,892
(5,646)
-
-
-
7,270
7,270
(12,916)
49
(12,965)
(0.00)
(0.00)
Selected Balance Sheet Data
$
2017
3,118,080
31,634,747
13,710,900
45,345,647
24,343,309
11,050
24,354,359
20,991,288
45,345,647
$
2016
1,484,762
14,063,217
3,528,207
17,591,424
6,838,202
-
6,838,202
10,753,222
17,591,424
As of December 31,
2015
$
135,152
9,200,052
1,461,572
10,661,624
6,877,885
30,808
6,908,693
3,752,931
10,661,624
$
2014
36,758
1,817,485
404,546
2,222,031
1,461,124
-
1,461,124
760,907
2,222,031
2013
55,069
532,464
29,561
562,025
23,567
-
23,567
538,458
562,025
$
$
$
$
$
Our business is conducted in China, and the financial records of Jinzheng are maintained in RMB, its functional currency. However, we use the
U.S. dollar as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts translated into U.S. dollars
using the then-current exchange rates. Our financial statements have been translated into U.S. dollars in accordance with Accounting Standards
Codification (“ASC”) 830-10, “Foreign Currency Matters.” We have translated our asset and liability accounts using the exchange rate in effect at the
balance sheet date. We translated our statements of operations using the average exchange rate for the period. We reported the resulting translation
adjustments under other comprehensive income (loss). The consolidated balance sheet amounts, with the exception of equity at December 31, 2017 and
2016 were translated at RMB 6.5064 and RMB 6.9448 to $1.00, respectively. The equity accounts were stated at their historical rate. The average
translation rates applied to consolidated statements of income and comprehensive income and cash flows for the years ended December 31, 2017, 2016
and 2015 were RMB 6.7570, RMB 6.6441 and RMB 6.2288 to $1.00, respectively.
1
We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case
may be, at any particular rate, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the
conversion of RMB into foreign exchange and through restrictions on foreign trade.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Forex Exchange Rate
2012
2013
2014
2015
2016
2017
October 2017
November 2017
December 2017
January 2018
February 2018
March 2018
April 2018 (through April 28, 2018)
(RMB per U.S. Dollar)
Period End
Average (1)
6.3090
6.1090
6.1484
6.4917
6.9448
6.5064
6.3115
6.1938
6.1458
6.2288
6.6441
6.7570
(RMB per U.S. Dollar)
Period High
Period Low
6.6544
6.6403
6.6199
6.5167
6.3508
6.3468
6.3343
6.5786
6.5740
6.5063
6.2963
6.2644
6.2726
6.2739
(1) Annual averages were calculated by using the average of the midpoint exchange rate of each day during the relevant year.
B.
Capitalization and indebtedness.
Not applicable for annual reports on Form 20-F.
C.
Reasons for Offer and use of Proceeds.
Not applicable for annual reports on Form 20-F.
D.
Risk Factors.
2
Risks Related to Our Business
Our limited operating history makes it difficult to evaluate our future prospects and results of operations, and we face certain risks and uncertainties
as an early stage company, which, if we are unsuccessful in addressing such risks, could have a material adverse effect on our business.
We have a limited operating history. Jinzheng was established in 2012. Newater Technology and Newater HK were established in 2015. As our
operating history is limited, the revenues and income potential of our business and markets are unproven. Our limited operating history and the early stage
of development of the industry in which we operate makes it difficult to evaluate our business and future prospects. We cannot assure that we will
maintain our profitability or that we will not incur net losses in the future. Any failure to realize anticipated revenue growth could result in significant
operating losses. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in
evolving markets such as the growing market for water treatment businesses in China. In addition, we face numerous risks, uncertainties, expenses and
difficulties frequently encountered by companies at an early stage of development. We will continue to encounter risks and difficulties in implementing
our business model, including potential failure to:
● increase our revenue and market share by targeting specific markets;
● expand our operations and business to other provinces;
● attract additional customers and increase spending per customer;
● attract a wider client base;
● increase visibility of our brand and maintain customer loyalty;
● respond to competitive market conditions;
● anticipate and adapt to changing conditions in the markets in which we operate as well as changes in government regulations, mergers and
acquisitions involving our competitors, technological developments and other significant competitive and market dynamics;
● manage risks associated with intellectual property rights;
● maintain effective control of our costs and expenses;
● raise sufficient capital to sustain and expand our business;
● attract, train, retain and motivate qualified personnel, continue to train, motivate and retain our existing employees, attract and integrate new
employees, including into our senior management; and
● upgrade our technology to support additional research and development of new water treatment filtration products.
3
We cannot predict whether we will be successful in addressing any or all of these risks. If we were unsuccessful in addressing these risks and
uncertainties, our business, financial condition and results of operation may be materially and adversely affected.
Wage increases in China may prevent us from sustaining our competitive advantage and could reduce our profit margins.
Labor costs in China have increased with China’s economic development, including Yantai where our offices are based. Rising inflation in
China is also putting pressure on wages. Wage costs for our employees form a significant part of our costs. For instance, in 2017, 2016 and 2015, our
compensation and benefit costs for our employees were $2.5 million, $1.2 million and $0.8 million, respectively. These amounts accounted for 10 %,
10% and 11% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. In addition, we are required by Chinese laws
and regulations to pay various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance,
unemployment insurance and maternity insurance to designated governmental agencies for the benefit of our employees. We expect that our labor costs,
including wages and employee benefits, will continue to increase, particularly as we seek to remain competitive in retaining the quality and number of
employees that our business requires. In addition, the future issuance of equity-based compensation to our professional staff and other employees would
also result in additional stock dilution for our shareholders. Unless we are able to pass on these increased labor costs to our customers by increasing prices
for our products, projects and services, our profitability and results of operations may be materially and adversely affected. Furthermore, the Chinese
government has promulgated new laws and regulations to enhance labor protections in recent years, such as the Labor Contract Law and the Social
Insurance Law. As the interpretation and implementation of these new laws and regulations are still evolving, our employment practice may not at all
times be deemed in compliance with the new laws and regulations. If we are subject to penalties or incur significant liabilities in connection with labor
disputes or investigation, our business and profitability may be adversely affected.
Our revenue will decrease if the industries in which our customers operate experience a protracted slowdown.
Our customers generally operate in the waste (garbage), chemical and energy industries. Therefore, we are subject to general changes in
economic conditions impacting these industry segments of the economy. If these industries do not grow or if there is a contraction in these industries,
demand for our business will decrease. Demand for our business is typically affected by a number of overarching economic factors, including interest
rates, environmental laws and regulations, the availability and magnitude of private and governmental investment in infrastructure projects and the health
of the overall economy. If there is a decline in economic activity in China and the markets in which we operate or a protracted slowdown in industries
upon which we rely for our sales, demand for our projects, products and services and our revenue will likewise decrease which could have a materially
adverse effect on our business.
Any decline in the availability or increase in the cost of raw materials could materially impact our earnings.
Our filtration products, project installation operations and service sales depend heavily on the ready availability of various raw materials. The
availability of raw materials may decline, and their prices may fluctuate greatly. If our suppliers are unable or unwilling to provide us with raw materials
on terms favorable to us, we may be unable to produce certain products. The inability to produce certain filtration products, installation projects or to
provide wastewater treatment services for customers could result in a decrease in profit and damage to our corporate reputation. In the event our raw
material costs increase, we may not be able to pass these higher costs on to our customers in full or at all.
We rely on a limited number of vendors, and the loss of any significant vendor could harm our business, and the loss of any one of such vendors
could have a material adverse effect on our business.
We consider our major vendors to be those vendors that accounted for more than 10% of overall purchases in any given fiscal period. For the
year ended December 31, 2017 and 2016, Dalian Huarui Heavy Industry Group Limited by Share Ltd. accounted for 43% and 54% of our raw material
purchases, respectively. For the year ended December 31, 2015, purchases from Heilongjiang Binteer accounted for 45.31% of the total purchases. We
have not entered into a long-term contract with this major vendor and instead rely on individual contracts with such vendor. Although we believe that we
can locate a replacement vendor readily on the market for prevailing prices, any difficulty in replacing such a vendor could negatively affect our
company’s performance to the extent it results in higher prices or a slower supply chain.
4
Historically we have relied significantly on related party transactions, and a decline in sales to related parties may adversely impact our revenue in the
event we do not generate revenue from unrelated third parties.
In 2015, 52% of our sales revenues were generated from related parties, among which, 35% of revenues were generated from Mojie Technology
(Beijing) Co., Ltd (“Mojie”) and 17% of revenues were generated from Heilongjiang Binteer Environmental Protection Equipment Manufacturing Co.,
Ltd. (“Heilongjiang Binteer”). In 2016, 2% of our sales revenues were generated from related parties, among which, 2% of revenues were generated from
Heilongjiang Binteer and less than 1% from Mojie. In 2017 we did not have any sales revenues generated from related parties. While our dependence on
related parties ceased in 2017, there can be no assurance that such dependence will not return, potentially significantly, in the future. Mojie is a related
party company founded by our Chief Financial Officer, Zhuo Zhang, and our Chief Executive Officer, Yuebiao Li. On July 5, 2015, Zhuo Zhang and
Yuebiao Li transferred 100% of their equity interests in Mojie to a third party individual but continue to have significant influence on Mojie. Yuebiao Li,
our Chief Executive Officer, established Heilongjiang Binteer. Mr. Li then transferred his 60% equity interest in May 2014 to his brother, Yuefeng Li.
Due to health issues Yuefeng Li then transferred his equity interest for zero consideration to his business partner. We believe we have traditionally been
Heilongjiang Binteer’s major vendor and customer and have significant influence on its operations in 2015 and 2016. In the event we are unable to
continue to generate sales to unrelated parties to replace revenue from Mojie and Heilongjiang Binteer, our revenues will likely decrease.
Collectability of our accounts receivable has adversely impacted our operating cash flow, and may continue to do so.
We reported cash flow used in operations in the amounts of $3,189,701, 663,655 and 2,958,430 for the years ended December 31, 2017, 2016
and 2015. Negative cash flow from operations in 2016 and 2017 was partly due to the increase in balance of net accounts receivable from third parties.
Negative cash flow from operations in 2015 was mainly due to the increase in balances of net accounts receivable from both third parties and related
parties. As of December 31, 2017 and 2016, the balance of net accounts receivable from third parties were $6,050,495, and $2,637,236, respectively; the
balance of net accounts receivable from related parties were $0 and $1,060,977, respectively. If the accounts receivables cannot be collected in time, or at
all, a significant amount of bad debt expense will occur, and our business, financial condition and results of operation may be materially and adversely
affected.
We face substantial inventory risk, which if such risk is not addressed could have a material adverse effect on our business.
We must order materials for our products, projects and services and build inventory in advance of production. We typically acquire materials
through a combination of purchase orders, supplier contracts and open orders, in each case based on projected demand.
Our inventory includes raw materials, work-in progress products and finished goods. As of December 31, 2017, our inventory was $10,279,397.
Inventory turnover for the year ended December 31, 2017 was 159 days. As our markets are competitive and subject to rapid technology and price
changes, there is a risk that we will forecast incorrectly and order or produce incorrect amounts of products or not fully utilize firm purchase
commitments. If we were unsuccessful in accurately quantifying appropriate levels of inventory, our business, financial condition and results of operation
may be materially and adversely affected.
5
Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products, which could
have a material adverse effect on our business.
In order to optimize our product manufacturing, we must manage our supply chain for raw materials and delivery of our products. Supply chain
fragmentation and local protectionism within China further complicates supply chain disruption risks. Local administrative bodies and physical
infrastructure built to protect local interests may pose transportation challenges for raw material transportation as well as product delivery. In addition,
profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, natural
disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain,
manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products. If we were unsuccessful in
maintaining efficient operation of our supply chain, our business, financial condition and results of operation may be materially and adversely affected.
We expect our customer support teams and our quality assurance and manufacturing monitoring procedures to continue to keep claims at a level
that does not support a need for a financial reserve. However, if we experience significant increases in claims or customers’ failure to pay the final 5-20%
of a purchase/installation price as a result of quality concerns, our financial results could be adversely affected.
Our operations are subject to geographic market risks, which could adversely affect our revenues and profitability.
In 2017, approximately 84% of our revenues were realized from three geographic markets, with approximately 48%, 32% and 4% of our
revenues from clients located in the Beijing, Qingdao (Shandong Province) and Shaanxi Province, respectively. Accordingly, we are subject to risks
related to the economies of these geographic markets. In addition to economic conditions, the geographic concentration of our primary clients suggests
that regional specific legislation, taxes and disasters such as earthquakes could disproportionately affect us and our financial performance. A downturn in
wastewater treatment demand or economic conditions in these regions could result in a material decline in our business, financial condition and results of
operation.
We face certain risks in collecting our accounts receivable and we have a small number of customers who account for a significant amount of our
revenues, the failure to collect could have a material adverse effect on our business.
With the recent expansion of our business, our accounts receivable has increased. At the end of 2017 and 2016, our accounts receivable from
both third parties and related parties were $6,050,495 and $3,698,213, respectively. These amounts represented 24% of our total revenues in 2017 and
30% of our total revenues in 2016. In 2016, accounts receivable turnover was 130 days, and in 2017, it decreased to 70 days. This decrease is primarily
because in 2017 there were no sales to Mojie and Heilongjiang Binteer, as a result the impact of the relaxed credit standards applicable to those two
related parties was limited.
Although we believe that we have developed a robust receivables management system and have not incurred a situation where an accounts
receivable has become uncollectable, as our business continues to scale, we believe that our accounts receivable balance will continue to grow. This, in
turn, increases our risks for bad debts and uncollectible receivables. To the extent we incur additional bad debts and/or uncollectible receivables, our
business, financial condition and results of operation may be materially and adversely affected.
6
We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan and
address competitive challenges, which could have a material adverse effect on our business.
We increased our number of full-time employees from 75 at December 31, 2015, 95 at December 31, 2016 to 173 at December 31, 2017, and our
total revenues from $7 million in 2015, $12 million in 2016 to $25 million in 2017. This expansion has resulted, and will continue to result, in substantial
demands on our managerial, administrative, operational, financial and other resources. Furthermore, we intend to grow by expanding our business,
increasing market penetration of our existing products, developing new products and increasing our targeting of industrial park wastewater treatment,
municipality wastewater recycling, and seawater desalination markets in China. To manage this growth, we must develop and improve our existing
administrative and operational systems and our financial and management controls and further expand, train and manage our work force.
As we continue these efforts, we may incur substantial costs and expend substantial resources due to, among other things, different technology
standards, legal considerations and cultural differences. We will be required to dedicate additional financial resources and personnel to optimize our
operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these
measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, projects and services, which will impair our revenue
growth and hurt our overall financial performance.
We cannot assure you that our growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of
operations and cash flow.
We intend to grow by expanding our business, increasing market penetration of our existing products, developing new products and increasing
our targeting of industrial park wastewater treatment, municipality wastewater recycling, and seawater desalination markets in China. However, many
obstacles to this expansion exist, including increased competition from similar businesses, our ability to improve our products and product mix to realize
the benefits of our research and development efforts, unexpected costs and costs associated with marketing efforts. We cannot, therefore, assure you that
we will be able to successfully overcome such obstacles and establish our business in any additional markets. Our inability to implement this internal
growth strategy successfully may have a negative impact on our growth, future financial condition, and results of operations or cash flows.
If we fail to compete successfully against new and existing competitors, we may not be able to increase our market share, and our profitability may be
adversely affected.
We do and will continue to face significant competition in China in the water filtration business. We compete for clients primarily on the basis of
our brand name, price and the range of products and services that we offer. Some of our existing and potential competitors may have competitive
advantages, such as significantly greater financial, marketing or other resources. We cannot assure that we will be able to successfully compete against
new or existing competitors. If we fail to maintain our reputation and competitiveness, customers demand for our products, projects and services could
decline.
7
If we fail to protect our intellectual property rights, it could harm our business and competitive position.
We own 19 patents in China covering our water filtration production technology, and we rely on a combination of patent, trademark and trade
secret laws and non-disclosure agreements and other methods to protect our intellectual property rights.
The process of seeking patent protection on future patents can be lengthy and expensive, our patent applications may fail to result in patents
being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and
patent applications may also be challenged, invalidated or circumvented.
Implementation of Chinese intellectual property-related laws has historically been lacking, primarily because of ambiguities in Chinese laws and
enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States
or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to
litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such
litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management
attention, which could harm our business and competitive position.
We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a
material adverse effect on our financial condition and results of operations.
Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual
property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the
subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential
competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents
that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States
and other countries in Asia. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative
proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel.
Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:
● pay damage awards;
● seek licenses from third parties;
● pay ongoing royalties;
● redesign our branded products; or
● be restricted by injunctions.
Each of these events could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers
deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of
operations.
Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of proprietary information and trade secrets.
In addition to patents, we rely on confidentiality agreements to protect our technical know-how and other proprietary information.
Confidentiality agreements are used, for example, when we talk to potential clients, consultants, contractors and vendors. In addition, our scientists and
each of our research and development and manufacturing employees have signed a confidentiality agreement. Nevertheless, there can be no guarantee that
an employee or a third party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or
inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any
legal action we might take against persons making such unauthorized disclosures.
8
If we experience a significant disruption in, or a breach in security of, our information technology systems or if we fail to implement, manage or
integrate new systems, software and technologies successfully, it could harm our business.
Our information technology (“IT”) systems are an integral part of our business. We depend on our IT systems to process transactions, manage
logistics, keep financial records, prepare our financial reporting and operate other critical functions. Security breaches, cyber-attacks or other serious
disruptions of our IT systems can create systemic disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to
prevent or adequately respond to such breaches, attacks or other disruptions, our operations could be adversely affected or we may suffer financial or
reputational damage.
In addition, our ability to effectively implement our business plan in a rapidly evolving market requires effective planning, reporting and
analytical processes and systems. We are improving and expect that we will need to continue to improve and further integrate our IT systems, reporting
systems and operating procedures on an ongoing basis. If we fail to do so effectively, it could adversely affect our ability to achieve our objectives.
Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and
financial performance.
Manufacturing or design defects (including in products or components that we source from third parties), unanticipated use of, or inadequate
disclosure of risks relating to, the use of products that we make and sell may lead to personal injury, death or property damage. These events could lead to
recalls or alerts relating to our products, result in the removal of a product from the market or result in product liability claims being brought against us.
Product recalls, removals and liability claims can lead to significant costs, as well as negative publicity and damage to our reputation that could reduce
demand for our products.
Our future growth depends on new products and new technology innovation, and failure to invent and innovate could adversely impact our business
prospects.
Our future growth depends in part on maintaining our competitive advantage with current products in new and existing markets, as well as our
ability to develop new products and technologies to serve such markets. To the extent that competitors develop competitive products and technologies, or
new products or technologies that achieve higher customer satisfaction, our business prospects could be adversely impacted. In addition, regulatory
approvals for new products or technologies may be required and these approvals may not be obtained in a timely or cost effective manner, adversely
impacting our business prospects.
Changes in demand for our products and business relationships with key customers and suppliers may negatively affect operating results.
To achieve our objectives, we must develop and sell products that are subject to the demands of our customers. This is dependent on many
factors, including managing and maintaining relationships with key customers, responding to the rapid pace of technological change and obsolescence,
which may require increased investment by us or result in greater pressure to commercialize developments rapidly or at prices that may not fully recover
the associated investment, and the effect on demand resulting from customers’ research and development, capital expenditure plans and capacity
utilization. If we are unable to keep up with our customers’ demands, our sales, earnings and operating results may be negatively affected.
9
We may be unable to deliver our backlog on time, which could affect future sales and profitability and our relationships with customers.
Our ability to meet customer delivery schedules for backlog is dependent on a number of factors including sufficient manufacturing plant
capacity, adequate supply channel access to raw materials and other inventory required for production, an adequately trained and capable workforce,
project engineering expertise for certain large projects and appropriate planning and scheduling of manufacturing resources. Many of the contracts we
enter into with our customers require long manufacturing lead times. Failure to deliver in accordance with customer expectations could subject us to
contract cancellations and financial penalties, and may result in damage to existing customer relationships and could have a material adverse effect on our
business, financial condition and results of operations.
We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.
Our future success depends heavily upon the continued service of our key executives. In particular, we rely on the expertise and experience of
Yuebiao Li, our founder, Chairman and Chief Executive Officer. We rely on his industry expertise and experience in our business operations, and in
particular, his business vision, management skills, and working relationship with our employees, our other major shareholders, the regulatory authorities,
and many of our clients. If he became unable or unwilling to continue in his present position, or if he joined a competitor or formed a competing company
in violation of his employment agreement, we may not be able to replace him easily, our business may be significantly disrupted and our financial
condition and results of operations may be materially adversely affected.
We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a
material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable
candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any
member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business
partners and other key professionals and staff members of our Company. Although each of our senior management and key personnel has signed a
confidentiality and non-competition agreement in connection with his or her employment with us, we cannot assure that we will be able to successfully
enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.
In addition, we compete for qualified personnel with other water treatment companies, and we face competition in attracting skilled personnel
and retaining the members of our senior management team. These personnel possess technical and business capabilities, including expertise relevant to
the water treatment market, which are difficult to replace. There is intense competition for experienced senior management with technical and industry
expertise in the water treatment industry, and we may not be able to retain our key personnel. Intense competition for these personnel could cause our
compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our
business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we
are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company
domiciled in the British Virgin Islands and failure to comply with such obligations could have a material adverse effect on our business.
Prior to the completion of our initial public offering, Jinzheng operated as a private company located in China. In connection with our initial
public offering, we formed Newater Technology in the British Virgin Islands, Newater HK Limited in Hong Kong and made Jinzheng a Newater
subsidiary in China. In the process of taking these steps to prepare our company for the initial public offering, Jinzheng’s senior management became the
senior management of Newater Technology. None of Newater Technology’s senior management has experience managing a public company or managing
a British Virgin Islands company.
10
As a result of our initial public offering, our company became subject to laws, regulations and obligations that did not currently apply to it, and
our senior management had no experience in complying with such laws, regulations and obligations. For example, Newater Technology needs to comply
with the British Virgin Islands laws applicable to companies that are domiciled in that country. The senior management was only experienced in operating
the business of Jinzheng in compliance with Chinese laws. Similarly, by virtue of our initial public offering, Newater Technology is required to file
annual and current reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to
comply with such obligations could have a material adverse effect on Newater. In addition, we expect that the process of learning about such new
obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise
be spent on the operation of our water treatment business.
We have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management focus
from our business and could significantly impact our financial results.
Availability of business insurance products and coverage in China is limited, and most such products are expensive in relation to the coverage
offered. We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurances on
commercially reasonable terms make it impractical for us to maintain such insurances. As a result, we do not have any business liability, disruption or
litigation insurance coverage for our operations in China. Accordingly, a business disruption, litigation or natural disaster may result in substantial costs
and divert management’s attention from our business, which would have an adverse effect on our results of operations and financial condition.
We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing
when needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. Any additional equity financing may result in
dilution to the holders of our outstanding shares of capital stock. Additional debt financing may impose affirmative and negative covenants that restrict
our freedom to operate our business, including covenants that:
● limit our ability to pay dividends or require us to seek consent for the payment of dividends;
● increase our vulnerability to general adverse economic and industry conditions;
● require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow
to fund capital expenditures, working capital and other general corporate purposes; and
● limit our flexibility in planning for, or reacting to, changes in our business and our industry.
We cannot guaranty that we will be able to obtain additional financing on terms that are acceptable to us, or any financing at all, and the failure
to obtain sufficient financing could adversely affect our business operations.
Potential disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of short-term funds for
liquidity requirements, which could adversely affect our results of operations, cash flows and financial condition.
Potential changes in the global economy may affect the availability of business and consumer credit. We may need to rely on the credit markets,
particularly for short-term borrowings from banks in China, as well as the capital markets, to meet our financial commitments and short-term liquidity
needs if internal funds from our operations are not available to be allocated to such purposes. Disruptions in the credit and capital markets could adversely
affect our ability to draw on such short-term bank facilities. Our access to funds under such credit facilities is dependent on the ability of the banks that
are parties to those facilities to meet their funding commitments, which may be dependent on governmental economic policies in China. Those banks may
not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of
borrowing requests from us and other borrowers within a short period of time.
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Long-term disruptions in the credit and capital markets could result from uncertainty, changing or increased regulations, reduced alternatives or
failures of financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption could require us to take
measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.
Such measures may include deferring capital expenditures, and reducing or eliminating discretionary uses of cash. These events would adversely impact
our results of operations, cash flows and financial position.
We rely on short-term borrowings for our liquidity and we may not be able to continue to obtain financing on favorable terms, if at all.
Our liquidity relies significantly on short-term borrowings. For the years ended December 31, 2017, 2016 and 2015, cash provided by
borrowings from third-parties was $8,805,683, $11,613,289 and $4,013,614, respectively. Financing may not be available to us on favorable terms, if at
all. If we are unable to obtain short-term financing in an amount sufficient to support our operations, it may be necessary, to suspend or curtail our
operations, which would have a material adverse effect on our business and financial condition. In that event, current stockholders would likely
experience a loss of most of or all of their investment.
Our bank accounts are not insured or protected against loss.
Jinzheng maintains cash accounts with various banks located in China. Such cash accounts are not insured or otherwise protected. Should any
bank holding such cash deposits become insolvent, or if Jinzheng is otherwise unable to withdraw funds, Jinzheng would lose the cash on deposit with
that particular bank.
Changes in China’s environmental laws and policies may affect our financial condition.
Our products, projects and services are mainly used in the fields of municipal and industrial wastewater treatment and reuse, water purification
and desalination. Our business is in line with China’s current focus on environmental protection policies, specifically the Water Ten Plan and the 13th
Five Year Plan (2016-2020). However, should China alter its environmental policies towards less regulation, we believe demand for our products will
decrease, adversely impacting our results of operations, cash flows and financial position.
Risks Relating to Our Corporate Structure
We will likely not pay dividends in the foreseeable future.
We have not previously paid any cash dividends, and we do not anticipate paying any dividends on our common shares in the foreseeable
future. Although we have achieved net profitability in 2017, we cannot assure that our operations will continue to result in sufficient revenues to enable us
to operate at profitable levels or to generate positive cash flows from operating activities. Furthermore, there is no assurance that our Board of Directors
will declare dividends even if we are profitable. Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other
things, our earnings, financial condition, capital requirements and other factors. If we determine to pay dividends on any of our common shares in the
future, we will be dependent, in large part, on receipt of funds from Jinzheng for our cash needs, including the funds necessary to pay dividends and other
cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities
organized in China is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if
any, at the time of the determination of the total assets of our Company over the sum of our liabilities, as shown in our books of account, plus our capital),
and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary
course of business; and the realizable value of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as
shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we
will be dependent on receipt of funds from Jinzheng. See “Dividend Policy.”
12
Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a
withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of
the foreign investment entity is subject to a withholding tax of 5%.
The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently
permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Jinzheng is
also required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to its compulsory reserves fund until the
accumulative amount of such reserves reaches 50% of its registered capital.
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other
than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into registered
capital, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. As of December 31, 2017 and 2016, the
accumulated appropriations to statutory reserves amounted to $705,698 and $382,802 respectively.
Our business may be materially and adversely affected if any of our Chinese subsidiaries declare bankruptcy or become subject to a dissolution or
liquidation proceeding.
The Enterprise Bankruptcy Law of China provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they
fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.
Our Chinese subsidiaries hold certain assets that are important to our business operations. If any of our Chinese subsidiaries undergoes a
voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our
ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Jinzheng is required to allocate a portion of its after-tax profits, to the statutory reserve fund, and as determined by its board of directors, to the staff
welfare and bonus funds, which may not be distributed to equity owners.
Pursuant to Company Law of P.R. China (2013 Revision), Wholly Foreign-Owned Enterprise Law of the P.R. China (2000 Revision) and
Implementing Rules for the Law of the People’s Republic of China on Wholly Foreign Owned Enterprises (2014 Revision), Jinzheng is required to
allocate a portion of its after-tax profits, to the statutory reserve fund, and in its discretion, to the staff welfare and bonus funds. No lower than 10% of an
enterprise’s after tax-profits should be allocated to the statutory reserve fund. When the statutory reserve fund account balance is equal to or greater than
50% of the Jinzheng’s registered capital, no further allocation to the statutory reserve fund account is required. Jinzheng determines, in its own discretion,
the amount contributed to the staff welfare and bonus funds. The staff welfare and bonus fund is used for the collective welfare of the staff of Jinzheng.
These reserves represent appropriations of retained earnings determined according to Chinese law.
As of the date of this annual report, the amounts of staff welfare and bonus funds have not yet been determined, and we have not committed to
establishing such amounts at this time. Under current Chinese laws, Jinzheng is required to set aside staff welfare and bonus funds amounts, but has not
yet done so. Jinzheng has not done so because Chinese authorities grant companies flexibility in making a determination. Chinese law requires such a
determination to be made in accordance with the company’s organizational documents and Jinzheng’s organizational documents do not require the
determination to be made within a particular timeframe. Although we have not yet been required by Chinese authorities to make such determinations or
set aside such amounts, Chinese authorities may require Jinzheng to rectify its noncompliance and we may be fined if we fail to do so after receiving a
warning within its set time period.
Additionally, Chinese law provides that a Chinese company must allocate a portion of after-tax profits to the statutory reserve fund and the staff
welfare and bonus funds reserve prior to the retention of profits or the distribution of profits to foreign invested companies. Therefore, if for any reason,
the dividends from Jinzheng cannot be repatriated to us or not in time, our cash flow may be adversely impacted or we may become insolvent.
13
Our failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading of our common shares on a
foreign stock exchange could have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.
On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce of the People’s Republic of China (“MOFCOM”),
jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which was subsequently revised on June 22,
2009 (the “M&A Rule”). The M&A Rule contains provisions that require that an offshore special purpose vehicle (“SPV”) formed for overseas listing
purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading
of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published Provisions on Indirect Issuance of Securities
Overseas by a Domestic Enterprise or Overseas Listing of Its Securities for Trading, which specify documents and materials required to be submitted to
the CSRC by an SPV seeking CSRC’s approval of overseas listings.
However, the application of the M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the
scope and applicability of the CSRC approval requirement. Our Chinese counsel, KaiTong Law Firm, has given us the following advice, based on their
understanding of current Chinese laws and regulations:
● At the time of our equity interest acquisition, as the acquiree, Jinzheng was not related to or connected with the acquirer, Newater HK.
Accordingly, we did not need the approval from MOFCOM. In addition, we have received all relevant approvals and certificates required
for the acquisition; and
● the CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly issued equity
interest to acquire existing or newly issued equity interest in Chinese domestic companies, or the SPV-domestic company share swap, due to
the fact there has not been any SPV-domestic company share swap in our corporate history, Newater Technology does not constitute a SPV
that is required to obtain approval from the CSRC for overseas listing under the New M&A Rule.
● In spite of the lack of clarity on this issue, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like our
initial public offering are subject to the M&A Rule.
The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the M&A
Rule. We did not obtain CSRC approval prior to our initial public offering. If prior CSRC approval was required, we may face regulatory actions or other
sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit
our operating privileges in China, or take other actions that could have a material adverse effect upon our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our common shares.
Substantial uncertainties exist with respect to the enactment timetable and final content of draft China Foreign Investment Law and how it may
impact the viability of our current corporate structure, corporate governance and business operations.
MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 (the “Draft FIL”). The Draft FIL embodies an
expected Chinese regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic investments. MOFCOM is currently soliciting comments on this draft and
substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.
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Among other things, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control” in determining
whether a company is considered a foreign-invested enterprise, or an FIE. The Draft FIL specifically provides that entities established in China but
“controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry
clearance, treated as a Chinese domestic investor provided that the entity is “controlled” by Chinese entities and/or citizens. Once an entity is determined
to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State
Council later. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance, prior approval from the
government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.
The development, manufacture and sales of wastewater treatment products are not currently subject to foreign investment restrictions set forth in
the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform Commission and the
Ministry of Commerce that was amended in 2015 and became effective in April 2015. The Draft FIL, if enacted as proposed, will not materially impact
the viability of our current corporate structure, corporate governance and business operations in many aspects. However, should the development,
manufacture and sales of wastewater treatment products become subject to foreign investment restrictions set forth in the Catalogue of Industries for
Guiding Foreign Investment then the viability of our current corporate structure, corporate governance and business operations may be materially
impacted in many aspects.
Risks Related to Doing Business in China
Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC shareholders.
China passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective on January 1, 2008.
Under the EIT Law, resident enterprises pay income tax at the rate of 25% for their worldwide income while non-resident enterprises pay 20% for their
income generated from China. As far as the definition of resident enterprises, according to the EIT Law, an enterprise established outside of China with
“de facto management bodies” within China is considered a “resident enterprise.” The implementing rules of the EIT Law define de facto management as
“substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation of China (the “SAT”) issued the Circular 82 Concerning Relevant Issues Regarding
Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of De Facto Management
Bodies (“Circular 82”) further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or
group. Pursuant to the Circular 82, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified
as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in
China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting
books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
are often resident in China. The SAT issued a bulletin on August 3, 2011 to provide more guidance on the implementation of Circular 82, or Bulletin 45.
Bulletin 45 clarifies certain matters relating to resident status determination, post-determination administration and competent tax authorities. In addition,
the SAT issued a bulletin on January 29, 2014, which further provides that, among other things, an entity that is classified as a “resident enterprise” in
accordance with Circular 82 shall file the application for classifying its status of residential enterprise with the local tax authorities where its main
domestic investors are registered. Form the year in which the entity is determined to be a “resident enterprise,” any dividend, profit and other equity
investment gain shall be taxed in accordance with the enterprise income tax law and its implementing rules. A resident enterprise would have to pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders.
We believe that neither Newater Technology nor Newater HK meet all the conditions outlined in the preceding paragraph to be classified as a
PRC “resident enterprise.” Newater Technology does not have a PRC enterprise or enterprise group as its primary controlling shareholder, and we are not
aware of any offshore company with a corporate structure similar to the company that has been deemed a PRC “resident enterprise” by the PRC tax
authorities. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with
respect to the interpretation of the term “de facto management body,” we cannot guarantee that the relevant authorities will not make a contrary
conclusion to ours. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of
unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income
as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by
our non-PRC stockholders from transferring our shares. In addition to the uncertainty in how the new resident enterprise classification could apply, it is
also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold
PRC income tax on our dividends payable to our foreign shareholders, or if we are required to pay PRC income tax on the transfer of our shares under the
circumstances mentioned above, the value of your investment in our shares or ADSs may be materially and adversely affected. It is unclear whether, if we
are considered as a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into
between China and other countries or areas.
15
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
In connection with our initial public offering, we became subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that
prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined
by the statute for the purpose of obtaining or retaining business. We are also subject to the Anti-Unfair Competition Law of the PRC and the relevant anti-
bribery provisions in the Criminal Law of the PRC, or together, the “PRC Anti-Bribery Laws.” The current PRC Anti-Bribery Laws prohibit the payment
of bribes to government officials, private companies or individuals in a commercial transaction or their agents. We have operations, agreements with third
parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments
by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in process of
implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the
purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all
contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires all
hospitality involving promotion of sales to foreign governments and government-owned or controlled entities to be in accordance with specified
guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and the PRC Anti-Bribery
Laws.
However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or
distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or PRC Anti-Bribery Laws may
result in severe criminal or administrative sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating
results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by
companies in which we invest or that we acquire.
Our subsidiaries’ financial statements are prepared under different accounting standards than our consolidated financial statements.
We prepare the financial statements for each of our subsidiaries that are PRC legal entities in accordance with the requirements of generally
accepted accounting principles in China, or PRC GAAP. These financial statements drive how we calculate the taxes payable for operations of these
subsidiaries. By contrast, we prepare the consolidated financial statements for Newater Technology in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. The process of consolidating the financial statements and changing from PRC GAAP to U.S. GAAP
requires us to make certain adjustments on consolidation. This can result in some discrepancies between the financial statements used to prepare our tax
filings in China and the financial statements audited by our independent registered accounting firm and subsequently filed with the SEC. To the extent the
discrepancies between PRC GAAP and U.S. GAAP are material, we could find, for example, that a PRC subsidiary shows taxable income for which
payment of taxes is due, while our U.S. GAAP-audited financial statements show taxable loss.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could result in a
loss of your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and
negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity
has centered on financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly
traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these
companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the
allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company and our business. If we become
the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to
investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven
to be groundless, our Company and business operations will be severely hampered and your investment in our shares could be rendered worthless.
We are dependent on the state of China’s economy as all of our business is conducted in China and a decline would have a material adverse effect on
our business, financial condition and results of operations.
Currently, all of our business operations are conducted in China, and all of our customers are also located in China. Accordingly, any material
slowdown in the China’s economy may cause our customers to reduce expenditures or delay the building of new facilities or projects. This may in turn
lead to a decline in the demand for the products, projects and services we provide. Any such decline would have a material adverse effect on our business,
financial condition and results of operations.
16
Since our operations and assets are located in China, shareholders may find it difficult to enforce a U.S. judgment against the assets of our Company,
our directors and executive officers.
Our operations and assets are located in China. In addition, our executive officers and directors are non-residents of the U.S., and substantially
all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against us or any of these persons. See “Enforceability of Civil Liabilities.”
Although we do not import goods into or export goods out of China, fluctuation of the RMB may indirectly affect our financial condition by affecting
the volume of cross-border money flow.
Although we use the United States dollar for financial reporting purposes, all of the transactions effected by Jinzheng are denominated in China’s
currency, the RMB. The value of the RMB fluctuates and is subject to changes in China’s political and economic conditions. We do not currently engage
in hedging activities to protect against foreign currency risks. Even if we choose to engage in such hedging activities, we may not be able to do so
effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when
transferring money raised outside of China into the country or paying vendors for services performed outside of China.
If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar
amount that you will actually ultimately receive.
In the event we pay dividends in the future, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them,
even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is
declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S.
dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend
distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign
currency decreases before you actually convert the currency into U.S. dollars, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar
amount that you will actually ultimately receive.
We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by the U.S. Internal
Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a
U.S. investor. For example, if we are a PFIC, a U.S. investor will become subject to burdensome reporting requirements. The determination of whether or
not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be
classified as a PFIC for U.S. tax purposes if either:
● 75% or more of our gross income in a taxable year is passive income; or
● the average percentage of our assets by value in a taxable year that produce or are held for the production of passive income (which includes
cash) is at least 50%.
The calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change. In
addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised in our initial public offering.
We cannot assure that we will not be a PFIC for any taxable year. See “Taxation – United States Federal Income Taxation-Passive Foreign Investment
Company.”
Introduction of new laws or changes to existing laws by the Chinese government may adversely affect our business.
The Chinese legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal
guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of
China and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more market-oriented
economy, the Chinese government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in China is still
evolving, laws and regulations or their interpretation may be subject to further changes. Such uncertainty and prospective changes to the Chinese legal
system could adversely affect our results of operations and financial condition.
17
We may be subject to foreign exchange controls in China, which could limit our use of funds raised in our initial public offering, which could have a
material adverse effect on our business.
Jinzheng is subject to Chinese rules and regulations on currency conversion. In China, SAFE regulates the conversion of the RMB into foreign
currencies. Currently, foreign investment enterprises (“FIEs”) are required to apply to SAFE for “Registration of Establishment as FIEs”. Jinzheng is a
FIE, with such registration, Jinzheng is allowed to open foreign currency accounts including the “current account” and the “capital account”. Currently,
conversion within the scope of the “current account” and general “capital account” can be effected without requiring the approval of SAFE. However,
conversion of currency in some restricted “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the
approval of SAFE.
In particular, if Jinzheng borrows foreign currency through loans from Newater Technology or other foreign lenders, these loans must be
registered with SAFE. If Jinzheng is financed by means of additional capital contributions, certain Chinese government authorities, including MOFCOM,
or the local counterparts of SAFE and MOFCOM, must approve these capital contributions. These restrictions could limit our use of funds raised in our
initial public offering which could have an adverse effect on our business.
Governmental control of currency conversion may affect the value of your investment.
The Chinese government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of
currency out of China, which may take as long as six months in the ordinary course. We receive the majority of our revenues in Renminbi. Under our
current corporate structure, our income is derived from payments from Jinzheng. Shortages in the availability of foreign currency may restrict the ability
of Jinzheng to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated
obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and
expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also
at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. See
“Our Business – Regulations on Foreign Currency Exchange and Dividend Distribution.”
Fluctuation of the Renminbi could materially affect our financial condition and results of operations.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions. On July 21, 2005, the Chinese government changed its decade-old policy of pegging the value of the Renminbi to the U.S.
dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation
has generally been positive, there remains international pressure on the Chinese government to adopt an even more flexible currency policy, which could
result in a further and more rapid appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi may materially and
adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S.
dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments or expenditures more
costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. See “Exchange Rate Information.”
18
Recent changes in China’s labor law restrict our ability to reduce our workforce in China in the event of an economic downturn and may increase
our production costs which could have a material adverse effect on our business.
To clarify certain details in connection with the implementation of the Labor Contract Law, the China State Council promulgated the
Implementing Rules for the Labor Contract Law on September 18, 2008, which came into effect immediately. The legislation formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Among other things, this new law provides for specific
standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the
payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term
employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either
has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An
“employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated
pursuant to the standards and procedures set forth under the new law. Because of the lack of precedent for the enforcement of such a law, the standards
and procedures set forth under the law in relation to the termination of an employment contract have raised concerns among foreign investment
enterprises in China that such an “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally,
under the new law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a
restructuring undertaken pursuant to China’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business
operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of
the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance or
precedent as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant Chinese authorities. All of our
employees working for us exclusively within China are covered by the new law and thus, our ability to adjust the size of our operations when necessary in
periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally
or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our
results of operations and financial condition.
Our business benefits from certain government subsidies and incentives. Expiration, reduction or discontinuation of, or changes to, these incentives
will increase our burden and reduce our net income which could have a material adverse effect on our business and operations.
Jinzheng has received subsidies from some governmental agencies after meeting certain conditions, such as developing certain technologies,
which are chosen as annual key research and development, plans or obtaining certain technological certifications.
Jinzheng received the following subsidies in 2015:
● RMB 180,000 as Jinzheng’s research and development plan was chosen as one of the annual key plans of Shandong Province. (“RMB 180K
Subsidy”)
● RMB 200,000 as Jinzheng successfully applied for the subsidy of production and cooperation project of Yantai City, Laishan District.
(“RMB 200K Subsidy”)
The above subsidies were subject to further research and development obligations and were recorded as deferred income in 2015. The research
and development projects required by the RMB 200K Subsidy and RMB 180K Subsidy were completed in the years ended December 31, 2016 and 2017,
respectively, and therefore the RMB 200,000 and RMB 180,000 received in 2015 were recognized as government grants in the accompanying
consolidated statements of income and comprehensive income for the years ended December 31, 2017 and 2016, respectively.
Jinzheng received the following subsidies in 2016:
● RMB 500,000 as Jinzheng successfully applied for the subsidy of university-industry cooperation and international cooperation projects
(“RMB 500K Subsidy”). The recognition requirements for the RMB 500K Subsidy include research and development projects completed
with higher education institutions and collaboration with foreign companies with advanced technologies.
● RMB 1,200,000 as Jinzheng successfully applied for the subsidy of special membrane project (“RMB 1.2M Subsidy”). The recognition
requirements for the RMB 1.2M Subsidy include the commencement of special membrane project in Laishan District Economic
Development Area in 2016 and tax payment of certain amount in the same year.
● RMB 9,732,000 as Jinzheng successfully applied for the high technology subsidy (“RMB 9.7M Subsidy”). Due to its encouragement and
incentive nature to invest in local economic development, there is no specific requirement for the RMB 9.7M Subsidy. The RMB 9.7M
Subsidy was granted by the Management Committee of Laishan District Economic Development Area. The grant’s purpose is to encourage
the Company to invest in researching and developing new products and expanding production scale, which will contribute to the local
economic development by bringing more job opportunities and generating more tax revenues.
19
The requirements of the above subsidies totaling RMB 11,432,000 received in 2016 were fully fulfilled and the subsidies were recognized as
other income in consolidated statements of income and comprehensive income for the year ended December 31, 2016.
Jinzheng received the following subsidies in 2017:
● RMB 300,000 as Jinzheng successfully applied for the subsidy of innovation-driven development (“RMB 300K Subsidy”).
● RMB 2,594,000 as Jinzheng successfully applied for the subsidy of special membrane project (“RMB 2.6M Subsidy”).
● RMB 200,000 as Jinzheng was chosen as one of the Provincial Industrial Design Centers in Shandong Province.
● RMB 100,000 as Jinzheng was chosen as the City DTRO Membrane Engineering Lab of Yantai City in Shandong Province.
● RMB 95,975 as Jinzheng successfully applied for the subsidy on interest expense incurred by the Company for loans obtained.
The requirements of the above subsidies totaling RMB 3,289,975 received in 2017 were fully fulfilled and the subsidies were recognized as
government grant in consolidated statements of income and comprehensive income for the year ended December 31, 2017.
For the years ended December 31, 2017, 2016 and 2015, the Company recognized government grants approximately $514,000 (RMB
3,469,975), $1,751,000 (RMB11,632,000) and $0 in the consolidated statements of income and comprehensive income, respectively.
In addition, Jinzheng obtained the Hi-Tech Enterprise certificate and is entitled to a preferential income tax rate of 15% for 2016 and 2017. The
15% tax rate is less than the standard 25% income tax rate in China. The local Chinese government authorities may reduce or eliminate these incentives
through new legislation at any time in the future. In the event Jinzheng is no longer exempt from lowered income taxation, its applicable tax rate would
increase from 15% to up to 25%, the standard business income tax rate in China. In addition, the termination of one-time subsidies for water treatment
equipment business development could increase the burden of manufacturing and selling water treatment equipment in the future. The reduction or
discontinuation of any of these economic incentives could negatively affect our business and operations.
Labor laws in China may adversely affect our results of operations.
On June 29, 2007, the Chinese government promulgated a new labor law, namely, the Labor Contract Law of China, which became effective on
January 1, 2008, which was further amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on
employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon
seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our
ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely
affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all
employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a comparative
disadvantage.
Chinese regulations relating to the establishment of offshore special purpose companies by Chinese residents may subject our Chinese resident
shareholders to personal liability and limit our ability to inject capital into our Chinese subsidiaries, limit our subsidiaries’ ability to increase its
registered capital, distribute profits to us, or otherwise adversely affect us.
On July 4, 2014, China’s SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange
Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or Circular
37, which became effective as of July 4, 2014. According to Circular 37, prior registration with the local SAFE branch is required for Chinese residents to
contribute domestic assets or interests to offshore companies, known as SPVs. Moreover, Circular 37 applies retroactively. As a result, Chinese residents
who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange registration of overseas investments as required
before July 4, 2014 shall send a letter to SAFE and its branches for explanation. SAFE and its branches shall, under the principle of legality and
legitimacy, conduct supplementary registration, and impose administrative punishment on those in violation of the administrative provisions on the
foreign exchange pursuant to the law.
We have requested our shareholders who are Chinese residents to make the necessary applications, filings and amendments as required under
Circular 37 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the
relevant requirements. However, we cannot provide any assurances that all of our shareholders who are Chinese residents will comply with our request to
make or obtain any applicable registrations or comply with other requirements required by Circular 37 or other related rules. The failure or inability of our
Chinese resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal
sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from our initial public
offering) Jinzheng, limiting Jinzheng’s ability to pay dividends or otherwise distributing profits to us.
20
We may be subject to fines and legal sanctions by SAFE or other Chinese government authorities if we or our employees who are Chinese citizens fail
to comply with Chinese regulations relating to employee stock options granted by offshore listed companies to Chinese citizens.
On February 15, 2012, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Concerning the
Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or Circular 7.
Under Circular 7, Chinese citizens who are granted share options by an offshore listed company are required, through a qualified Chinese agent or a
Chinese company which participates in the share option, and is held by or actually controlled by the offshore listed Company, to register with SAFE and
complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. If our Chinese
employees and we are granted share options, our Chinese employees and we will be subject to Circular 7. Failure to comply with these regulations may
subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other Chinese government authorities and may prevent us from
further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.
Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading
of securities overseas by our Chinese resident stockholders may subject such stockholders to fines or other liabilities.
Other than Circular 37, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the
Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and
supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any Chinese individual seeking to make a direct
investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in
accordance with SAFE provisions. Chinese individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.
We may not be fully informed of the identities of all our beneficial owners who are Chinese residents. For example, because the investment in or
trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely
that we will know the identity of all of our beneficial owners who are Chinese residents. Furthermore, we have no control over any of our future
beneficial owners and we cannot assure you that such Chinese residents will be able to complete the necessary approval and registration procedures
required by the Individual Foreign Exchange Rules.
It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will
affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our Chinese
resident stockholders to make the required registration will subject our subsidiaries to fines or legal sanctions on their operations, restriction on remittance
of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.
Changes in China’s political and economic policies could harm our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are
subject to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many
respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation
of resources.
21
The Chinese economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been
transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the
Chinese government have had a positive effect on the economic development China, we cannot predict the future direction of these economic reforms or
the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the
economies of most countries belonging to the Organization for Economic Cooperation and Development (“OECD”). These differences include, without
limitation:
● economic structure;
● level of government involvement in the economy;
● level of development;
● level of capital reinvestment;
● control of foreign exchange;
● methods of allocating resources; and
● balance of payments position.
As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy
were similar to those of the OECD member countries. See “Our Business – Industry and Market Background.”
Since 1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these efforts
to develop a legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts
based on existing law may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a
judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary, in many cases, creates additional uncertainty as to the outcome
of any lawsuit. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our
activities in China will also be subject to administration review and approval by various national and local agencies of the Chinese government. Because
of the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our
activities. Although we have obtained all required governmental approvals to operate our business as currently conducted, to the extent we are unable to
obtain or maintain required governmental approvals, the Chinese government may, in its sole discretion, prohibit us from conducting our business.
If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade controversy between the United States and China could adversely affect the market
price of our common shares and our ability to access U.S. capital markets.
The Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result
in the total loss of our investment in that country.
Our business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments in
China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to our detriment
from time to time with little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private
enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in
China and in the total loss of any investment in us.
22
Because our operations are located in China, information about our operations is not readily available from independent third-party sources.
Because Jinzheng is based in China, our shareholders may have greater difficulty in obtaining information about them on a timely basis than
would shareholders of a U.S.-based company. Its operations will continue to be conducted in China and shareholders may have difficulty in obtaining
information about them from sources other than the company itself. Information available from newspapers, trade journals, or local, regional or national
regulatory agencies such as issuance of construction permits and contract awards for development projects will not be readily available to shareholders
and, where available, will likely be available only in Chinese. Shareholders will be dependent upon management for reports of their progress,
development, activities and expenditure of proceeds.
Chinese economic growth slowdown may cause negative effect to our business.
Since 2010, the annual growth rate of the Chinese economy has declined, from approximately 11% gross domestic product in 2010 to 6.9% in
2017. This situation has impacted many types of service industries, such as restaurant and tourism, and some manufacturing industries. Our business
operations in China rely primarily on the waste (garbage), chemical and energy industries that are less influenced by economic growth slowdown than
service industries. However, if China’s economic growth continues to slow down, then our business could be adversely affected if slow expansion or
shrinkage of the industries we serve occurs.
Risks Associated with Ownership of Our Common Shares
The market price for our common shares may be volatile, which could result in substantial losses to investors.
The trading prices for our common shares have fluctuated since we first listed our common shares. Since our common shares became listed on
the NASDAQ on July 28, 2017, the trading price of our common shares has ranged from $7.32 to $28.20 per common share, and the last reported trading
price on April 27, 2018 was $11.73 per common share. The market price of our common shares may fluctuate significantly in response to numerous
factors, many of which are beyond our control, including:
● actual or anticipated fluctuations in our revenue and other operating results;
● the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
● actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow
our company, or our failure to meet these estimates or the expectations of investors;
● announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint
ventures, or capital commitments;
● price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
● lawsuits threatened or filed against us;
● price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; and
● other events or factors, including those resulting from war or incidents of terrorism, or responses to these events
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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices
of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and
adversely affect our business.
We are an “emerging growth company,” and we cannot be certain if choosing to elect the reduced reporting requirements applicable to emerging
growth companies will make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to
be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of
the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not
previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1
billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common shares held by non-affiliates
exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following
December 31. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find
our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common shares may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal
control. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation,
which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm is required to attest to the
effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer
an “emerging growth company,” which may be up to five full years following the date of our initial public offering. If we identify material weaknesses in
our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal
control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness
of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports
and the market price of our common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which
our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial
and management resources.
If our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.
The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. In order to
qualify for continued listing on the NASDAQ Capital Market, we must meet the following criteria:
● Our shareholders’ equity must be at least $2,500,000; or the market value of our listed securities must be at least $35,000,000; or our net
income from continuing operations in our last fiscal year (or two of the last three fiscal years) must have been at least $500,000;
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● The market value of our shares must be at least $1,000,000;
● The minimum bid price for our shares must be at least $1.00 per share;
● We must have at least 300 shareholders;
● We must have at least 2 market makers; and
● We must have adopted NASDAQ-mandated corporate governance measures, including a Board of Directors comprised of a majority of
independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics among other
items.
If our shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In
addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on
the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally
considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not so listed or are delisted at some later
date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers
that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure
schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our
common shares might decline. If our common shares are delisted from the NASDAQ Capital Market at some later date or become subject to the penny
stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.
We will incur increased costs as a result of being a public company, which could have a material adverse effect on our profitability.
As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now
engage U.S. securities law counsel and U.S. GAAP auditors that we did not need prior to our initial public offering, and we will continue to have annual
payments to remain listed on the Nasdaq Capital Market. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC
and NASDAQ, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our
legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will continue to
incur additional costs associated with our public company reporting requirements. Added costs of this nature will naturally reduce our profitability and
could have a material adverse effect on our business.
The requirements of being a public company may strain our resources and divert management’s attention, which could have a material adverse effect
on our business.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the
Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and
regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and
financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly
after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, and current reports with
respect to our business and operating results.
As a result of disclosure of information in filings required of a public company, our business and financial condition are more visible, which we
believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and
operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources
necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.
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We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also
make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and
compensation committee, and qualified executive officers.
The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies which could have an adverse
effect on our results of operations.
As a reporting company in the United States, we are required to file periodic reports with the Securities and Exchange Commission upon the
occurrence of matters that are material to our Company and shareholders. In some cases, we will need to disclose material agreements or results of
financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which
would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S.-listed public company, we are
governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S.
laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.
Our classified board structure may prevent a change in control of our Company.
Our board of directors is divided into three classes of directors. Class A directors hold office for a term expiring at the 2020 annual meeting of
shareholders, Class B directors hold office for a term expiring at the 2018 annual meeting of shareholders and Class C directors hold office for a term
expiring as the 2019 annual meeting of shareholders. Directors of each class are chosen for three-year terms upon the expiration of their current terms.
The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change
in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.”
Shares eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding
common shares in the public marketplace could cause the price of our common shares.
The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that
these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common shares. An
aggregate of 10,809,000 of our shares are currently outstanding. The 1,610,000 shares sold in our initial public offering are freely transferable without
restriction or further registration under the Securities Act. The remaining 9,199,000 shares are “restricted securities” as defined in Rule 144. These shares
may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.
Our employees, officers and/or directors will control a sizeable amount of our common shares, decreasing your influence on shareholder decisions.
Our employees, officers and/or directors will, in the aggregate, beneficially own approximately 44.4% of our outstanding shares. As a result, our
employees, officers and directors possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders
for approval. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in
control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our Company
and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders, including those who
purchased shares in our initial public offering. See “Principal Stockholders.”
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As the rights of stockholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs are governed by our amended and restated memorandum and articles of association, the British Virgin Islands Business
Companies Act, 2004 (the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our
directors, actions by minority stockholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent
governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from
comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding,
authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin
Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the
British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully
developed and judicially interpreted bodies of corporate law.
As a result of all of the above, holders of our shares may have more difficulty protecting their interests through actions against our management,
directors or major shareholders than they would as shareholders of a U.S. company. For a discussion of material differences between the provisions of the
BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital – Differences in
Corporate Law.”
British Virgin Islands companies may not be able to initiate shareholder derivative actions in a federal court of the United States and may have to
proceed with such action in the British Virgin Islands, thereby limiting shareholders’ ability to protect their interests.
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States and may
have to proceed with such action in the British Virgin Islands. The circumstances in which any such action may be brought, and the procedures and
defenses that may be available with respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more
limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them
if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of
courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in
the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the
British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce
the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us
successfully, they may not be able to recover anything to make up for the losses suffered.
The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the
shareholders are dissatisfied with the conduct of our affairs.
Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the
BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the
constituent documents of the corporation, in our case, our Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the
company conducted in accordance with the general law and the Memorandum and Articles.
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There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the
common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in
Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who
express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have
the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the
company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association,
then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the
scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the
wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has
not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded
minority shareholders under the laws of many states in the United States.
We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not
provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more
difficult for you to evaluate our performance and prospects.
We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act,
we are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For
example, we are required to issue quarterly reports or proxy statements and we do not intend to file quarterly reports. We are not required to disclose
detailed individual executive compensation information and we do not intend to disclose detailed executive compensation information. Furthermore, our
directors and executive officers are not required to report equity holdings under Section 16 of the Exchange Act and we are not subject to the insider
short-swing profit disclosure and recovery regime and we do not intend to file Section 16 reports for officers and directors.
As a foreign private issuer, we are also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to
ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we do plan to disclose
material information to all investors at this time. In addition, we arestill be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule
10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S.
domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S.
domestic reporting companies.
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Item 4. Information on the Company
A.
History and Development of the Company.
Our Corporate Structure
Structural Overview
We are a holding company incorporated in the British Virgin Islands that owns all of the outstanding capital stock of Newater HK, our wholly
owned Hong Kong subsidiary, Newater HK, in turn, owns all of the outstanding capital stock of our operating subsidiary Jinzheng that is based in Yantai,
China. On January 25, 2016, and February 5, 2016, respectively, Newater HK entered into an equity transfer agreement and supplementary equity transfer
agreement with the shareholders of Jinzheng at the time, Yuebiao Li, Zhuo Zhang, and Yue Zhang, to acquire 100% of the equity interests in Jinzheng.
Organization Structure and Purpose
Newater Technology, Inc. – We formed Newater Technology, our British Virgin Islands holding company, on September 30, 2015.
Newater HK Limited – We formed Newater HK, our wholly owned Hong Kong subsidiary, on November 4, 2015.
Yantai Jinzheng Eco-Technology Co., Ltd. – We formed Jinzheng, our principal operating company in China and wholly owned subsidiary of
Newater HK, on July 5, 2012. Jinzheng is registered in the Laishan District of Yantai. Its business scope, includes, the design, development,
manufacturing and sale of DTRO membranes and related equipment and the installation of those products.
Shandong Jinmo Recycled Water Resource Co., Ltd – We formed Jinmo, a former operating company in China wholly owned by Jinzheng,
on March 19, 2015 and disposed of it on December 8, 2016. Prior to being disposed of, Jinmo primarily engaged in the sale of products manufactured by
Jinzheng.
Corporate History
On January 25, 2016, and February 5, 2016, respectively, Newater HK entered into an equity transfer agreement and supplementary equity
transfer agreement with the shareholders of Jinzheng at the time, Yuebiao Li, Zhuo Zhang, and Yue Zhang, to acquire 100% of their equity interests in
Jinzheng. Pursuant to the terms of the January 25, 2016 equity transfer agreement, Newater HK agreed to pay RMB 20,000,000 for 100% of their equity
interests as follows: 1) RMB 11,000,000 to Yuebiao Li for his 55% equity interests in Jinzheng; 2) RMB 8,000,000 to Zhuo Zhang for her 40% equity
interests in Jinzheng; and 3) RMB 1,000,000 to Yue Zhang for her 5% equity interests in Jinzheng. Further, pursuant to the terms of the February 5, 2016
supplementary equity transfer agreement the parties agreed that an additional RMB 8,537,365 would be paid for the equity interests in Jinzheng allocated
as follows: 1) RMB 4,695,551 to Yuebiao Li; 2) RMB 3,414,946 to Zhuo Zhang; and 3) RMB 426,868 to Yue Zhang.
On March 27, 2016, the company issued 73,000 common shares at $0.65 per share to the incorporator with total gross proceeds of $47,450.
Further, on March 27, 2016, a total of 8,117,000 shares were issued at $0.65 per share, to six individuals and seven companies with total cash proceeds of
$5,276,050. On June 6, 2016, Newater Technology, Jinzheng and Newater HK entered in three separate Convertible Debt Investment Agreements with
three individuals. Pursuant to the Convertible Debt Investment Agreements the loans from these individuals in the aggregate amount of RMB 20,000,000
were converted into 724,000 common shares of Newater Technology. Furthermore, on June 6, 2016, Newater Technology, Jinzheng and Newater HK
entered into a Convertible Debt Investment Agreement with a fourth individual. Pursuant to the Convertible Debt Investment Agreement the loan from
this individual in the aggregate amount of RMB 5,000,000 was converted into 275,000 common shares of Newater Technology.
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The principal executive offices of our main operations are located at 8 Lande Road, Laishan District, Yantai City, Shandong Province, People’s
Republic of China 264000. Our telephone number at this address is (+86) 535-6212280. Our registered office in the Brithish Virgin Islands is at the
offices of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands, British Virgin Islands. Our agent for service of process in the
United States is Vcorp Agent Services, Inc. located at 25 Robert Pitt Dr., Suite 204, Monsey, New York 10952. Our corporate website is www.newater.cc.
Initial Public Offering
In August 2017, we completed our initial public offering, in which we offered and sold an aggregate of 1,610,000 common shares. We received
approximately $7.4 million in proceeds before expenses and less placement fee. Our common shares are listed on the NASDAQ Capital Market under the
symbol “NEWA.”
B.
Business Overview.
Business Overview
We are a wastewater purification treatment company that focuses on the development, manufacture and sale of DTRO and DTNF membrane
filtration products that are used in the treatment, recycling and discharge of wastewater. We also supply hardware and engineered systems necessary to
implement integrated solutions. We provide engineering support and installation, technical advice and service, and other project-related solutions to filter
wastewater into valuable, clean water. In addition, we act as a solution provider and purify wastewater for customers, such as landfill leachate treatment
and purification service. Our DTRO expertise enables us to develop an array of core materials and technologies that can be applied in a variety of ways to
solve complex filtration, separation and purification challenges related to wastewater treatment. We also offer traditional wastewater treatment solutions,
such as activated carbon and resins. Our products can be used across a wide spectrum of industries that include a wastewater treatment component and
applications to treat wastewater for discharge or filtration into high quality, re-useable clean water, including:
● Treatment of leachate from landfills;
● Treatment of power plant wastewater;
● Treatment of wastewater from oilfields;
● Treatment of wastewater from gas production;
● Treatment of high acid wastewater;
● Treatment of high alkali wastewater; and
● Desalination.
We currently primarily serve the energy, refuse (garbage and waste), and chemical industries. Our deep customer process knowledge, scientific
expertise, and related engineering know-how enable us to provide cost-effective solutions for our customers, with products that are specifically targeted to
meet their needs.
Jinzheng was founded in 2012 by our Chief Executive Officer, Yuebiao Li, and our Chief Financial Officer, Zhuo Zhang. Mr. Li has
approximately 10 years of experience in the water treatment industry. Ms. Zhang has 15 years of experience in financial related jobs. We are located in
Yantai City, Shandong Province, China and which we employ 173 people on a full-time basis. We have 24 employees in management, 27 employees in
sales and marketing, 32 employees in research and development and 90 employees in manufacturing and installation.
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We are actively pursuing additional markets and applications for our products and services, such as industrial parks, city sewage, and seawater
desalination. Virtually all of the raw materials, process fluids and waste streams resulting from industrial applications are candidates for multiple stages of
filtration, separation and purification.
We seek to establish long-term, strategic relationships with our clients by delivering specific filtration products and/or systems that help reduce
our clients’ operating costs and increase water filtration efficiencies. To achieve these objectives, we work closely with our clients to understand their
specific water filtration needs. We enter into individualized contracts containing pricing terms tailored to the client’s operation, with pricing driven by the
value we create for the client, rather than a pricing model focused solely on being able to deliver the least expensive product or system offering. We
believe we can enhance our ability to withstand competitive pricing pressure and obtain new and retain existing clients by offering tailored products and
customized water treatment solutions.
We have received several industry awards, including:
● recognized as a High-Tech Enterprise in 2015 by Department of Science and Technology of Shandong Province;
● ISO9000 Authentication (certification based upon quality and consistency);
● ISO14001 Authentication (certification based upon environmental performance);
● GB/T28001 Authentication (management system certification);
● awarded as an outstanding member of the Inner Mongolia Environmental Protection Industry in 2015;
● recognized as a member of the Innovation Consortium of the Water Saving Contract Industry in 2017;
● recognized as a Technology Enterprise in 2017 for three years by Department of Science and Technology of Yantai City; and
● recognized as a member of ESCO Committee of China Energy Conservation Association in 2017.
In addition, we were invited to:
● the Jiangsu Environmental Protection Department exhibition in Nanjing;
● the West Lake International Desalination and Water Reuse Academic Summit, in which Mr. Li was a presenter.
● a workshop on zero-discharge of wastewater organized by the Institute of Thermal Power Plants; and
● to represent Chinese enterprises in the Ninth Environmental Chapter Meeting of the Southeast Asian Economic Exchange and Advancement
Organization.
We believe our several industry awards, and active participation at conferences and other events within our field, reflect widespread recognition
of our stature in our industry and the perceived quality of our products and services.
Industry and Market Background
Water Filtration Methodology
The current market for wastewater treatment through membrane filtration is relatively new. Presently, there are several different types of
methods for wastewater treatment depending upon the industry in which the technology is being used. For example, the most common steps in water
treatment used by community water systems (mainly surface water treatment) include the following processes:
● Coagulation and Flocculation - Coagulation and flocculation are often the first steps in water treatment. Chemicals with a positive charge are
added to the water. The positive charge of these chemicals neutralizes the negative charge of dirt and other dissolved particles in the water.
When this occurs, the particles bind with the chemicals and form larger particles, called “floc.”
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● Sedimentation - During sedimentation, floc settles to the bottom of the water supply as a result of its weight. This settling process is called
sedimentation.
● Filtration - Once the floc has settled to the bottom of the water supply, the clear water on top will pass through filters of varying
compositions (sand, gravel, and charcoal) and pore sizes, in order to remove dissolved particles, such as dust, parasites, bacteria, viruses,
and chemicals.
● Disinfection - After the water has been filtered, a disinfectant (for example, chlorine or chloramine) may be added to kill any remaining
parasites, bacteria, and viruses, and to protect the water from germs when it is piped to homes and businesses.
The traditional technology for sewage and wastewater treatment utilizes organic sludge. Organic sludge is a biochemical process for treating
sewage and industrial wastewater that uses air (or oxygen) and microorganisms to biologically oxidize organic pollutants producing a waste sludge (or
floc) containing the oxidized material. In general, an activated sludge process includes:
● An aeration tank where air (or oxygen) is injected and thoroughly mixed into the wastewater; and
● A settling tank (usually referred to as a clarifier or “settler”) to allow the waste sludge to settle. Part of the waste sludge is recycled to the
aeration tank and the remaining waste sludge is removed for further treatment and ultimate disposal.
The treated water through this type of wastewater treatment usually is of poor quality and can only be used for low-end purposes.
We use processes called reverse osmosis and nanofiltration in our water filtration products to achieve higher levels of water filtration compared
to conventional filtration methods. Reverse osmosis is a process in which solutes (such as salts) are removed from a liquid solution (such as water). This
is accomplished by pressure pushing the liquid solution through a semi-permeable filtration membrane. Typically, the membranes are connected and
placed in a pressurized vessel. The pressure applied during reverse osmosis is greater than pressure from natural filtration. As a result, the pressurized
water will infiltrate to the side of the membrane, which has low pressure. The membrane (which is about as thick as cellophane, measured in millimeters)
allows only the water to pass through, not the impurities or contaminates. The result is that the contaminated liquid is retained on the pressurized side of
the membrane and the pure liquid is allowed to pass to the other side. Reverse osmosis membranes are typically used for desalination of water.
Nanofiltration functions similar to reverse osmosis, but it is generally targeted to remove only divalent (able to form two chemical bonds) and
larger ions. Nanofiltration membranes have pore sizes from 1-10 nanometers, just larger than that of reverse osmosis membranes. The pressure needed to
push the liquid solution through a nanofiltration membrane is less than what is needed to push fluid though reverse osmosis membranes. Ion-selectivity is
a significant feature of nanofiltration; salts with monovalent (able to form one chemical bond) anions - such as chlorides - are able to pass through the
membrane. However, salts with polyvalent (able for form more than one chemical bond) anions - such as sulfates - are retained. This ion-selectivity takes
place because negatively charged groups in the membrane prevent large polyvalent ions from reaching the pure water permeates. Therefore, many
nanofiltration processes involve enhancing wastewater recovery, as when concentrate from a reverse osmosis upstream filtration process is then passed
through a nanofilter to further dewater the waste.
Pretreatment is important when working with reverse osmosis and nanofiltration membranes due to the nature of their spiral-wound design. The
spiral-wound, pressurized vessel is engineered in such a fashion as to allow only one-way flow through the system. As such, the spiral-wound vessel does
not allow for back pulsing with water or air agitation to scour its filtration surface and remove solids. Since accumulated material cannot be removed from
the membrane surface systems, they are highly susceptible to fouling (loss of production capacity). In some instances, fouled membranes may need to be
replaced altogether. Therefore, pretreatment is a necessity for any reverse osmosis or nanofiltration system.
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China’s Membrane Filtration Market and Opportunity
The Chinese market for water treatment membranes is currently growing at a rate that exceeds that of the global membrane market and that of
the Chinese GDP. Over the past 10 years, the compound growth rate of the membrane industry is estimated at over 20%. Further, during the next five
years, the membrane industry is expected to more than double the output value from 2011-2015. The Membrane Industry Association of China expects
the Chinese membrane industry to generate output value of more than RMB 250 billion (approximately $38.5 billion) and an annual export value of RMB
10 billion (approximately $1.5 billion) by 2020.
A number of key macroeconomic factors shape the water filtration membrane industry, including population growth, an increasing water-supply
demand, urbanization, industrialization, and consumers’ health and environmental awareness. We believe, however, that the market is influenced most by
China’s recent initiatives towards clean water.
In 2007, the Chinese government introduced its new National Drinking Water Quality Standard (GB 5749-2006). The government set this
standard in accordance with international standards, but since the bar was set above the actual quality levels of China’s water, the standard didn’t take full
effect until July 2012. The Chinese government expected cities throughout China to come into full compliance by 2015. In light of these new
requirements, two independent non-profit organizations that focus on environmental risks (ChinaWater Risk and Chinadialogue) closely examined the
actual status of urban and rural water in China and found that a privileged 600 million of the approximate 750 million urban residents in China have
access to safe drinking water, but quality issues remain as secondary pollution (bacteria and contamination that pollutes drinking water during
transmission) in pipe networks is occurring. These organizations also found many instances of yellow water and excessive bacteria levels. The lower
alkaline level of the water increased its corrosiveness. This damaged the pipes’ protective lining and caused a layer of rust to be released into the water,
creating the ‘yellow water’ that came out of the taps. In addition, the report found that in 2010, 298 million rural Chinese lacked access to safe drinking
water.
In April 2015, the Chinese government issued the “Water Pollution Prevention and Control Action Plan”, or the “Water Ten Plan”). The Water
Ten Plan is the result of coordination and input from more than twelve governmental ministries and departments and requires China’s water quality to
improve by 2020 by:
● greatly reducing the percentage of badly polluted water bodies – over 70% of water in seven key rivers shall reach specified grading
standards;
● improving the quality of drinking water – over 93% of urban drinking water sources shall reach specified grading standards;
● reducing groundwater over extraction and control groundwater pollution – 85% of groundwater shall reach specified grading standards;
● improving the environmental quality of coastal areas – up to 70% of coastal water shall reach specified grading standards; and
● improving urban water environment in key regions – the amount of extremely polluted water in Beijing-Tianjin-Hebei shall fall by 15%, and
extremely polluted water shall be eliminated in Yangtze River Delta and Pearl River Delta.
Due to China’s recent focus on the continuous improvement of living standards through more stringent environmental laws and regulations for
clean water, compliance with these laws will be become more arduous and difficult for industries to achieve. Therefore, we believe new technology and
applications in water filtration will be in greater demand, which we expect will, in turn, drive demand for our products.
33
In March 2016, China announced its 13th Five Year Plan (2016-2020), which, among other matters, attempted to plug gaps in China’s drinking
water safety, such as water safety protection, water conservation reform and drinking water safety legislation. China’s five-year plans are blueprints
containing the country’s social, economic, and political goals. They encompass and intertwine with existing policies, regional plans, and strategic
initiatives. A five-year plan signals the Chinese government’s vision for future reforms and communicates this to other parts of the bureaucracy, industry
players and Chinese citizens. It is a living document that will go through constant revision over the next five years. The 13th Five Year Plan contains clean
water initiatives regarding the construction of urban sewage treatment and supporting facilities, urban reclaimed water recycling, and continued reduction
of waste emissions. Further, the plan requires industrial products to be completed with improved product technology, process equipment, and energy
efficiencies across the board. In addition, in the water pollution prevention action plan, there is an increased recognition on the importance of cooperating
with foreign technological partners in the areas of water treatment process equipment. We believe these polices, among others, from the 13th Five Year
Plan will cause more industries to utilize new technologies in water treatment, such as DTRO membrane filtration to comply with new laws and
regulations that will likely be implemented pursuant to the 13th Five Year Plan.
China’s Energy Market
According to a study published in March 2016 by Greenpeace, 45% of coal-fired power plants in China are located in areas of “water over-
withdrawal,” which are ecosystems that cannot support the amount of water being removed. China has the world’s largest number of installed coal fired
power plants, with more planned to be constructed each year. Coal-generated electricity has enormous impacts on freshwater systems. For example, a 500
Megawatt coal-fired power plant, in one cooling cycle, can withdraw enough water to deplete an Olympic-sized swimming pool roughly every three
minutes. In many countries, the coal industry creates one of the largest demands on freshwater resources. Every year these power plants consume
quantities of water equivalent to the basic requirements of 186 million people. Moreover, 48% of proposed coal-fired power plants in China are located in
the same ‘water over-withdrawal’ areas. From both the economic standpoint and the environmental protection standpoint, energy companies have great
incentives to reduce the amount of their water usage and recycle the wastewater produced at their power plants into clean, re-useable water, to flow back
into the power plants boilers and cooling systems for repeated use. The Water Ten Plan has also placed increased pressure and stricter requirements upon
coal fired power plants to conserve water usage and recycle wastewater. In addition, the 13th Five Year Plan (2016-2020) includes provisions for building
six to eight nuclear power plants a year for five years. Water used in nuclear power plants cannot be discharged or reused directly; it must be filtered and
then discharged or reused. Water filtration membranes are beneficial in this context because they have a low failure rate, and a high filtration rate.
Therefore, we believe the rapid development of Chinas’ nuclear power industry, along with the government’s enforcement tightening over water
discharge for the traditional coal fired power plants, will provide the water filtration membrane industry with a significant opportunity.
Pharmaceutical Market
A wide variety of products are made in the pharmaceutical manufacturing industry, typically requiring large volumes of chemicals, materials,
and substances that are used throughout the manufacturing process. Waste streams generated in this industry can be heavily laden with contaminants,
toxins, nutrients, and organic content, presenting unique challenges in terms of treatment, especially as regulations become more stringent.
Additionally, as is the case in other industrial manufacturing sectors, water is a critical ingredient in pharmaceutical and chemical manufacturing
operations; consistent and high-quality supplies are needed for a range of purposes including production, cleaning, material processing, and cooling. As
disruptions in raw water supply represent a significant concern, more pharmaceutical companies are turning to water efficiency initiatives to help mitigate
water scarcity-related risks. In fact, a variety of pharmaceutical companies in China are proceeding to upgrade their technology with membrane filtration
products to enhance efficiency and achieve better environmental compliance. We expect this market will continue to grow as China is currently the
second largest pharmaceutical market in the world (estimated at $105 billion), and it is estimated that by 2020 the China pharmaceutical market value will
be approximately $200 billon.
Industrial Market
China is still in the early to mid-stages of industrialization. China’s rapid development of its industrial economy has increased the demand for
industrial water, which in turn produces a large amount of wastewater. The steel industry has seen the greatest growth in China in recent years. China is
now the largest steelmaker in the world, producing 823 million tons in 2014, which accounted for almost half the world’s production. Water is used in
steel production in the cooling process. Like steel, water can be reused and recycled, thus improving efficiency of use and reducing demand as well as
cost. By increasing water recycling and cascading water use from higher to lower quality, steel producers have been able to reduce their water use and
consumption considerably. If wastewater is not recycled it must be treated before it is released back into the environment. Our membrane filtration
products can be used to treat wastewater, turning it into clean water, which can be released into the ecosystem or reused in production.
34
Titanium Dioxide Market
Driven by increasingly strict environmental protection policies, the titanium dioxide industry in China has begun seeking greater technological
advances to filter wastewater. Titanium dioxide is used in many products, such as coloring for food, cosmetics, crayons, and UV protection in sunscreens.
Titanium dioxide is also used in the paint industry, and gives paint its high gloss and rich depth of color. Titanium dioxide replaced lead in the paint
manufacturing process. In addition, titanium dioxide is currently being used to treat the air in fruit, vegetable and cut flower storage areas to prevent
spoilage and increases shelf life. The photocatalytic properties of titanium dioxide remove ethylene gas from the air. Ethylene is a naturally occurring
gaseous hormone produced by plant tissue that in low concentrations triggers the ripening of fruits and vegetables.
Our membrane filtration products can be deployed in this industry as well. In fact, we recently installed a filtration system in a titanium dioxide
plant in Yantai City, China, which we believe to be the first of its kind in China’s titanium dioxide industry. For that particular project, in order to remove
the impurities the facility filters the water three times, in three separate processes. Our membrane products are used at each filtering process to treat the
wastewater, and create clean water that is reused in the filtering processes. The untreated wastewater contains high concentrations of acids and metals.
While we believe that the deployment of our membrane filtration system in the context of a titanium dioxide operation is a new application in China, we
believe other titanium dioxide manufacturers will follow suit.
Global Market
Globally, sales for membranes and membrane modules reached $4.4 billion in 1999 and grew to $12 billion in 2012 with an annual growth rate
around 7% to 8%. Further, the global membrane market is projected to grow at a rate of 9% from 2015 to reach a value of $32 billion by 2020. We
currently do not have a significant international presence; however, we believe our operational expertise positions us to take advantage of the expansion
of the global membrane filtration market in the event we decide to pursue those opportunities.
Our Competitive Strengths
We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success.
Product Advantages. We believe that our DTRO membranes possess better characteristics than traditional reverse osmosis membranes because
our membrane technology offers industrial water users ways to clean their wastewater output or reuse it as clean water in the production process. We
believe that our DTRO membranes will allow us to take advantage of dynamic market demands for superior membranes generated by stricter Chinese
environmental laws and regulations.
Production Advantages. We have the ability to manufacture a variety of membrane filtration components, assembling and installing membrane
units in filtration systems, testing membrane filtration units as well as developing, designing and manufacturing membrane filtration units, including
DTRO membranes. In addition, we have conducted our own research to create what we believe is a more advanced and semi-automated membrane unit
production line. We believe our China competitors are currently using manual assembly lines.
Experienced Management Team and Personnel with a Demonstrated Track Record. Our management team, led by our Chief Executive
Officer Yuebiao Li, and our Chief Financial Officer, Zhuo Zhang, have significant industry experience and demonstrated track records of managing costs,
adapting to changing market conditions, and developing new products. In addition, Mr. Li has a vast network and understanding of the market. Our
workforce is highly skilled with specialized training, designed to address complex and individualized client issues.
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Innovative Products. We have the technology to produce clean water from sewage wastewater though the use of DTRO membranes. We have
not yet completed a sewage project where clean drinkable water was produced from treated leachate because we do not yet have the capacity. However,
we have done sewage wastewater testing on 2 locations for 4 months to determine that we have the technology to produce clean water. Traditional sewage
treatment companies invest large amounts of capital and operating costs to treat wastewater only so that it can be discharged in compliance with
applicable environmental laws, but the wastewater has no end-use value. Our DTRO membranes have the ability to clean that same wastewater to a level
that is suitable for drinking or other end uses, which enhances value to our customers in that market.
Strong Gross Margins. We believe that our gross margin, approximately 33% in 2017, allow us to compete effectively in a rapidly changing and
increasingly complex Chinese market. We believe we can continue to maintain high gross margins while the demand for our membrane filtration products
remains high and the technological barriers to enter the market remain in place. Technological barriers include experience, technological know-how and
research and development.
We provide a full range of water treatment solutions and are not limited to the supply of water filtration products. We are able to install
complete water treatment solutions for customers, which allow us to target end users, along with intermediaries. Our ability to provide customers with
complete solutions, including engineering support, installation, and technical advice, for their water treatment needs allows us to capture many types of
users in the water treatment market. In addition, being able to provide total solutions creates a larger market for our membrane products.
Our Strategies
We provide technical solutions in engineering projects, support and installation, technical advice and services and other water treatment related
solutions. Our goal is to become one of the premier water treatment solution companies by implementing the following strategies:
Continue to develop filtration membrane products. We are committed to researching and developing filtration membranes for use in different
industries. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. For example, in the area
of waste filtration and seawater desalination, we are developing and testing an extreme pressure (200 bar) membrane module. For the mining and
smelting industries, we developed and produced an acid and basic separation membrane module.
We intend to increase our revenue and market share by targeting intermediate customers. We intend to target intermediate customers that do
not produce their own products, such as engineering companies and project contractors. These customers tend to have a large demand for water filtration
membrane products and water treatment solutions. We are able to provide these companies with new water treatment membrane products to replace the
aging products of their customers or end users. This model helps us achieve continuous and stable profitability. It also helps us obtain institutional
knowledge, which may be applicable to water treatment solutions for other clients.
Market Opportunity. China’s 13th Five Year Plan (2016-2020) promotes a cleaner and greener economy, with strong commitments to
environmental management and protection, clean energy and emissions controls, ecological protection and security, and the development of green
industries. This demonstrates a focus on charting a sustainable course for the Chinese economy in the long-term. The 13th Five Year Plan offers
opportunities for the private sector to support China’s environmental goals and bring clean technology and innovation into China as part of the large-scale
environmental reform contemplated by the 13th Five Year Plan. We will market our technology and applications in water filtration, which we expect will
be in greater demand to due to stricter environmental regulations.
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We intend to expand our business into new industries. Currently, our customers are primarily in the energy, refuse (garbage and waste), and
chemical industries (e.g., titanium dioxide). We plan to enter the industrial park wastewater treatment, municipality wastewater recycling, and seawater
desalination industries. Treatment of wastewater from industrial parks usually includes the treatment of wastewater from several chemical companies
located in an industrial park. The wastewater from all the companies in the industrial park will require treatment at the same wastewater treatment facility.
This wastewater will possess several different chemicals. We believe that our DTRO membrane technology has the ability to treat the wastewater, and
turn it into clean water that can be reused in production.
We intend to increase our revenue and market share by expanding our business network to other provinces. We started with our facility in
Yantai City, Shandong Province. Currently, the majority of our customers are located in the Jiangsu Province, Liaoning Province and Inner Mongolia
Autonomous Region. We intend to expand our business to customers located on Shandong Province, Jiangsu Province and Inner Mongolia Autonomous
Region in 2018.
Our Products
Our product line is focused upon the refuse (garbage and waste), chemical and energy sectors. Our primary products are DTRO membranes,
DTNF membranes and water purification equipment.
All of our products are produced in compliance with China Good Manufacturing Practices. We believe our products enjoy a good reputation in
the industry. The following products are examples illustrating our expertise and research and development capability.
DTRO Membranes
Our DTRO membranes are able to treat highly concentrated sewage and are able to withstand high pressure and contamination. Our DTRO
membranes offer our highest level of filtration. DTRO membranes are used to treat and recycle wastewater, and have the following advantages:
● high quality of outflowing water;
● consistent quality of wastewater after filtration;
● applicability to a variety of industries;
● ease of construction;
● efficient startup times;
● high degree of automation;
● use of less floor space;
● a high recovery rate (the amount of clean water that can be produced from treated wastewater) coupled with low energy consumption;
● low cost of operation;
● simplified pretreatment process;
● less clogging compared to traditional membranes;
● reduced scaling and contamination;
● longer lifespan;
● ease of maintenance;
● low replacement cost.
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We produce three types of DTRO membranes, all of which can withstand different pressure amounts (75 Bar, 90 Bar and 120 Bar). The 75 Bar
membrane is used for treating landfill leachate and for recycling water in titanium dioxide and power plants. For high-pressure environments, we
manufacture 90 Bar and 120 Bar DTRO membranes. 90 Bar membranes treat wastewater in the chemical industry, and 120 Bar membranes desalinate
seawater.
DTNF Membranes
Our DTNF membranes have larger pore sizes than our DTRO membranes, and unlike DTRO membranes do not reject all ions. They have higher
water permeability than our DTRO membranes and operate at much lower pressures. Our DTNF membranes are used in different industries than our
DTRO membranes, and are generally used for our clients that have acidic wastewater or wastewater containing high levels of alkali. These clients use
DTNF membranes because they are able to achieve the required levels of filtration, but cost less to operate than DTRO membranes because less energy is
needed in the filtration process of DTNF membranes, making them a more economical alternative when primarily divalent ion removal is required.
The DTNF membrane is used to treat and recycle wastewater, and has the following advantages:
● the ability to process large volumes of water;
● reduction of heavy metals;
● superior nitrate and sulfate reduction qualities;
● ability to soften hard water; and
● color removal from water.
We produce three types of DTNF membranes. The first DTNF membrane is used to treat highly acidic water. This membrane is best suited for
the iron and steel, titanium dioxide and smelting industries. This type of membrane is useful for clients that have wastewater containing high sulfuric acid
levels.
The second DTNF membrane is used to treat wastewater with high alkaline levels. It is normally used in applications where manufacturing
equipment needs to be cleaned. This type of membrane has been successfully used by clients in the fertilizer industry.
The third DTNF membrane is used to treat wastewater containing divalent ions and wastewater containing smaller molecular weight particles
and amino acids. This type of membrane has also been successfully used by clients in the fertilizer industry.
Our Projects
We specialize in producing and installing wastewater membrane filtration systems for customers that require customized wastewater filtration
systems to treat wastewater upon discharge into the ecosystem or to reuse such water in their operating systems. We also offer traditional wastewater
treatment solutions. Currently, our customers are primarily in the waste (garbage), chemical and energy industries. We hope to expand our customer base
in the future to industrial park wastewater treatment, municipality wastewater recycling, and seawater desalination industries. Due to the unique
requirements of clients in these different industries, we focus on designing filtration systems that are tailored to fit the needs of specific clients, and we
use skilled workers to install these systems.
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The following examples illustrate some of our installation projects utilizing our membrane filtration technology:
(1) Treatment of 2,400 cubic meters tons of wastewater per day for reuse in a titanium dioxide plant in Yantai City, Shandong Province. The
main components of the wastewater are sodium sulfate and soluble titanium salts. These impurities impact the production of the titanium
dioxide. In order to remove these impurities, the facility filters the water three times in three separate processes. Our DTNF membrane
products are used at each filtering process stage to treat the wastewater, and create clean water that is reused in the filtering processes. We
selected DTNF membranes for this project due to their reliable operating history and lower energy cost. The overall recovery rate for
recycled wastewater at this plant is approximately 80%.
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(2) Treatment of 50 tons of leachate per day at a landfill in Heilongjiang Province, China. In processing leachate, DTRO filtration has the
advantages of high stability for long periods of time, high and stable water recovery, less clogging of membranes, stain resistance and low
contamination qualities and a long lifespan. The overall recovery rate for the wastewater at this facility is approximately 75%.
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(3) Treatment of desulfurized wastewater and reuse at a power plant located in Harbin City, China. Desulfurized wastewater from power plants
normally comes with the problems of hard water, muddy and high salinity. DTRO technology was used to resolve these issues and reuse the
wastewater at this electric power plant and achieved near zero emissions. The overall recovery rate for recycled wastewater at this plant is
approximately 75%.
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(4) Single DTRO membrane module to treat wastewater at a fertilizer company in Yantai City, China. The purpose of this DTRO system is to
treat wastewater, which is discharged after cleaning the fermentation tank. The amount of wastewater being treated per day is approximately
24 tons. Our DTRO system was selected, in part, because it does not require a large amount of floor space. After treatment, the wastewater
became clean useable water and can be used for irrigation. The leftover concentrate was shipped to a separate location for further treatment.
The overall recovery rate at this facility is approximately 75%.
Our Services
In 2017 we began acting as a solution provider and purify wastewater for customers, such as landfill leachate treatment and purification service.
For example, we provided landfill leachate purification service to the Jiangshan Town government, Laixi City, Shandong Province. All the equipment
used to treat the leachate (wastewater) is built, owned and operated by us and we derive revenue based upon the volume of wastewater we treat. The
service is continued to be provided in 2018 and as of the filing date, the Company received payments for the service in the total amount of approximately
$7,992,000 (RMB 52,000,000) in 2018. The Company also entered into another service revenue agreement in 2018. Pursuant to the agreement, the
Company agreed to provide treatment and purifications service to treat and purify at least 520,000-cubic-meter wastewater at a fixed unit price of RMB
150 per cubic meter (including VAT of 17%).
Customers
Our current customers are primarily in the energy, waste (garbage), and chemical industries. We determine a particular customer’s credit limits
based on its size, creditworthiness and financial strength to minimize the likelihood of bad debt and non-payments. The company’s top five customers in
2017 were the following: 1) Beijing Hezhong Qingyuan Environmental Protection Science and Technology Co., Ltd.; 2) Government of Jiangshan Town,
Laixi District, Qingdao City, Shandong Province, China; 3) Beijing Aritime Intelligent Control Co., Ltd.; 4) Danjiangkou Runshui Environmental
Technology Co., Ltd.; 5) Shanghai Mingnuo Environmental Technology Co., Ltd. These customers collectively accounted for 87 % of our revenues in
2017.
Sales and Marketing
We are increasing our marketing efforts. We have established marketing networks in many cities throughout China. We have established
customer contacts in the cities of Yantai, Beijing, Harbin and Shanghai, and we are in the process of expanding markets in Shandong Province, Jiangsu
Province and Inner Mongolia Autonomous Region in 2018. Customer contacts can take sales orders, visit existing clients or prospective clients,
troubleshoot issues for clients and/or offer solutions and engage technical support from the company to resolve the client’s challenges. We currently have
business cooperation partners in Northeast China and Nanjing City. We plan to develop more business cooperation partners in Anhui Province and Inner
Mongolia Autonomous Region in 2018.
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We plan to continue to develop our client base of intermediate users of water filtration membrane products, such as engineering companies and
project contactors that do not manufacture their own water filtration products. We believe there is a significant opportunity to provide intermediate users
filtration products for use in projects for their customers. In addition, we will continue to seek smaller to intermediate sized projects that our larger
competitors are not aware of or for which they cannot effectively compete due to economies of scale. As a result of our operating efficiencies and size, we
are able to implement smaller scale projects on a profitable basis.
The focus of our sales and marketing efforts is to educate prospective customers on what we believe differentiates us as a water treatment
business provider in the market. Specifically, our sales and marketing efforts focus on our approach of being able to provide tailored and complete water
treatment solutions or customized filtration products. We are able to provide a client with a comprehensive water treatment solution plan that gives the
client quantifiable value per dollar spent for our products, projects and services. This provides the client a means of comparing value created per dollar
spent by comparing solution plans they may receive from our competitors. We believe that this approach has been crucial in winning and retaining clients
and increasing our ability to withstand competitive pricing pressure.
Competition
We face significant competition in our market from numerous large companies and many smaller regional competitors. In some instances, our
primary competition comes from alternative, often older technologies, such as chemical additives, sand filtration, and pasteurization as opposed to the
finer level of membrane filtration that we provide. There are barriers to entry in our market limiting the number of qualified competitors. These barriers
result from stringent product performance standards, product qualification protocols and requirements for consistent levels of service and support. We
believe that our broad array of products and product designs coupled with our engineering and manufacturing expertise enables us to provide customers
with differentiated product performance and value and customer support.
Many large foreign corporations have entered the Chinese market, including Pall Corporation, Rochem Group, General Electric, and Koch
Industries, Inc. Large foreign corporations have a competitive advantage over us with regard to capital and technology. We also compete with a domestic
company, Beijing Tiandiren Environmental Protection Co., Ltd.
Our products are generally customized. Customers’ needs and requirements vary from project to project. As a result, technical solutions at
bidding create price driven competition. We attempt to mitigate this price pressure by differentiating ourselves from our competition based on the value
we bring to clients through the quality of our products, projects and services and the ability to provide tailored solutions for their needs.
We believe we have competitive advantages in the market we serve due to our ability to identify smaller-sized projects occurring throughout
China due to Mr. Li’s network and experience. Many of these opportunities are not as widely publicized as larger-scale projects, which often opt for
foreign systems manufactured by large corporations. We are able to maximize our deal flow by being aware of all opportunities due to information
provided by our sales team. In addition, we enjoy the advantage of being able to provide products to intermediate users that are unable to produce their
own filtration products.
The principal competitive factors in our markets include:
● the ability to provide projects, products and services that are innovative and attractive to customers;
● product functionality, quality and performance;
● pricing;
● ability to find projects;
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● reputation in the market;
● ability to introduce new products to the market in a timely manner; and
● ability to address unique client needs.
Research and Development
We are committed to researching and developing filtration membranes for use in different industries. We believe scientific and technological
innovations will help our Company achieve its long-term strategic objectives.
In light of differing water solution needs for each industry and customer, we can develop unique DTRO membranes and modules tailored to the
particular requirements of each customer. In the field of reusing high quality wastewater, we developed a fully-automated dry DTRO membrane
production line. In the area of waste filtration and seawater desalination, we are developing and testing an extreme pressure (200 bar) membrane module.
For the mining and smelting industries, we developed and produced an acid and basic separation membrane module. The concentrate acid from mining
and smelting industries is normally treated with lime/calcium oxide, to neutralize the waste. Currently spiral wound membrane modules technology are
used, however, they are easily blocked in the treatment process. Our acid DTRO membrane module has better performance than spiral wound membrane
module technology because it is not as easily blocked. We are currently investigating other industries to develop unique membranes. Our research and
development efforts are an integral part of our operations and the crux of our differentiation strategy, which we believe to be our competitive advantage.
As of December 31, 2017, our research and development team had a total of 32 researchers and analysts focusing on mechanical design and
advancements in membrane technology, including water-resistant membrane, high-pressure membranes, antipollution membranes and enhanced acid
separator membranes and desalination membranes. Quality control is an important aspect of the team’s work and ensuring quality at every stage of the
process has been a key driver in maintaining and developing brand value.
We have collaborated with Yantai University on research and development. We signed a High Salinity (or heavy salt water) Wastewater DTRO
Membrane Integrated Processing Technology Research and Production Cooperation Agreement with Yantai University on January 15, 2015. Pursuant to
the arrangement, Yantai University will conduct a research study on wastewater with high concentrate of salt, and the design process for pretreatment of
high salt wastewater, and we paid Yantai University a total of RMB 400 (approximately $61) in 2017. The Cooperation Agreement expired in 2017
without further renewal.
For the years ended December 31, 2017, 2016 and 2015, we spent $1,355,648, $622,051 and 434,974, respectively, on research and development
We anticipate that we will focus our research and development efforts on improving existing products and developing new technology in the coming
years.
Sources of Raw Materials
We purchase raw materials on the market at prevailing market prices. We purchase from a variety of suppliers and believe these raw materials
are widely available. We purchase our membrane columns, pumps and other components of water treatment equipment from Dalian Huarui Heavy
Industry Group Limited by Share Ltd., which accounted for 43% of our total purchases for the year ended December 31, 2017. We believe our
relationships with the suppliers of our raw materials are strong. We do not expect the prices of such raw materials to vary greatly from their current prices,
as there has traditionally been little price volatility for such materials. If we were unable to purchase from our primary suppliers, including Dalian Huarui
Heavy Industry Group Limited by Share Ltd., we do not expect we would face difficulties in locating other suppliers at substantially the same prices, but
may experience delays, which may be substantial, in transitioning to the new supplier.
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Intellectual Property Rights
We rely on our technology patents to protect our domestic business interests and ensure our position as a water filtration DTRO membrane
pioneer in our industry. We have placed a high priority on the management of our intellectual property. Some products that are material to our operating
results incorporate patented technology. Patented technology is critical to the continued success of our products. However, we do not believe that our
business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon
any particular patent. Patents in China are principally protected under the Patent Law of China. The duration of a patent right is either 10 years (utility
model or design) or 20 years (invention) from the date of application, depending on the type of patent right. We currently hold 19 patents in China:
Proprietary Name
Patent No
Patent Type
Application
Date
Approval
Date
Expiration
Date
Authority
Reverse Osmosis concentrated
water recycling equipment
with additional booster pump
Oilfield drilling water bottom
mud wastewater treatment
equipment
Unpowered back wash filter
equipment
Disk type membrane column
recycled water recovery
equipment
Rounded membrane filter
equipment
Electrochemical, catalytic
oxidation combined device for
treatment of high
concentration organic
wastewater
Automatic identification of
positive and reverse function
of secondary water supply
equipment control system
Water supply equipment
control system of automatic
switch between double power
source
ZL 2014 2 0430050.9
Utility Mode
8/1/2014
12/10/2014
8/1/2024
ZL 2014 2 0821047.X
Utility Model
12/23/2014
5/20/2015
12/23/2024
ZL 2014 2 0821941.7
Utility Model
12/23/2014
5/27/2015
12/23/2024
ZL 2014 2 0838892.8
Utility Model
12/26/2014
5/20/2015
12/26/2024
ZL 2014 2 0839414.9
Utility Model
12/26/2014
5/27/2015
12/26/2024
ZL 2014 2 0859863.X
Utility Model
12/31/2014
5/27/2015
12/31/2024
ZL 2014 2 0860988.4
Utility Model
12/31/2014
7/8/2015
12/31/2024
ZL 2014 2 0861010.X
Utility Model
12/31/2014
5/6/2015
12/31/2024
45
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
Disc tube two-stage system
reserve osmosis membrane
New type of disc tube reserve
osmosis membrane column for
sterilization
Disc tube reserve osmosis
system with constant recovery
rate
New type of diversion plate
used in disc tube membrane
column
Zero discharge treatment
recycling device for dyeing
wastewater
Pre-processing treatment
equipment for desulfurization
waste water of power plant
Multistage disc tube reserve
osmosis system
Pre-processing equipment for
the modularity of disc tube
reserve osmosis system
Disc tube reserve osmosis
system with low energy
consumption and high
recovery rate
Mobile high-salt organic
waste water recycling
equipment
ZL 2016 2 0180627.4
Utility Model
3/10/2016
7/27/2016
3/10/2026
ZL 2016 2 0657397.6
Utility Model
6/29/2016
12/14/2016
6/29/2026
ZL 2017 2 0863934.7
Utility Model
7/17/2017
2/2/2018
7/17/2027
ZL 2017 2 0863935.1
Utility Model
7/17/2017
2/2/2018
7/17/2027
ZL 2017 2 0863942.1
Utility Model
7/17/2017
1/19/2018
7/17/2027
ZL 2017 2 0863945.5
Utility Model
7/17/2017
2/23/2018
7/17/2027
ZL 2017 2 0864450.4
Utility Model
7/17/2017
1/19/2018
7/17/2027
ZL 2017 2 0864516.X
Utility Model
7/17/2017
1/23/2018
7/17/2027
ZL 2017 2 0864953.1
Utility Model
7/17/2017
3/9/2018
7/17/2027
ZL 2017 2 0864955.0
Utility Model
7/17/2017
1/23/2018
7/17/2027
Packing box
ZL 2017 3 0429766.6
Design
9/12/2017
1/23/2018
9/12/2027
46
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
China State
Intellectual Property
Office
Regulations and National Policies Relating to the Water Treatment Equipment Manufacturing Industry
REGULATION
Pursuant to (a) the Law of China on the Prevention and Control of Water Pollution, which was adopted in 1984 and amended in 2008 and in
2017, (b) the Law of China on Circular Economy Promotion, which was adopted in 2009, and (c) Regulation on Urban Drainage and Sewage Treatment
which was adopted in 2014, the Chinese government supports the application of advanced and applicable technology to the prevention and control of
water pollution, the research, development and promotion of science and technology. Further, the Chinese government encourages social funds to invest,
construct and operate urban drainage and sewage treatment equipment.
Pursuant to the Water Ten Plan, the Chinese government adopted specific targets related to water quality and environmental protection. To
achieve these targets, the government will promote research and advanced technologies on water pollution treatment and recycling.
The principal regulation governing foreign ownership of water treatment equipment manufacturing businesses in China is the Foreign
Investment Industrial Guidance Catalogue, which was last amended by Ministry of Commerce and the National Development and Reform Commission in
2017. Under the Guidance Catalogue, our main business, the water treatment equipment manufacturing business is in an industry that foreign investors
are encouraged to invest in. Foreign investment in the water treatment equipment manufacturing business in China is subject to approval from Ministry of
Commerce and/or the local counterpart authorized by Ministry of Commerce in accordance with the business scale and total amount of investment. The
foreign ownership of our Chinese subsidiary, Jinzheng, was approved by Department of Commerce of Shandong Province, and has obtained Certificate of
Approval for Establishment of Enterprise with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in China issued by People’s Government
of Shandong Province on February 2, 2016.
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and the
Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current account items,
including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items,
such as direct investment, loans, repatriation of investment and investment in securities outside China, unless the prior approval of SAFE or its local
counterparts is obtained. In addition, any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed
the difference between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign
loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered
capital must be approved by the China Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or
registrations on a timely basis, if at all, which could result in a delay in the process of making these loans.
The dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange,
subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the
capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities.
Dividend Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include the Company
Law of China (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000, and the Administrative Rules under the
Foreign Investment Enterprise Law (1990), as amended respectively in 2001 and 2014.
Under these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits, if any,
determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned investment enterprises in China are
required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50%
of the registered capital of the enterprises. These reserves are not distributable as cash dividends, and a wholly foreign-owned enterprise is not permitted
to distribute any profits until losses from prior fiscal years have been offset.
47
Circular 37. On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, Chinese residents
shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments before contributing the
domestic assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch by such Chinese resident is also required if the
registered overseas SPV’s basic information such as domestic individual resident shareholder, name, operating period, or major events such as domestic
individual resident capital increase, capital reduction, share transfer or exchange, merger or division has changed. Although the change of overseas funds
raised by overseas SPV, overseas investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be
required to make foreign exchange registration if required by SAFE and its branches.
Moreover, Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV, but failed
to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are required to send a letter to
SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 37 may result in
receiving a warning from SAFE and its branches, and may result in a fine of up to RMB 300,000 for an organization or up to RMB 50,000 for an
individual. In the event of failing to register, if capital outflow occurred, a fine up to 30% of the illegal amount may be assessed.
Chinese residents who control our Company are required to register with SAFE in connection with their investments in us. If we use our equity
interest to purchase the assets or equity interest of a Chinese company owned by Chinese residents in the future, such Chinese residents will be subject to
the registration procedures described in Circular 37.
Circular 19 & Circular 16. On March 30, 2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 19, which became effective on June 1, 2015. Circular 19 regulates the conversion
of foreign currency capital funds into RMB by a foreign-invested enterprise, and limits how the converted RMB may be used.
Furthermore, SAFE promulgated a circular on June 9, 2016, Circular on Reforming and Regulating Policies on the Administration over Foreign
Exchange Settlement under Capital Accounts, or Circular 16, which further revises several clauses in Circular 19. Both Circular 19 and Circular 16
regulate that foreign exchange incomes of a domestic enterprise under their capital account shall not be used in the ways stated below:
● For expenditures that are forbidden by relevant laws and regulations, or for purposes which are not included in the business scope approved
by relevant government authority;
● For direct or indirect securities investments within China, or for any other kinds of investments except banks’ principal-guaranteed wealth-
management products, unless otherwise prescribed by other laws and regulations;
● For issuing RMB entrusted loans directly or indirectly (except those included in the business scope), or for repaying inter-enterprise loans
(including advances by the third party), or for repaying bank loans which has been on-lent to third parties;
● For issuing RMB loans to non-affiliated enterprises, unless expressly permitted in the business scope;
● For purchasing or constructing real estate which is not for personal use, in addition to those real estate enterprises.
In addition, SAFE supervises the flow and use of those RMB capital converted from foreign currency capital funds of a foreign-invested
company by further focusing on ex post facto supervisions and violations, and the use of the net proceeds from our initial public offering to invest in or
acquire any other Chinese companies in China is subject to the provisions under both Circular 19 and Circular 16.
New M&A Regulations and Overseas Listings
On August 8, 2006, six Chinese regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8,
2006 and was amended on June 22, 2009. This New M&A Rule, among other things, includes provisions that purport to require that an offshore special
purpose vehicle formed for purposes of overseas listing of equity interests in Chinese companies and controlled directly or indirectly by Chinese
companies or individuals obtain the approval of CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock
exchange.
On September 21, 2006, CSRC published on its official website the Provisions on Indirect Issuance of Securities Overseas by a Domestic
Enterprise or Overseas Listing of Its Securities for Trading, which specify procedures regarding CSRC’s approval for overseas listings by special purpose
vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the
approval process. The application of this new Chinese regulation remains unclear with no consensus currently existing among leading Chinese law firms
regarding the scope of the applicability of the CSRC approval requirement.
Our China counsel, KaiTong Law Firm, has advised us that, based on their understanding of the current Chinese laws and regulations:
● we currently control Jinzheng by virtue of Newater HK acquiring 100% of the equity interests of Jinzheng, which are regulated by the New
M&A Rule. According to the New M&A Rule, when a domestic company or a domestic natural person, through an overseas company
established or controlled by it, to acquire a domestic company’s equity interest which is related to or connected with it, approval from
Ministry of Commerce is required. At the time of our equity interest acquisition, as the acquiree, Jinzheng was not related to or connected
with the foreign investor, or the acquirer, Newater HK. Accordingly, we did not need the approval from Ministry of Commerce. In addition,
we have received all relevant approvals and certificates required for the acquisition;
48
● the CSRC approval under the New M&A Rule only applies to overseas listings of SPVs that have used their existing or newly issued equity
interest to acquire existing or newly issued equity interest in Chinese domestic companies, or a SPV-domestic company share swap.
Newater does not constitutes a SPV that is required to obtain approval from the CSRC for overseas listing under the New M&A Rule
because there has not been any SPV-domestic company share swap in our corporate history; and
● notwithstanding the above analysis, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like our initial
public offering are subject to the New M&A Rule.
Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their Chinese Subsidiaries
An offshore company may invest equity in a Chinese company, which will become the Chinese subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which
include the Wholly Foreign-Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture
Enterprise Law, all as amended from time to time, and their respective implementing rules; the Administrative Provisions on Foreign Exchange in
Domestic Direct Investment by Foreign Investors; and the Notice of the State Administration on Foreign Exchange on Further Improving and Adjusting
Foreign Exchange Administration Policies for Direct Investment.
Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by
the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with
SAIC, Ministry of Commerce and SAFE.
Shareholder loans made by offshore parent holding companies to their Chinese subsidiaries are regarded as foreign debts in China for regulatory
purpose, which is subject to a number of Chinese laws and regulations, including the Chinese Foreign Exchange Administration Regulations, the Interim
Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and
the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under these regulations, the shareholder loans made by offshore parent holding companies to their Chinese subsidiaries shall be registered with
SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such Chinese subsidiaries, including any shareholder loans, shall not
exceed the difference between the total investment amount and the registered capital amount of the Chinese subsidiaries, both of which are subject to the
governmental approval.
Regulations Relating to Intellectual Property Rights
Patent. Patents in China are principally protected under the Patent Law of China. The duration of a patent right is either 10 years (utility model
or design) or 20 years (invention) from the date of application, depending on the type of patent right.
Copyright. Copyright in China, including copyrighted software, is principally protected under the Copyright Law of China and related rules and
regulations. Under the Copyright Law, for a company, the term of protection for copyright is 50 years from the first publication of its work.
49
Trademark. Registered trademarks are protected under the Trademark Law of China and related rules and regulations. Trademarks are registered
with the Trademark Office of the State Administration for Industry and Commerce. Where registration is sought for a trademark that is identical or similar
to another trademark that has already been registered or given preliminary examination and approval for use in the same or similar category of
commodities or services, the application for registration of such trademark could be rejected. Trademark registrations are effective for a renewable ten-
year period, unless otherwise revoked.
Domain names. Domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT. The
MIIT is the major regulatory body responsible for the administration of the Chinese Internet domain names, under supervision of which the CNNIC is
responsible for the daily administration of .cn domain names and Chinese domain names. MIIT adopts the “first to file” principle with respect to the
registration of domain names.
Employee Stock Option Plans
In February 2012, SAFE promulgated the Circular on Issues concerning the Foreign Exchange Administration of Domestic Individual
Participation in Stock Option Incentive Plans of Companies Listed Overseas, or Circular 7, replacing earlier rules promulgated in March 2007, to regulate
the foreign exchange administration of Chinese citizens and non-Chinese citizens who reside in China for a continuous period of not less than one year,
with a few exceptions, who participate in stock incentive plans of overseas publicly-listed companies. Pursuant to these rules, these individuals who
participate in any stock incentive plan of an overseas publicly-listed company, are required to register with SAFE through a domestic qualified agent,
which could be the Chinese subsidiaries of such overseas listed company, and complete certain other procedures. We and our executive officers and other
employees who are Chinese citizens or non-Chinese citizens who reside in China for a continuous period of not less than one year and have been granted
options would be subject to these regulations. Failure to complete such SAFE registrations could subject us and these employees to fines and other legal
sanctions. The State Administration of Taxation has issued certain circulars concerning employee share options or restricted shares. Under these circulars,
our employees working in China who exercise share options or are granted restricted shares would be subject Chinese individual income tax.
Regulations Relating to Labor
Pursuant to the China Labor Law, which was adopted in 1995, and the China Labor Contract Law, which was adopted in 2008 and amended in
2012, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related
regulations and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is
required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate
employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.
An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two
consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates an
indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining or raising the
conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite
term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007 and
effective as of January 2008, an employee who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation,
those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are
entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated at three times
their normal salaries for each waived vacation day.
Pursuant to the Regulations on Occupational Injury Insurance which was adopted in 2004 and amended in 2010, and the Interim Measures
concerning the Maternity Insurance for Enterprise Employees, which was adopted in 1995, Chinese companies must pay occupational injury insurance
premiums and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance
Premiums, which was adopted in 1999, and the Interim Measures concerning the Administration of the Registration of Social Insurance, which was
adopted in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social insurance. Both Chinese
companies and their employees are required to contribute to the social insurance plans. The aforesaid measures are reiterated in the Social Insurance Law
of China, which was adopted in July 2011, which stipulates the system of social insurance of China, including basic pension insurance, medical insurance,
unemployment insurance, occupational injury insurance and maternity insurance. Pursuant to the Regulations on the Administration of Housing Fund,
which was adopted in 1999 and amended in 2002, Chinese companies must register with applicable housing fund management centers and help each of
their employees to establish a special housing fund account in an entrusted bank. Both Chinese companies and their employees are required to contribute
to the housing funds.
50
Regulations Relating to Environmental Protection
The Environmental Protection Law, which was adopted in 1989 and amended in 2015, effectively established the legal framework for
environment protection in China. The Environmental Protection Law requires the Ministry of Environmental Protection (the “MEP”), to implement
uniform supervision and administration of environmental protection work nationwide and establishes national waste discharge standards. Enterprises
producing environmental contamination and other public hazards must incorporate environmental protection work into their planning and establish
environmental protection systems.
Through the adoption of the Environmental Impact Assessment Law of China in 2003 and the Rule on Classification for Environmental Impact
Assessment of Construction Projects in 2009, the Chinese government established a system to appraise the environmental impact of construction projects
and classify the appraisal based on the degree of environmental impact caused by the construction project.
C.
Organizational Structure.
Structural Overview
We are a holding company incorporated in the British Virgin Islands that owns all of the outstanding capital stock of Newater HK, our wholly
owned Hong Kong subsidiary, Newater HK, in turn, owns all of the outstanding capital stock of our operating subsidiary Jinzheng that is based in Yantai,
China. On January 25, 2016, and February 5, 2016, respectively, Newater HK entered into an equity transfer agreement and supplementary equity transfer
agreement with the shareholders of Jinzheng at the time, Yuebiao Li, Zhuo Zhang, and Yue Zhang, to acquire 100% of the equity interests in Jinzheng.
Organization Structure and Purpose
Newater Technology, Inc. – We formed Newater Technology, our British Virgin Islands holding company, on September 30, 2015.
Newater HK Limited – We formed Newater HK, our wholly owned Hong Kong subsidiary, on November 4, 2015.
Yantai Jinzheng Eco-Technology Co., Ltd. – We formed Jinzheng, our principal operating company in China and wholly owned subsidiary of
Newater HK, on July 5, 2012. Jinzheng is registered in the Laishan District of Yantai. Its business scope, includes, the design, development,
manufacturing and sale of DTRO membranes and related equipment and the installation of those products.
Shandong Jinmo Recycled Water Resource Co., Ltd – We formed Jinmo, a former operating company in China wholly owned by Jinzheng,
on March 19, 2015 and disposed of it on December 8, 2016. Prior to being disposed of, Jinmo primarily engaged in the sale of products manufactured by
Jinzheng.
Corporate History
On January 25, 2016, and February 5, 2016, respectively, Newater HK entered into an equity transfer agreement and supplementary equity
transfer agreement with the shareholders of Jinzheng at the time, Yuebiao Li, Zhuo Zhang, and Yue Zhang, to acquire 100% of their equity interests in
Jinzheng. Pursuant to the terms of the January 25, 2016 equity transfer agreement, Newater HK agreed to pay RMB 20,000,000 for 100% of their equity
interests as follows: 1) RMB 11,000,000 to Yuebiao Li for his 55% equity interests in Jinzheng; 2) RMB 8,000,000 to Zhuo Zhang for her 40% equity
interests in Jinzheng; and 3) RMB 1,000,000 to Yue Zhang for her 5% equity interests in Jinzheng. Further, pursuant to the terms of the February 5, 2016
supplementary equity transfer agreement the parties agreed that an additional RMB 8,537,365 would be paid for the equity interests in Jinzheng allocated
as follows: 1) RMB 4,695,551 to Yuebiao Li; 2) RMB 3,414,946 to Zhuo Zhang; and 3) RMB 426,868 to Yue Zhang.
On March 27, 2016, the company issued 73,000 common shares at $0.65 per share to the incorporator with total gross proceeds of $47,450.
Further, on March 27, 2016, a total of 8,117,000 shares were issued at $0.65 per share, to six individuals and seven companies with total cash proceeds of
$5,276,050. On June 6, 2016, Newater Technology, Jinzheng and Newater HK entered in three separate Convertible Debt Investment Agreements with
three individuals. Pursuant to the Convertible Debt Investment Agreements the loans from these individuals in the aggregate amount of RMB 20,000,000
were converted into 724,000 common shares of Newater Technology. Furthermore, on June 6, 2016, Newater Technology, Jinzheng and Newater HK
entered into a Convertible Debt Investment Agreement with a fourth individual. Pursuant to the Convertible Debt Investment Agreement the loan from
this individual in the aggregate amount of RMB 5,000,000 was converted into 275,000 common shares of Newater Technology.
On August 2, 2017, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “NEWA”. The
Company offered 1,400,000 common shares at $5 per share. Net proceeds raised by the Company from the initial public offering amounted to $6,145,325
after deducting underwriting discounts and commissions and other offering expenses. Out of the $6.1 million net proceeds, $500,000 was deposited into
an escrow account to satisfy the initial $500,000 in potential indemnification obligations arising during an escrow period of two years following the
closing date of August 2, 2017 and was presented as restricted cash, non-current, on the accompanying consolidated balance sheets. On August 3, 2017,
the Company sold additional 210,000 common shares at $5 per share. Net proceeds raised by the Company amounted to $966,000 after deducting
underwriting discounts. As a result, the Company raised a total of $7,111,325 from issuance of common shares in the year ended December 31, 2017.
51
D.
Property, Plants and Equipment.
Our headquarters is located at Ruida Road, Laishan District Economic Development Area, Yantai, Shandong Province, People’s Republic of
China. We currently have one Chinese domestic operating company, Jinzheng, following our disposal in December 2016 of Jinmo. Our facilities are used
for manufacture, sales and marketing, research and development and administrative functions. We own a manufacturing facility located at Jinzheng
Industrial Park, Yantai, the building complex will total 291,470 sq. ft. on an 8.07-acre site. A large portion of this facility is still under construction,
however, we recently completed part of the production facility that hosts the traditional manufacturing line for membrane modules and the facility for
manufacturing wastewater treatment equipment and began operation on April 13, 2018. We expect to complete the construction in 2020.
All the other facilities that we currently use are leased. We believe our facilities are adequate for our current needs and we do not believe we will
encounter any difficulty in extending the terms of the leases by which we occupy our respective premises. A summary description of our leased facilities
locations follows:
Office
The company headquarters office
The company headquarters production shop
The company Jinan City, Shandong Province liaison office
Address
No. 11 of Ruida Road, Laishan
District Economic Development
Area, Yantai, Shandong Province
No. 8, Lande Road, Laishan
District Economic Development
Area, Yantai, Shandong Province
No. 9777, Jingshi Road,
Room 2105, Building #4, Lu
Shang Guo Ao, Lixia District,
Jinan City, Shandong Province
Rental Term
Space
December 2017 – April 2018
34,304. sq. ft.
April 2017 - April 2018
10,764 sq. ft.
July 2017 – June 2018
1,020 sq. ft.
The company Shijiazhuang City, Hebei Province liaison office 66 Yuhua W Rd, Rooms 04-05,
November 2017 – November 2018 3487 sq. ft.
14/F, Haiyue World, Qiaoxi
District, Shijiazhuang City, Hebei
Province
The company Urumuqi City, Xinjiang Province liaison office 666 Xuanwuhu Road, Unit 2,
Room 1503, Building #5, Bao
Neng Cheng, Jingkai District,
Urunuqi City, Xinjiang Province
December 2017 – December 2018 947.22 sq. ft.
The company Xi’an City, Shanxi Province liaison office
Hai Rong Ming Cheng, North
Nineth Fengcheng Road, Unit 1,
Room 1607, Building #46,
December 2017 – December 2018 1146.68 sq. ft.
Item 4A. Unresolved Staff Comments
Not applicable.
52
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited
consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-
looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this annual report.
A.
Operating Results.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited
consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-
looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this report.
Overview
We specialize in the development, manufacture and sale of DTRO and DTNF membranes for water treatment, recycling and discharge. We
provide technical solutions in engineering support and installation, technical advice and services, and other project related solutions to turn wastewater
into valuable clean water. Our expertise in DTRO and DTNF membrane enables us to develop an array of core materials and technologies that can be
applied in many ways to solve complex wastewater treatment challenges and to meet our customers’ increasingly difficult needs for fluid filtration,
separation and purification.
Our proprietary materials and technologies, combined with our ability to engineer and incorporate them into fully integrated systems, leads us to
believe that we are one of the leading providers of DTRO and DTNF membranes technology. Our DTRO membrane technology was identified by
China’s Science and Technology Promotion Center of Ministry of Water Resources as a key technology for turning wastewater into high quality clean
water.
Our products can be used across a wide array of markets and applications to convert wastewater into high quality, re-useable clean water. We
currently primarily serve the waste (garbage), chemical and energy industries, in which some of our customers include: the Government of Jiangshan
town, Laixi City, Shandong Province, PRC, Beijing Hezhong Qingyuan Environmental Protection Science and Technology Co., Ltd., Beijing Aritime
Intelligent Control Co., Ltd., Nanjing Blue Sky Environmental Protection Science and Technology Co., Ltd., Dalian Yihe Electric Power Installation Co.,
Ltd, respectively. Our extensive customer process knowledge, scientific expertise, and related engineering know-how enable us to provide unique and
cost-effective solutions for our customers, with products that are well matched to their needs.
We actively pursue markets and applications in which our products can make a substantial difference to customers. These capabilities also allow
us to develop new and innovative products and enter new markets, such as industrial park wastewater treatment, municipality wastewater recycling, and
seawater desalination.
We operate our business in China through our subsidiary, Jinzheng. Prior to our disposal in December 2016 of Jinmo, we also conducted sales of
products manufactured by Jinzheng through Jinmo.
Revenues
We derive our revenues from product sales, such as sales of water purifying membranes and water purification equipment, project sales (water
purification installation projects) and service sales (providing water treatment service such as landfill leachate treatment and purification service).
Revenue consists of the invoiced value for the sales, net of value-added tax (“VAT”), business tax, applicable local government levies, rebates, discounts
and returns.
The following factors affect the revenues we derive from our operations.
Maintain our competitive advantages. We actively pursue markets and applications in which our products can make a substantial difference to
our customers. We especially target projects in which our integrated water treatment solutions are able to enhance performance and economics. This
strategy leverages our resources and capabilities to help our customers improve operating efficiencies within their processes. We make extensive use of
our engineering and scientific expertise in wastewater management to provide unique and cost-effective solutions for customers. If we fail to maintain our
reputation and competitiveness, customers demand for our products, projects and services could decline.
53
Competition. The market for our products, projects and services is generally competitive. We often compete with many other companies ranging
from small regional companies to large international companies. Our competition varies and is a function of the business areas in which, and the client
sectors for which, we perform our business. The number of competitors for any procurement can vary widely, depending upon technical qualifications,
the relative value of the project, geographic location, the financial terms and risks associated with the work, and any restrictions placed upon competition
by the client. Historically, clients have chosen among competing companies by weighing the quality, innovation and timeliness of the Company’s service
versus its cost to determine which company offers the best value. When less work becomes available in a given market, price becomes an increasingly
important factor.
We believe that our principal competitors include the following companies, Pall Corporation, Beijing Tiandiren Environmental Protection
Technology Co., Ltd, and Rochem Group.
Expansion. We believe that we should continue to expand our business to other regions of China to increase our market share. Our customers in
Beijing, Heilongjiang Province and Yantai City contributed approximately 40%, 40% and 10% of our 2015 total revenue, respectively. In 2016, our
customers in Jiangsu Province, Liaoning Province and Inner Mongolia Autonomous Region accounted for approximately 30%, 20% and 10% of the total
sales, respectively. In 2017, our clients in Beijing, Qingdao City in Shandong province and Shaanxi Province accounted for approximately 48%, 32% and
4% of the total sales, respectively. Presently, we intend to expand our business to customers located in Shandong Province, Jiangsu Province and Inner
Mongolia Autonomous Region. If we fail to expand to other geographic regions, our revenue growth could slow down.
Loss of key personnel. Our rapid growth in revenue was derived from our competitive advantage in our products, projects and services. We rely
heavily on the expertise and leadership of our senior management to maintain our core competence. The loss of the service of any of our key personnel
could adversely affect our business, especially Yuebiao Li, our founder, Chairman and Chief Executive Officer. We have obtained non-compete
agreements and confidentiality agreements from our scientist and technique staffs in our research and development and manufacturing departments.
Seasonality. Our business is affected by seasonality. Bidding, procuring contracts and designing projects usually occurs in the first half of the
year. Implementation of projects usually occurs in the second half of the year. Therefore, the company realizes significantly more income in the second
half of the year (especially in the fourth quarter) than the first half of the year.
Costs and Expenses
We primarily incur the following costs and expenses:
Costs of revenues. Cost of revenues consists primarily of direct raw materials, direct payroll of workshop staff, utility and supply costs consumed
in the manufacturing process, manufacturing labor, depreciation expense and overhead expenses necessary to manufacture finished goods as well as
distribution costs such as inbound freight charges. As our customer base continues to grow and we increasingly conduct larger scale projects, we expect
our cost of revenues to increase in absolute dollars as we acquire more significant amounts of raw materials and expand our workshop staff to support our
continued growth. We expect our cost of revenue as a percentage of revenue to increase. Cost of revenues from related party represents the costs incurred
from Heilongjiang Binteer in 2016 and 2015. There was no cost of revenues from related parties in 2017.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expense for our
corporate staff in supporting departments, research and development expense, communication costs, gasoline, welfare expenses, education expenses,
professional fees (including consulting, audit and legal fees), travel and business hospitality expenses. We anticipate that our administrative expenses,
particularly those related to support personnel costs, professional fees, as well as Sarbanes-Oxley compliance, will increase.
54
Income tax provision. We account for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification,
which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the financial statements or tax returns.
As Newater Technology and Newater HK had no operating profit or tax liabilities for the years ended December 31, 2017, 2016 and 2015, our
income tax expense reflects income tax paid and provided by Jinzheng and Jinmo prior to Jinmo being disposed of in 2016. Jinzheng was granted by four
government departments of Shandong Province, including the Department of Science and Technology, Finance Bureau, Shandong Local Taxation Bureau
and Shandong Provincial Office of State Administration of Taxation, the “High-Tech Enterprise” designation, qualifying it for a preferential tax rate of
15% for the years ended December 31, 2016 and 2017. Jinmo was recognized as a small, low-profit enterprise and received a preferential income tax of
10% for the years ended December 31, 2016 and 2015. We expect income tax expenses to increase as a result of the expiration of these tax benefits, and
to thereafter vary each reporting period depending upon taxable income fluctuations and our availability of tax benefits.
The following factors affect our cost of revenues and expense.
Price fluctuation of raw materials. The purchase of raw materials accounts for the majority of cost of goods sold. The price of raw materials is
out of our control and the fluctuation of materials may significantly affect our operating results. Although our current materials supply is stable, we could
be impacted by material price fluctuation in coming years.
Prevailing salary levels. Our cost of revenues is impacted by prevailing salary levels. Although we have not been subject to significant wage
inflation in China, a significant increase in the market rate for wages could harm our operating results and our operating margin. Our ability to attract,
retain, and expand our senior management and our professional and technical staff is an important factor in determining our future success. The market
for qualified scientists and engineers is competitive and, from time to time, it may be difficult to attract and retain qualified individuals with the required
expertise at a fair wage. An increase in compensation of our scientists and engineers may increase our operating costs.
Depreciation and amortization. Our depreciation and amortization expenses are mainly driven by the net value of machinery equipment, motor
vehicles, buildings, land use rights and other items. Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual
value, if any, using the straight-line method over estimated useful life of 20 years, 10 years and 5 years. Land use rights are amortized over a useful life of
50 years. Any change of the depreciation and amortization accounting policy or impairment of our property may affect our operating results.
Collectability of our accounts receivable. Our balance of net accounts receivable from third parties was $6,050,495 as of December 31, 2017,
representing an increase of $3,413,259, or 129%, compared with $2,637,236 as of December 31, 2016. The increase in our third parties receivable
balance was largely attributed to our 111% growth in revenue from third parties. If the accounts receivable cannot be collected in time, a significant
amount of bad debt expense will occur in the coming years, which will affect our operating result significantly.
Our balance of net accounts receivable from related parties was $0 and $1,060,977 as of December 31, 2017 and 2016, respectively. The related
party receivable balance of $1,060,977 at December 31, 2016 was entirely related to Jinmo, which was disposed of on December 8, 2016. The receivable
originates from a sale from Jinzheng to Jinmo prior to December 2016. The sale was recorded as an intercompany transaction and eliminated on our
consolidated statements of income and comprehensive income for the year ended December 31, 2016. The receivable was fully collected in 2017.
Normally, we require our customers to pay 30% of the total sales amount upon signing contract, 30% before delivery, 30% after installation and
testing, and the remaining 10% as a quality guarantee to be paid within one or two years after the completion of the sale. We primarily provided relaxed
terms to Mojie and Heilongjiang Binteer, two related parties of the Company. Although they are not allowed to return the unsold products and projects
back to the Company, Mojie and Heilongjiang Binteer make an effort to market our brand and advertise our products and projects. To acknowledge such
effort, we allow a longer payment period of eight months for Mojie and three months for Heilongjiang Binteer upon the inspection date. Specifically,
Mojie and Heilongjiang Binteer are allowed to settle the total amount owed within these periods if they are unable to satisfy the applicable installment
payment terms. As of December 31, 2017, we collected all of the receivables from Jinmo, resulting in the zero balance of account receivable from related
parties as of December 31, 2017, compared with the balance of $1,060,977 as of December 31, 2016.
55
Given the familiarity with Heilongjiang Binteer and Yuefeng Li, and believing that default by Heilongjiang Binteer was remote, Jinzheng
provided Heilongjiang Binteer relaxed payment terms of three months upon inspection date in 2016. The relaxed payment terms were not intended to
allow Heilongjiang Binteer to make payment after they have sold our products. However, this does not rule out the possibility that Heilongjiang Binteer
may have utilized our relaxed payment terms to pay us after they had sold our products. In 2016, we received all payments from Heilongjiang Binteer.
Disposal
On December 8, 2016, the Company transferred its 100% equity interest in Jinmo to Beijing Hezhong Qingyuan Environmental Protection
Science and Technology Co., Ltd. for cash consideration of $31,678 (RMB 220,000).
The disposal did not constitute a strategic shift that will have a major effect on our operations or financial results and as such, the disposal was
not classified as discontinued operations in our consolidated statements of income and comprehensive income for the year ended December 31, 2016.
Results of Operations
For the years ended December 31, 2017, 2016 and 2015.
For the years ended December 31,
2016
2015
2017
Net revenues
Net revenues from related parties
Cost of revenues
Cost of revenues from related party
Gross profit
Gross margin
Selling, general and administrative
Operating income
Interest expense
Interest income
Government grant
Other expenses
Income before tax
Income tax provisions
Net income
$
$
25,339,497
-
17,077,129
-
8,262,368
11,985,055
294,666
7,182,081
556,692
4,540,948
3,318,833
3,659,421
778,903
2,984,968
3,214,383
33%
37%
46%
5,575,086
2,687,282
242,707
(112,592)
(513,538)
3,956
3,066,749
475,818
2,590,931
$
3,146,521
1,394,427
155,553
(5,091)
(1,750,726)
12,534
2,982,157
548,437
2,433,720
$
1,643,313
1,571,070
164,613
(2,612)
-
10,642
1,398,427
452,850
945,577
56
Revenues. We are a specialized wastewater treatment company with the goal to turn wastewater into re-useable clean water. For different
industries, the types of wastewaters are different. We have to customize our DTRO products and treatment solutions for each client’s situation. In 2017,
we experienced a rapid revenue growth, which was evidenced by the increase in both the number and size of project, product and service sales.
Our revenue from third parties was $25,339,497 and $11,985,055 for the years ended December 31, 2017 and 2016, respectively, an increase of
$13,354,442, or 111%. Our revenue growth in the year ended December 31, 2017 resulted primarily from increased demand for our projects and services,
evidenced by a large increase in our project sales, an increased number of customers and larger scale projects we were awarded, and service sales. We had
$4,000,940 in product sales for the year ended December 31, 2017, representing a decrease of $4,854,344, or 55%, compared to product sales of
$8,855,284 for the year ended December 31, 2016. In addition, we achieved projects sales of $13,343,223 for the year ended December 31, 2017,
representing an increase of $10,213,452, or 326%, comparing to $3,129,771 projects sales for the year ended December 31, 2016.
We began to deliver sewage purification service in the year ended December 31, 2017. For example, we provided landfill leachate purification
service to the Jiangshan Town government, Laixi City, Shandong Province, PRC. Revenue from service sales was $7,995,334 for the year ended
December 31, 2017.
Our revenue from third parties was $11,985,055 and $3,318,833 for the years ended December 31, 2016 and 2015, respectively, an increase of
$8,666,222, or 261%.
We did not generate any revenue from related parties for the year ended December 31, 2017, compared with revenue from related parties of
$294,666 for the year ended December 31, 2016. The revenue from related parties for the year ended December 31, 2016 represents the sales to
Heilongjiang Binteer and Mojie. Our related party sales decreased $3,364,755 from $3,659,421 for the year ended December 31, 2015 to $294,666 for the
year ended December 31, 2016. The decrease for related party sales was mainly attributed to decreased sales to Heilongjiang Binteer and Mojie.
We purchased raw materials and water purification equipment from Heilongjiang Binteer for the years ended December 31, 2016 and 2015. We
utilize other suppliers for our important raw materials, such as Dalian Huarui Heavy Industry Group Limited by Share Ltd. We did not purchase any raw
materials from our related parties for the year ended December 31, 2017.
Cost of revenues. Our cost of revenues increased to $17,077,129 by $9,338,356, or 121%, for the year ended December 31, 2017 compared to
cost of revenues of $7,738,773 for the year ended December 31, 2016. The increase in cost of revenues directly corresponded to the increase in revenue
during the same year. Our cost of revenues as a percentage of revenue was 67%, 63% and 54% for the years ended December 31, 2017, 2016 and 2015,
respectively. This increase was primarily due to revenue growth and the corresponding lower gross margin for the year ended December 31, 2017. Our
cost of revenues increased by $3,974,902, or 106%, to $7,738,773 for the year ended December 31, 2016 from $3,763,871 for the year ended December
31, 2015. The increase was primarily due to revenue growth and the corresponding lower gross margin for the year ended December 31, 2016.
Our cost of revenues increased by $3,974,902, or 106%, for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Gross margin. Our gross margin decreased from 37% for the year ended December 31, 2016, to 33% for the year ended December 31, 2017.
57
Our gross margin decreased from 46% for the year ended December 31, 2015, to 37% for the year ended December 31, 2016.
Selling, general and administrative expenses. Selling, general and administrative expenses were $5,575,086 for the year ended December 31,
2017, and $3,146,521 for the year ended December 31, 2016, an increase of $2,428,565, or 77%. The increase in selling, general and administrative
expenses is mainly due to higher payroll paid to administrative personnel and our management team, an increase in research and development expenses,
and an increase in domestic and overseas business traveling expenses. Payroll expense increased by $1,007,184 or 155%, from $650,804 in 2016 to
$1,657,988 in 2017, reflecting the increased number of employees required to expand our business. Research and development expenses increased by
$733,597 or 118%, from $622,051 in 2016 to $1,355,648 in 2017, which was mainly due to the increased number of projects and project size expansion.
Travelling expenses increased by $31,552 or 12%, from $256,651 in 2016 to $288,203 in 2017 as there were more travelling expenses for overseas
travels.
Selling, general and administrative expenses were $3,146,521 for the year ended December 31, 2016, and $1,643,313 for the year ended
December 31, 2015, an increase of $1,503,208, or 91%. The increase in selling, general and administrative expenses is mainly due to higher payroll paid
to administrative personnel and our management team, an increase in research and development expenses, and an increase in domestic and overseas
business traveling expenses. Payroll expense increased by $326,453 or 101%, from $324,351 in 2015 to $650,804 in 2016, reflecting the increased
number of employees required to expand our business. Research and development expense increased by $187,077 or 43%, from $434,974 in 2015 to
$622,051 in 2016, which is mainly due to the increased number of projects and project size expansion. Traveling expenses increased by $115,399 or 82%,
from $141,252 in 2015 to $256,651 in 2016, as sales and installation workers travelled more in 2016 and there were more overseas travels for potential
business.
We anticipate that our administrative expenses, particularly those related to support personnel costs, professional fees, as well as Sarbanes-Oxley
compliance, will continue to increase as we are a reporting company in the United States.
Income from operations. Our income from operations was $2,687,282 for the year ended December 31, 2017 and $1,394,427 for the year ended
December 31, 2016. Our operating income as a percentage of total revenues was 11% for the year ended December 31, 2017 and 11% for the year ended
December 31, 2016.
Our income from operations was $1,394,427 for the year ended December 31, 2016 and $1,571,070 for the year ended December 31, 2015. Our
operating income as a percentage of total revenues was 11% for the year ended December 31, 2016 and close to 23% for the year ended December 31,
2015. The change was due to our decreased gross margin and increased selling, general and administrative expenses.
Income taxes. We incurred income tax expense of $475,818, $548,437 and $452,850 for the years ended December 31, 2017, 2016 and 2015,
respectively. The $72,619 decrease for the year ended December 31, 2017, compared with 2016 was due to decreased net income before tax and increase
of the additional deduction for research and development expenses allowed by China tax law. The income tax expense increased $95,587 for the year
ended December 31, 2016, compared with 2015, resulted from our increased net income. Jinzheng was designated a “High-Tech Enterprise,” qualifying it
for a preferential tax rate of 15% for the years ended December 31, 2016 and 2017. Jinmo was recognized as small, low-profit enterprise and received a
preferential income tax of 10% for the years ended December 31, 2016 and 2015. The standard enterprise income tax rate in China is 25%.
Net income. Our net income was $2,590,931 and $2,433,720 for the years ended December 31, 2017 and 2016, representing an increase of
$157,211. The slight increase in net income was a result of increased revenue for the year ended December 31, 2017, compared to the year ended
December 31, 2016.
Our net income was $2,433,720 and $945,577 for the years ended December 31, 2016 and 2015, representing an increase of $1,488,143. The
increase in net income was a result of our government subsidies of $1,750,726 (RMB11,632,000) for our research and development on wastewater
treatment and offset by lower gross margin and increased selling and administrative expense for the year ended December 31, 2016, compared to the year
ended December 31, 2015.
58
B.
Liquidity and Capital Resources
Liquidity
For the years ended December 31, 2017, 2016, and 2015
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate
on an ongoing basis. On December 31, 2017, our working capital was $7,291,438, compared to working capital of $7,225,015 on December 31, 2016.
Our cash and cash equivalents balance on December 31, 2017 totaled $3,118,080, compared to $1,484,762 on December 31, 2016. During the
year ended December 31, 2017, we used cash in operating activities of $3,189,701, used cash in investing activities of $7,191,807, and had cash provided
by financing activities of $11,893,205. The effect of the prevailing exchange rates on our cash position was in the amount of $121,621. During the year
ended December 31, 2016, we used cash in operating activities of $663,655, used cash in investment activities of $2,980,495 and had cash provided by
financing activities of $5,150,172. The negative effect of prevailing exchange rates on our cash position was in the amount of $156,412 in 2016. During
the year ended December 31, 2015, we used cash in operating activities of $2,958,430, used cash in investment activities of $2,203,707 and had cash
provided by financing activities of $5,263,611. The negative effect of prevailing exchange rates on our cash position was in the amount of $3,080 in 2015.
Net cash used in operating activities for the year ended December 31, 2017 totaled $3,189,701. The activities were mainly comprised of an
increase of inventories of $4,923,400, an increase in advances to suppliers and other current assets of $412,955, an increase in net accounts receivable
from third parties of $3,345,269, and offset by net income of $2,590,931, an increase in accounts payable and bank acceptance notes to vendors of
$2,825,887, an increase in accrued expenses and other payables of $589,638, an increase in advances from customers of $499,067, a decrease in net
accounts receivable from related parties of $1,090,465 and an increase in other current liabilities of $570,244.
Net cash used in operating activities for the year ended December 31, 2016 totaled $663,655. The activities were mainly comprised of an
increase in net accounts receivable of $1,410,115, an increase in inventory of $2,743,853, an increase in advance to suppliers and other current assets of
$2,289,933, a decrease in account payable to related party of $2,140,504, and offset by our net income of $2,433,720, depreciation and amortization
expense of $187,662, bad debt expense of $76,459, a decrease in account receivable from related parties of $3,645,922, a decrease in the other non-
current assets of $22,857, an increase in accounts payable and bank acceptance notes to vendors of $1,079,258, an increase in advance from customers of
$425,736, an increase in other current liabilities of $352,502.
Net cash used in operating activities for the year ended December 31, 2015 totaled $2,958,430. The activities were mainly comprised of an
increase in net accounts receivable of $1,411,777, an increase in net accounts receivable from related parties of 3,754,977, an increase in inventory of
$1,890,918, an increase in advance to suppliers and other current assets of $540,737, and offset by our net income of $945,577, depreciation expense of
$86,396, bad debt expense of $39,173, a decrease in advance to supplier - related party of $793,106, a decrease in the other non-current assets of
$132,971, an increase in accounts payable and bank acceptance notes to vendors of $582,555, an increase in accounts payable to related party of
$1,159,416, an increase in other current liabilities of $437,151, and an increase in income tax payable of $550,163.
The increase in our cash flows used in operating activities for the year ended December 31, 2017, compared to the year ended December 31,
2016, primarily resulted from our increased net accounts receivable from third parties, and increased inventories, and offset by decreased net accounts
receivable from related parties, increased accounts payable and bank acceptance notes to vendors, increased advances from customers and increased other
current liabilities.
The decrease in cash outflows from our operating activities for the year ended December 31, 2016, compared to the year ended December 31,
2015, primarily resulted from our decreased accounts receivable - related party, increased accounts payable and bank acceptance notes, increased net
income, and offset by increased inventory, increased advance to suppliers and other current assets, increased advance to supplier – related party and
decreased income tax payable.
Net cash used in investing activities for the year ended December 31, 2017 totaled $7,191,807. The activities were primarily comprised of
$1,482,360 spent to purchase property, plant and equipment, and a $5,712,407 net increase in restricted cash.
Net cash used in investing activities for the year ended December 31, 2016 totaled $2,980,495. The activities were primarily comprised of
$2,261,745 spent to purchase the land use rights for a piece of land, $239,467 advanced to related parties, $301,019 advanced to third parties, $922,380
transferred to restricted cash, and offset by collections from related parties of $473,320 and repayment from third parties of $338,646.
59
Net cash used in investing activities for the year ended December 31, 2015 totaled $2,203,707. The activities were primarily comprised of
$1,218,404 spent to purchase property and equipment, $353,767 advanced to related parties, $40,136 advanced to third parties, $621,567 transferred to
restricted cash, and offset by collections from related parties of $20,871, and proceeds from disposal of property, plant and equipment of $9,296.
One of our primary uses of cash in our investing activities for each year is for our purchase of property, plant and equipment and land use right.
We spent $1,415,719 more than in 2016 in purchasing property, plant and equipment for the year ended December 31, 2017. However, we spent
$2,261,745 for the year December 31, 2016 in purchasing the land use rights. Restricted cash increased $4,790,027 for the year ended December 31, 2017
compared to 2016. As a result, we used $4,211,312 more than the year December 31, 2016 in our investing activities for the year ended December 31,
2017.
One of our primary uses of cash in our investing activities for each period is for our purchase of property and equipment and land use right. We
spent $1,109,982 more than year of 2015 in purchasing property and land use right for the year ended December 31, 2016. In addition, we collected
$452,449 more than the year of 2015 in repayment from our related parties, paid $114,300 less than the year of 2015 in advance to our related parties,
paid $260,883 more than the year of 2015 in advance to third parties and transferred $300,813 more to restricted cash for the year ended December 31,
2016. As a result, we used $776,778 more than the year of 2015 in our investing activities for the year ended December 31, 2016.
For the year ended December 31, 2017, net cash provided by financing activities was $11,893,205. We received these funds from issuances of
common shares of $7,111,325, borrowings from third parties of $8,805,683, offset by repayment to related parties of $739,973, and repayment to third
parties of $3,283,830.
For the year ended December 31, 2016, net cash provided by financing activities was $5,150,172. We received these funds from issuances of
common shares of $5,323,026, capital contributions from shareholders of $198,917, borrowings from third parties of $11,613,289, borrowings from
related parties of $2,558,661, offset by the repayment to related parties of $1,982,733, capital distribution in connection with acquisition of a subsidiary of
$4,418,425 and repayment to third parties of $8,142,563.
For the year ended December 31, 2015, net cash provided by financing activities was $5,263,611. We received these funds from capital
contributions from shareholders of $2,212,796, borrowings from third parties of $4,013,614, borrowings from related parties of $478,969, offset by
repayment to related parties of $799,590 and repayment to third parties of $642,178.
We received $6,743,033 more than the year of 2016 in financing activities for the year ended December 31, 2017. We received proceeds of
$1,788,299 more than in 2016 from issuances of common shares, paid capital distribution in connection with acquisition of a subsidiary of $4,418,425
less than the year of 2016, and repaid $1,242,760 and $4,858,733 less than the year of 2016 in repayment to related parties and third parties, respectively
for the year ended December 31, 2017. However, we received proceeds of $2,558,661 and $2,807,606 less than the year 2016 in borrowings from related
parties and third parties, respectively.
We received $113,439 less than the year of 2015 in financing activities for the year ended December 31, 2016. We received proceeds of
$5,323,026 more than in 2015 from issuances of common shares, received capital contribution from shareholders of $2,013,879 less than in 2015, and
received proceeds of $7,599,675 more than in 2015 from borrowings from third parties for the year ended December 31, 2016. We received proceeds of
$2,079,692 more than in 2015 in borrowings from related parties, paid $7,500,385 more than the year of 2015 repayments to third parties, paid
$1,183,143 more than year of 2015 in repayment to related parties and paid additional $4,418,425 in capital distribution in connection with acquisition of
a subsidiary for the year ended December 31, 2016.
Other than the Chinese government’s stricter policies on pollution control and the growing demand for wastewater reuse across many industries,
both of which we believe may increase our liquidity if they continue, we are not aware of any trends or any demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way.
For 2018, we expect our main growth will be from our wastewater treatment business in China. The demand for our products, projects and
services appears to be strengthening, from which we expect to generate more positive cash flow.
Our long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of our spending to
support the maintenance and growth of our operations, the expansion of our sales and the continued market acceptance of our products, projects and
services. Compared to $2,879,853 short-term loans outstanding as of December 31, 2016, we had $9,031,747 short-term loans outstanding as of
December 31, 2017. Our total liability increased significantly for the year of 2017 due to our large purchase of inventories, increase in restricted cash and
acquisition of property, plant and equipment. We mainly relied on proceeds from issuance of common shares, borrowings from third parties and cash
inflow from revenue to support our operations for the year ended December 31, 2017.
60
Regulatory Restrictions on Capital Injections
We plan to use proceeds from our IPO to fund our business. In order to do so, we will be required to comply with the following Chinese
regulations regarding capital injections to foreign-invested enterprises.
Chinese regulations relating to investments in offshore companies by Chinese residents. SAFE promulgated the Circular on Relevant Issues
Concerning Foreign Exchange Control on Domestic Residents’ Financing and Round trip Investment through Offshore Special Purpose Vehicles, or
SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires Chinese residents to register and update certain investments in companies incorporated
outside of China with their local SAFE branch. SAFE also subsequently issued various guidance and rules regarding the implementation of SAFE
Circular 37, which imposed obligations on Chinese subsidiaries of offshore companies to coordinate with and supervise any Chinese-resident beneficial
owners of offshore entities in relation to the SAFE registration process.
We may not be aware of the identities of all of our beneficial owners who are Chinese residents. We do not have control over our beneficial
owners and cannot assure you that all of our Chinese -resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation
rules. The failure of our beneficial owners who are Chinese residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE
Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our Company who are Chinese residents to comply with the
registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our Chinese
subsidiaries to fines and legal sanctions, which may be substantial. Failure to register may also limit our ability to contribute additional capital to our
Chinese subsidiaries and limit our Chinese subsidiaries’ ability to distribute dividends to our Company. These risks may have a material adverse effect on
our business, financial condition and results of operations.
China regulates loans to and direct investment in Chinese entities by offshore holding companies and there is governmental control of currency
conversion. We are an offshore holding company conducting our operations in China through our wholly owned subsidiary Jinzheng. As an offshore
holding company, we may make loans and additional contributions to Jinzheng subject to approval from government authorities and RMB 40,000,000
limitations on amount.
Any loan to Jinzheng, which is treated as a foreign-invested enterprise under Chinese law, is subject to Chinese regulations and foreign exchange
loan registrations. In January 2003, the China State Development and Reform Commission, SAFE and Ministry of Finance jointly promulgated the
Circular on The Interim Provisions on the Management of Foreign Debts, or the Circular 28, limiting the total amount of foreign debt a foreign-invested
enterprise may incur to the difference between the amount of total investment approved by the Ministry of Commerce or its local counterpart for such
enterprise and the amount of registered capital of such enterprise, and requiring registration of any such loans with SAFE. As of December 31, 2017, the
amount of approved total investment of Jinzheng was $5,759,705 (RMB 40,000,000) and registered capital and additional paid in capital was $2,879,853
(RMB 20,000,000) and $1,229,318 (RMB 8,537,365), respectively, which means Jinzheng currently cannot obtain loans in excess of $1,650,534 from our
entities outside mainland China.
We may choose to finance Jinzheng by means of capital contributions. These capital contributions must be approved by the Ministry of
Commerce or its local counterpart. In March 2015, SAFE issued the Circular Concerning the Reform of the Administration of the Settlement of Foreign
Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No.19, which became effective in June 2015. SAFE Circular No.19 regulates the
conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used.
Furthermore, SAFE promulgated a circular in June 2016, SAFE Circular No.16, which further revises some clauses in the SAFE Circular No.19. SAFE
Circular No. 19 and No.16 provide that the capital-account foreign exchange incomes of a domestic enterprise shall not be used for expenditures that are
forbidden by relevant laws and regulations, for purposes that are not included in the business scope approved by the applicable government authority,
shall not be used for direct or indirect equity investments within China or for any other kind of investment except principal-guaranteed wealth-
management products, unless otherwise prescribed by other laws and regulations, shall not be used for issuing RMB entrusted loans (except included in
the business scope approved by the applicable government authority or issuing RMB entrusted loans to affiliated enterprises), repaying inter-enterprise
loans, repaying bank loans which has been refinanced to third parties, issuing RMB loans to non-affiliated enterprises unless expressly permitted in the
business scope and shall not be used to purchase real estate that is not for personal use except if the company is a real estate enterprise. In addition, SAFE
supervises the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company by further focusing on
ex post facto supervision and violations. These two circulars may limit our ability to use the net proceeds from our initial public offering to invest in or
acquire any other Chinese companies in China, which may adversely affect our liquidity and our ability to fund and expand our business in China.
61
Capital Resources
As of December 31, 2017 and 2016
The following table provides selected balance sheets comparisons as of December 31, 2017 and December 31, 2016:
ASSETS
Current assets
Cash and cash equivalents
Restricted cash, current portion
Accounts receivable, net
Accounts receivable from related party, net
Notes receivable
Inventories
Deferred cost of revenue
Advances to suppliers and other current assets, net
Due from related parties
Total current assets
Restricted cash, non-current portion
Property, plant and equipment, net
Land use rights, net
Deferred tax assets
Other non-current assets
Total assets
LIABILITIES
Accounts payable and bank acceptance notes to vendors
Loans due within one year
Due to related parties
Current portion of deferred income
Advances from customers
Income tax payables
Accrued expenses and other payables
Total current liabilities
Long term loans
Total liabilities
December 31,
2017
2016
Variance
%
$
$
$
$
3,118,080
6,753,685
6,050,495
-
-
10,279,397
2,547,580
2,885,510
-
31,634,747
500,000
10,449,466
2,243,183
518,251
-
45,345,647
4,903,058
9,020,697
-
-
1,408,208
501,921
8,509,425
24,343,309
11,050
24,354,359
$
$
$
$
1,484,762
1,439,926
2,637,236
1,060,977
68,108
4,840,234
-
2,528,411
3,563
14,063,217
-
1,199,611
2,143,002
181,003
4,591
17,591,424
1,844,077
2,879,853
714,999
25,919
833,742
329,212
210,400
6,838,202
-
6,838,202
$
$
$
$
1,633,318
5,313,759
3,413,259
(1,060,977)
(68,108)
5,439,163
2,547,580
357,099
(3,563)
17,571,530
500,000
9,249,855
100,181
337,248
(4,591)
27,754,223
3,058,981
6,140,844
(714,999)
(25,919)
574,466
172,709
8,299,025
17,505,107
11,050
17,516,157
110%
369%
129%
(100)%
(100)%
112%
N/A
14%
100%
125%
N/A
771%
5%
186%
100%
158%
166%
213%
100%
100%
69%
52%
3,944%
250%
N/A
256%
62
We maintain cash and cash equivalents in mainland China and Hong Kong. At December 31, 2017 and 2016, bank deposits were as follows:
Country
China (mainland)
China (offshore bank account)
Total
December 31,
2017
2,419,776
698,304
$
2016
1,470,758
11,431
3,118,080
$
1,482,189
$
$
An important proportion of our cash balances at December 31, 2017 and 2016 are in the form of RMB and held in bank accounts at financial
institutions located in China. Cash held in banks in China is not insured. In 1996, the Chinese government introduced regulations relaxing restrictions on
the conversion of the RMB; however restrictions still remain, including restrictions on foreign-invested entities. Foreign-invested entities may only buy,
sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore,
the conversion of RMB for capital account items, including direct investments and loans, is subject to China government approval. Chinese entities are
required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will
not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on
deposit in banks in China is not readily deployable by us for use outside of China.
Cash and cash equivalents
As of December 31, 2017, cash and cash equivalents were $3,118,080, compared to $1,484,762 at December 31, 2016. The components of
increase of $6,733,318, $1,349,610 and $98,394 for the years ended December 31, 2017, 2016, and 2015, are reflected below.
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Exchange rate effect on cash
Net cash inflow
Restricted cash
Years Ended
December 31,
2016
$
2017
(3,189,701) $
(7,191,807)
11,893,205
121,621
(663,655) $
(2,980,495)
5,150,172
(156,412)
2015
(2,958,430)
(2,203,707)
5,263,611
(3,080)
$
1,633,318
$
1,349,610
$
98,394
Restricted cash, current represents the bank deposit of $1,499,990 pledged for the bank acceptance notes issued to suppliers, deposits of
$153,695 for guarantee service provided by Yantai Financing Guarantee Co., Ltd, and the certificate of deposits in the amount of $5,100,000 using the
funds of IPO pledged for the short term loan of $4,610,845 (RMB 30,000,000) obtained from Industrial and Commercial Bank of China. The Company
had current portion of restricted cash of $6,753,685 and $1,439,926 as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Company had non-current portion of restricted cash of $500,000 which was held as security in an escrow account
pursuant to an escrow indemnification agreement in connection with our IPO to satisfy the initial $500,000 in any potential indemnification obligations
arising during an escrow period of two years following the closing date on August 2, 2017.
Accounts receivable, net
Accounts receivable, net as of December 31, 2017 was $6,050,495, an increase of $3,413,259, or 129%, compared to $2,637,236 as of
December 31, 2016. This increase resulted primarily from an increases in the volume of products, projects and services we provided. Our revenue
increased by 106% for the year ended December 31, 2017 primarily from an increase the volume of products, projects and services we provided.
63
Advance to suppliers and other current assets, net
As of December 31, 2017 and 2016, advances to suppliers and other current assets consisted of the following:
Other current assets
VAT-input
Others
Total other current assets
Advances to suppliers
Total
Less: allowance for doubtful accounts
Advances to suppliers and other current assets, net
December 31,
2017
December 31,
2016
Fluctuation
%
$
$
651,056
393,581
1,044,637
1,840,873
2,885,510
-
2,885,510
$
$
-
610,216
610,216
1,991,343
2,601,559
73,148
2,528,411
651,056
(216,635)
434,421
(150,470)
283,951
(73,148)
357,099
N/A
-36%
71%
8%
11%
-100%
14%
Balance of advance to suppliers decreased by $150,470, or 8%, from $1,991,343 as of December 31, 2016 to $1,840,873 as of December 31,
2017. The increase was mainly due to our rapid growth of revenue for the year ended December 31, 2017, which required increased prepayment for
outsourcing service and purchasing of raw materials.
Other current assets include the value added tax pending for deduction, advances to employees for business travels or business development
purposes and other miscellaneous receivables such as utility fees, social insurances, personal income taxes paid in advance on behalf of employees and
deposits, which include guarantee deposit, rent deposits, and security deposits for bidding on customer projects.
The Company advanced RMB 2,000,000 (approximately $307,700) to Yantai Yezhan Economic and Trade Ltd., Co. on August 10, 2016. The
loan bore an annual interest of 5% and was due in six months. On September 29, 2016, the loan was fully repaid along with interest.
The Company advanced RMB 8,500,000 (approximately $1,236,490) to Yantai Runtai Medical Co., Ltd. on February 22, 2017. The loan bears
an annual interest rate of 10% and was due in six months. On August 22, 2017, the loan was extended for another 4 months with the same interest rate. As
of December 31, 2017, the loan was fully repaid along with interest.
Inventories
As of December 31, 2017, our inventory balance was $10,279,397, an increase of $5,439,163, or 112%, compared to $4,840,234, as of
December 31, 2016. The increase was due to the increase of work in progress and raw materials as follows:
Raw materials
Work in progress
Finished goods
Less: write-down of inventories
Inventories
64
$
December 31,
2017
2,833,317
7,446,080
-
10,279,397
-
10,279,397
$
$
December 31,
2016
1,707,610
3,132,624
-
4,840,234
-
4,840,234
$
Deferred cost of revenue
As of December 31, 2017 and 2016, our balance for deferred cost of revenue was $2,547,580 and $0, respectively. The Company used the
proportional performance method for recognition of service revenue. The related costs were charged to cost of revenue in proportion to the revenue
recognized. The remaining costs incurred were deferred and presented as “Deferred cost of revenue” in the accompanying consolidated balance sheets.
Property, plant and equipment, net
Net property, plant and equipment as of December 31, 2017 were $6,816,333, an increase of $5,616,722 compared to $1,199,611 as of
December 31, 2016.The significant increase was due to the construction of our new headquarter and manufacturing factory.
Machinery equipment
Electronic equipment
Office equipment
Motor vehicles
Buildings
Computer software
Construction in progress
Leasehold improvements
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
December 31,
2017
1,143,605
117,220
81,248
932,877
106,038
81,939
8,350,135
80,053
10,893,115
(443,649)
10,449,466
$
$
2016
Variance
%
941,333
69,037
62,542
194,961
89,661
23,825
-
50,011
1,431,370
(231,759)
1,199,611
202,272
48,183
18,706
737,916
16,377
58,114
8,350,135
30,042
9,461,745
(211,890)
9,249,855
21%
70%
30%
378%
18%
244%
N/A
60%
661%
91%
771%
Depreciation expense for the years ended December 31, 2017, 2016 and 2015, was $188,995, $165,906 and $86,396, respectively.
Land use rights, net
As of December 31, 2017 and 2016, land use rights consisted of the following:
Cost
Less: accumulated amortization
Land use rights, net
$
December 31,
2017
2,311,611
(68,428)
2,243,183
$
$
December 31,
2016
2,163,815
(20,813
2,143,002
$
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $44,498, $21,756 and $0, respectively.
On July 19, 2016, the Company entered into a land use right transfer agreement with Yantai Aotesai Energy Ltd., pursuant to which the
Company purchased a parcel of land of 32,442 square meters located in Laishan District Economic Development Area for a total consideration of
approximately $2,248,829 (RMB 14,598,725). Transfer of the land use right was completed in March 2017.
Loans due within one year
Loans due within one year increased by $6,140,844 to $9,020,697 as of December 31, 2017 from $2,879,853 as of December 31, 2016. The
proceeds from short-term loans were mainly used to supplement the cash used in operations. Our rapid revenue growth resulted in significant needs for
cash for the year ended December 31, 2017. Our current assets increased by $17,571,530, or 125%, to $31,634,747 for the year ended December 31, 2017
from $14,063,217 for the year ended December 31, 2016. This increase was mainly financed by our proceeds from issuance of common shares in our
IPO, and the short-term loans for the year ended December 31, 2017.
65
Off-Balance Sheet Arrangements
Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any
entity that is not consolidated with us is a party, under which we have:
● Any obligation under certain guarantee contracts,
● Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or
market risk support to that entity for such assets,
● Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and
classified in shareholder equity in our statement of financial position, and
● Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk
or credit risk support to us, or engages in leasing, hedging or research and development services with us.
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of
business, we enter into operating lease commitments, and other contractual obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States.
Trend Information
Based on our experience and observations of the business in which we operate, we believe the following trends are likely to affect our industry
and, as a result, our Company, if they continue in the future.
● Demand for water treatment systems has an inverse relationship to the availability and quality of water resources worldwide. As China’s
clean water resources become scarcer, the cost of water goes up, which is driving the trend toward industrial water reuse. The increased
demand and investment in wastewater treatment system will benefit our continued future growth.
● Regulatory mandates and the desire to maximize cost savings are the primary drivers of water reclamation efforts in China. In April 2015,
the Chinese State Council issued the Water Ten Plan. This plan has demonstrated the Chinese government’s strong commitment for
preserving water and recycling wastewater. The cost of water (acquisition, handling, discharge, and energy costs) is on the rise. Many
industrial plants are looking to reduce the overall expense of water treatment, whether it is through acquisition costs, discharge fees, or
energy costs to handle water. Water reuse provides customers with a significant opportunity to cut costs. We believe that our membrane
technology offers industrial water users creative ways to clean their wastewater output or reuse it as clean water in the production process.
66
● While we continue to target significant market opportunities that we believe are still available in Northern and Eastern China, we are also
looking for opportunities in other regions of China. Presently, we intend to expand our business to customers located in Shandong Province,
Jiangsu Province and Inner Mongolia Autonomous Region.
● Currently, we have customers for our business primarily in the waste (garbage), chemical and energy industries. We hope to expand our
customer base in the future to industrial park wastewater treatment, municipality wastewater recycling, and seawater desalination industries.
● We believe that competition in the wastewater treatment market is going to become more intense, and consolidation is going to prevail in the
near future. It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing
competitors may put significant pressure on our ability to increase market share.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We
evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the
judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can
vary depending on the situation, actual results may differ from the estimates.
The critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated financial
statements appearing elsewhere in this annual report. Management believes that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about our operating results and financial condition.
Revenue Recognition
The Company derives its revenues from: (1) sale of products such as water purifying membranes and water purification equipment (“product
sales”); (2) sale of water purifying installation projects (“project sales”); and (3) providing water treatment service such as landfill leachate treatment and
purification service (“service sales”). We recognize revenue when title and risk of loss have been transferred to the customer, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Revenue consists of the invoiced value
for the sales net of VAT, business tax, applicable local government levies, rebates, discounts and returns. For product sales and project sales, revenue is
recognized using completed performance method and for service sales, revenue is recognized using proportional performance method.
There were no sales returns and allowances for the years ended December 31, 2017, 2016 and 2015. We do not provide any unconditional right
of return, pricing protection or any other concessions to our customers. We provide free after-sales service, including warranty, technical support and
training for a period ranging from one to two years. The actual after-sales expense was immaterial for the years ended December 31, 2017, 2016 and
2015.
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and
information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained
and as our operating environment changes. Significant estimates and assumptions by management include, among others, useful lives and impairment of
long-lived assets, allowance for doubtful accounts, valuation of inventories and income taxes including the valuation allowance for deferred tax assets.
While we believe that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from
those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period
they are determined to be necessary.
67
Fair Value of Financial Instruments
For certain of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, notes receivables, inventories,
advances to suppliers and other current assets, accounts payable and bank acceptance notes to vendors, loans due within one year, advances from
customers, and accrued expenses and other payables, the carrying amounts approximate their fair values due to the short maturities.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
freemarket dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however,
practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Foreign Currency Translation
Our consolidated financial statements are presented in United States dollar, which is our reporting currency. The functional currency of Newater
Technology and Newater HK is the United States dollar. The functional currency of Jinzheng and Jinmo is RMB. For Jinzheng and Jinmo, results of
operations and cash flows are translated at average exchange rates during the year, assets and liabilities are translated at the unified exchange rate at the
end of the year, and equity is translated at historical exchange rates. The resulting translation adjustments are included in determining other
comprehensive income. Transaction gains and losses are reflected in the consolidated statements of income and comprehensive income.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)”. Under ASU 2014-09, revenue is
recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity
expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning
after December 15, 2017, and early adoption is permitted for periods beginning after December 15, 2016. The Company elected to adopt the new standard
effective January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective
method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified
retrospective method). The Company elected adopting the standard using the modified retrospective method. Under this method, the Company will
recognize the cumulative effect of adoption as an adjustment to its opening balance of retained earnings. The Company has identified its revenue streams
and assessed each for the impacts. The Company expects the adoption of Topic 606 will not have a material impact in the timing or amount of revenue
recognized, including the presentation of revenues in the Company’s consolidated statements of income.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The
amendments in ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent
in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments in this
ASU are effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods
presented. The Company adopted this amendment effective January 1, 2017. The adoption did not have an impact on our consolidated financial
statements and related disclosures other than for reclassification of current deferred tax items to non-current for all periods presented.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 specifies the accounting for leases. For operating leases,
ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on its
balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term,
generally on a straight-line basis. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions.
ASU 2016-02 is effective for publicly-traded companies for annual reporting periods, and interim periods within those years, beginning after December
15, 2018. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The
modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition approach. The Company plans to adopt the standard effective January 1, 2019. The Company
anticipates this standard will have a material impact on the Company’s consolidated balance sheets. However, the Company does not expect the adoption
will have a material impact on the consolidated statements of income and comprehensive income. While the Company is continuing to assess potential
impacts of the standards, it’s expected that the most significant impact will be the recognition of a right-of-use asset and a lease liability for the ongoing
leases.
68
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do
not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the
standard effective January 1, 2018, and anticipates this standard will not have a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and
Joint Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements
or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an
accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures
including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have
not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The
Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-
03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial
statements.
Impact of Inflation
We do not believe the impact of inflation on our Company is material. Our operations are in China and China’s inflation rates have been
relatively stable in the last three years: 2.0% in 2017, 1.6% in 2016, and 2.0% in 2015.
Impact of Foreign Currency Fluctuations
We do not believe the impact of foreign currency fluctuations on our Company is material. Regarding purchase of raw materials, we are subject
to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases
through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in
China.
We do not have material export sales and almost all of our revenue was derived from our domestic sales.
We have not had any foreign currency investments hedged by currency borrowings or other hedging instruments. We manage our price risks
through productivity improvements and cost-containment measures.
C.
Research and Development, Patent and Licenses, etc.
Please refer to Item 4 Subparagraph B, “Information on the Company—Business Overview—Research and Development” and “—Intellectual
Property Rights.”
69
D.
Trend Information.
Based on our experience and observations of the business in which we operate, we believe the following trends are likely to affect our industry
and, as a result, our Company, if they continue in the future.
● Demand for water treatment systems has an inverse relationship to the availability and quality of water resources worldwide. As China’s
clean water resources become scarcer, the cost of water goes up, which is driving the trend toward industrial water reuse. The increased
demand and investment in wastewater treatment system will benefit our continued future growth.
● Regulatory mandates and the desire to maximize cost savings are the primary drivers of water reclamation efforts in China. In April 2015,
the Chinese State Council issued the Water Ten Plan. This plan has demonstrated the Chinese government’s strong commitment for
preserving water and recycling wastewater. The cost of water (acquisition, handling, discharge, and energy costs) is on the rise. Many
industrial plants are looking to reduce the overall expense of water treatment, whether it is through acquisition costs, discharge fees, or
energy costs to handle water. Water reuse provides customers with a significant opportunity to cut costs. We believe that our membrane
technology offers industrial water users creative ways to clean their wastewater output or reuse it as clean water in the production process.
● While we continue to target significant market opportunities that we believe are still available in Northern and Eastern China, we are also
looking for opportunities in other regions of China. Presently, we intend to expand our business to customers located in Shandong Province,
Jiangsu Province and Inner Mongolia Autonomous Region.
● Currently, we have customers for our business primarily in the waste (garbage), chemical and energy industries. We hope to expand our
customer base in the future to industrial park wastewater treatment, municipality wastewater recycling, and seawater desalination industries.
● We believe that competition in the wastewater treatment market is going to become more intense, and consolidation is going to prevail in the
near future. It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing
competitors may put significant pressure on our ability to increase market share.
70
E.
Off-Balance Sheet Arrangements.
Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any
entity that is not consolidated with us is a party, under which we have:
● Any obligation under certain guarantee contracts,
● Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or
market risk support to that entity for such assets,
● Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and
classified in shareholder equity in our statement of financial position, and
● Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk
or credit risk support to us, or engages in leasing, hedging or research and development services with us.
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of
business, we enter into operating lease commitments, and other contractual obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States.
F.
Tabular Disclosure of Contractual Obligations.
We have certain potential commitments that include future estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and
amounts of payments.
The following table summarizes our contractual obligations as of December 31, 2017, and the effect these obligations are expected to have on
our liquidity and cash flows in future periods:
Contractual obligations
Operating leases
Total
G.
Safe Harbor.
See “Forward-Looking Statements.”
Total
1 year
2-3 years
3-5 years
$
$
110,651
110,651
$
$
110,651
110,651
$
$
-
-
$
$
5 years and
thereafter
-
-
$
$
-
-
71
Item 6. Directors, Senior Management and Employees
A.
Directors and Senior Management.
MANAGEMENT
The following table sets forth our executive officers and directors, their ages and the positions held by them:
Name
Yuebiao Li (1) (2)
Zhuo Zhang (1) (2)
Hengtong Li (1) (3) (5) (6) (7)
Zhicun Chen (1) (3) (5)(6) (7)
Yan Shen (1) (4) (5) (6) (7)
Age
45
41
54
45
48
Position
Chief Executive Officer and Chairman of the Board
Chief Financial Officer and Director
Director
Director
Director
Appointed
June, 2016
June, 2016
June, 2016
June, 2016
June, 2016
(1)
(2)
(3)
The individual’s business address is c/o Yantai Jinzheng Eco-Technology Co., Ltd. 8 Lande Road, Laishan District, Yantai, Shandong China.
Class C director whose term expires at the 2019 succeeding annual meeting of shareholders.
Class B director whose term expires at the 2018 succeeding annual meeting of shareholders.
Class A director whose term expires at the 2020 annual meeting of shareholders.
(4)
(5) Member of audit committee.
(6) Member of compensation committee.
(7) Member of nominating committee.
Yuebiao Li. Mr. Li has served as the Chief Executive Officer and Chairman of Newater Technology since June 2016. Mr. Li co-founded
Jinzheng in 2012 and has served as Jinzheng’s Chief Executive Officer since July 2012. Mr. Li has also served as Jinzheng’s executive director since
February 2016. Mr. Li served as General Manager of Daqing Jiejingyuan Water Treatment Equipment Sales Co., Ltd. from 2005 until 2012 and had
previously served as Sales Manager from 2000 until 2005. Mr. Li received his associate degree in accounting from Heilongjiang University. Mr. Li was
nominated as a director because his experience serving in executive positions at companies operating in the water treatment industry and has extensive
knowledge, experience and relationships in China’s water treatment industry.
Zhuo Zhang. Ms. Zhang has served as the Chief Financial Officer and Vice Chairman of Newater Technology since June 2016. Ms. Zhang co-
founded Jinzheng in 2012 and has served as Jinzheng’s Chief Financial Officer since July 2012. From July 2012 to February 2016, Ms. Zhang also served
as executive director and general manager of Jinzheng. Ms. Zhang has served as general manager of Jinzheng since February 2016.. From September
2005 through May 2012, Ms. Zhang served as Finance Manager of Daewoo Shipbuilding Ocean (Shandong) Co., Ltd., a subsidiary incorporated in
Shandong province by Seoul based shipbuilder DSME. From May 2000 through September 2005, Ms. Zhang was Finance Manager of Doosan
Engineering Machinery (China) Co, Ltd., a South Korean owned machine tool company in Shandong Province. Ms. Zhang holds a bachelor degree in
accounting from Shandong Technology and Business University. Ms. Zhang was nominated as a director because of her extensive operating, accounting,
internal control and financial knowledge of the Company, which gives her detailed understanding of the complexities of our operations.
72
Hengtong Li. Mr. Li has served as an independent director of Newater Technology since June 2016. Since 2000, Mr. Li has been the Deputy
Director of Yantai Huansheng Tax Accounting Firm. Between 1995 and 2000, Mr. Li served as General Manager of Yantai Ziguang Technology Co.,
Ltd. Between 1991 and 1995, Mr. Li served as Chief Financial Officer of Yantai Chunsheng Knitwear Co., Ltd. Mr. Li is a member of the Chinese
Institute of Certified Public Accountants (CICPA), and a member of Certified Tax Agents (CTA). Mr. Li holds a bachelor degree in management
engineering from Qingdao University. Mr. Li was nominated as a director because of his experience in management, tax and accounting.
Zhicun Chen. Ms. Chen has served as an independent director of Newater Technology since June 2016. Since 2013, Ms. Chen has been the
Chief Financial Officer of Achilles Shanghai International Trading Co., Ltd. Between 2008 and 2013, Ms. Chen served as Chief Financial Officer of
Shanghai Celco Electronic Co., Ltd. Between 2000 and 2008, Ms. Chen worked as head of finance and accounting department of the Forestry Bureau of
the Great Khingan Mountain. Ms. Chen is a member of the Institute of Public Accountants of Australia (IPA), a member of the Institute of Financial
Accountants (IFA) of the United Kingdom, and a member of China Association of Chief Financial Officers. Ms. Chen holds a bachelor degree in
accounting from Changchun University of Science and Technology. Ms. Chen was nominated as a director because of her experience in accounting and
auditing.
Yan Shen. Mr. Shen has served as an independent director of Newater Technology since June 2016. Since May 2017, Mr. Shen has served as
the business manager of Quanzhou Wanhua Shiwang Micro Fibre Co., Ltd., in charge of sales. Between 2001 to 2017, Mr. Shen served as Associate
General Manager of Yantai Wanhua Micro Fibre Co., Ltd., in charge of national sales and marketing. Between 1993 and 2001, Mr. Shen served as
international trade manager of China Machinery Import and Export Yantai Co., Ltd. Mr. Shen received his bachelor degree in machinery design and
manufacturing from Yantai University. Mr. Shen was nominated as a director because of his sales and marketing experience.
There are no family relations among any of our officers or directors. There are no other arrangements or understandings pursuant to which our
directors are selected or nominated.
B.
Compensation.
Executive Compensation
Our board of directors has not adopted or established a formal policy or procedure for determining the amount of compensation paid to our
executive officers. Currently, our board of directors determines the compensation to be paid to our executive officers based on our financial and operating
performance and prospects, and contributions made by the officers to our success. Each of our named executive officers are measured by a series of
performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria are set forth based on certain objective
parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and
overall corporate performance. The board of directors will make an independent evaluation of appropriate compensation to key employees, with input
from management. The board of directors has oversight of executive compensation plans, policies and programs
In 2017, we expensed an aggregate of approximately $208,000 as salaries, bonuses and fees to our senior officers named in this annual report.
Other than salaries, fees and share incentives, we do not otherwise provide pension, retirement or similar benefits to our officers and directors.
73
Director Compensation
Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their
services on the Board of Directors. Non-employee directors are entitled to receive $10,000 per year for serving as directors and may receive option grants
from our Company. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors
meeting attended, up to a maximum of $2,000 per meeting and $4,000 per year.
Summary Director Compensation Table FY 2017
Name
Hengtong Li
Zhicun Chen
Yan Shen
C.
Board Practices.
Director fees
earned or
paid in cash
$
1,480
1,480
1,480
Other
Compensation
-
$
-
-
$
Total
($)
1,480
1,480
1,480
See information provided in response to Item 6.A. above as to the current directors.
Composition of Board
Our board of directors currently consists of five directors. There are no family relationships between any of our executive officers and directors.
The directors are divided into three classes, as nearly equal in number as the then total number of directors permits. All directors hold office until
the next annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected and
qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of
Directors. Our Class A director was reelected at our 2017 annual general meeting of shareholders and shall face reelection every three years thereafter.
Class B directors shall face re-election at our 2018 annual general meeting of shareholders and every three years thereafter. Class C directors shall face re-
election at our 2019 annual general meeting of shareholders and every three years thereafter.
If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in
each class as nearly as possible. Any additional director of a class elected to fill a vacancy resulting from an increase in such class will hold office for a
term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These
board provisions could make it more difficult for third parties to gain control of our Company by making it difficult to replace members of the Board of
Directors.
There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a
general meeting.
The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence
provided by NASDAQ Stock Market Rule 4200(a)(15). Hengtong Li, Zhicun Chen and Yan Shen are our independent directors.
There are no other arrangements or understandings pursuant to which our directors are selected or nominated.
74
Our Board of Directors plays a significant role in our risk oversight. The Board of Directors makes all relevant company decisions. As such, it is
important for us to have both our Chief Executive Officer and Chief Financial Officer serve on the Board as they play key roles in the risk oversight or
the Company. As a smaller reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our
directors in risk oversight matters.
Board Committees
Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating
committee. The audit committee is responsible for overseeing the accounting and financial reporting processes of our Company and audits of the financial
statements of our Company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation
committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms
of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those
plans). The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making
recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers
diversity of opinion and experience when nominating directors.
Hengtong Li, Zhicun Chen, and Yan Shen serve on all three committees. At this time, Hengtong Li chairs the nominating committee; Zhicun
Chen chairs the audit committee; and Yan Shen chairs the compensation committee. Zhicun Chen qualifies as an “audit committee financial expert” as
that term is defined by the applicable SEC regulations and Nasdaq Capital Market corporate governance requirements.
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also
have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. See “Description of
Share Capital—Differences in Corporate Law” for additional information on our directors’ fiduciary duties under British Virgin Islands law. In fulfilling
their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Shareholders shall have the right to seek
damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
● having all the powers necessary for managing and for directing and supervising, the business and affairs for the Company;
● appointing officers and determining the term of office of the officers;
● fixing the emoluments of officers;
● exercising all powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations
whether of the Company or of any third party;
● designating committees of directors;
● executing checks, promissory notes, drafts, bills of exchange and other negotiable instruments on behalf of the Company; and
● determining that any sale, transfer, lease, exchange, or other disposition is in the usual or regular course of the business carried on by the
Company and such determination is, in the absence of fraud, conclusive.
75
Interested Transactions
A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is
interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction
we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written
resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to
be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or
arrangement which he shall make with our Company, or in which he is so interested and may vote on such motion.
Remuneration and Borrowing
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or
prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or
committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The
compensation committee will assist the directors in reviewing and approving the compensation structure for the directors.
Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or
any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation
of the company or of any third party.
Qualification
A director is not required to hold shares as a qualification to office.
Limitation on Liability and Other Indemnification Matters
Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good
faith with a view to our best interests. Our memorandum and articles of association provide that, to the fullest extent permitted by British Virgin Islands
law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their
duties. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not
limit the liability of directors under United States federal securities laws.
We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees,
and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative
proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal
proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the
director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her
conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of
any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act
honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If
a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all
expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in
connection with the proceedings.
We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or
officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or
officers against the liability as provided in our memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing
provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable as a matter of United States law.
D.
Employees.
Our Employees
As of December 31, 2017, we employed 173 people on a full-time basis. We have 24 employees in management, 27 employees in sales and
marketing, 32 employees in research and development and 90 employees in manufacturing and installation. Our employees are not represented by a labor
organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we
are required by PRC law to cover employees in China with various types of social insurance. For the years ended December 31, 2017, 2016 and 2015, we
contributed approximately $188,383, $143,918 and $36,372 to the employee benefit plans and social insurance, respectively. The effect on our liquidity
by the payments for these contributions is immaterial. We believe that we are in material compliance with the relevant PRC employment laws.
76
Employment Agreements
Under Chinese laws, there are some situations where we can terminate employment agreements without paying economic compensation, such as
the employer maintains or raises the employment conditions but the employee refuses to accept the new employment agreement, when the employment
agreement is scheduled to expire, the employee is retired in accordance with laws or the employee is dead, declared dead or has disappeared. For
termination of employment in absence of legal cause, we are obligated to pay the employee two-month’s salary for each year we have employed the
employee. We are, however, permitted to terminate an employee for cause without paying economic compensation, such as when the employee has
committed a crime, being proved unqualified for recruitment during the probation period, seriously violating the rules and regulations of the employer, or
the employee’s actions or inactions have resulted in a material adverse effect to us.
Our employment agreements with our executive officers generally provide for a term of three (3) years, provided that either party may terminate
the agreement on sixty (60) days notice and a salary to be paid monthly, subject to certain limitations. The agreements also provide that the executive
officers are to work an average of forty (40) hours per week and the agreements are subject to the laws of the People’s Republic of China. During the
agreement and for three (3) years afterward, our executive officers are required to keep trade secrets confidential.
The contracts that we have entered into with executive officers include the following:
Employment Agreement of Yuebiao Li
We entered into an employment agreement with Yuebiao Li effective November 1, 2017, providing for Mr. Li to serve as the Company’s Chief
Executive Officer. Under the terms of Mr. Li’s employment agreement, Mr. Li is, among other matters, to take overall responsibility for the operational
management and financial management of the Company in compliance with all applicable laws and devote a minimum of forty hours per week to the
Company’s business and affairs and in return will be entitled to the following:
● Annual compensation of RMB 660,000 RMB (approximately $102,000); and
● Reimbursement of reasonable business expenses.
Mr. Li will be eligible to receive an annual bonus based upon annual profit of the company, in the sole discretion of the board of directors.
Mr. Li’s employment agreement is for a term of thirty-six months, unless the parties enter into a new agreement before the expiration of the term or either
party terminates the agreement in writing at least sixty days before the expiration of its term.
Additionally, Mr. Li’s employment agreement provides for confidentiality and nondisclosure provisions, whereby Mr. Li is required to keep
trade secrets confidential during the course of his employment and for a period of thirty-six months following the termination of his employment. His
employment contract also contains a non-compete clause for a duration of twenty-four months following his employment.
Employment Agreement of Zhuo Zhang
We entered into an employment agreement with Zhuo Zhang effective November 1, 2017, providing for Ms. Zhang to serve as the Company’s
Chief Financial Officer. Under the terms of Ms. Zhang’s employment agreement, Ms. Zhang is, among other matters, is to oversee all financial and
operational controls and metrics of the company in accordance with industry rules and devote a minimum of forty hours per week to the Company’s
business and affairs and in return will be entitled to the following:
● Annual compensation of RMB 660,000 (approximately $102,000); and
● Reimbursement of reasonable business expenses.
Ms. Zhang will be eligible to receive an annual bonus based upon annual profit of the company, in the sole discretion of the board of directors.
Mr. Zhang’s employment agreement is for a term of thirty-six months, unless the parties enter into a new agreement before the expiration of the term or
either party terminates the agreement in writing at least sixty days before the expiration of its term.
Additionally, Ms. Zhang’s employment agreement provides for confidentiality and nondisclosure provisions, whereby Ms. Zhang is required to
keep trade secrets confidential during the course of her employment and for a period of thirty-six months following the termination of her employment.
Her employment contract also contains a non-compete clause for a duration of twenty-four months following her employment.
E.
Share Ownership.
The following tables set forth certain information with respect to the beneficial ownership of our common shares as of April 30, 2018, for:
● each of our directors and named executive officers; and
● all of our directors and executive officers as a group.
77
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power or the power to
receive the economic benefit with respect to all common shares that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 10,809,000 common shares outstanding at April 30, 2018. Unless otherwise indicated, the address
of each beneficial owner listed in the table below is c/o Yantai Jinzheng Eco-Technology Co, Ltd. 8 Lande Road, Laishan District, Yantai, Shandong
China.
Name of Beneficial Owner
Yuebiao Li (2) (3) (5)
Zhuo Zhang (4) (5)
Hengtong Li (5)
Zhicun Chen (5)
Yan Shen (5)
All directors and executive officers as a group
Beneficial Ownership (1)
Common Shares
2,900,000
1,900,000
0
0
0
4,800,000
Percentage
26.8%
17.6%
*
*
*
44.4%
*
(1)
(2)
(3)
(4)
(5)
Less than 1%.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common
shares or the power to receive the economic benefit of the common shares.
Chairman and Chief Executive Officer
Represents 2,900,000 shares held directly by Tigerwind Group Limited, a British Virgin Islands limited liability company controlled by Yuebiao
Li. Mr. Li holds voting and investment power over the shares held.
Chief Financial Officer
Director
Item 7. Major Shareholders and Related Party Transactions
A.
Major Shareholders.
As of April 30, 2018, no stockholders known to us was a beneficial owner of more than 5% of our outstanding common shares other than the
shareholders identified in the directors and executive officers group in the table above. We have determined beneficial ownership in accordance with the
rules of the SEC.
78
B.
Related Party Transactions.
The Company had transactions with the following related parties in the years ended December 31, 2017, 2016 and 2015:
Name of Related Party
Yuebiao Li
Principal shareholder, Chairman of the Board and Chief Executive Officer (“CEO”)
Nature of Relationship
Zhuo Zhang
Yue Zhang
Xiaojun Chen
Principal shareholder, Director, Chief Financial Officer (“CFO”)
Principal shareholder, Zhuo Zhang’s sister
Husband of Zhuo Zhang
Heilongjiang Binteer Environmental Protection
Equipment Manufacturing Co., Ltd.
(“Heilongjiang Binteer”)
Established by Yuebiao Li, and then Mr. Li transferred his 60% equity interest to his brother,
Yuefeng Li in May 2014. Yuefeng Li then transferred his 60% equity interest to a third party
individual for zero consideration in March 2016. Heilongjiang Binteer continues to be significantly
influenced by the Company because the Company was its primary vendor and customer in the years
ended December 31, 2016 and 2015.
Daqing Wanjieyuan Water Treatment Equipment
Sales Co., Ltd. (“Daqing Wanjieyuan”)
Controlled by Yuebiao Li
Mojie Technology (Beijing) Co., Ltd. (“Mojie”)
Established and controlled by Yuebiao Li and Zhuo Zhang. All of the equity interest was transferred
to a third party in July 2015 but continues to be significantly influenced by the Company because the
Company was its primary vendor in the years ended December 31, 2016 and 2015.
Yantai Jinna Commerce Co., Ltd. (“Jinna”)
Significantly influenced by Yue Zhang, principal shareholder and sister of Zhuo Zhang.
Shandong Jinmo Recycled Water Resource Co.,
Ltd. (“Jinmo”)
A subsidiary that was incorporated on March 19, 2015 and disposed of to a third party on December
8, 2016 for consideration of RMB 220,000 (approximately $31,678). After the transfer, the Company
continues to have significant influence on Jinmo as Ping Yu, vice-chief executive officer of Jinzheng,
serves as the legal representative of Jinmo.
Revenues from related parties and accounts receivable from related parties, net
The Company primarily provides products such as membranes, components and water purification equipment to Heilongjiang Binteer, Mojie,
Daqing Wanjieyuan and Jinna. For the years ended December 31, 2016 and 2015, the Company generated net related party revenues from Heilongjiang
Binteer, Mojie, Daqing Wanjieyuan and Jinna in the amount of $294,666 and $3,659,421, respectively. The Company had no revenues from related
parties in the year ended December 31, 2017. The net accounts receivable from related parties amounted to $0 and $1,060,977 as of December 31, 2017
and 2016, respectively.
Net revenues from related parties consisted of the following:
Heilongjiang Binteer
Mojie
Jinna
Daqing Wanjieyuan
Total
$
$
-
-
-
-
-
$
$
290,007
3,268
1,391
-
294,666
$
$
79
For the Years Ended December 31,
2016
2017
2015
1,213,905
2,437,283
-
8,233
3,659,421
During the period from January 1, 2016 to December 7, 2016, Jinzheng sold equipment of $1,063,137 to Jinmo. The equipment sales were made
prior to the disposal of Jinmo, recorded as intercompany sales and eliminated on consolidated statements of income and comprehensive income for the
year ended December 31, 2016. The receivables in connection with the sales were outstanding as of December 31, 2016 and fully collected as of
December 31, 2017.
Accounts receivable from related parties consisted of the following:
Jinmo
Accounts receivable from related parties
Less: allowance for doubtful accounts
Accounts receivable from related parties, net
December 31,
2017
$
$
-
-
-
-
The movement of allowance for doubtful accounts for accounts receivable from related parties consisted of the following:
$
December 31,
2016
1,063,137
1,063,137
(2,160)
1,060,977
$
Allowance for doubtful accounts, beginning balance
Increase
Decrease
Effects of foreign exchange rate
Allowance for doubtful accounts, ending balance
Materials supplied by related party and accounts payable to related party
December 31,
2017
December 31,
2016
$
$
-
-
-
-
-
$
$
2,311
-
-
(151)
2,160
The Company also purchased materials from Heilongjiang Binteer amounting to $556,692 and $2,971,017 for the years ended December 31,
2016 and 2015, respectively. The materials purchased include membrane column, membrane filter, and other components of water treatment equipment.
There was no purchase from related parties in the year ended December 31, 2017.
For the year ended December 31, 2016, the total purchase from Heilongjiang Binteer represented cost of revenues from related party for 2016.
For the year ended December 31, 2015, total purchase from Heilongjiang Binteer of $2,971,017 and the purchase of $13,951 from 2014, totaling
$2,984,968, constituted the cost of revenues from related party for 2015. The balance of accounts payable to related party was $0 as of December 31,
2017 and 2016.
Due from related parties
Due from related parties consisted of the following:
Yue Zhang
Jinmo
Total
80
December 31,
2017
December 31,
2016
$
$
-
-
-
$
$
683
2,880
3,563
On January 29, 2015, the Company entered into a car leasing agreement with Yuebiao Li, pursuant to which the Company would lease Yuebiao
Li’s personal car from February 1, 2015 to January 31, 2018 under a monthly rent of approximately $2,400 (RMB 15,000). The Company paid $28,898
(RMB 180,000) for twelve months’ use during 2015 and the balance of $2,311 (RMB 15,000) due from Yuebiao Li as of December 31, 2015 was
expensed during 2016 with the use of the car. The agreement was terminated at the end of the year ended December 31, 2016.
From time to time, the Company advances to Yue Zhang, principal shareholder of the Company and Zhuo Zhang’s sister, in connection with the
Company’s daily operations. The advances are in immaterial amount each time and reflected as due from Yue Zhang before invoices are issued by the
Company’s service providers. For the year ended December 31, 2016, the Company advanced $240,492 to Yue Zhang and $239,809 has been used in
ordinary course of business. The balance due from Yue Zhang was $0 and $683 as of December 31, 2017 and 2016, respectively.
The balance due from Jinmo represents non-secured short-term loan obtained from the Company, which bears no interest and was due on
demand. The balance was paid off during 2017.
Due to related parties
Due to related parties consisted of the following:
Zhuo Zhang
Yuebiao Li
Total
December 31,
2017
December 31,
2016
$
$
-
-
-
$
$
1,084
713,915
714,999
The balance of due to related parties represents expenses incurred by related parties in the ordinary course of business, expense related parties
paid on behalf of the Company as well as the loans the Company obtained from related parties for working capital purposes. The loans owed to the related
parties are interest free, unsecured and repayable on demand.
On August 31, 2015, Zhuo Zhang and Xiaojun Chen, on behalf of the Company, entered into a non-interest-bearing car loan agreement with
Ping’an Bank, pursuant to which a loan of $25,834 (RMB167,708) was provided for car purchase. The loan was guaranteed and pledged by the Company.
The loan was fully repaid on August 17, 2016.
In September 2015, Zhuo Zhang deposited $267,510 (RMB 1,736,596) in the bank on behalf of the Company, as pledge for bank acceptance
notes issued by the Company. The deposits was used to settle the liabilities when the bank acceptance notes was due on March 26, 2016. The amount was
repaid to Zhuo Zhang during the year ended December 31, 2016.
On November 28, 2016, Yantai Guotai Investment Limited Company (“Yantai Guotai”), Yuebiao Li, and Jinzheng entered into a borrowing
agreement, pursuant to which (1)Yuebiao Li personally borrowed approximately $719,963 (RMB 5,000,000) from Yantai Guotai at annual interest rate of
10% for one year and (2) Jinzheng received and used the principal as zero-interest borrowing from Yuebiao Li, due on demand. The principal was
received and used by Jinzheng and recorded as a loan from Yuebiao Li as of December 31, 2016. During the year ended December 31, 2017, repayments
to Yuebiao Li totaled $739,973 (RMB 5,000,000).
On November 30 and December 28, 2016, respectively, the Company paid approximately $5,040 (RMB 35,000) and $2,160 (RMB 15,000) to
purchase a trademark from Daqing Wanjieyuan.
C.
Interests of experts and counsel.
Not applicable for annual reports on Form 20-F.
Item 8. Financial Information
A.
Consolidated Statements and Other Financial Information.
See information provided in response to Item 18 below.
Legal and Administrative Proceedings
In November 2017, Beijing Tiandiren Environ-Tech Company Limited brought a lawsuit against Jinzheng in Beijing Intellectual Property Court
in Beijing, China, alleging that Jinzheng infringed on its patent on manufacturing DTNF membranes. The plaintiff claimed total damages in the amount of
approximately $153,695 (RMB 1,000,000). The Company is vigorously defending itself against the claim and has filed an application for invalidation to
the patent review committee of the court and requested to dismiss the case. As of the filing date, the application for invalidation has been denied, and the
trial date for this case has not been set. Management believes the liability to the Company that may arise as a result of the case is not probable.
81
Dividend Policy
The holders of our common shares are entitled to dividends out of funds legally available when and as declared by our board of directors subject
to the BVI Act. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. We currently
intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt
of dividends or other payments from our subsidiaries and other holdings and investments. Our subsidiaries may, from time to time, be subject to
restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory restrictions. In particular, Chinese regulations may restrict the ability of
Jinzheng to pay dividends to us. See “Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.”
B.
Significant Changes.
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing
A.
Offer and listing details.
Our common shares have been listed on the NASDAQ Capital Market since July 28, 2017 under the symbol “NEWA.” The table below shows,
for the periods indicated, the high and low market prices for our shares.
Price per share of
common shares:
High
Low
$
$
$
$
$
$
$
$
$
$
$
16.24
11.79
16.24
21.50
28.20
16.24
14.10
21.00
13.69
21.50
28.20
$
$
$
$
$
$
$
$
$
$
$
7.32
7.32
8.30
8.66
11.17
8.60
7.86
8.66
10.12
12.38
11.17
Annual highs and lows
Fiscal year 2017 (from July 28, 2017)
Quarterly highs and lows
Third quarter 2017 (from July 28, 2017)
Fourth quarter 2017
First quarter 2018
Second quarter 2018 (through April 27, 2018)
Monthly highs and lows
November 2017
December 2017
January 2018
February 2018
March 2018
April 2018 (through April 27, 2018)
B.
Plan of distribution.
Not applicable for annual reports on Form 20-F.
C.
Markets.
Our common shares are listed on the NASDAQ Capital Market under the symbol “NEWA.”
D.
Selling shareholders.
Not applicable for annual reports on Form 20-F.
E.
Dilution.
Not applicable for annual reports on Form 20-F.
F.
Expense and issue.
Not applicable for annual reports on Form 20-F.
82
Item 10. Additional Information
A.
Share Capital.
Not applicable for annual reports on Form 20-F.
B.
Memorandum and Articles of Association.
We incorporate by reference the description of our Memorandum and Articles of Association, as currently in effect in the British Virgin Islands,
set forth in our registration statement on Form F-1, declared effective on July 27, 2017 (File No. 333-217355).
C.
Material Contracts.
Other than described elsewhere in this annual report, we did not have any other material contracts.
D.
Exchange Controls.
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996), as
amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and the Interim Measures on
Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current account items, including the distribution of
dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items, such as direct investment,
loans, repatriation of investment and investment in securities outside China, unless the prior approval of SAFE or its local counterparts is obtained. In
addition, any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its
respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be registered with
SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered capital must be approved by
the China Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or registrations on a timely basis, if at
all, which could result in a delay in the process of making these loans.
The dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange,
subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the
capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities.
Circular 37
On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular 37, Chinese residents shall apply to
SAFE and its branches for going through the procedures for foreign exchange registration of overseas investments before contributing the domestic assets
or interests to a SPV. An amendment to registration or filing with the local SAFE branch by such Chinese resident is also required if the registered
overseas SPV’s basic information such as domestic individual resident shareholder, name, operating period, or major events such as domestic individual
resident capital increase, capital reduction, share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by
overseas SPV, overseas investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to
make foreign exchange registration if required by SAFE and its branches.
83
Moreover, Circular 37 applies retroactively. As a result, Chinese residents who have contributed domestic assets or interests to a SPV, but failed
to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are required to send a letter to
SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration procedures set forth in Circular 37 may result in
receiving a warning from SAFE and its branches, and may result in a fine of up to RMB 300,000 for an organization or up to RMB 50,000 for an
individual. In the event of failing to register, if capital outflow occurred, a fine up to 30% of the illegal amount may be assessed.
Chinese residents who control our Company are required to register with SAFE in connection with their investments in us. If we use our equity
interest to purchase the assets or equity interest of a Chinese company owned by Chinese residents in the future, such Chinese residents will be subject to
the registration procedures described in Circular 37.
Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An offshore company may invest equity in a Chinese company, which will become the Chinese subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which
include the Wholly Foreign-Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture
Enterprise Law, all as amended from time to time, and their respective implementing rules; the Administrative Provisions on Foreign Exchange in
Domestic Direct Investment by Foreign Investors; and the Notice of the State Administration on Foreign Exchange on Further Improving and Adjusting
Foreign Exchange Administration Policies for Direct Investment.
Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by
the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with
SAIC, Ministry of Commerce and SAFE.
Shareholder loans made by offshore parent holding companies to their Chinese subsidiaries are regarded as foreign debts in China for regulatory
purpose, which is subject to a number of Chinese laws and regulations, including the Chinese Foreign Exchange Administration Regulations, the Interim
Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and
the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under these regulations, the shareholder loans made by offshore parent holding companies to their Chinese subsidiaries shall be registered with
SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such Chinese subsidiaries, including any shareholder loans, shall not
exceed the difference between the total investment amount and the registered capital amount of the Chinese subsidiaries, both of which are subject to the
governmental approval.
Regulation of Dividend Distribution
The principal regulations governing the distribution of dividends by foreign holding companies include the Company Law of China (1993), as
amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2000, and the Administrative Rules under the Foreign Investment
Enterprise Law (1990), as amended respectively in 2001 and 2014.
Under these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits, if any,
determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned investment enterprises in China are
required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50%
of the registered capital of the enterprises. These reserves are not distributable as cash dividends, and a wholly foreign-owned enterprise is not permitted
to distribute any profits until losses from prior fiscal years have been offset.
84
E.
Taxation.
The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax matters related to an investment in our common
shares. It is directed to U.S. Holders (as defined below) of our common shares and is based on laws and relevant interpretations thereof in effect as of the
date of this annual report, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in
our common shares, such as the tax consequences under state, local and other tax laws.
The following brief description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S.
dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this annual report and on
U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations
thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect
the tax consequences described below.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of
shares and you are, for U.S. federal income tax purposes,
● an individual who is a citizen or resident of the United States;
● a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States,
any state thereof or the District of Columbia;
● an estate whose income is subject to U.S. federal income taxation regardless of its source; or
● a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all
substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
China Enterprise Income Tax
According to the Enterprise Income Tax Law of China (the “EIT Law”), which was promulgated on March 16, 2007, became effective on
January 1, 2008, and last amended on February 24, 2017, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%,
unless they qualify for certain exceptions. The Regulation on the Implementation of Enterprise Income Tax Law of China (the “EIT Rules”) was
promulgated on December 6, 2007 and became effective on January 1, 2008.
On April 14, 2008, the Chinese Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the
Administrative Measures for Certifying High and New Technology Enterprises, which retroactively became effective on January 1, 2008. Under the EIT
Law, certain qualified high-tech companies may benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified
into certain industries strongly supported by the Chinese government and set forth by certain departments of the Chinese State Council. Jinzheng was
granted the high and new technology enterprise (“HNTE”) qualification valid until the year-end of 2017. There can be no assurance, however, that
Jinzheng will continue to meet the qualifications for such a reduced tax rate. In addition, there can be no guaranty that relevant governmental authorities
will not revoke Jinzheng’s “high and new technology enterprise” status in the future.
85
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of Newater and our offshore subsidiaries. Under the EIT
Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise”, which means that
it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de
facto management body” as a managing body that exercises substantive and overall management and control over the production and business, personnel,
accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, at April 22, 2009 which provides that a foreign enterprise controlled by a Chinese company or a Chinese company group will
be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following criteria are satisfied:
● the place where the senior management and core management departments that are in charge of its daily operations perform their duties is
mainly located in China;
● its financial and human resources decisions are made by or are subject to approval by persons or bodies in China;
● its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in
China; and
● more than half of the enterprise’s directors or senior management with voting rights frequently reside in China.
We do not believe that we meet the conditions outlined in the preceding paragraph since Newater does not have a Chinese enterprise or
enterprise group as our primary controlling shareholder. In addition, we are not aware of any offshore holding companies with a corporate structure
similar to the Company that has been deemed a China “resident enterprise” by the Chinese tax authorities.
If we are deemed a China resident enterprise, we may be subject to the EIT at the rate of 25% on our global income, except that the dividends we
receive from our Chinese subsidiaries may be exempt from the EIT to the extent such dividends are deemed dividends among qualified resident
enterprises. If we are considered a resident enterprise and earn income other than dividends from our Chinese subsidiaries, a 25% EIT on our global
income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
China Value-Added Tax (“VAT”)
The Provisional Regulations of the PRC on Value-added Tax were promulgated by the State Council on December 13, 1993 and came into effect on
January 1, 1994 which were subsequently amended on November 10, 2008 and came into effect on January 1, 2009 and amended on February 6, 2016.
The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax was promulgated by the Ministry of Finance
on December 25, 1993 and subsequently amended on December 15, 2008 and October 28, 2011, or collectively, VAT Law. On November 19, 2017, the
State Council promulgated the Decisions on Abolishing the Provisional Regulations of the PRC on Business Tax and Amending the Provisional
Regulations of the PRC on Value-added Tax, or Order 691. According to the VAT Law and Order 691, all enterprises and individuals engaged in the sale
of goods, the provision of processing, repair and replacement services, sales of services, intangible assets, real property and the importation of goods
within the territory of the PRC are the taxpayers of VAT. The VAT tax rates generally applicable are simplified as 17%, 11%, 6% and 0%, and the VAT
tax rate applicable to the small-scale taxpayers is 3%. The VAT rate for the sale of most of our goods is 17%, and for the provision of services relating to
construction work is 6%.
86
British Virgin Islands Taxation
Under the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British
Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin
Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax
on dividends paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI
Act. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the
British Virgin Islands.
United States Federal Income Taxation
The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
● a dealer in securities or currencies;
● a person whose “functional currency” is not the United States dollar;
● banks;
● financial institutions;
● insurance companies;
● regulated investment companies;
● real estate investment trusts;
● broker-dealers;
● traders that elect to mark-to-market;
● U.S. expatriates;
● tax-exempt entities;
● persons liable for alternative minimum tax;
● persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
87
● persons that actually or constructively own 10% or more of our voting shares;
● persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or
● persons holding our common shares through partnerships or other pass-through entities.
Prospective purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances
as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.
Taxation of Dividends and Other Distributions on our Common Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the
common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date
of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends
received from other U.S. corporations.
With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable
to qualified dividend income, provided that (1) the common shares are readily tradable on an established securities market in the United States, or in the
event we are deemed to be a Chinese “resident enterprise” under the China tax law, we are eligible for the benefits of an approved qualifying income tax
treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed
below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under
U.S. Internal Revenue Service authority, common shares are considered for purpose of clause (1) above to be readily tradable on an established securities
market in the United States if they are listed on the NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability of the
lower rate for dividends paid with respect to our common shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend
income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to
the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on
foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with
respect to our common shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category
income.”
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to the extent the amount of the distribution
exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a
non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Common Shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other
taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
common shares. The gain or loss will generally be capital gain or loss. Capital gains are generally subject to United States federal income tax at the same
rate as ordinary income, except that non-corporate U.S. Holders who have held common shares for more than one year may be eligible for reduced rates
of taxation. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States
source income or loss for foreign tax credit limitation purposes.
88
Passive Foreign Investment Company
Based on our current and anticipated operations and the composition of our income and assets, we do not expect to be a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2017. Our actual PFIC status for
the current taxable years ending December 31, 2017 will not be determinable until after the close of such taxable years and, accordingly, there is no
guarantee that we will not be a PFIC for the current taxable year. PFIC status is a factual determination for each taxable year which cannot be made until
the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:
● at least 75% of its gross income is passive income; or
● at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets
that produce or are held for the production of passive income (the “asset test”).
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in
which we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because
the value of our assets for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will
depend in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to
become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets
will be affected by how, and how quickly, we spend the cash we raised in our initial public offering. If we are a PFIC for any year during which you hold
common shares, we will continue to be treated as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a
PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common shares.
If we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make a
“mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions
you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess
distribution. Under these special tax rules:
● the excess distribution or gain will be allocated ratably over your holding period for the common shares;
● the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated
as ordinary income, and
● the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating
losses for such years, and gains (but not losses) realized on the sale or other disposition of the common shares cannot be treated as capital, even if you
hold the common shares as capital assets.
89
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax
treatment discussed above. If you make a mark-to-market election for the common shares, you will include in ordinary income each year an amount equal
to the excess, if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted tax basis in such common
shares. You are allowed a deduction for the excess, if any, of the adjusted tax basis of the common shares over their fair market value as of the close of
the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in your income
for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the
common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common
shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such common shares. Your tax basis in the common shares will be adjusted to reflect any such income
or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends and
Other Distributions on our Common Shares” generally would not apply.
The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least
15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the NASDAQ Capital Market. If the common shares are regularly traded on the NASDAQ Capital Market and if you are a holder of common
shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax
treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross
income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund
election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable
U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund
election. If you hold common shares in any year in which we are a PFIC, you will generally be required to file U.S. Internal Revenue Service Form 8621
to report your ownership of our common shares as well as distributions received on the common shares, any gain realized on the disposition of the
common shares, any PFIC elections you would like to make in regard to the common shares, and any information required to be reported pursuant to such
an election.
You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections
discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be
subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S.
Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status
generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the
application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax
liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with
the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to
common shares, subject to certain exceptions (including an exception for shares held in accounts maintained by certain financial institutions), by
attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which
they hold shares. U.S. Holders are urged to consult their own tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
90
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its
foreign status to the payor, under penalties of perjury, on the applicable IRS Form W-8BEN.
F.
Dividends and Paying Agents.
Not applicable for annual reports on Form 20-F.
G.
Statement by Experts.
Not applicable for annual reports on Form 20-F.
H.
Documents on Display.
We are subject to the information requirements of the Exchange Act. In accordance with these requirements, the company files reports and other
information with the SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
a web site at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. In accordance with
NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at www.newater.cc. In addition, we will provide hard
copies of our annual report free of charge to shareholders upon request.
I.
Subsidiary Information.
Not Applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our main interest rate exposure relates to bank borrowings. We manage our interest rate exposure with a focus on reducing our overall cost of
debt and exposure to changes in interest rates. As of December 31, 2017, we had $8,914,300 in outstanding bank borrowings, with an effective interest
rate of 4.412 %. As of December 31, 2016, we had outstanding bank loans of $2,807,857, with an effective interest rate of 5.722%.
As of December 31, 2017, if effective interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming
the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our Company
would have been RMB 602,339 ($89,143) lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash
equivalents and loan receivables.
As of December 31, 2016, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the
amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity owners of our Company
would have been RMB 165,750 ($24,947) lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash
equivalents and loan receivables.
91
Credit Risk
As of December 31, 2017, we had cash and cash equivalents of $3,118,080. Our cash and cash equivalents are invested primarily in savings and
deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a small amount of interest income.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do
not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have
an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the
selling prices of our products do not increase with these increased costs
Foreign Exchange Risk
Our functional currency is the RMB, and our financial statements are presented in U.S. dollar. The exchange rate between RMB and U.S. dollar
fluctuates frequently. The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without
giving effect to any underlying change in our business or results of operation.
Currently, our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars. Our exposure to foreign exchange risk will
primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar may materially affect our
earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars in the future.
Commodity Risk
We are not exposed to commodity price risk.
Item 12. Description of Securities Other Than Equity Securities
With the exception if Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and 12.D.4,
this Item 12 is not applicable, as the company does not have any American Depository Shares.
92
Item 13. Defaults, Dividends Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
PART II
See “Item 10.B – Additional Information – Memorandum and articles of association” for a description of the rights of securities holders, which
remain unchanged.
Item 15. Controls and Procedures
(a)
Disclosure Controls and Procedures.
As of December 31, 2017 (the “Evaluation Date”), the company carried out an evaluation, under the supervision of and with the participation of
management, including the company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the
company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the
foregoing, the chief executive officer and chief financial officer concluded that as of the Evaluation Date the company’s disclosure controls and
procedures were effective and designed to ensure that all material information required to be included in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decision
regarding required disclosure.
(b)
Management’s annual report on internal control over financial reporting.
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation
report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for
newly public companies.
(c)
Attestation report of the registered public accounting firm.
Not applicable.
(d)
Changes in internal control over financial reporting.
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-
F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 15T. Controls and Procedures
Not applicable.
Item 16. [Reserved]
Item 16A. Audit Committee and Financial Expert
The company’s Board of Directors has determined that Mr. Zhicun Chen qualifies as an “audit committee financial expert” in accordance with
applicable NASDAQ Capital Market standards. The company’s Board of Directors has also determined that Mr. Chen and the other members of the Audit
Committee are all “independent” in accordance with the applicable NASDAQ Capital Market standards.
Item 16B. Code of Ethics
Our board of directors has adopted a code of ethics that applies to all of our directors, executive officers and employees. We have filed our code
of ethics as an exhibit to our registration statement on Form F-1, declared effective on July 27, 2017 (File No. 333-217355). The code is also available on
our official website under the investor relations section at www.newater.cc
93
Item 16C. Audit-Related Fees
Audit Fees
During fiscal 2017 and 2016, MaloneBailey, LLP’s fees for the annual audit of our financial statements and the periodic reviews of the financial
statements were $270,000 and $160,000, respectively.
Audit-Related Fees
During fiscal 2017 and 2016, the Company did not incur audit-related services for services rendered in connection with financial due diligence of
the company in connection with the company’s initial public offering.
Tax Fees
The company has not paid Malone Bailey, LLP for tax services in fiscal 2017, 2016 and 2015.
All Other Fees
The company has not paid Malone Bailey, LLP for any other services in fiscal 2017, 2016 and 2015.
Audit Committee Pre-Approval Policies
Before MaloneBailey, LLP was engaged by the company to render audit or non-audit services, the engagement was approved by the company’s
audit committee. All services rendered by MaloneBailey, LLP have been so approved.
Item 16D. Exemptions form the Listing Standards for the Audit Committee
Not Applicable.
Item 16E. Purchase of Equity Securities by the Issuer and the Affiliated Purchasers
Neither the company nor any affiliated purchaser has purchased any shares or other units of any class of the company’s equity securities
registered by the company pursuant to Section 12 of the Securities Exchange Act during the fiscal year ended December 31, 2017.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the
NASDAQ Capital Market. NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the
NASDAQ Capital Market prior to issuance (or potential issuance) of securities equaling 20% or more of the company’s common stock or voting power
for less than the greater of market or book value.
Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers like the company to follow their
home country practice rather than this shareholder approval requirement. The company, therefore, is not required to obtain such shareholder approval
prior to entering into a transaction with the potential to issue securities as described above.
In order to qualify for the exemption set forth in Rule 5615(a)(3), we must promptly notify NASDAQ of our intention to utilize our home
country practice of the British Virgin Islands by providing NASDAQ a written statement from independent counsel licensed in the British Virgin Islands.
The written statement provided to NASDAQ must state that the British Virgin Islands does not have an equivalent to NASDAQ’s 20% rule and that our
current practice is both legal and an accepted business practice in the British Virgin Islands. We have not determined whether we will follow our home
practice of not obtaining shareholder approval prior to entering into a transaction with the potential to issue securities as described above. Therefore,
currently there are no significant differences between our corporate governance practices and those followed by U.S. domestic companies under Nasdaq
rules.
Item 16H. Mine Safety Disclosure
Not applicable.
94
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
PART III
The consolidated financial statements of Newater Technology, Inc. are included at the end of this annual report, beginning with page F-1.
Item 19. Exhibits
Exhibit
1.1
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
Memorandum and Articles of Association (1)
Specimen Common Share Certificate (1)
Equity Transfer Agreement of Yantai Jinzheng Eco-Technology Co., Ltd. dated January 25, 2016 (1)
Equity Transfer Agreement of Yantai Jinzheng Eco-Technology Co., Ltd. dated February 5, 2016 (1)
Employment Agreement of Yuebiao Li (2)
Employment Agreement of Zhuo Zhang (2)
Translation of January 20, 2016 financial supporting agreement with Laishan District Economic Development Area. (1)
Translation of July 19, 2016 assignment of land use right transfer agreement with Yantai Aotesai Energy Ltd. (1)
Translation of Convertible Debt Agreement dated June 6, 2016 by and between Newater Technology, Newater HK, Jinzheng and
Hairwong Wang (1)
Translation of Convertible Debt Agreement dated June 6, 2016 by and between Newater Technology, Newater HK, Jinzheng and
Honghua Liu (1)
Translation of Convertible Debt Agreement dated June 6, 2016 by and between Newater Technology, Newater HK, Jinzheng and Yang
Gao (1)
Translation of Convertible Debt Agreement dated June 6, 2016 by and between Newater Technology, Newater HK, Jinzheng and Yuxiang
Qi (1)
95
Exhibit
4.11
Translation of June 28, 2017 line of credit with Huaxia Bank Co., Ltd. (1)
4.12
Translation of September 28, 2017 loan agreement with Industrial and Commercial Bank of China
8.1
11.1
12.1
12.2
13.1
13.2
List of Subsidiaries (1)
Code of Ethics (1)
Certification of the Chief Executive Officer of Newater Technology, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer of Newater Technology, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer of Newater Technology, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer of Newater Technology, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Labels Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
(1)
(2)
Filed as an exhibit to the Newater Technology, Inc.’s Registration Statement on Form F-1, as amended on Form F-1 (Registration No. 333-217355)
initially filed on April 18, 2017 and hereby incorporated by reference.
Filed as an exhibit to Newater Technology, Inc.’s Report on Form 6-K, filed on December 1, 2017 and incorporated reference.
96
The registrant hereby certifies that is meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
NEWATER TECHNOLOGY, INC.
By:
/s/ YUEBIAO LI
Yuebiao Li
Chief Executive Officer
Date: April 30, 2018
97
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7 – F-27
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Newater Technology, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Newater Technology, Inc. and Subsidiaries (collectively, the “Company”) as of
December 31, 2017 and 2016, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2016.
Houston, Texas
4/30/2018
F-2
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Cash and cash equivalents
Restricted cash, current
Accounts receivable, net
Accounts receivable from related party, net
Notes receivable
Inventories
Deferred cost of revenue
Advances to suppliers and other current assets, net
Due from related parties
Total current assets
Restricted cash, non-current
Property, plant and equipment, net
Land use rights, net
Deferred tax assets
Other non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and bank acceptance notes to vendors
Loans due within one year
Due to related parties
Deferred income
Advances from customers
Income tax payables
Accrued expenses and other payables
Total current liabilities
Long term loans
Total liabilities
Shareholders’ equity
Common shares ($0.001 par value, 200,000,000 shares authorized, 10,809,000 and 9,199,000 shares issued and
outstanding as of December 31, 2017 and 2016, respectively)
Additional paid-in capital
Statutory reserves
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2017
December 31,
2016
$
$
$
$
3,118,080
6,753,685
6,050,495
-
-
10,279,397
2,547,580
2,885,510
-
31,634,747
500,000
10,449,466
2,243,183
518,251
-
45,345,647
4,903,058
9,020,697
-
-
1,408,208
501,921
8,509,425
24,343,309
11,050
24,354,359
$
$
$
1,484,762
1,439,926
2,637,236
1,060,977
68,108
4,840,234
-
2,528,411
3,563
14,063,217
-
1,199,611
2,143,002
181,003
4,591
17,591,424
1,844,077
2,879,853
714,999
25,919
833,742
329,212
210,400
6,838,202
-
6,838,202
10,809
15,059,181
705,698
5,228,733
(13,133)
20,991,288
45,345,647
$
9,199
7,949,466
382,802
2,960,698
(548,943)
10,753,222
17,591,424
The accompanying notes are an integral part of these consolidated financial statements
F-3
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31,
2016
2015
2017
Net revenues
Net revenues from related parties
Total revenues
Cost of revenues
Cost of revenues from related party
Total cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative
Total operating expenses
Income from operations
Interest expense
Interest income
Government grants
Other expenses
Total other expense (income)
Income before income tax provisions
Income tax provisions
Net income
Other comprehensive income (loss)
Foreign currency translation adjustment
Total comprehensive income
Earnings per common share
Basic
Diluted
Weighted average number of common shares outstanding
Basic
Diluted
$
$
$
$
$
25,339,497
-
25,339,497
17,077,129
-
17,077,129
8,262,368
5,575,086
5,575,086
2,687,282
242,707
(112,592)
(513,538)
3,956
(379,467)
3,066,749
475,818
2,590,931
535,810
3,126,741
0.26
0.26
$
$
$
$
$
11,985,055
294,666
12,279,721
7,182,081
556,692
7,738,773
4,540,948
3,146,521
3,146,521
1,394,427
155,553
(5,091)
(1,750,726)
12,534
(1,587,730)
2,982,157
548,437
2,433,720
(383,947)
2,049,773
0.28
0.28
$
$
$
$
$
3,318,833
3,659,421
6,978,254
778,903
2,984,968
3,763,871
3,214,383
1,643,313
1,643,313
1,571,070
164,613
(2,612)
-
10,642
172,643
1,398,427
452,850
945,577
(166,349)
779,228
0.12
0.10
9,864,479
9,864,479
8,767,738
8,767,738
8,200,000
9,160,087
The accompanying notes are an integral part of these consolidated financial statements
F-4
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Number of
Shares
Common
Shares
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Statutory
Reserves
Accumulated Other
Comprehensive
Income (Loss)
Total Shareholders’
Equity
Balance, January 1,
2015
Net income
Capital contribution from
owners
Statutory reserves
Foreign currency
translation adjustment
Balance, December 31,
2015
Net income
Capital contribution from
owners
Statutory reserves
Issuance of common
shares for debt
conversion
Issuance of common
shares for cash
Capital distribution in
connection with
acquisition of a
subsidiary
Foreign currency
translation adjustment
Balance, December 31,
2016
Net income
Statutory reserves
Issuance of common
shares for cash
Foreign currency
translation adjustment
Balance, December 31,
8,200,000 $
-
-
-
-
8,200 $
-
787,151 $ (35,797) $
-
945,577
- $
-
-
-
-
2,212,796
-
-
(92,995)
-
-
8,200,000
-
8,200
-
2,999,947
-
816,785
2,433,720
-
-
-
-
198,917
-
-
(289,807)
999,000
999
3,846,001
-
-
-
-
-
-
5,323,026
(4,418,425)
-
-
-
-
-
9,199,000
-
-
9,199
-
-
7,949,466
-
-
2,960,698
2,590,931
(322,896)
382,802
322,896
1,610,000
1,610
7,109,715
-
-
-
-
-
-
-
-
92,995
-
92,995
-
-
289,807
-
-
-
-
1,353 $
-
-
-
(166,349)
(164,996)
-
-
-
-
-
-
(383,947)
(548,943)
-
-
-
535,810
760,907
945,577
2,212,796
-
(166,349)
3,752,931
2,433,720
198,917
-
3,847,000
5,323,026
(4,418,425)
(383,947)
10,753,222
2,590,931
-
7,111,325
535,810
2017
10,809,000 $
10,809 $15,059,181 $5,228,733 $
705,698 $
(13,133) $
20,991,288
The accompanying notes are an integral part of these consolidated financial statements
F-5
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2016
2015
2017
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash used in operating activities:
$
2,590,931
$
2,433,720
$
945,577
Depreciation and amortization expense
Bad debt expense
Deferred income taxes
Loss on disposal of property, plant and equipment
Gain on disposal of subsidiary
Changes in assets and liabilities:
Accounts receivable
Accounts receivable from related parties
Notes receivable
Inventories
Deferred cost of revenue
Advances to suppliers and other current assets
Advances to supplier - related party
Due from related parties
Other non-current assets
Accounts payable and bank acceptance notes to vendors
Accounts payable to related party
Deferred income
Advances from customers
Due to related parties
Income tax payables
Accrued expenses and other payables
Net cash used in operating activities
Cash flows from investing activities
Purchase of land use rights
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Advances to third parties
Repayments from third parties
Advances to related parties
Repayments from related parties
Net change in restricted cash
Cash received in connection with disposal of subsidiary
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuances of common shares
Capital contribution from shareholders
Capital distribution in connection with acquisition of a subsidiary
Borrowings from related parties
Repayment to related parties
Proceeds from loans due within one year
Repayment of loans
Net cash provided by financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplemental cash flow information
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities:
Stock issued for debt conversion
Properties acquired with loans
Liabilities assumed in connection with purchase of property, plant and equipment
233,493
229,707
(312,997)
-
-
(3,345,269)
1,090,465
70,000
(4,923,400)
(2,453,097)
(412,955)
-
703
4,719
2,825,887
-
(26,639)
499,067
5,102
144,944
589,638
(3,189,701)
-
(1,482,360)
-
(1,236,490)
1,236,490
-
2,960
(5,712,407)
-
(7,191,807)
7,111,325
-
-
-
(739,973)
8,805,683
(3,283,830)
11,893,205
121,621
1,633,318
1,484,762
3,118,080
244,753
656,602
-
206,000
7,445,478
$
$
$
$
$
$
187,662
76,459
(82,162)
-
(789)
(1,410,115)
3,645,922
(56,139)
(2,743,853)
-
(2,289,933)
-
75,469
22,857
1,079,258
(2,140,504)
(30,102)
425,736
(28,257)
(181,386)
352,502
(663,655)
(2,261,745)
(66,641)
-
(301,019)
338,646
(239,467)
473,320
(922,380)
(1,209)
(2,980,495)
5,323,026
198,917
(4,418,425)
2,558,661
(1,982,733)
11,613,289
(8,142,563)
5,150,172
(156,412)
1,349,610
135,152
1,484,762
307,797
812,637
3,847,000
-
-
$
$
$
$
$
$
86,396
39,173
(106,401)
6,199
-
(1,411,777)
(3,754,977)
64,218
(1,890,918)
-
(540,737)
793,106
(1,023)
132,971
582,555
1,159,416
61,007
(42,227)
(68,302)
550,163
437,151
(2,958,430)
-
(1,218,404)
9,296
(40,136)
-
(353,767)
20,871
(621,567)
-
(2,203,707)
-
2,212,796
-
478,969
(799,590)
4,013,614
(642,178)
5,263,611
(3,080)
98,394
36,758
135,152
8,354
9,088
-
-
-
$
$
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements
F-6
NEWATER TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – ORGANIZATION
Newater Technology, Inc. (“Newater Technology”) was incorporated on September 30, 2015 under the laws of the British Virgin Islands. On November
4, 2015, Newater Technology incorporated a wholly owned subsidiary, Newater HK Limited (“Newater HK”) in Hong Kong for the purpose of being a
holding company for the equity interest in Yantai Jinzheng Eco-Technology Co., Ltd. (“Jinzheng”). Other than the equity interest in Newater HK,
Newater Technology does not conduct any operations or own any material assets or liabilities except for cash, restricted cash and prepaid professional
fees. Newater HK does not conduct any operations or own any material assets or liabilities except for cash, restricted cash, professional fees payable, and
the 100% of the equity interest of Jinzheng which it acquired on January 25, 2016.
Jinzheng was founded in Yantai City, Shandong Province, People’s Republic of China (“PRC”) on July 5, 2012 as a limited liability company. Prior to
December 8, 2016, Jinzheng had a wholly owned subsidiary, Shandong Jinmo Recycled Water Resource Co., Ltd. (“Jinmo”), which was incorporated on
March 19, 2015, in Yantai City, Shandong Province, PRC. Jinmo, prior to being disposed of in December 2016, and Jinzheng are engaged in the business
of manufacturing and selling Disk Tube Reverse Osmosis (“DTRO”) and Disk Tube Nanofiltration (“DTNF”) membrane filtration products, delivering
water purifying installation projects, and providing water treatment services.
On January 25, 2016, and February 5, 2016, respectively, Newater HK entered into an equity transfer agreement and a supplementary equity transfer
agreement with Yuebiao Li, Zhuo Zhang, and Yue Zhang, the shareholders of Jinzheng at the time, to acquire 100% of the equity interests in Jinzheng
(“reorganization”).
On December 8, 2016, the Company transferred 100% of its equity interests in Jinmo to a third party company, Beijing Hezhong Qingyuan
Environmental Protection Science and Technology Co., Ltd., for a consideration of RMB 220,000 (approximately $31,678).
As a result, Jinmo, prior to it being disposed of on December 8, 2016, Newater HK, and Jinzheng are referred to as subsidiaries. Newater Technology and
its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.
Immediately before and after the reorganization, the shareholders of Jinzheng controlled Jinzheng and Newater Technology. Therefore, for accounting
purposes, the reorganization is accounted for as a transaction between entities under common control. Accordingly, the accompanying consolidated
financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. The historical cost of
the both parties are carried forward.
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
This basis of accounting differs in certain material respects from that used for the preparation of the books of Jinzheng and Jinmo, which are prepared in
accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC
(“PRC GAAP”), the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary
adjustments not recorded in the books of Jinzheng and Jinmo to present them in conformity with U.S. GAAP.
The accompanying consolidated financial statements consolidate the financial statements of Newater Technology, its 100% owned subsidiary Newater
HK, Newater HK’s 100% owned subsidiary Jinzheng, and Jinzheng’s 100% owned subsidiary Jinmo prior to December 2016. All significant
intercompany balances and transactions have been eliminated. The results of subsidiaries acquired or disposed of during the respective periods are
included in the consolidated statements of income and comprehensive income from the effective date of acquisition or up to the effective date of disposal,
as appropriate.
F-7
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollar (“$”), which is the reporting currency of the Company. The
functional currency of Newater Technology and Newater HK is United States dollar. The functional currency of Jinzheng and Jinmo is Renminbi
(“RMB”). For the subsidiaries whose functional currencies are RMB, results of operations and cash flows are translated at average exchange rates during
the period, assets and liabilities are translated at the exchange rate at the end of the period, and equity is translated at historical exchange rates. The
resulting translation adjustments are included in determining other comprehensive income or loss. Transaction gains and losses are reflected in the
consolidated statements of income and comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions and
information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived
with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained
and as operating environment changes. Significant estimates and assumptions by management include, among others, useful lives and impairment of
long-lived assets, allowance for doubtful accounts, contingencies and litigation, total costs in connection with service revenues, valuation of inventories
and income taxes including the valuation allowance for deferred tax assets. While the Company believes that the estimates and assumptions used in the
preparation of the financial statements are appropriate, actual results could differ from those estimates. Estimates and assumptions are periodically
reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all other highly liquid instruments with original
maturities of three months or less.
Restricted Cash
The current portion of restricted cash includes bank deposits used to pledge bank acceptance notes, cash deposits pledged in exchange for guarantee
service provided by third party and certificate of deposit pledged for bank loan obtained from a bank. The Company entered into credit agreements with
commercial banks in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company
can issue bank acceptance notes to its suppliers as payments for purchases. In order to issue bank acceptance notes, the Company is generally required to
make initial deposits to the endorsing banks in amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the
Company. The cash in such accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months.
The non-current portion of restricted cash represents cash deposited into an escrow account to satisfy the initial $500,000 in potential indemnification
obligations arising during an escrow period of two years following the closing date of August 2, 2017 of the Company’s initial public offering.
Accounts Receivable and Allowance for Bad Debts
The Company presents accounts receivables, net of allowances for doubtful accounts and returns, to ensure accounts receivable are not overstated due to
being uncollectible.
Accounts receivable consists principally of amounts due from trade customers. Credit is extended based on an evaluation of the customer’s financial
condition and collateral is not generally required. Certain credit sales are made to industries that are subject to cyclical economic changes.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments or to
cover potential credit losses. Estimates are based on historical collection experience, current trends, credit policy and relationship between accounts
receivable and revenues. In determining these estimates, the Company examines historical write-offs of its receivable and reviews each client’s account to
identify any specific customer collection issues.
F-8
Retentions Receivable
Retentions receivable represent the amount withheld by customers until the warranty period, usually one to two years, is over. Retentions receivable
which were expected to be collected within one year of $670,877 and $708,424 were included in the balance of accounts receivable as of December 31,
2017 and 2016, respectively. Retentions receivable which were expected to be collected after one year were presented separately as other non-current
asset. Retentions receivable from related parties which were expected to be collected within one year of $0 and $53,833 were included in the balance of
accounts receivable from related party, net as of December 31, 2017 and 2016, respectively.
Inventories
Inventories, consisting of raw materials, work in progress and finished goods are stated at the lower of cost or net realizable value utilizing the weighted
average method. Cost includes all costs of purchase, cost of conversion and other costs incurred to bring the inventories to their present location and
condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to sell.
The valuation of inventory requires the Company to estimate excess and slow moving inventories. The Company evaluates the recoverability of the
inventory based on assumption about expected demand and market conditions.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Cost represents the purchase price of the asset and
other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to
expense; major additions to physical properties are capitalized. Gains and losses on disposal of property, plant and equipment are recognized in the
statement of income and comprehensive income based on the net disposal proceeds less the carrying amount of the assets.
Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using the straight-line method over
their estimated useful lives. Estimated useful lives are as follows:
Machinery equipment
Computer software
Electronic equipment
Office equipment
Motor vehicles
Buildings
Leasehold improvements
10 years
10 years
5 years
5 years
10 years
20 years
The lesser of remaining lease term or 5 years
Construction in progress mainly represents expenditures on the Company’s factory under construction. All direct costs relating to the acquisition or
construction of the Company’s factory including interest cost are capitalized as construction in progress. Construction in progress is not depreciated until
the asset is placed in service.
Land Use Rights
According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only
through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the estimated useful
life of 50 years.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. For the years ended December 31, 2017, 2016 and 2015, the Company did not record any impairment charges on
long-lived assets.
F-9
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, current portion of restricted cash, accounts receivable, notes
receivables, inventories, deferred cost of revenue, advances to suppliers and other current assets, accounts payable and bank acceptance notes to vendors,
loans due within one year, advances from customers, deferred income, income tax payables, and accrued expenses and other payables, the carrying
amounts approximate their fair values due to the short maturities.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free
market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however,
practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Operating Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases.
Payments made under operating leases are charged to the consolidated statements of income and comprehensive income on a straight-line basis over the
lease period.
Earnings per Share
Basic earnings per common share is computed by dividing net earnings attributable to common shareholders by the weighted-average number of common
shares outstanding during the year. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the
weighted average number of common stock outstanding and dilutive potential common stock during the year. Potentially dilutive common shares consist
of common stock warrants using the treasury stock method. Common equivalent shares are not included in the denominator of the diluted earnings per
share calculation when inclusion of such shares would be anti-dilutive.
Revenue Recognition
The Company derives its revenues from: (1) sale of products such as water purifying membranes and water purification equipment (“product revenues”);
(2) sale of water purifying installation projects (“project revenues”); and (3) providing wastewater treatment services such as landfill leachate treatment
and purification (“service revenues”). The Company recognizes revenue when title and risk of loss have transferred to the customer, collection of relevant
receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Revenue consists of the invoiced value
for the sales net of value-added tax (“VAT”), business tax, applicable local government levies, rebates, discounts and returns.
The Company chooses its customers with scrutiny and keeps record of collection of receivable. Receivables from customers with solid credit condition
and history are considered probable to be collected.
There were no sales returns and allowances for the years ended December 31, 2017, 2016 and 2015. The Company does not provide unconditional right
of return, pricing protection or any other concessions to its customers. Historically, warranty claims were immaterial.
For product sales, transfer of title and risk of loss occur when the membranes and equipment are delivered.
The following are the specific revenue recognition policies for project revenues and service revenues.
Project Revenues
The general contract terms of water purifying installation projects include project management, timeframe of the project, payment terms, rights and
obligations of parties, acceptance criteria, and liability for breach of contract.
The term of project management specifies the details such as design and manufacturing of the water-purifying equipment, site installation, trial runs and
technical support and training. A general contract is normally completed within two months and does not include a general right of return.
Transfer of title and risk of loss occur when the equipment is delivered and installed in accordance with the contractual terms. In instances where
contractual terms include a provision for customer acceptance, revenue is recognized when either (i) the Company has previously demonstrated that the
equipment meets the specified criteria based on either seller or customer-specified objective criteria or (ii) upon formal acceptance received from the
customer if the equipment has not been previously demonstrated to meet customer-specified objective criteria.
The Company usually provides free after-sales service under project revenues, which includes warranty, technical support and training for a period
ranging from one to two years. The actual after-sales expense was immaterial for the years ended December 31, 2017, 2016 and 2015.
F-10
Service Revenues
Service revenues are derived from the arrangements where the Company acts as a solution provider and purifies wastewater for customers. The general
contract terms of wastewater treatment service include operation management, timeframe of the service, pricing and payment terms, rights and obligations
of parties, testing criteria, and liability for breach of contract.
The term of pricing and payment specifies the details such as a fixed price per unit and that the ownership of materials and equipment belongs to the
Company.
The Company recognizes service revenues using proportional performance method. Specifically, the revenues have been recognized based on the volume
of wastewater purified multiplied by negotiated contract billing rates, an output method, assuming all other revenue recognition criteria are met. The
Company had service revenues in the year ended December 31, 2017 for the first time.
Cost of Revenues and Deferred Cost of Revenue
The Company’s cost of revenues primarily consists of (i) materials and equipment costs, (ii) compensation and related overhead expenses for personnel
involved in the customization of its products, delivery, installation and maintenance and services (“compensation and overhead costs”), (iii) contractor
costs, and (iii) depreciation of equipment used in operations.
For product sales and project revenues, all costs associated with the sales are expensed when revenues are recognized. For service revenues, when
revenue is recognized over multiple periods in accordance with the Company’s revenue recognition policies, total costs are deferred and amortized over
the same period that associated service revenue is recognized. The costs incurred but not expensed yet are recognized as “Deferred cost of revenue” on
the accompanying consolidated balance sheets. As of December 31, 2017 and 2016, deferred cost of revenue totaled $2,547,580 and $0, respectively.
Government Grants
Government grants include cash subsidies received from the PRC government by the subsidiaries of the Company. Such subsidies are generally provided
as incentives from the local government to encourage the expansion of local businesses. The government grant is recognized in the consolidated
statements of income and comprehensive income when cash is received and the relevant performance criteria specified in the grant are met. In the years
ended December 31, 2017, 2016 and 2015, the Company received government grants of approximately $487,000 (RMB 3,289,975), $1,721,000 (RMB
11,432,000) and $61,000 (RMB 380,000), respectively, and recognized approximately $514,000 (or RMB 3,469,975, including RMB 3,289,975 from
issuance in 2017 and RMB 180,000 from issuance in 2015), $1,751,000 (or RMB 11,632,000, including RMB 11,432,000 from issuance in 2016 and
RMB 200,000 from issuance in 2015), and $0 in the consolidated statements of income and comprehensive income, respectively. As of December 31,
2017 and 2016, approximately $0 and $26,000 were recorded as deferred income, respectively. The details including performance criteria are as follows:
Jinzheng received the following subsidies in 2015:
● RMB 180,000 as Jinzheng’s research and development plan was chosen as one of the annual key plans of Shandong Province. (“RMB 180K
Subsidy”)
● RMB 200,000 as Jinzheng successfully applied for the subsidy of production and cooperation project of Yantai City, Laishan District.
(“RMB 200K Subsidy”)
The above subsidies were subject to further research and development obligations and were recorded as deferred income in 2015. The research and
development projects required by the RMB 200K Subsidy and RMB 180K Subsidy were completed in the years ended December 31, 2016 and 2017,
respectively. Therefore the RMB 200,000 and RMB 180,000 received in 2015 were recognized in consolidated statements of income and comprehensive
income in the years ended December 31, 2016 and 2017, respectively.
Jinzheng received the following subsidies in 2016:
● RMB 500,000 as Jinzheng successfully applied for the subsidy of university-industry cooperation and international cooperation projects
(“RMB 500K Subsidy”). The recognition requirements for the RMB 500K Subsidy include research and development projects completed
with higher education institutions and collaboration with foreign companies with advanced technologies.
● RMB 1,200,000 as Jinzheng successfully applied for the subsidy of special membrane project (“RMB 1.2M Subsidy”). The recognition
requirements for the RMB 1.2M Subsidy include the commencement of special membrane project in Laishan District Economic
Development Area in 2016 and tax payment of certain amount in the same year.
● RMB 9,732,000 as Jinzheng successfully applied for the high technology subsidy (“RMB 9.7M Subsidy”). There is no specific requirement
for the RMB 9.7M Subsidy.
F-11
The requirements of the above subsidies totaling RMB 11,432,000 received in 2016 were fully fulfilled and the subsidies were recognized in consolidated
statements of income and comprehensive income for the year ended December 31, 2016.
Jinzheng received the following subsidies in 2017:
● RMB 300,000 as Jinzheng successfully applied for the subsidy of innovation-driven development (“RMB 300K Subsidy”).
● RMB 2,594,000 as Jinzheng successfully applied for the subsidy of special membrane project (“RMB 2.6M Subsidy”).
● RMB 200,000 as Jinzheng was chosen as one of the Provincial Industrial Design Centers in Shandong Province.
● RMB 100,000 as Jinzheng was chosen as the City DTRO Membrane Engineering Lab of Yantai City in Shandong Province.
● RMB 95,975 as Jinzheng successfully applied for the subsidy on interest expense incurred by the Company for loans obtained.
The requirements of the above subsidies totaling RMB 3,289,975 received in 2017 were fully fulfilled and the subsidies were recognized as government
grants in consolidated statements of income and comprehensive income for the year ended December 31, 2017.
Research and Development
Research and development costs are expensed as incurred. The costs primarily consist of raw materials consumed in research and development activities
and salaries paid for the development and improvement of the Company’s products. Research and development costs for the years ended December 31,
2017, 2016 and 2015 were $1,355,648, $622,051 and $434,974, respectively, and are included in general and administrative expenses.
Selling Expenses
Selling expenses consist primarily of advertising, salaries, travelling and shipping and handling costs incurred during the selling activities. Advertising
and transportation expenses are charged to expense as incurred.
Advertising costs in the amounts of $1,519, $7,931 and $8,816 for the years ended December 31, 2017, 2016 and 2015, respectively, are included in
selling expenses.
Shipping and handling costs amounting to $14,178, $11,663 and $41,002 for the years ended December 31, 2017, 2016 and 2015, respectively, are
included in selling expenses.
Income Taxes
The Company accounts for income taxes under the provision of FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
F-12
Comprehensive Income/Loss
ASC 220 “Comprehensive Income” established standards for reporting and display of comprehensive income/loss, its components and accumulated
balances. Components of comprehensive income/loss include net income/loss and foreign currency translation adjustments. As of December 31, 2017 and
2016, the only component of accumulated other comprehensive income/loss was foreign currency translation adjustments.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, restricted cash, notes receivables and accounts
receivable arising from its normal business activities. The Company places its cash and restricted cash in what it believes to be credit-worthy financial
institutions. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence, believes that its notes receivable and accounts receivable credit risk exposure
beyond such allowance is limited.
Related Parties Transactions
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the
Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone
who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when
there is a transfer of resources or obligations between related parties. Related parties may be individuals or corporate entities.
Segment Reporting
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal
organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the
source for determining the Company’s reportable segments. The Company’s chief operating decision maker has been identified as the chief executive
officer of the Company who reviews financial information of separate operating segments based on U.S. GAAP. The chief operating decision maker now
reviews results analyzed by customer. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the
Company has determined that it has only one operating segment.
F-13
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)”. Under ASU 2014-09, revenue is recognized when a
customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive
in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December
15, 2017, and early adoption is permitted for periods beginning after December 15, 2016. The Company elected to adopt the new standard effective
January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or
retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).
The Company elected adopting the standard using the modified retrospective method. Under this method, the Company will recognize the cumulative
effect of adoption as an adjustment to its opening balance of retained earnings. The Company has identified its revenue streams and assessed each for the
impacts. The Company expects the adoption of Topic 606 will not have a material impact in the timing or amount of revenue recognized, including the
presentation of revenues in the Company’s consolidated statements of income and comprehensive income.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The amendments in
ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified
balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments in this ASU are
effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.
The Company adopted this amendment effective January 1, 2017. The adoption did not have an impact on our consolidated financial statements and
related disclosures other than for reclassification of current deferred tax items to non-current for all periods presented.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU
2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on its balance
sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally
on a straight-line basis. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. ASU 2016-
02 is effective for publicly-traded companies for annual reporting periods, and interim periods within those years, beginning after December 15, 2018.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition
approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may
not apply a full retrospective transition approach. The Company plans to adopt the standard effective January 1, 2019. The Company anticipates this
standard will have a material impact on the Company’s consolidated balance sheets. However, the Company does not expect the adoption will have a
material impact on the consolidated statements of income and comprehensive income. While the Company is continuing to assess potential impacts of the
standards, it’s expected that the most significant impact will be the recognition of a right-of-use asset and a lease liability for the ongoing leases.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not
provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the standard
effective January 1, 2018, and anticipates this standard will not have a material impact on the Company’s consolidated statements of cash flows.
F-14
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint
Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or
existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting
standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a
description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been
implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has
incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The
Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.
Note 3 – RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings or
financial position.
Note 4 – DISPOSAL
On December 8, 2016, the Company sold all of the assets and liabilities of Jinmo to a third party for proceeds of approximately $31,678 (RMB 220,000),
which resulted in a gain on the transaction of $789. Including the gain on the sale transaction, Jinmo contributed $14,511 to income before income taxes
provisions for the year ended December 31, 2016. Jinmo has historically been reported as a component of the Company’s operations and contributed
$21,799 to income before income taxes provisions for the year ended December 31, 2015.
The disposal did not constitute a strategic shift that would have a major effect on the Company’s operations or financial results and as such, the disposal
was not classified as discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 2016.
Note 5 – RESTRICTED CASH
The current portion of restricted cash includes the bank deposit pledged for the bank acceptance notes issued to suppliers in the amount of $1,499,990,
deposits for guarantee service provided by Yantai Financing Guarantee Co., Ltd. in the amount of $153,695 and certificate of deposits of $5,100,000 in
the offshore bank account of Newater HK pledged for the short term loan of $4,610,845 (RMB 30,000,000) obtained from Industrial and Commercial
Bank of China. Also see Note 12 for details on the short term loans. As of December 31, 2017 and 2016, the Company had current portion of restricted
cash of $6,753,685 and $1,439,926, respectively.
As of December 31, 2017, the Company had non-current portion of restricted cash of $500,000 which was held as security in an escrow account to satisfy
the initial $500,000 in potential indemnification obligations arising during an escrow period of two years following the closing date on August 2, 2017.
Note 6 – ACCOUNTS RECEIVABLE, NET
The net book value of accounts receivable consisted of the following as of December 31, 2017 and 2016:
Accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
The movement of allowance for doubtful accounts consisted of the following:
Allowance for doubtful accounts, beginning balance
Increase
Decrease
Effects of foreign exchange rate
Allowance for doubtful accounts, ending balance
F-15
$
December 31,
2017
6,326,723
(276,228)
6,050,495
$
$
December 31,
2016
2,674,134
(36,898)
2,637,236
$
December 31,
2017
December 31,
2016
$
$
36,898
231,926
-
7,404
276,228
$
$
39,473
-
-
(2,575)
36,898
Note 7 – INVENTORIES
At December 31, 2017 and 2016, inventories consisted of the following:
Raw materials
Work in progress
Finished goods
Less: write-down of inventories
Inventories
Certain inventories have been pledged to obtain short term loans. See Note 12 for details.
Note 8 – ADVANCES TO SUPPLIERS AND OTHER CURRENT ASSETS, NET
As of December 31, 2017 and 2016, advances to suppliers and other current assets consisted of the following:
$
December 31,
2017
2,833,317
7,446,080
-
10,279,397
-
10,279,397
$
$
December 31,
2016
1,707,610
3,132,624
-
4,840,234
-
4,840,234
$
Other current assets
VAT-input
Others
Total other current assets
Advances to suppliers
Total
Less: allowance for doubtful accounts
Advances to suppliers and other current assets, net
December 31,
2017
December 31,
2016
$
$
651,056
393,581
1,044,637
1,840,873
2,885,510
-
2,885,510
$
$
-
610,216
610,216
1,991,343
2,601,559
(73,148)
2,528,411
Other current assets include the value added tax pending for deduction, advances to employees for business travels or business development purpose and
other miscellaneous receivables such as utility fees, social insurances, personal income tax paid in advance on behalf of employees and deposits, which
include guarantee deposit, rent deposit, and security deposit for bidding customer projects.
The Company advanced RMB 2,000,000 (approximately $307,700) to Yantai Yezhan Economic and Trade Ltd., Co. on August 10, 2016. The loan bears
annual interest of 5% and was due in six months. On September 29, 2016, the loan was fully repaid along with interest.
The Company advanced RMB 8,500,000 (approximately $1,236,490) to Yantai Runtai Medical Co., Ltd. on February 22, 2017. The loan bears an annual
interest rate of 10% and was due in six months. On August 22, 2017, the loan was extended for another 4 months with the same interest rate. As of
December 31, 2017, the loan was fully repaid along with interest.
F-16
Note 9 – PROPERTY, PLANT AND EQUIPMENT, NET
As of December 31, 2017 and 2016, property, plant and equipment consisted of the following:
Machinery equipment
Electronic equipment
Office equipment
Motor vehicles
Buildings
Computer software
Construction in progress
Leasehold improvements
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
$
December 31,
2017
1,143,605
117,220
81,248
932,877
106,038
81,939
8,350,135
80,053
10,893,115
(443,649)
10,449,466
$
December 31,
2016
$
$
941,333
69,037
62,542
194,961
89,661
23,825
-
50,011
1,431,370
(231,759)
1,199,611
During the year ended December 31, 2017, the liabilities assumed in connection with purchase of property, plant and equipment totaled $7,445,478. The
liabilities were included in accrued expenses and other payables in the accompanying consolidated balance sheets as of December 31, 2017.
Depreciation expense for the years ended December 31, 2017, 2016 and 2015, was $188,995, $165,906 and $86,396, respectively.
Certain properties and equipment have been pledged to obtain short term loans. See Note 12 for details.
Note 10 – LAND USE RIGHTS, NET
As of December 31, 2017 and 2016, land use rights consisted of the following:
Cost
Less: accumulated amortization
Land use rights, net
$
December 31,
2017
2,311,611
(68,428)
2,243,183
$
$
December 31,
2016
2,163,815
(20,813)
2,143,002
$
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $44,498, $21,756 and $0, respectively.
On July 19, 2016, the Company entered into a land use rights transfer agreement with Yantai Aotesai Energy Ltd., pursuant to which the Company
purchased the land use rights of a parcel of land of 32,442 square meters located in Laishan District Economic Development Area for a total consideration
of approximately $2,248,829 (RMB 14,598,725). The land use rights were placed into use in the year ended December 31, 2016, when the full payments
were made. Certificate of the land use rights was obtained in March 2017.
The land use rights have been pledged to obtain short term loans and other guarantees. See Note 12 for details.
Note 11 – DEFERRED TAX ASSETS
The components of the deferred tax assets are as follows:
Deferred tax assets, non-current
Unpaid accrued expenses
Allowance for doubtful accounts
Expense cut-off
Others
Deferred tax assets
Less: valuation allowance
Deferred tax assets, non-current
December 31,
2017
December 31,
2016
$
$
52,474
41,434
-
424,343
518,251
-
518,251
$
$
57,221
5,859
10,972
106,951
181,003
-
181,003
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with
reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at
the applicable tax rate.
F-17
Note 12 – LOANS
Loans and related guarantees are comprised of the following:
Bank of Qingdao, Yantai Branch
Industrial and Commercial Bank of China,
Yantai Economic Development Zone Branch
Bank of China, Yantai Bonded Port Areas
Branch
Bank of China, Yantai Bonded Port Areas
Branch
Yantai Branch, China Everbright Bank
Guarantees and Pledges
Yantai Financing Guarantee Co., Ltd.;
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company, and his wife;
Zhuo Zhang, principal shareholder, Director and Chief Financial
Officer of the Company
Pledged by the Company with certificate of deposit of $5,100,000
Yantai Runtai Medical Co., Ltd. (“Runtai”);
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company, and his wife;
Zhuo Zhang, principal shareholder, Director and Chief Financial
Officer of the Company, and her husband;
Yue Zhang, principal shareholder, sister of Zhuo Zhang who is
principal shareholder, Director and Chief Financial Officer of the
Company; Xiaojun Chen and Yuezhang each pledged an apartment
for this loan
Runtai;
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company, and his wife;
Pledged with an apartment owned by Yue Zhang, principal
shareholder, sister of Zhuo Zhang
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company and his wife;
Zhuo Zhang, principal shareholder, Director and Chief Financial
Officer of the Company;
Huaxia Bank Co., Ltd., Yantai Xingfu Branch Runtai;
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company, and his wife;
Zhuo Zhang, principal shareholder, Director and Chief Financial
Officer of the Company, and her husband;
Pledged by the Company’s property and equipment
Huaxia Bank Co., Ltd.; Yantai Xingfu Branch Runtai;
Yuebiao Li, principal shareholder, Chairman of the Board and Chief
Executive Officer of the Company, and his wife;
Zhuo Zhang, principal shareholder, Director and Chief Financial
Officer of the Company, and her husband;
Pledged by the Company’s inventories
Daqing Yahualong Lubricating Oil Selling
Ltd.
eCapital (China) Leasing Co., Ltd.
Total short term loans
Volkswagen Finance (China) Co., Ltd.
Total loans
Less: short term loans and current portion of
long term loans
Long term loans - due over one year
F-18
December 31,
2017
December 31,
2016
$
1,536,948
$
4,610,845
-
-
-
1,151,941
1,229,559
-
-
-
1,536,948
-
88,266
9,002,566
29,181
9,031,747
215,990
1,439,926
-
71,996
-
-
-
2,879,853
9,020,697
11,050
$
$
-
-
On February 2, 2015, the Company entered into a one-year loan contract with Beijing Bangruisi Investment Co., Ltd. (“Bangruisi”), pursuant to which the
Company borrowed $2,310,643 (RMB 15,000,000) with an annual interest rate of 10%, and Yuebiao Li, principal shareholder, Chairman of the Board
and Chief Executive Officer of the Company, transferred 1% of the Company’s equity interest to a person assigned by Bangruisi as the pledge. Bangruisi
would have the option to extend the loan for another year upon maturity. In addition, Bangruisi would have the right to convert all or part of the loan into
contributed capital of Jinzheng at a price of $2,310,643 (RMB 15,000,000) for 20% equity interest within two years from inception of the loan and the
right would not expire in case of early repayment. Furthermore, the Company granted Bangruisi a transferable option to acquire a maximum of 5% of the
Company’s equity interest by a consideration of $770,214 (RMB 5,000,000). If Bangruisi decides to purchase less than 5% of the Company’s equity
interest, the consideration would be adjusted proportionately. The 5% interest could be repurchased by Yuebiao Li and Zhuo Zhang with a price of
$1,540,428 (RMB 10,000,000) upon the consent of Bangruisi. If the Company were to accept capital contributions at terms which were more favorable to
other investors, Yuebiao Li and Zhuo Zhang should compensate Bangruisi for the price difference and Bangruisi would enjoy the same favorable terms.
The contract also states that Yuebiao Li and Zhuo Zhang were obligated to pay for certain penalty if the net income of Jinzheng did not reach $2,310,643
(RMB 15,000,000) and $4,621,286 (RMB 30,000,000) for the year of 2015 and 2016, respectively. If the Company did not generate sufficient net income
to meet the net income requirement in 2015, it would be allowed to make up for the deficiency in 2016. In events of default, Bangruisi could choose one
of the following settlements: (1) demand penalty at a daily rate of 1‰ of the unpaid portion, or (2) convert the defaulted amount to contributed capital and
have 40% of the Company’s equity interest.
The Company made full repayment of the principal and accrued interest in January 2016 and the 1% equity interest was returned. Consequently, the
agreement was fully terminated and the Company was not subject to any further obligations.
On June 30, 2015, the Company borrowed a ten-month non-interest bearing loan of $462,129 (RMB 3,000,000) from Runtai and made payment of
$308,086 (RMB 2,000,000) in the same year. The remaining balance was repaid in March 2016.
On July 9, 2015, the Company borrowed a one-year loan of $154,043 (RMB 1,000,000) with an annual interest rate of 7.275% from Bank of China,
Yantai Changjiang Road Branch and made full payment in advance on November 9, 2015.
On November 10, 2015, the Company borrowed a non-interest bearing loan of $154,043 (RMB 1,000,000) from a third party individual for working
capital purposes and made full payment in the same quarter.
On November 10, 2015, the Company entered into a one-year loan agreement with Bank of China, Yantai Bonded Port Areas Branch to borrow $770,214
(RMB 5,000,000) with an annual interest rate of 5.665%. The loan was jointly guaranteed by Runtai, Yuebiao Li and his wife, Xiaojun Chen, husband of
Zhuo Zhang, and Yue Zhang and fully repaid on October 25, 2016. On the same day, the Company entered into another loan agreement with the same
bank to borrow approximately $1,151,941 (RMB 8,000,000) for working capital purposes. The loan was due on October 24, 2017 with a floating interest
at the prime rate issued by National Inter-Bank Borrowing Center on the initial drawdown date plus 135.50 points. The loan was guaranteed by parties
listed above and Xiaojun Chen and Yue Zhang each had a house pledged for the loan. The agreement also specified that the Company should use the land
use rights of the parcel of land of 32,442 square meters which was transferred from Aotesai as pledge once the transfer procedure was completed. See
Note 10 for the details on the land use rights. The Company fully repaid the loan on October 26, 2017. On November 1, 2017, the Company entered into a
loan agreement with the same bank to borrow approximately $1,229,559 (RMB 8,000,000) due on November 1, 2018 for working capital purposes. The
loan bears an annual interest rate of 5.873% payable quarterly in arrears and is guaranteed by the parties listed above and pledged with an apartment
owned by Yue Zhang.
On January 5, 2016, the Company borrowed approximately $61,908 (RMB 400,000) from a third party individual for working capital purposes with zero
interest and fully repaid on January 6, 2016.
On January 13, 2016, the Company borrowed approximately $3,077,000 (RMB 20,000,000) from Yantai Xiangyu Logistics Co., Ltd. with zero interest
for six months, approximately $2,538,525 (RMB 16,500,000) of which was used to repay the borrowing from Bangruisi and the remaining was used for
operating purpose. Subsequently from April 2, 2016 to June 1, 2016, the Company borrowed a total of approximately $3,077,000 (RMB 20,000,000)
from three third party individuals with zero interest for three months to make repayments to Yantai Xiangyu Logistics Co., Ltd. On June 6, 2016, the
Company entered into a series of debt conversion agreements with the three individuals, pursuant to which the total borrowings were converted to
724,000 shares of the Company’s common shares at $4.25 per share.
F-19
On March 21 and March 25, 2016, the Company borrowed $768,470 (RMB 4,990,000) and $1,530 (RMB 10,000), respectively, from a third party
individual, for three months without interest. This loan was converted to 275,000 shares of the Company’s common shares at $2.8 per share on June 6,
2016.
On June 7, 2016, the Company entered into a loan agreement with Yantai Yongxiang Asset Management Ltd., pursuant to which the Company borrowed
approximately $1,494,216 (RMB 9,700,000) at a daily interest rate of 0.025%. The Company received the fund on July 20, 2016 and repaid the principal
along with interest on July 22, 2016.
On July 6, 2016, the Company entered into a loan agreement with Daqing Yahualong Lubricating Oil Selling Ltd., pursuant to which the Company
borrowed approximately $307,700 (RMB 2,000,000) at annual interest rate of 5% with a term of three months for working capital purposes. On
September 5, 2016, the Company repaid approximately $60,210 (RMB 400,000) and agreed with the creditor to extend the loan for another three months
at the same interest rate. On November 22, 2016 and December 13, 2016, the Company repaid approximately $96,964 (RMB 600,000) and $75,263
(RMB 500,000), respectively. On January 6, 2017, the Company reached another extension agreement with the creditor to extend the remaining balance
of RMB 500,000 for another three months with the same interest rate. The principal of RMB 500,000 along with interest was repaid on April 12, 2017.
On July 13, 2016, the Company entered into a loan agreement with Yantai Branch, China Everbright Bank to borrow approximately $215,990 (RMB
1,500,000) for working capital purposes. The loan was due on January 12, 2017 with a fixed annual interest rate of 6.525%. The loan was guaranteed by
Yuebiao Li, Yanhui Li, wife of Yuebiao Li, and Zhuo Zhang. On January 4, 2017, the loan was fully repaid. On the same day, the Company entered into
another loan agreement with the same bank to borrow approximately $215,990 (RMB 1,500,000) for working capital purposes. The loan was due on July
3, 2017 with a fixed annual interest rate of 6.525% and guaranteed by Yuebiao Li, Yanhui Li, wife of Yuebiao Li, and Zhuo Zhang. The principal along
with interest was repaid on July 3, 2017.
On July 19, 2016, the Company obtained a line of credit of approximately $3,080,857 (RMB 20,000,000) from Huaxia Bank Co., Ltd. Yantai Xingfu
Branch. The line of credit starts from July 19, 2016 and ends on June 30, 2017. The borrowings under the line of credit are guaranteed by Runtai, Yuebiao
Li and his wife, Zhuo Zhang and her husband. In addition, the Company pledged certain property and equipment with original book value of
approximately $2,955,467 (RMB 19,186,003) for the line of credit. On July 26, 2016, the Company entered into a loan agreement under the line of credit,
pursuant to which the Company borrowed approximately $1,439,926 (RMB 10,000,000) at an annual interest rate of 5.655% from July 26, 2016 to June
28, 2017. The loan was fully repaid on June 28, 2017. On the same day, the Company entered in another loan agreement with the same bank to borrow
approximately $1,536,948 (RMB10,000,000) at an annual interest rate of 5.655% for the period from June 28, 2017 to June 28, 2018. The loan is
guaranteed by the parties listed above and pledged by the Company with certain inventories with original cost of approximately $3,110,863 (RMB
20,240,449).
On August 29, 2017, the Company entered into a loan agreement with Yantai Branch, Bank of Qingdao to borrow approximately $1,536,948
(RMB10,000,000) for working capital purposes. The loan is due on August 28, 2018 with a fixed annual interest rate of 5.655%. The loan is guaranteed
by Yantai Financing Guarantee Co., Ltd., Yuebiao Li and his wife, and Zhuo Zhang. The land use rights transferred from Yantai Aotesai Energy Ltd.
were pledged to obtain the guarantee provided by Yantai Financing Guarantee Co., Ltd.
On September 28, 2017, the Company entered into a loan agreement to borrow approximately $4,610,845 (RMB 30,000,000) from Industrial and
Commercial Bank of China, Yantai Economic Development Zone Branch, for the period from September 28, 2017 to September 25, 2018. The loan bears
an annual interest rate of 5.003% and is pledged with a certificate of deposit in the amount of $5,100,000 using the funds from IPO by Newater HK. The
amount of the certificate of deposit was included in restricted cash, current portion in the consolidated balance sheets.
On November 8, 2017, the Company entered into two loan agreements with Volkswagen Finance (China) Co., Ltd. (“Volkswagen Loans”) in connection
with acquisition of vehicles with net book value of $55,822 (RMB 363,200), which were pledged to secure the loans. The loans bear an effective interest
rate of 9.090% per annum and are due in 24 months. The loans obtained pursuant to the agreements totaled $30,738 (RMB 200,000). For the year ended
December 31, 2017, the Company repaid in the total amount of $1,556 (RMB 10,131). As of December 31, 2017, current portion of the Volkswagen
Loans totaled $18,131, which has been included in the balance of short term loans in the accompanying consolidated balance sheet, and long term portion
totaled $11,050.
On December 21, 2017, the Company entered into four loan agreements, each with a term of 12 months and an effective interest rate of 17.049% per
annum with eCapital (China) Leasing Co., Ltd. (“eCapital Loans”) in connection with acquisition of vehicles with net book value of $183,195 (RMB
1,191,941), which were pledged to secure the loan. Pursuant to the loan agreements, the Company borrowed a total amount of $192,580
(RMB1,253,000), with monthly repayment payable in arrears. For the year ended December 31, 2017, repayment of $104,314 (RMB 678,708) was made.
As of December 31, 2017, the outstanding balance for eCapital Loans totaled $88,266 (RMB 574,292).
Total amount of $223,318 of the Volkswagen Loans and eCapital Loans were used for purchase of passenger vehicles in the amount of $206,000 plus
value-added tax of $17,318 during the year ended December 31, 2017.
The interest expenses for the years ended December 31, 2017, 2016 and 2015 were $242,707, $155,553, and $164,613, respectively.
F-20
Note 13 – RELATED PARTY TRANSACTIONS
The Company had transactions with the following related parties in the years ended December 31, 2017, 2016 and 2015:
Name of Related Party
Yuebiao Li
Principal shareholder, Chairman of the Board and Chief Executive Officer (“CEO”)
Nature of Relationship
Zhuo Zhang
Yue Zhang
Xiaojun Chen
Principal shareholder, Director, Chief Financial Officer (“CFO”)
Principal shareholder, Zhuo Zhang’s sister
Husband of Zhuo Zhang
Heilongjiang Binteer Environmental Protection
Equipment Manufacturing Co., Ltd. (“Heilongjiang
Binteer”)
Established by Yuebiao Li, and then Mr. Li transferred his 60% equity interest to his brother,
Yuefeng Li in May 2014. Yuefeng Li then transferred his 60% equity interest to a third party
individual for zero consideration in March 2016. Heilongjiang Binteer continues to be significantly
influenced by the Company because the Company was its primary vendor and customer in the years
ended December 31, 2016 and 2015.
Daqing Wanjieyuan Water Treatment Equipment
Sales Co., Ltd. (“Daqing Wanjieyuan”)
Controlled by Yuebiao Li
Mojie Technology (Beijing) Co., Ltd. (“Mojie”)
Established and controlled by Yuebiao Li and Zhuo Zhang. All of the equity interest was transferred
to a third party in July 2015 but continues to be significantly influenced by the Company because
the Company was its primary vendor in the years ended December 31, 2016 and 2015.
Yantai Jinna Commerce Co., Ltd. (“Jinna”)
Significantly influenced by Yue Zhang, principal shareholder and sister of Zhuo Zhang.
Shandong Jinmo Recycled Water Resource Co.,
Ltd. (“Jinmo”)
A subsidiary that was incorporated on March 19, 2015 and disposed of to a third party on December
8, 2016 for consideration of RMB 220,000 (approximately $31,678). After the transfer, the
Company continues to have significant influence on Jinmo as Ping Yu, vice-chief executive officer
of Jinzheng, serves as the legal representative of Jinmo.
Revenues from related parties and accounts receivable from related parties, net
The Company primarily provides products such as membranes, components and water purification equipment to Heilongjiang Binteer, Mojie, Daqing
Wanjieyuan and Jinna. For the years ended December 31, 2016 and 2015, the Company generated net related party revenues from Heilongjiang Binteer,
Mojie, Daqing Wanjieyuan and Jinna in the amount of $294,666 and $3,659,421, respectively. The Company had no revenues from related parties in the
year ended December 31, 2017. The net accounts receivable from related parties amounted to $0 and $1,060,977 as of December 31, 2017 and 2016,
respectively.
Net revenues from related parties consisted of the following:
Heilongjiang Binteer
Mojie
Jinna
Daqing Wanjieyuan
Total
$
$
-
-
-
-
-
$
$
290,007
3,268
1,391
-
294,666
$
$
F-21
For the Years Ended December 31,
2016
2017
2015
1,213,905
2,437,283
-
8,233
3,659,421
During the period from January 1, 2016 to December 7, 2016, Jinzheng sold equipment of $1,063,137 to Jinmo. The equipment sales were made prior to
the disposal of Jinmo, recorded as intercompany sales and eliminated on consolidated statements of income and comprehensive income for the year ended
December 31, 2016. The receivables in connection with the sales were outstanding as of December 31, 2016 and fully collected as of December 31, 2017.
Accounts receivable from related parties consisted of the following:
Jinmo
Accounts receivable from related parties
Less: allowance for doubtful accounts
Accounts receivable from related parties, net
December 31,
2017
$
$
-
-
-
-
The movement of allowance for doubtful accounts for accounts receivable from related parties consisted of the following:
$
December 31,
2016
1,063,137
1,063,137
(2,160)
1,060,977
$
Allowance for doubtful accounts, beginning balance
Increase
Decrease
Effects of foreign exchange rate
Allowance for doubtful accounts, ending balance
Materials supplied by related party and accounts payable to related party
December 31,
2017
December 31,
2016
$
$
-
-
-
-
-
$
$
2,311
-
-
(151)
2,160
The Company also purchased materials from Heilongjiang Binteer amounting to $556,692 and $2,971,017 for the years ended December 31, 2016 and
2015, respectively. The materials purchased include membrane column, membrane filter, and other components of water treatment equipment. There was
no purchase from related parties in the year ended December 31, 2017.
For the year ended December 31, 2016, the total purchase from Heilongjiang Binteer represented cost of revenues from related party for 2016. For the
year ended December 31, 2015, total purchase from Heilongjiang Binteer of $2,971,017 and the purchase of $13,951 from 2014, totaling 2,984,968,
constituted the cost of revenues from related party for 2015. The balance of accounts payable to related party was $0 as of December 31, 2017 and 2016.
Due from related parties
Due from related parties consisted of the following:
Yue Zhang
Jinmo
Total
December 31,
2017
December 31,
2016
$
$
-
-
-
$
$
683
2,880
3,563
F-22
On January 29, 2015, the Company entered into a car leasing agreement with Yuebiao Li, pursuant to which the Company would lease Yuebiao Li’s
personal car from February 1, 2015 to January 31, 2018 under a monthly rent of approximately $2,400 (RMB 15,000). The Company paid $28,898 (RMB
180,000) for twelve months’ use during 2015 and the balance of $2,311 (RMB 15,000) due from Yuebiao Li as of December 31, 2015 was expensed
during 2016 with the use of the car. The agreement was terminated at the end of the year ended December 31, 2016.
From time to time, the Company advances to Yue Zhang, principal shareholder of the Company and Zhuo Zhang’s sister, in connection with the
Company’s daily operations. The advances are in immaterial amount each time and reflected as due from Yue Zhang before invoices are issued by the
Company’s service providers. For the year ended December 31, 2016, the Company advanced $240,492 to Yue Zhang and $239,809 has been used in
ordinary course of business. The balance due from Yue Zhang was $0 and $683 as of December 31, 2017 and 2016, respectively.
The balance due from Jinmo represents non-secured short-term loan obtained from the Company, which bears no interest and was due on demand. The
balance was paid off during 2017.
Due to related parties
Due to related parties consisted of the following:
Zhuo Zhang
Yuebiao Li
Total
December 31,
2017
December 31,
2016
$
$
-
-
-
$
$
1,084
713,915
714,999
The balance of due to related parties represents expenses incurred by related parties in the ordinary course of business, expense related parties paid on
behalf of the Company as well as the loans the Company obtained from related parties for working capital purposes. The loans owed to the related parties
are interest free, unsecured and repayable on demand.
On August 31, 2015, Zhuo Zhang and Xiaojun Chen, on behalf of the Company, entered into a non-interest-bearing car loan agreement with Ping’an
Bank, pursuant to which a loan of $25,834 (RMB167,708) was provided for car purchase. The loan was guaranteed and pledged by the Company. The
loan was fully repaid on August 17, 2016.
In September 2015, Zhuo Zhang deposited $267,510 (RMB 1,736,596) in the bank on behalf of the Company, as pledge for bank acceptance notes issued
by the Company. The deposits was used to settle the liabilities when the bank acceptance notes was due on March 26, 2016. The amount was repaid to
Zhuo Zhang during the year ended December 31, 2016.
On November 28, 2016, Yantai Guotai Investment Limited Company (“Yantai Guotai”), Yuebiao Li, and Jinzheng entered into a borrowing agreement,
pursuant to which (1) Yuebiao Li personally borrowed approximately $719,963 (RMB 5,000,000) from Yantai Guotai at annual interest rate of 10% for
one year, and (2) Jinzheng received and used the principal as zero-interest borrowing from Yuebiao Li, due on demand. The principal was received and
used by Jinzheng and recorded as a loan from Yuebiao Li as of December 31, 2016. During the year ended December 31, 2017, repayments to Yuebiao Li
totaled $739,973 (RMB 5,000,000).
On November 30 and December 28, 2016, respectively, the Company paid approximately $5,040 (RMB 35,000) and $2,160 (RMB 15,000) to purchase a
trademark from Daqing Wanjieyuan.
Note 14 – INCOME TAXES
British Virgin Islands (“BVI”)
Under the current laws of BVI, Newater Technology is not subject to tax on income or capital gain. In addition, payments of dividends by the Company
to their shareholders are not subject to withholding tax in the BVI.
Hong Kong
The Company’s subsidiary, Newater HK, is incorporated in Hong Kong and has no operating profit or tax liabilities during the period. Newater HK is
subject to tax at 16.5% on the assessable profits arising in or derived from Hong Kong.
PRC
Jinzheng and Jinmo were incorporated in the PRC and are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the
relevant PRC income tax laws. On March 16, 2007, the National People’s Congress enacted a new enterprise income tax law, which took effect on
January 1, 2008. The law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises. In the fourth
quarter of 2015, Jinzheng was granted with the “High-Tech Enterprise” designation and is qualified for a preferential tax rate of 15% for the years ended
December 31, 2016 and 2017. In the years ended December 31, 2016 and 2015, Jinmo was recognized as small low-profit enterprise and received a
preferential income tax of 10% for years then ended.
F-23
The provision for income taxes consists of the following:
Current
Deferred
Total
For the Years Ended
December 31,
2016
2017
$
$
788,815
(312,997)
475,818
$
$
680,756
(132,319)
548,437
$
$
2015
554,082
(101,232)
452,850
The reconciliations of the statutory income tax rate and the Company’s effective income tax rate are as follows:
HK statutory income tax rate
Valuation allowance recognized with respect to the loss in the HK company
PRC statutory income tax rate
Effect of income tax exemptions and reliefs
Effect of additional deduction allowed for R&D expense
Effect of expenses not deductible for tax purposes
Others
Total
Accounting for Uncertainty in Income Taxes
For the Years Ended
December 31,
2016
2015
2017
16.50%
(16.50)%
25.00%
(10.00)%
(2.74)%
0.81%
2.45%
15.52%
16.50%
(16.50)%
25.00%
(11.63)%
-
0.05%
4.97%
18.39%
16.50%
(16.50)%
25.00%
(0.23)%
-
7.79%
(0.18)%
32.38%
The tax authority of the PRC government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those
enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject to change. It is therefore uncertain as
to whether the PRC tax authority may take different views about the Company’s PRC entities’ tax filings, which may lead to additional tax liabilities.
ASC 740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated
the Company’s tax positions and concluded that no provision for uncertainty in income taxes was necessary as of December 31, 2017 and 2016.
Note 15 – STATUTORY RESERVES
According to the Company Law in the PRC, companies are required to set aside 10% of their after-tax profit to general reserves each year, based on the
PRC accounting standards, until the cumulative total of such reserves reaches 50% of the registered capital. These general reserves are not distributable as
cash dividends to equity owners. The Company had appropriated $705,698 and $382,802 to statutory reserves as of December 31, 2017 and 2016,
respectively.
Note 16 – STOCKHOLDERS’ EQUITY
The stockholders’ equity structures as of December 31, 2015 was presented after giving retroactive effect to the reorganization of the Company that was
completed in the first quarter of 2016.
On September 30, 2015, Newater Technology was incorporated in the British Virgin Islands. On the same day, the Company issued 10,000 common
shares at $0.001 per share to its incorporator with cash proceeds of $10. On March 27, 2016, the Company issued 73,000 common shares at $0.65 per
share to the incorporator with total cash proceeds of $47,450.
On March 27, 2016, a total of 8,117,000 shares were issued at $0.65 per share, to six individuals and seven companies with total cash proceeds of
$5,276,050 received, among which $4,418,425 was distributed to the former owners of Jinzheng to acquire 100% of its equity interest.
On June 6, 2016, the Company converted loans of $3,077,000, owed to three third party individuals, to 724,000 common shares at $4.25 per shares. On
the same day, the Company converted a loan of $770,000, owed to another third party individual, to 275,000 common shares at $2.80 per share. As a
result, the Company had 9,199,000 common shares outstanding with par value of $0.001 per share before the initial public offering. Also See Note 12 for
more details.
On August 2, 2017, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “NEWA”. The Company
offered 1,400,000 common shares at $5 per share. Net proceeds raised by the Company from the initial public offering amounted to $6,145,325 after
deducting underwriting discounts and commissions and other offering expenses. Out of the $6.1 million net proceeds, $500,000 was deposited into an
escrow account to satisfy the initial $500,000 in potential indemnification obligations arising during an escrow period of two years following the closing
date of August 2, 2017 and was presented as restricted cash, non-current, on the accompanying consolidated balance sheets. On August 3, 2017, the
Company sold additional 210,000 common shares at $5 per share. Net proceeds raised by the Company amounted to $966,000 after deducting
underwriting discounts. As a result, the Company raised a total of $7,111,325 from issuance of common shares in the year ended December 31, 2017.
As of the filing date, there was a total number of 10,809,000 shares outstanding.
F-24
Note 17 – EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted net income per share for the years ended December 31, 2017, 2016 and 2015:
Net income available to common shareholders for basic and diluted net income per common share $
Weighted average common shares outstanding – basic
Effect of dilutive securities:
Warrants issued to third party
Weighted average common shares outstanding – diluted
Net income per common share – basic
$
Net income per common share – diluted
$
0.26
For the Years Ended
December 31,
2016
2,433,720
8,767,738
$
$
2017
2,590,931
9,864,479
-
9,864,479
0.26
-
8,767,738
0.28
0.28
$
$
$
$
2015
945,577
8,200,000
960,087
9,160,087
0.12
0.10
On February 2, 2015, the Company entered into a one-year loan contract with Bangruisi, pursuant to which Bangruisi lent $2,310,643 (RMB 15,000,000)
with an annual interest rate of 10% to the Company, and would have the right to convert all or part of the loan into contributed capital of Jinzheng at a
price of $2,310,643 (RMB 15,000,000) for 20% equity interest within two years from inception of the loan and the right would not expire in case of early
repayment. Furthermore, the Company granted Bangruisi a transferable option to acquire a maximum of 5% of the Company’s equity interest by a
consideration of $770,214 (RMB 5,000,000). Those terms constitute warrants with exercise price of $1.19 and $1.88, respectively. Those warrants and
options were cancelled subsequently when the loan was paid in full. Also see Note 12 for more details.
Note 18 – CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS AND SUPPLIERS
Customers
For the years ended December 31, 2017, 2016 and 2015, customers accounting for 10% or more of the Company’s revenue were as follows:
Customer
Beijing Hezhong Qingyuan Environmental Protection Science and Technology Co., Ltd.
(“Hezhong Qingyuan”)
Government of Jiangshan Town, Laixi District, Qingdao City, Shandong Province, PRC
(“Jiangshan Town”)
Beijing Aritime Intelligent Control Co., Ltd. (“Beijing Aritime”)
Nanjing Blue Sky Environmental Protection Science and Technology Co., Ltd. (“Blue Sky”)
Dalian Yihe Electric Power Installation Co., Ltd. (“Dalian Yihe”)
Mojie
Heilongjiang Binteer
*
Less than 10%
F-25
For the Years Ended
December 31,
2016
2015
2017
35.19%
31.70%
13.34%
*%
*%
*%
*%
12.63%
*%
*%
32.19%
20.93%
*%
*%
*%
*%
*%
*%
*%
34.93%
17.40%
Jiangshan Town and Blue Sky, accounted for 47.40% and 11.76% of the total current outstanding accounts receivable as of December 31, 2017,
respectively.
Blue Sky and Dalate Sino German Environmental Protection Science and Technology Co., Ltd., a wholly owned subsidiary of Hezhong Qingyuan
accounted for 12.52% and 46.96% of the Company’s total outstanding accounts receivable as of December 31, 2016, respectively.
Suppliers
For the years ended December 31, 2017, 2016 and 2015, suppliers accounting for 10% or more of the Company’s purchase were as follows:
Supplier
Dalian Huarui Heavy Industry Group Limited by Share Ltd. (“Dalian Huarui”)
Heilongjiang Binteer
For the Years Ended December 31,
2016
2017
2015
43.35%
*%
53.96%
*%
*%
45.31%
Dalian Huarui and Qingdao Longde Water Affair Engineering Co., Ltd. accounted for 50.56% and 18.44% of the total accounts payable and bank
acceptance notes to vendors as of December 31, 2017, respectively.
Dalian Huarui accounted for 21.03% of the total advances to suppliers as of December 31, 2016.
Note 19 – SEGMENTAL AND REVENUE ANALYSIS
The Company operates in a single operating segment that includes the selling of water purifying membranes and water purification equipment (products),
developing, installing and selling of water purification projects (projects) and providing water treatment service such as landfill leachate treatment and
purification service (services).
The net revenues consist of the following:
Products
Projects
Services
Net revenues
Products – related parties
Projects – related parties
Net revenues from related parties
Total revenues
All of the Company’s long-lived assets are located in the PRC.
F-26
$
$
$
For the Years Ended
December 31,
2016
8,855,284
3,129,771
-
11,985,055
294,666
-
294,666
12,279,721
$
$
$
2017
4,000,940
13,343,223
7,995,334
25,339,497
-
-
-
25,339,497
2015
25,010
3,293,823
-
3,318,833
3,590,812
68,609
3,659,421
6,978,254
Note 20 – COMMITMENTS AND CONTINGENCIES
Commitments
On February 28, 2015, the Company entered into a lease agreement with to lease an office space for Jinmo located in No. 508, A Building, No. 33,
Changjiang Road, Yantai Economic Technical Development Area, Yantai, Shandong Province. The lease started from March 1, 2015 with a term of three
years. The annual rent of $1,605 (RMB 10,000) was waived by the government of Yantai Economic Technical Development Area, Yantai, Shandong
Province, as an incentive of investment. With the disposal of Jinmo in December 2016, this was no longer an operating lease for the Company.
The Company leases facilities with expiration dates between June 2017 and December 2018. Rental expenses for the years ended December 31, 2017,
2016 and 2015 were $111,893, $83,945 and $63,326, respectively.
The Company has future minimum lease obligations as of December 31, 2017 as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Litigation
$
$
110,651
-
-
-
-
-
110,651
In November 2017, Beijing Tiandiren Environ-Tech Company Limited brought a lawsuit against Jinzheng in Beijing Intellectual Property Court in
Beijing, China, alleging that Jinzheng infringed their patent on manufacturing DTNF membrane. The plaintiff claimed total damages in the amount of
approximately $153,695 (RMB 1,000,000). The Company is vigorously defending itself against the claim and has filed an application for invalidation to
the patent review committee of the court and requested to adjourn the case. As of the filing date, the application for invalidation has been denied, and the
trial date for this case has not been set. Management believes the liability to the Company that may arise as a result of the case is not probable and
therefore no accruals have been made in the accompanying consolidated financial statements.
Note 21 – SUBSEQUENT EVENTS
On January 9, 2018, the Company’s Board of Directors approved the strategic partnership agreement between the Company and NW Blockchain Limited
(“NWBL”), a blockchain developer which is newly incorporated in 2018 and focuses on environmental protection projects. Pursuant to the agreement,
NWBL will help the Company identify and develop potential customers with blockchain technology. As of the filing date, NWBL had no activities and
no transactions occurred under the strategic partnership agreement.
In April 2018, the Company received proceeds of a loan from Qingdao Metro Leasing Co., Ltd. in the amount of approximately $4,611,000 (RMB
30,000,000). The loan bears a nominal interest rate of 6.00% per annum and is due in 36 months. The loan is guaranteed by Yuebiao Li, his wife, Zhuo
Zhang and her husband and pledged by the Company’s equipment in the original cost of approximately $6,629,000 (RMB 43,131,575). The Company
paid security deposit of approximately $461,000 (RMB 3,000,000) and debt issuance costs of approximately $277,000 (RMB 1,800,000) in cash.
F-27
No: 0160600208-2017NIAN (KAIFA) ZI00132HAO
Exhibit 4.12
Working Capital Loan Contract
(2016 Version)
Important Notice: This Contract is entered into by the Parties in accordance with laws based on equality and free will, and the terms and conditions of this
Contract fully reflect the genuine intention of the Parties hereto. In order to protect legal rights and interests of the Borrower, the Lender hereby draws the
Borrower's special attention to the terms and conditions of this Contract in relation to each Party's rights and obligations, in particular those in bold.
Lender: Industrial and Commercial Bank of China Limited, Yantai Development Zone Branch
Person in Charge: XIAOYAN LIU
Address: No.6 Changjiang Rd, Development Zone, Yantai Postal Code: 264006
Borrower: Yantai Jinzheng Eco-Technology Co., Ltd.
Legal Representative: YUEBIAO LI Contact Person: XIAOYING CHEN Phone: 18660587871
Address: Ruida Rd, Development Zone, Laishan District, Yantai Postal Code: 264003
Tel: 6626909 Fax: N/A E-mail: N/A
[Borrow please accurately and completely fill out the above information to ensure the timely delivery of any notices and legal documents.]
Upon equal negotiations and mutual agreement, the Lender and the Borrower enter into this Contract in relation to the provision of relevant loan by
the Lender to the Borrower.
Article 1 Purpose of Loan
Part I General Conditions
The loan hereunder shall be used for the following purposes. Without written consent of the Lender, the Borrower shall not use the loan for any
purpose other than those listed below. The Lender has the right to supervise the use of the proceeds of the loan.
Purpose: Purchase raw material.
Article 2 Amount and Term of Loan
2.1 The currency and amount of the loan hereunder shall be RMB30,000,000 (in words: Say In RenMinBi Yuan Thirty Million Only) (if there is any
inconsistency between the amount in figures and the amount in words, the amount in words shall prevail.)
2.2 The term of the loan hereunder shall be 12 Months commencing from the actual withdrawal date (or if there are more than one withdrawal, the
first withdrawal date) as stated on the receipt of loan.
Article 3 Interest Rate, Interest and Fees
3.1 [Determination of Interest Rate for RMB Loans]
Interest rate for RMB loans shall be determined in accordance with Item (3) below:
(1) Fixed interest rate at __/__% per annum, which shall remain unchanged within the term of this Contract.
(2) The borrowing rate is determined by the benchmark interest rate plus the fluctuation range.
A. The interest rate shall be executed on the same day as the interest rate is determined at the same time, and shall be adjusted at the same time.
B. The borrowing rate of each withdrawal is determined and adjusted.
1
(3) The interest rate on each loan is determined by the benchmark interest rate plus a floating range, in which the benchmark interest rate is the LPR of
the one-year loan issued by the national inter-bank lending center one day before the effective date of each loan contract, with the floating range plus
70.25 base point (a base point is 0.01%). The interest rate of each withdrawal is adjusted according to Item A :
A. Adjusted on a 12-month basis. Starting at the second adjustment, the Interest Rate Determination Day is 12 months from the date of withdrawal,
and the Borrower shall adjust the interest rate one day before the Interest Rate Determination Day based on the benchmark interest rate plus a
floating range issued by the national inter-bank lending center. If the Interest Rate Determination Day does not exist in a month of adjustment,
the last of the month is the Interest Rate Determination Day. If the national inter-bank lending center does not announce the benchmark interest
rate on the day before the Interest Rate Determination Day, the benchmark interest rate announced on the last work day shall prevail, and so
forth.
B. Not adjustment throughout the loan term.
(4) Others:________________________/_______________________
3.2 [Determination of Interest Rate for Foreign Currency Loans]
Interest rate for foreign currency loans shall be determined in accordance with Item / below:
(1) Fixed interest rate at __/__% per annum, which shall remain unchanged within the term of this Contract.
(2) Floating interest rate. The loan interest rate shall be / month / (LIBOR/HIBOR) (the benchmark interest rate) plus a margin equal to / base point(s) (a
base point is equal to 0.01%). The margin shall remain unchanged within the term of this Contract. If the Borrower makes more than one withdrawal,
the loan interest rate for each withdrawal shall be calculated separately. After the Borrower makes withdrawal, the benchmark interest rate will be
adjusted in accordance with Item / below, and the loan interest for each interest period shall be calculated according to the loan interest rate as
adjusted and applicable to such interest period:
A. The benchmark interest rate will be adjusted in each interest period as applicable to such benchmark interest rate. The benchmark interest rate
applicable to each interest period subsequent to the initial period shall be determined on the same numerical date in the month of such adjustment
as the withdrawal date. If there is no same numerical date in the month of adjustment as the withdrawal date, the benchmark interest rate for such
period shall be determined on the last day of such month of adjustment;
B. The benchmark interest rate for each interest period shall be adjusted on the first day of such interest period.
(3) Others:_________/________________________________________________________
3.3 The loan interest hereunder shall accrue from the actual withdrawal date on monthly basis, and be settled every Month (month/quarter/half year).
Upon maturity of the loan, all outstanding interest shall be paid together with the principal. The daily interest rate shall be applicable annual interest
rate/360 days.
3.4 Penalty interest will be imposed in addition to the loan interest rate hereunder at 30 % on any overdue amount (overdue penalty interest rate), or
at 50 % on any amount that is used for any purpose other than those set out hereunder (misappropriation penalty interest rate).
2
3.5 In addition to the loan interest, the Borrower shall also pay to the Lender the commitment fee, which shall be the difference between the amount
of the loan under Article 2 above and the amount for which the Borrower has made withdrawal (the daily average balance during the period for which
such commitment fee is paid (the Fee Period) multiplied by a rate of __/___‰ per annum, and shall be paid in accordance with Item _/___ below.
(1) the commitment fee shall be paid to the Lender in one lump sum upon the expiry date of the Fee Period;
(2) the commitment fee shall be paid to the Lender in installments on 20th day of / (each month/the last month of each quarter/the last month of each
half-year), from the effectiveness date of this Contract until the expiration date of the Fee Period.
The Fee Period means, in case of a revolving loan, the period within which the revolving facility may be used, or in case of a non-revolving loan, the
period from the date of this Contract to the date of the last withdrawal as agreed under Article 4.
If the commitment fee is to be paid in installments and the Borrower fails to promptly pay any installment of the commitment fee, then the
Lender may cease to advance the loan, or cancel all or part of the amount for which the Borrower has not made withdrawal.
Article 4 Withdrawal
4.1 The Borrower shall make withdrawal according to its actual need for fund in accordance with Item (2) below:
(1) The withdrawal shall be made before__/___;
(2) The term of withdrawal shall be made in one or more times by the date of the effective date of this contract until November 30th, 2017.
(3) withdrawal as the following time
4.2 If the Borrower fails to make withdrawal as required above, the Lender may cancel all or part of the loan.
Article 5 Repayment
5.1 The Borrower shall repay the loans hereunder in accordance with Item (1) below:
(1) The Borrower shall fully repay the loan in one lump sum upon its maturity.
(2) The Borrower shall repay the loan in installments according to the following schedule (if there is not enough space below, please state the repayment
schedule on a separate page):
Time of Repayment
Amount of Repayment
5.2 If the loan hereunder falls in any of the following events, the Borrower shall immediately repay the loan upon receipt of relevant fund, without
any compensation to be paid by the Borrower for prepayment caused thereby:
/______________________________________________________________________________
5.3 Except for the event under Article 5.2 above, if the Borrower prepays any amount of the loan hereunder, the Borrower shall pay a prepayment fee
as calculate below: prepayment of the loan X the left terms of loan X __/___‰, the remaining repayment is less than one month, calculate on a monthly
basis.
Article 6 Special Provisions in Relation to Revolving Loans (optional clause: this article is ☐ applicable/ not applicable)
6.1 The loan hereunder is provided on a revolving basis. The amount and the term of the loan as set out in Article 2 above is the limit of the revolving
credit line and the term to use such revolving credit line, respectively. The term to use the revolving credit line shall commence on the date when this
Contract takes effect.
6.2 The RMB revolving loan is determined by the benchmark lending rate announced by the people's bank of China.
3
Article 7 Security
If the security for the loan hereunder is a security with a maximum secured amount, the relevant security contract (with the maximum secured amount) is
as follows:
Name of the security contract: ___________/__________ (No.:_______/__________)
Security Provider: ___/___
Article 8 Financial Covenants (optional clause: this article is ☐applicable/not applicable)
Within the term of this Contract, the Borrower shall comply with the following covenants in relation to financial indicators:
___________ / _________________________________________________
Article 9 Dispute Resolution
All disputes under this Contract shall be solved in accordance with Item (2) below:
(1) Such dispute shall be submitted to _______ /______Arbitration Commission for arbitration at ___/ ________(place of arbitration) in accordance with
the arbitration rules of such commission in force upon submission of arbitration application. The arbitration award shall be final and binding upon
both parties.
(2) Such dispute shall be submitted to the jurisdiction of the competent court of place where the Lender is located.
Article 10 Miscellaneous
10.1 This Contract is made in TWO copies, with each of the Borrower, the Lender holding ONE copy, and has equal legal effect.
10.2 The following appendices and other appendices as confirmed by both parties shall constitute integral part of this Contract and have equal legal
effect as this Contract:
Appendix 1: Form of Withdrawal Notice
Appendix 2: Consignment agreement
Article 11 Other Matters Agreed by the Parties
/
Article 1 Interest Rate and Interest
Part II Particular Conditions
1.1 In foreign currency borrowing, LIBOR is two banking days before the date of withdrawal or adjustment of the benchmark interest rate.
1.2 If the loan hereunder adopts a floating interest rate, the interest rate will continue to be adjusted in accordance with the original adjustment rules
after such loan is overdue.
4
1.3 If interest is settled on a monthly basis, the settlement date shall be 20th day of each month; if interest is settled on a quarterly basis, the
settlement date shall be 20th day of the last month of each quarter; and if interest is settled on a half-year basis, the settlement date shall be 20 June and 20
December of each year.
1.4 The first interest period shall commence from the actual withdrawal date to the first interest settlement date; the last interest period shall
commence from the day immediately following the end of the preceding interest period to the final repayment date; and each of the other interest period
shall commence from the day immediately following the end of the preceding interest period to the next interest settlement date.
1.5 Loan Interest= principal X day rate X actual days.
1.6 If the people's bank of China decides to adjust the lending rate, it shall handle it in accordance with the relevant provisions of the people's bank of
China, and the lender shall not notify the borrower separately.
1.7 When signing the contract to determine borrowing rates in accordance with the relevant benchmark lending rate published by the people's bank of
China or the national interbank funding center released a certain proportion, base lending rate down
Article 2 Advance and Payment of Loan
2.1 The Lender has no obligation to advance any loan to the Borrower until all following conditions have been satisfied by the Borrower or waived
by the Lender:
(1) Except for unsecured loans, the Borrower has provided security as required by the Lender and completed relevant formalities for provision of such
security;
(2) There is no default event occurring under this Contract or any other contract between the Borrower and the Lender;
(3) The purpose of loan as stated in the supporting documents provided by the Borrower is consistent with the purpose as agreed hereunder;
(4) other materials required by the Lender have been submitted to the Lender.
2.2 All written documents provided by the Borrower to the Lender for withdrawal shall be originals. If no original is available, the Borrower may,
upon consent of the Lender, provide photocopies affixed with the Borrower's company seal.
2.3 When applying for withdrawal, the Borrower shall submit a withdrawal notice to the Lender at least 5 bank business days prior to the proposed
withdrawal date. Once submitted, a withdrawal notice will be irrevocable unless otherwise agreed by the Lender in writing.
2.4 After all conditions precedent to withdrawal have been satisfied by the Borrower or waived by the Lender, the Lender will remit the loan into a
designated account of the Borrower. Such remittance shall be deemed as advance of the loan by the Lender to the Borrower in accordance with this
Contract.
2.5 In accordance with relevant regulatory requirement and management requirement of the Lender, a loan exceeding certain value or meeting certain
other conditions shall be subject to the entrusted payment arrangement, where the Lender will, upon and in accordance with withdrawal request and
payment entrustment issued by the Borrower, pay the proceeds of the loan to relevant payees for the purpose as agreed under this Contract. For this
purpose, the Borrower shall enter into an entrusted payment agreement with the Lender, which shall be attached hereto as an appendix, and shall open or
designate a dedicated account with the Lender for such entrusted payment.
5
Article 3 Repayment
3.1 The Borrower shall repay the principal of and pay the interest on the loan hereunder and other amount payable in accordance with the amount and
schedule as required under this Contract. The Borrower shall, on the day that is three bank business day prior to the repayment date and each interest
settlement date, deposit into a repayment account opened by the Borrower with the Lender sufficient fund to repay the principal, interest and other
amount to be paid on such repayment date or interest settlement date. The Lender may transfer an amount equal to such principal, interest and other
amount payable out of such account on such repayment date or interest settlement date without further instruction from the Borrower, or require the
Borrower to cooperate in completing relevant formalities for such transfer. If the balance of the repayment account is not sufficient to pay all amounts to
be paid by the Borrower, the Lender may decide the priority sequence of each item to be settled.
3.2 If the Borrower applies for prepayment of all or part of the loan, it shall submit a written application to the Lender for its approval 10 bank
business days prior to such prepayment, and pay to the Lender relevant compensation as agreed hereunder.
3.3 If the Lender approves any prepayment, the Borrower shall fully pay on the prepayment date all principal, interest and other amounts due and
payable as of such prepayment date hereunder.
3.4 The Lender may require the Borrower to early repay any loan based on the Borrower's collection of receivables.
3.5 The applicable interest rate grade (based on term of loan) will not change if the actual term of loan is shortened due to any prepayment by the
Borrower or early repayment as required by the Lender in accordance with this Contract.
Article 4 Revolving loan
4.1 If the loan hereunder is provided on a revolving basis, the aggregate amount of outstanding loans taken by the Borrower at any time within the
term to use the revolving credit line may not exceed the amount of the revolving credit line. The term of each withdrawal made by the Borrower shall
commence from the actual withdrawal date to the agreed repayment date, each as stated on relevant receipt of loan. No withdrawal may have a repayment
date that is beyond the term to use the revolving credit line.
4.2 If the loan hereunder is provided on a revolving basis, and the Borrower fails to make any withdrawal within three consecutive months from the
date of this Contract, the Lender may cancel the revolving credit line.
Article 5 Security
5.1 Except for unsecured loans, the Borrower shall provide legal and effective security acceptable to the Lender for the performance of its obligations
hereunder. A security contract will be entered into separately.
5.2 The Borrower shall promptly notify the Lender of any damage, depreciation, title dispute, seizure or attachment of the collateral hereunder, or
unauthorized disposal of the collateral by the mortgagor, or any adverse change to the guarantor's financial condition, or any other adverse change to the
claims of the Lender, and provide other security that is acceptable to the Lender.
6
5.3 The lender shall have the right to re-evaluate the guaranty value and guarantee ability of the guarantor on a regular or irregular basis.
5.4 Where the loan hereunder is secured by a pledge over accounts receivable, the Lender may declare accelerated maturity of the loan and require
the Borrower to immediately repay all or part of the principal and pay the interest of the loan, or provide additional legal, effective and sufficient security
acceptable to the Lender, if any of the following events occurs within the term of this Contract:
(1) The bad debt ratio in relation to accounts receivable by the pledgor from the payer of such accounts receivable increases for two consecutive months;
(2) the accounts receivable that are due but not recovered by the pledgor from the payer of such accounts receivable represent at least 5% of the total
outstanding accounts receivable to be paid by such payer to the pledge;
(3) Any trade dispute (including without limitation dispute over quality, technology or service) or debt dispute arises between the pledgor of the accounts
receivable and relevant payer or other third party, which may prevent the accounts receivable from being settled when they become due.
Article 6 Account management
6.1 The Borrower shall designate a special collection account with the Lender, which will be used to collect relevant sales revenue or fund to be used
to repay the loan. If any sales revenue is settled by non-cash method, the Borrower shall ensure that the proceeds of such revenue will be promptly
transferred into the special collection account when it receives the same.
6.2 The Lender may supervise on the special collection account, including without limitation monitoring and supervising income and expenditure of
such account, and the Borrower shall cooperate with the Lender in such supervision. If requested by the Lender, the Borrower shall enter into an account
supervision agreement with the Lender.
Article 7 Representations and Warranties
The Borrower makes the following representations and warranties to the Lender, and these representations and warranties will remain valid and effective
within the term of this Contract:
7.1 It is eligible to act as a borrower hereunder, and has all qualifications and capacity to enter into and perform this Contract.
7.2 It has obtained all necessary authorizations or approvals to enter into this Contract. Its execution and performance of this Contract does not
violate its articles of association or any applicable laws or regulations, or conflict with any of its obligations under other contracts.
7.3 Its other debts have been repaid when they become due and it has not committed any malicious default in repaying any principal or interest of
bank loan.
7.4 It has a well-established organizational structure and financial management system. It has not committed any material violation of regulations or
disciplines during its production and operation in the past one year. Its current senior management has no material negative record.
7.5 All documents and information provided by the Borrower to the Lender are true, accurate, complete and effective and do not contain any false
record, gross omission or misleading statement.
7.6 The financial and accounting reports provided by the Borrower to the Lender are prepared in accordance with the general accepted accounting
principle of, Hong Kong Financial Reporting Standards, and give true, fair and complete presentation of the operation and indebtedness status of the
Borrower. The financial condition of the Borrower had no material adverse change since the end date of its latest financial and accounting reports.
7.7 It has not concealed from the Lender any litigation, arbitration or claim involving the Borrower.
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Article 8 Undertakings of the Borrower
8.1 The Borrower undertakes to draw down and use the loan in accordance with the schedule and purpose as agreed hereunder. The Borrower shall
not use the proceeds of the loan hereunder for investment in fixed assets or equity, or for investment in securities or futures market, or any other purpose
prohibited or restricted by applicable laws and regulations.
8.2 The Borrower undertakes to settle principal, interest and any other amount payable in relation to the loan hereunder in accordance with this
Contract.
8.3 The Borrower undertakes to accept and actively cooperate with the Lender's check and supervision on use of the proceeds of the loan (including
purpose of the loan) including account analysis, voucher verification and on-site investigation, and to regularly summarize and report information on the
use of proceeds of the loan as requested by the Lender.
8.4 The Borrower undertakes to accept credit check by the Lender, to provide financial documents including balance sheets and income statements
and other documents that reflect the Borrower's ability to repay its debts, as requested by the Lenders, and to actively assist and cooperate with the Lender
in investigating, understanding and supervising its production, operation and financial conditions.
8.5 The Borrower undertakes not to distribute any dividend or profit in any form before full settlement of principal, interest and other amount payable
in relation to the loan hereunder.
8.6 The Borrower undertakes to obtain prior written consent of the Lender or make appropriate arrangements in relation to the realization of the
Lender's claims to the Lender's satisfaction, before it carries out any merger, division, decrease of capital, equity change, transfer of material assets and
creditor's rights, material external investment, material increase of debt financing and other action that may cause an adverse impact on the Lender's rights
and interests.
8.7 The Borrower undertakes to promptly notify the Lender upon occurrence of any of the following events:
(1) any change to its articles of association, business scope, registered capital or legal representative;
(2) its winding-up, dissolution, liquidation, suspension of business, revocation or cancellation of its business license, or application (or be applied for) for
bankruptcy;
(3) it is or may be involved in any material economic dispute, litigation or arbitration, or its property is subject to seizure, attachment or supervision in
accordance with applicable laws;
(4) any of its shareholders, directors or current senior management personnel is suspected of major crime or involved in any material economic dispute.
8.8 The Borrower undertakes to disclose its related party relationship and related transaction to the Lender in a prompt, complete and accurate
manner.
8.9 The Borrower undertakes to promptly confirm receipt of all notices sent by the Lender by post or any other means.
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8.10 The Borrower undertakes not to dispose of its own assets in a way that will reduce its ability to repay its debts. The Borrower undertakes not to
provide security to the benefit of any third party in a way that will harm the Lender's rights and interests.
8.11 If the loan hereunder is an unsecured loan, the Borrower undertakes to regularly make complete, true and accurate disclosure to the Lender in
relation to all securities provided by the Borrower for others, and enter into an account supervision agreement as requested by the Lender. If any provision
of security may affect its ability to perform its obligations hereunder, the Borrower shall obtain written consent of the Lender on such provision of
security.
8.12 The Borrower undertakes to bear the expenses incurred by the Lender for realization of its claim hereunder, including without limitation legal
fee, appraisal fee and auction fee.
8.13 The debt hereunder is senior to the debts owed by the Borrower to its shareholders, and is not subordinated to similar debts owed by the
Borrower to other creditors.
8.14 The Borrower undertakes to reinforce the management of environmental and social risks, and agrees to accept the Lender's supervision and
inspection in this regard. If requested by the Lender, the Borrower shall provide the Lender with relevant environmental and social risk report.
Article 9 Undertakings of the Lender
9.1 The Lender undertakes to advance the loan to the Borrower in accordance with this Contract.
9.2 The Lender undertakes to keep non-public materials and information provided by the Borrower confidential, unless otherwise required by
applicable laws and regulations or agreed hereunder.
Article 10 Default
10.1 The Borrower will be in default upon occurrence of any of the following events:
(1) The Borrower fails to repay any principal, interest or other amount payable in relation to the loan hereunder in accordance with this Contract, or fails
to perform any other obligations hereunder, or breaches any of its representations, warranties or undertakings hereunder;
(2) The Borrower fails to provide other security acceptable to the Lender when the security provided hereunder suffers any change that is adverse to the
claim of the Lender;
(3) the Borrower fails to settle any other debt when it becomes due (including due to accelerated maturity declared by the creditor), or is in default or
breach of any of its obligations under other agreements, which has affected or may affect performance of its obligations hereunder;
(4) the Borrower's ability to make profit, repay debts or operate its business, or its financial indicators such as cash flow do not comply with agreed
standard or suffer deterioration, which has affected or may affect performance of its obligations hereunder;
(5) the Borrower's equity structure, production, operation or external investment suffers any material adverse change, which has affected or may affect
performance of its obligations hereunder;
(6) the Borrower is or may be involved in any material economic dispute, litigation or arbitration, or its property is subject to attachment, seizure or
enforcement, or the Borrower is investigated or punished by any competent judicial or administrative authority in accordance with laws, or any media
report that the Borrower has violated relevant regulations or policies of the State, which has affected or may affect performance of its obligations
hereunder;
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(7) there is any abnormal change or missing of major individual investor or key management personnel of the Borrower, or any competent judicial
authority has launched investigation on or restricted right of freedom of such investor or personnel in accordance with laws, which has affected or
may affect performance of the Borrower's obligations hereunder;
(8) the Borrower obtains fund or credit facility from the Lender by using false contracts between the Borrower and its related party or transactions that
do not actually exist, or intentionally uses related transactions to evade from or invalidate the Lender's claim;
(9) the Borrower is or may be under winding-up, dissolution, liquidation, suspension of business, or its business license has been or may be revoked or
cancelled, or it has applied or been applied, or may apply or be applied, for bankruptcy;
(10) there is any liability accident or major environmental and social risk event caused by the Borrower's violation of applicable laws and regulations,
regulatory rules or industry standard in relation to food safety, production safety, environmental protection or other environmental and social risk
management, which has affected or may affect performance of its obligations hereunder;
(11) where the loan hereunder is an unsecured loan, the Borrower's credit rating, profitability, asset liability ratio, net cash flow in operation activities, etc.
do not comply with the Lender's requirement on grant of unsecured loans, or the Borrower creates mortgage or pledge over its effective operation
assets or provides guarantee to the benefit of others without written consent of the Lender, which has affected or may affect performance of the
Borrower's obligations hereunder;
(12) other events that may cause adverse impact on realization of the Lender's claim hereunder.
10.2 If the Borrower is in default, the Lender may take any one or more of the following steps:
(1) the Lender may require the Borrower to remedy its default within a designated period;
(2) the Lender may cease to advance the loans and other amounts to the Borrower under this Contract or any other contract between the Lender and the
Borrower, and cancel all or part of the loan or other amount for which the Borrower has not made withdrawal;
(3) the Lender may declare immediate maturity of all outstanding loans and other amounts under this Contract or any other contract between the Lender
and the Borrower, and require immediate repayment of such loans and amounts;
(4) The Lender shall be entitled to claim for the portion or the entirety of the security amount against the Guarantor herein without any further consent by
the Borrower;
(5) the Lender may require the Borrower to compensate the Lender against all losses caused by such default of the Borrower;
10.3 If the Borrower fails to repay any loan when it becomes due (including due to accelerated maturity as declared by the Lender), the Lender may
impose penalty interest on the Borrower at the overdue penalty interest rate as agreed hereunder from the day immediately following the due date.
Compound interest will accrue at the overdue penalty interest rate on any interest that the Borrower fails to pay when it becomes due.
10.4 If the Borrower fails to use the loan for the purpose as agreed hereunder, the Lender may impose penalty interest on the misappropriated part of
the loan at the misappropriation penalty interest rate as agreed hereunder from the date of misappropriation. When the loan is being misappropriated,
compound interest will accrue at the misappropriation penalty interest rate on any interest that the Borrower fails to pay when it becomes due.
10
10.5 If both of the penalty interest rates under Articles 10.3 and 10.4 are applicable to the Borrower, the higher of the two interest rates will apply.
The two types of penalty interest may not be applied at the same time.
10.6 The Lender may make a public announcement in media to demand repayment if the Borrower fails to repay any principal, interest (including
penalty interest and compound interest) or any other amount payable as scheduled.
10.7 If the control relationship between the Borrower and its related party has changed, or any related party of the Borrower is in any event under
Articles 10.1 (excluding Articles 10.1(1) and (2)), which has affected or may affect performance of the Borrower's obligations hereunder, the Lender may
take all steps as set out under this Contract.
Article 11 Deduction and Setoff
11.1 If the Borrower fails to repay any debt due hereunder (including due to accelerated maturity declared by the Lender) in accordance with this
Contract, the Lender may deduct relevant amount from all RMB and foreign exchange accounts opened by the Borrower with the Lender or any other
branch office of Industrial and Commercial Bank of China to set off such debt, until all debts of the Borrower hereunder are fully settled.
11.2 If the currency of deducted amount is different from that of the loan hereunder, the amount will be converted in accordance with applicable
exchange rate published by the Lender on the date of such deduction. The Borrower shall bear all interest and other expenses incurred between the
deduction date and the actual settlement date (i.e. the date when the debts hereunder are actually settled after the Lender converts the deducted amount
into the currency of the loan hereunder in accordance with applicable State policies on administration of foreign exchange), as well as the difference
caused by fluctuation of exchange rate during such period.
11.3 If the amount deducted by the Lender is insufficient to repay all debts owed by the Borrower, the Lender may decide the priority sequence of
each item to be settled.
Article 12 Transfer of Rights and Obligations
12.1 The Lender may transfer all or part of its rights hereunder to a third party, without consent of the Borrower. The Borrower may not transfer any
of its rights or obligations hereunder without written consent of the Lender.
12.2 The Borrower acknowledges that the Lender or Industrial and Commercial Bank of China Limited (ICBC) may, based on operation and
management requirements, authorize or appoint another branch office of ICBC to perform the rights and obligations hereunder, or transfer the loan
hereunder to another branch office of ICBC. Such transfer by the Lender does not require further consent of the Borrower. The branch office of ICBC that
is the transferee of the rights and obligations of the Lender hereunder may exercise all rights hereunder, and may in its own name initiate litigation or
arbitration or apply for enforcement in relation to the dispute hereunder.
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Article 13 Effectiveness, Amendment and Termination
13.1 This Contract shall take effect as of the date hereof, and end upon the date when all of the Borrower's obligations hereunder are fully performed.
13.2 Any amendment to this Contract shall be agreed by the Parties and made in writing. Amended clauses or an amendment agreement shall
constitute an integral part of this Contract and have equal legal effect as this Contract. The rest terms of this Contract which are not amended shall remain
effective. The original terms of this Contract which are to be amended shall remain effective until the relevant amendments take effect.
13.3 Amendments to or termination of this Contract shall not prejudice each Party's right to claim compensation for loss. The dispute resolution
clause hereof shall survive termination of this Contract.
Article 14 Governing Law and Dispute Resolution
The execution, validity, interpretation, performance and dispute resolution of this Contract shall be governed by the PRC law. All disputes and
controversies arising from or in connection with this Contract shall be solved by the Parties through consultations, failing which, be solved by the means
agreed hereunder.
Article 15 Confirmation of address of litigation and arbitration documents
15.1 The borrower confirms that the address listed on the first page of this contract is the address for the dispute notifications.
15.2 The borrower agrees that the arbitration institution or the court may use the fax or E-mail recorded in the first page of this contract to serve the
arbitration documents, except the judgment, the written order and the conciliation statement.
15.3 The above service agreement shall be applicable to the first, second and final stages of the arbitration and proceedings.
15.4 The borrower shall ensure the true validity of the information such as the address, contact, fax, E-mail and other information recorded in the
contract.
Article 16 Entire Agreement
Part I (General Provisions) and Part II (Specific Provisions) of this Contract shall constitute a complete working capital loan contract, and the same term
shall have the same meaning in both parts. Both parts above are applicable to the loan granted to the Borrower hereunder.
Article 17 Notices
17.1 All notices hereunder shall be sent in writing. Unless otherwise agreed, the address of each Party as stated in this Contract will be its address for
communication and contact. If the contact address or other contact information of a Party changes, such Party shall promptly notify the other Party of
such change in writing.
17.2 If either Party hereto refuses to confirm receipt of a notice or a notice is otherwise unable to be delivered, the Party sending such notice may
serve such notice by means of notarization or public announcement.
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Article 18 Special provisions on VAT
18.1 The interest and expenses paid by the borrower to the lender under this contract are tax-inclusive.
18.2 If the borrower asks the lender to issue the VAT invoice, it should register its information with the lender first, including the full name of the
lender, taxpayer identification number or social security code, address, phone number, bank name and account. The borrower shall ensure the truth,
accuracy and completeness of such information, and provide the relevant supporting documents to the lender. The lender shall announce the relevant
requirements through its branch or website.
18.3 If the borrower receives the VAT invoice on its own, it shall provide the lender with a power of attorney for the seal.
18.4 The lender shall have the right to delay the issuing of invoices due to such force majeure as natural disasters or government ACTS.
18.5 The VAT invoice is lost or damaged by the borrower; the lender is not responsible for compensating the borrower for the relevant economic
losses.
18.6 When a Red-Letter VAT invoice is needed due to circumstances such as any sales return, suspension of taxed services, mistakes in VAT
invoices, which do not qualify for invalidation of the VAT invoice that was already issued, pursuant to the relevant laws, regulations and other
administrative documents, the borrower shall submit the information required for the Issuance of Red-Letter VAT Invoice to tax authorities; after the
review of the tax authority, the lender will issue the Red-Letter VAT invoice upon the notice of the tax authority.
18.7 During the performance of the contract, in case of the national adjustment of tax rates, the lender has the right to adjust the agreed price of this
Contract based upon the national adjustment of tax rates.
Article 19 Miscellaneous
19.1 Failure to exercise, partial exercise or delay in exercise by the Lender of any of its rights hereunder will not constitute waiver of or amendment
to such right or any other right, nor will it affect the Lender's further exercise of such right or any other right.
19.2 Invalidity or unenforceability of any provision hereof will not affect validity or enforceability of any other provision hereof or validity of the
whole Contract.
19.3 If so required by applicable laws, regulations, or other financial regulators, the Lender may provide the information related to this Contract and
other information related to the Borrower to the credit information database of the People's Bank of China and other countries or other credit database
created in accordance with laws for duly qualified institutions or individuals to check or use. The Lender may also obtain information related to the
Borrower by using the credit information basic database of the People's Bank of China or other credit database created in accordance with laws for
purpose of execution and performance of this Contract.
19.4 The terms used in this Contract including "related party", "related party relationship", "related transaction", "major individual investor" and "key
management personnel" shall have the meaning given to them in the Accounting Standard for Business Enterprises No. 36—Disclosure of Related Parties
(Cai Kuai [2006] No. 3) issued by the Ministry of Finance of the People's Republic of China and its amendments.
19.5 The environmental and social risks referred to herein means any harm that may be caused by the Borrower or its material affiliates to the
environment and society during their construction, production and operation activities, and related risks, including the environmental and social problems
in relation to energy consumption, pollution, land, health, safety, relocation and settlement of residents, ecological protection and climate change.
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19.6 The documents and vouchers prepared and retained by the Lender in relation to the loan hereunder in accordance with its business practice shall
constitute valid proof of debt relationship between the Borrower and the Lender, and shall be binding upon the Borrower.
19.7 In this Contract, (1) any reference to this Contract shall include all amendments and supplements to this Contract; (2) the headings are for
reference only, and do not constitute any interpretation of this Contract, or restriction on contents or scope of provisions under such headings; and (3) if a
withdrawal date or repayment date is not a bank business day, it shall be postponed to the immediate following bank business day.
Both Parties confirm: The Parties of this Loan have fully agreed on all the terms and conditions of this Contract. The Lender has reminded the
Borrower to pay attention to all the terms and conditions regarding the Parties’ rights and responsibilities with full and accurate understandings, and
explained the relevant provisions to the Borrower upon his/her request. The Borrower has carefully read and fully understood all the terms and conditions
of this Contract, including Part I. General Conditions and Part II. Particular Conditions. Both Parties have agreed on all the terms and conditions of this
Contract with no objections.
Lender (Seal): Industrial and Commercial Bank of China Limited
Yantai Development Zone Branch
Legal Representative/Authorized Agent:
/s/ XIAOYAN REN
Borrower (Seal): Yantai Jinzheng Eco-Technology Co., Ltd.
Legal Representative/Authorized Agent:
/s/ YUEBIAO LI
This page is the signature page of Working Capital Loan Contract between our Bank and Yantai Jinzheng Eco-Technology Co., Ltd.
Date of Execution: September 27, 2017
14
Exhibit 12.1
I, Yuebiao Li Chief Executive Officer of Newater Technology, Inc. (the “Company”), certify that:
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of the Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the Company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Date: April 30, 2018
By: /s/ Yuebiao Li
Name: Yuebiao Li
Title: Chief Executive Officer
Exhibit 12.2
I, Zhuo Zhang Chief Financial Officer of Newater Technology, Inc. (the “Company”), certify that:
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of the Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the Company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal
control over financial reporting.
Date: April 30, 2018
By: /s/ Zhuo Zhang
Name: Zhuo Zhang
Title: Chief Financial Officer
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
I, Yuebiao Li, Chief Executive Officer of Newater Technology, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
● the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2017 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
● the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company at
the dates and for the periods indicated.
Date: April 30, 2018
By: /s/ Yuebiao Li
Name: Yuebiao Li
Title: Chief Executive Officer
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
I, Zhuo Zhang, Chief Financial Officer of Newater Technology, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
● the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2017 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
● the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company at
the dates and for the periods indicated.
Date: April 30, 2018
By: /s/ Zhuo Zhang
Name: Zhuo Zhang
Title: Chief Financial Officer