SHARING ECONOMY INTERNATIONAL INC. - Annual Report: 2017 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2017

or

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

For the transition period from ______________ to ______________

Commission file number: 001-34591

Securities registered under Section 12(b) of the Act: common stock, par value $0.001 per share

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

Indicate by check whether the issuer: (1) 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

If an emerging growth company,  indicate  by  check mark if  the registrant  has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided  pursuant  to Section  7(a)(2)(B) of  the Securities Act .  ☐ 

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Approximately $1,394,396 on June 30, 2017.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 4,445,709 shares of common stock are outstanding as of April 10, 2018.

Documents Incorporated by Reference: None.

SHARING ECONOMY INTERNATIONAL INC.

FORM 10-K

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People’s Republic of China (“PRC”) and Hong Kong, our ability to implement our strategic initiatives, our access to sufficient capital, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in “Item 1A. - Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

References in this annual report to “we,” “us,” the “Company” and words of like import refer to Sharing Economy International Inc. (“Sharing Economy International”), its subsidiaries, comprising, but not limited to, Inspirit Studio Limited which operates under the name of BuddiGo (“BuddiGo”), Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) and Wuxi Huayang Heavy Industries, Co., Ltd., formerly known as Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Heavy Industries”), both of which are variable interest entities under contractual arrangements with us whose financial statements are consolidated with ours, unless the context specifically states or implies otherwise. Dyeing and Heavy Industries are collectively referred to as the “Huayang Companies.” At December 31, 2017 and 2016, the business formerly conducted by Heavy Industries is treated as a discontinued operation. For list of subsidiaries, please refer to the section headed “Organization”.

Our reporting currency is the United States dollar. Our business is conducted by our subsidiaries and variable interest entities in China, using RMB, the currency of China, and our subsidiaries in Hong Kong use the Hong Kong dollar, and our consolidated financial statements are presented in United States dollars. In this annual report, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, and based on the exchange rate of Hong Kong dollar (HKD) to United States dollars determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

PART I

ITEM 1. BUSINESS

Currently, we are engaged in the manufacture and sales of textile dyeing and finishing machines and sharing economy businesses.

Through December 30, 2016, we operated in the forged rolled rings and related components segment, in which we manufactured and sold precision forged rolled rings, shafts, flanges, and other forged components for the energy industry including wind power and other industries. On December 30, 2016, we sold the stock in the entity that was engaged in the forged rolled rings and related components segment. Accordingly, the forged rolled rings and related components business is reflected as discontinued operations for all periods presented.

During 2016, we manufactured and sold petroleum and chemical equipment. We referred to this business as our petroleum and chemical equipment business. Because of a significant decline in revenues from this business, we determined that we would not continue to operate in this segment and accordingly, we reflect the operations of the petroleum and chemical equipment segment as discontinued operations for all periods presented.

Through our dyeing and finishing equipment segment, we design, manufacture and distribute a line of proprietary high and low temperature dyeing and finishing machinery to the textile industry. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets.

We design and produce airflow dyeing machines, which use air instead of water. Water is used in the traditional dyeing process. We believe that our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions. The Chinese government requires textile manufacturers to phase out older machinery that does not meet the new environmental standards, which, we believe will increase the need for equipment that complies there the Chinese government standards. Although our revenue from this segment declined in 2016, in the long-term we expect to increase our revenue from this segment. Our new after-treatment drying and compacting machine is used in the final finishing of knitted material, such as cotton, and is designed to improve the softness, reduce shrinkage and ensure better dimensional stability. We developed a new garment washing machine for denim. Made of stainless steel and customized for use by Chinese jeans manufacturers, the machine is capable of stone wash, enzyme wash and other water washing techniques.

In August 2016, we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment. We believe this patent technology will allow us to develop next generation dyeing and finishing equipment that will appeal to textile manufacturers in China as well as Southeastern Asia, particularly Vietnam and Bangladesh. We have developed a few prototypes based on this patent technology and have begun taking orders in small quantities.

On December 26, 2016, Dyeing and an unrelated individual formed Wuxi Shengxin New Energy Engineering Co., Ltd. (“Shengxin”), a limited liability company organized under the laws of the PRC in which Dyeing has a 30% equity interest and the unrelated third party holds a 70% interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. At December 31, 2016, Shengxin had not yet commenced operations. During the project construction period, we will have the priority to provide components and equipment such as: solar racking and mounting systems for the projects under the same conditions as the other vendors. During 2017, Shengxin has located a number of projects and also has discussions with various local government entities and incurred minor expenses in 2017 including due diligence expenses, land survey expenses and other miscellaneous expenses related to these potential projects. However, given the decrease in the Chinese government subsidies for utility scale solar projects in 2017 as well as the high cost of solar components, Shengxin has not been able to locate any project which it believes could yield an expected leveraged internal rate of return of higher than 12%. Accordingly, Shengxin has not invested into any solar projects.

Throughout 2017, we made significant changes in the overall direction of the Company. Given the headwinds affecting our manufacturing business, we are targeting high growth opportunities and have established new business divisions to focus on the development of sharing economy platforms and related rental businesses within the company. These initiatives are still in an early stage. We did not generate significant revenues from our sharing economy business initiatives in 2017.

Reverse Split; Change in Authorized Common Stock

On February 24, 2017, we filed a certificate of change which effected a one-for-four reverse split, which became effective in the marketplace on March 20, 2017, and a reduction in our authorized common stock from 50,000,000 shares to 12,500,000 shares. All share and per share information in this Form 10-K and our consolidated financial statements have been retroactively restated to reflect this reverse split.

Organization

We are a Nevada corporation. We were incorporated in Delaware on June 24, 1987 under the name Malex, Inc. We changed our corporate name to China Wind Systems, Inc. on December 18, 2007. On June 13, 2011, we changed our corporate name to Cleantech Solutions International, Inc. On August 7, 2012, we were converted into a Nevada corporation. On January 8, 2018, Nasdaq approved our corporate name change to Sharing Economy International Inc. 

We are the sole stockholder of Fulland Limited, a Cayman Islands limited liability company organized on May 9, 2007. Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and, until December 30, 2016, Fulland owned 100% of Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind”). Green Power is and Fulland Wind was a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”).

Fulland Wind was formed on August 27, 2008. In 2009, the Company began to produce and sell forged products through Fulland Wind. Through Fulland Wind, we manufactured and sold forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power and other industries, including large-scale equipment used in the manufacturing process for the various industries. We referred to this segment of its business as the forged rolled rings and related components segment. On December 30, 2016, Fulland sold the stock of Fulland Wind and accordingly, the forged rolled rings and related components business is reflected as discontinued operations for all periods presented. As of December 31, 2017, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967) which were guaranteed by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2017, these loans had been paid in full by Fulland Wind. 

Green Power is a party to a series of contractual arrangements dated October 12, 2007 with Wuxi Huayang Heavy Industries, Co., Ltd. (“Heavy Industries”) and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) which are sometimes collectively referred to as the “Huayang Companies.” The Huayang Companies, both of which are limited liability companies organized under the laws of, and based in, the PRC, and their stockholders, who are our chief executive officer, Jianhua Wu, and his wife, Lihua Tang. Our corporate organizational structure, including the contractual arrangements with the Huayang Companies, is designed to comply with certain laws and regulations of the PRC which restrict the manner in which Chinese companies, particularly companies owned by Chinese residents, may raise funds from non-Chinese sources.

The Company's latest business initiatives are focused on targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.

The following table sets forth our relationship our subsidiaries and the variable interest entities whose financial statements are consolidated with ours.

Our executive offices are located No. 9 Yanyu Middle Road, Qianzhou Village, Huishan District, Wuxi City, Jiangsu Province, China 214181, telephone (86)51083397559. We also have a business office in Hong Kong located at Unit 315-316, 3/F, Building 12W, Phase 3, Hong Kong Science Park, Shatin, N.T., Hong Kong.

Our website is www.seii.com. Information on our website or any other website does not constitute a part of this annual report.

Contractual arrangements with the Huayang Companies and their stockholders

We have contractual arrangements with the Huayang Companies and their stockholders, who are our chief executive officer, Jianhua Wu, and his wife, Lihua Tang, pursuant to which we provide these companies with technology consulting and other general business operation services. Through these contractual arrangements, we also have the ability to substantially influence these companies’ daily operations and financial affairs, appoint their senior executives and approve all matters requiring stockholder approval. As a result of these contractual arrangements, which enable us to control the Huayang Companies, we are considered the primary beneficiary of the Huayang Companies. Accordingly, we consolidate the results, assets and liabilities of the Huayang Companies in our financial statements.  

Our relationships with the Huayang Companies and their stockholders are governed by a series of contractual arrangements between Green Power, our wholly foreign owned enterprise in the PRC, and each of the Huayang Companies, which are our operating companies in the PRC. Under PRC laws, each of Green Power, Dyeing and Heavy Industries is an independent legal person and none of them is exposed to liabilities incurred by the other parties. Other than pursuant to the contractual arrangements between Green Power and the Huayang Companies described below, generally, neither of the Huayang Companies transfers any other funds generated from its operations to the other Huayang Company. On October 12, 2007, we entered into the following contractual arrangements with each of the Huayang Companies.

Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and each of the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dye and finishing machines, electrical equipment and related products. Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing its services under the agreement, or derived from the provision of the services. The Huayang Companies shall pay a quarterly consulting service fees to Green Power that is equal to all of the Huayang Companies’ profits for such quarter. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the agreement, with the extended term to be mutually agreed upon by the parties.

Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all stockholders of the Huayang Companies, Green Power provides guidance and instruction on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies stockholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agrees to pledge their accounts receivable and all of their assets to Green Power. Moreover, the Huayang Companies agree that without the prior consent of Green Power, the Huayang Companies will not engage in any transactions that could materially affect their respective assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of this agreement, with the extended term to be mutually agreed upon by the parties.

Equity Pledge Agreement. Under the equity pledge agreement between the Huayang Companies stockholders and Green Power, the Huayang Companies’ stockholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ stockholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies stockholders also agreed that upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies stockholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ stockholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.

Option Agreement. Under the option agreement between the Huayang Companies’ stockholders and Green Power, the Huayang Companies’ stockholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.

Our Dyeing and Finishing Business

Historically, our primary operations involved the design, manufacture and distribution of a line of proprietary high and low temperature dyeing and finishing machinery to the textile industry. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets.

The textile industry in China has been facing significant headwinds recently. Difficult economic conditions, a continuing decline in oil prices and limited availability of credit in China, presented numerous challenges for our dyeing machine business. Additionally, apparel factories and other factories have been shut down throughout the last year by China’s environmental bureau, which has been cutting electricity and gas supply to determine compliance with China’s environmental laws. In the past year, reports estimate that China has dispatched inspectors in as many as 30 provinces around the country and 80,000 factories—roughly 40 percent of the factories in China—have been fined, charged or closed because of their emissions. This has caused softer demand for our low-emission airflow dyeing machines as many of our potential customers have already upgraded to new models and the remaining potential customer base does not have the ability to make significant capital expenditures at this time. As a result, if we are to sell our products to the smaller textile manufacturers, it may be necessary for us to design and market a cheaper machine that meets the Chinese government requirements or reduce prices which would impact both revenues and gross margin.

We design, manufacture and distribute a line of proprietary high and low temperature dyeing and finishing machinery. We believe that we are one of the leading domestic Chinese manufacturers of textile dyeing machines, and our Huayang brand is nationally recognized. We currently have the capacity to manufacture and assemble approximately 600 textile-dyeing machines annually. Our state-of-the-art and automated production line enables us to manufacture our products efficiently, with lower labor and energy costs compared to traditional manufacturing methods. As part of our manufacturing process, we make corrosion-resistant stainless steel pumps and pressure vessels, which are not only critical components for our dyeing and finishing products but have other industrial applications as well.

In 1999, we received the “Advanced Enterprise for Progress in Science and Technology Award” from Wuxi City and the “Star of Brilliance Medal” from the Wuxi City Bureau of Industrial and Commercial Administration. In 2002, we were recognized as an “Advanced Enterprise for Technical Reform Input” by Qianzhou, a municipality within Wuxi City for our dyeing products.

We hold 33 Chinese patents, of which eight are described under “Intellectual Property Rights.” These patents cover an innovative production technique enabling more-effective cloth washing in dyeing machines under high temperature and pressure, the dyeing liquid mixing device, dyeing liquid atomizing device, horizontal manipulated devices, mechanical seal and atomizer of its airflow dyeing machine and cover components of the hot air circulation system of low emission air flow dyeing machines.

Our dyeing and finishing products are generally compact in design compared with alternatives on the market and feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing a wide variety of yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. In 2010, we introduced an advanced dyeing technology enabling a quick, economic and environment-friendly operation designed for optimal performance. The liquid pressure and quantity are adjusted to the respective type and quantity of fabric. The special layout of the pressure pump circuit is designed to provide constant and safe operations of the machine reducing resources wastage and enhancing performance.

We developed a high (low) temperature airflow dyeing machine. We believe that this new model of dyeing machine is efficient and cost effective and meets the requisite Chinese environmental standards. In September 2014, we received two Chinese patents which cover components of the hot air circulation system of our low emission air flow dyeing machines. We believe that the hot air circulation system helps to enhance the machines’ ability to produce higher quality textiles with a better look and feel.

We have developed a new air-fluid, dual-use dyeing machine which uses both air flow and fluid flow in the dyeing process. It allows users to customize the dyeing process according to the specific type of textile. It is equipped with a series of specialized and patented components, including nozzles, cloth wheels and cloth spreaders, which are designed to permit greater color evenness and reduce defects. It can be used on a wider range of textiles and uses 60% to 70% less water, about 30% less power and 40% to 50% less steam than traditional models of high-temperature, high-pressure dyeing machines and reduces the use of additives by about 50% while shortening dyeing time by one to two hours.

In August 2016, we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment. We believe this patent technology will allow us to develop next generation dyeing and finishing equipment that will appeal to textile manufacturers in China as well as Southeastern Asia, particularly Vietnam and Bangladesh. We have developed a few prototypes based on this patent technology and have begun taking orders in small quantities.

Our Sharing Economy Business

Beginning in the second quarter of 2017, we established new business divisions to focus on the development of sharing economy platforms and related rental businesses. We believe a true peer-to-peer sharing economy based on rentals will take significant market share in both the business and consumer markets over the next few years. 

Sharing economy business models are hosted through digital platforms that enable more precise, real-time measurement of spare capacity and have the ability to dynamically connect that capacity with those who need it. These digital platforms handle transactions that offer access over ownership through renting, lending, subscribing, reselling, swapping or donating. Consumers who use sharing economy business models are often more comfortable with transactions that involve deeper social interactions than traditional methods of exchange.

We have been exploring possible merger and acquisition opportunities that can bring to market more user-friendly platforms and convenient channels that allow people to rent what they need and make their lives easier. We are currently emphasizing the following areas:

On Demand Services

The ways people work and how services are provided has been changing, and there is a growing need for short-term services and workforces in the market. In December 2017, we acquired a 51% interest in Inspirit Studio Limited, which is engaged in developing a mobile app platform which provides instant errand services in a peer to peer model. BuddiGo, is our new sharing platform that allows users to outsource daily chores and mundane tasks to “Buddies” who can spare idle time to run errands. According to iimediaResearch, the number of users participating in the peer-to-peer delivery sharing market in China has grown from 124 million in 2014 to 231 million in 2016, and experts expect it to grow to 353 million by the end of 2018. We expect to launch this service in mid-2018. We are also exploring other on-demand and referral recruitment services.

Coworking and Coliving Development

According to Small Business Labs, the number of coworking spaces globally will exceed 30,000 by 2022, with over 5.1 million people utilizing coworking spaces. We are entering this market through partnerships and affiliations with current coworking and coliving space operators, including our recent acquisition of Anyworkspace.com, an online, real-time marketplace that connects workspace providers with clients who need temporary office and meeting spaces. We are seeking additional alliances with other operators in the near future. Furthermore, the development of our item rental services within our EC Power subsidiary, will also support our coworking and coliving rental community development.

Technology Development

In January 2018, we acquired a 60% interest in 3D Discovery, an IT service provider that develops virtual tours for the real estate, hospitality and interior design industries. 3D Discovery’s space capturing and modeling technology is already used by some of Hong Kong's leading property agencies to provide their clients with a truly immersive, first-hand experience of a physical space while saving them time and money. According to Goldman Sachs, the Real Estate virtual reality ("VR") industry is predicted to reach US$2.6 billion in 2025, supported by a potential user base of over 1.4 million registered real estate agents in some of the world's largest markets. Apart from its existing profitable operations, 3D Discovery is developing a mobile app which allows users to create an interactive virtual tour of a physical space by using a mobile phone camera.

We have established both in-house engineering teams and engaged with external technology partners and advisors to develop a common underlying information and transaction platform which can be used by different sharing economy vertical applications. Our technical teams and partners include experts in blockchain, artificial intelligence, big data, digital imaging and video technologies, eCommerce and UI/UX, among others. We are working with our partners to develop SEII’s “Sharing Blocks,” a blockchain-based platform which provides functions for secured user profile information and transaction records through a “Blockchain as a Service” (BaaS) model, allowing third-party sharing economy applications to utilize and build a global consolidated and trustworthy sharing economy ecosystem.

In August 2017, we signed an agreement with ECoin Global Limited ("ECoin") for the future purchase of ECoin redemption codes with an aggregate value of $50 million for total consideration of $20 million. We plan to resell the redemption codes in the form of ECrent gift cards at global locales through reseller channels, such as convenience stores. We are working with InComm, a global pre-payment network and solution provider, to sell the redemption codes with face values of HK$100, HK$300 and HK$500 at major convenience store networks in Hong Kong and Macau with other international locations to follow.

Sharing Communities

Because the sharing economy is predicated on the trust of all participants, we believe the best way to establish sharing behaviors is within communities. We are currently engaged in exclusive discussions with ECrent Capital Holdings Limited ("ECrent"), a private company incorporated in the British Virgin Islands focused on developing and operating a global rental platform to promote sharing economy across 30 countries and regions.

Solar Farm Joint Venture

On December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin, in which Dyeing has a 30% equity interest and Mr. Xue holds a 70% interest, pursuant to an agreement dated December 23, 2016. The agreement sets forth general terms relating to the proposed business, but does not set forth specific funding obligations for either party. Dyeing has agreed to invest RMB 60,000,000 (approximately $9,200,000) and had invested RMB 59.8 million ($9,189,397 at December 31, 2017, for which it received a 30% interest, and Mr. Xue has a commitment to invest RMB 140,000,000 (approximately $21.5 million), of which Mr. Xue has contributed RMB 60,000,000 (approximately $9.2 million), for which Mr. Xue received a 70% interest in Shengxin. Shengxin’s registered capital is RMB 200 million (approximately $30.7 million). Mr. Xue has advised Dyeing that he anticipates that he will fund the remaining RMB 80,000,000 (approximately $12.2 million) of his commitment during 2018. Since Mr. Xue did not make this payment by the end of 2017, Dyeing has the right to amend the contract, and both parties may adjust each side’s equity interest to reflect the amount of capital each side has actually invested. As of December 31, 2017, no changes have been made to such contract.

Shengxin intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. During 2017, Shengxin has located a number of projects and also has discussions with various local government entities and incurred minor expenses in 2017 including due diligence expenses land survey expenses, and other miscellaneous expenses related to these potential projects. However, given the decrease in the Chinese government subsidies for utility scale solar projects in 2017 as well as the high cost of solar components, Shengxin was has not been able to locate any project which it believes could yield an expected leveraged internal rate of return of higher than 12%. Accordingly, Shengxin has not invested into any solar projects. There are no provisions for additional projects, and we cannot assure you that we would participate in any projects beyond the scope of the present agreement with Mr. Xue.

During the project construction period, we will have the priority to supply components and equipment such as: solar racking and mounting systems for the projects under the same conditions as the other vendors. However, we cannot assure you that we can develop a competitive product at a competitive price.

The solar farm industry is China is subject to significant government regulation. In order to construct and operate solar farms in China, it is necessary to obtain a permit for a specific location, to obtain leasehold rights to a significant amount of contiguous land parcels in provinces where there is sufficient sunlight for most of the year to support a solar farm and to have an agreement to connect with the local grid. The development of solar farms requires significant funding, which, if financing is not available, would have to be provided by Dyeing and Mr. Xue. There are no agreements relating to the funding obligations of either Dyeing or Mr. Xue with respect to any specific project. Shengxin anticipates that to the extent that it obtains permits for solar farms, it will form a new subsidiary for the sole purpose of obtaining the permit for a specific location and constructing the solar farm at that location. The nature of the parties’ respective investments and the respective equity interest in any solar farm project will be determined on a case-by-case basis. To the extent that Mr. Xue develops the project, he may receive an equity interest in the project greater than the percentage of his equity investment, with the specific amount being subject to mutual agreement of the parties.

Our investment in Shengxin is subject to a high degree of risk. We cannot give any assurance that Shengxin will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably or that Dyeing will have the resources to provide any funds that may be required in order to fund any solar farm projects for which Shengxin may obtain permits. There may be a significant delay between the time funds are advanced for any project and the realization of revenue or cash flow from any project.

Marketing and Distribution

Substantially all of our revenue is derived from the sale of textile dyeing and finishing machines in China. We presently sell our products in Jiangsu and Zhejiang Provinces, both regions with significant textile production, as well as in many of the coastal regions of China such as Shandong and Guangdong provinces.

We market and sell our products through our internal sales force, which is based in our facilities in Wuxi. Our marketing programs include industrial conferences, trade fairs, sales training and advertising. Our sales and marketing groups work closely with our manufacturing groups to coordinate our product development activities, product launches and ongoing demand and supply planning. We sell our products directly to many of China’s largest textile producers. However, as the large textile producers purchase equipment that complies with the Chinese regulations, they have less of a need for new equipment and many of the smaller textile producers do not have the available funding or credit facilities to enable them to purchase capital equipment such as our dyeing and finishing equipment.

Our sharing economy businesses are still in a very early stage of development. We intend to market and sell our services for these businesses primarily through online media advertising. Online marketing consists of search engine marketing, display advertisements, referral programs and affiliate marketing. We have established a business unit, EC Advertising Limited, to support these endeavors. EC Advertising will provide resources to support the marketing needs of the sharing economy businesses via partnerships and acquisitions of advertising companies.

Growth Strategies

According to China’s National Development and Reform Commission, the main focus of the country’s textile industry has shifted from gaining competitive advantages based on labor costs toward the objectives of developing scientific and technological innovation as well as brand creation.

In support of this objective, we are continuing our efforts to develop and implement next-generation low energy consumption and high heating efficiency features to our machines. The current emphasis of our efforts continues to be on increasing automation features in our existing products and implementing power line communication technology throughout our production facilities to enable our customers to reduce their use of electricity and water. However, we experienced softer demand for our low-emission airflow dyeing machines as many of our customers already upgraded to newer models and much of our remaining customer base does not have the ability to make significant capital expenditures at this time. As a result, our sales in this segment declined from $17.4 million in 2016 to $13.5 million in 2017, and we cannot assure you that we will be able to increase our sales to his market.

Given the headwinds affecting our manufacturing business, we have made the decision to focus on high growth opportunities and have added new sharing economy business units into the group. Our latest business initiatives are focused on targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.

Today, the sharing economy is in the process of disrupting and transforming numerous industries, changing both business and consumer behavior. The sharing economy redefines how resources are being provided and utilizes them in a more efficient way. According to Juniper Research, total sharing economy revenue is predicted to reach $40.2 billion by 2022. PwC UK forecasts the five most prominent sharing economy sectors – collaborative finance, peer-to-peer accommodation, peer-to-peer transportation, on-demand household services and on-demand professional services, could see a 20-fold increase to €570 billion by 2025 in European markets, up from just €28 billion today. The sharing economy is spreading across different industries and regions, creating new market behavior.

In 2017, we began studying and acquiring sharing economy platforms in different market disciplines. Following these efforts, we are now grouping our sharing economy markets in the following verticals: coworking and coliving communities, community consumer resource sharing, collaborative transportation, on-demand peer-to-peer services, and social referral recruitment.

We believe further mergers and acquisitions have the potential to grow the Company rapidly and aggressively in new market opportunities, technology, products and platforms. We will continue targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.

Competition

Because of the importance of the Chinese textile industry in the world market, our dyeing and finishing business faces competition from both domestic and foreign suppliers. However, we believe that, due to the high quality of our products, our principal competition is from suppliers based in foreign countries, including Japan, Germany, Italy and France. Domestically, our chief competitor is Fong’s National Engineering (Shenzhen) Co., Ltd., a subsidiary of Fong’s Industries Company Ltd., a Hong-Kong based conglomerate.

We believe that we can effectively compete with these companies on the basis of the quality and performance of our products, our after-sales service, and cost. We provide one year of maintenance and repair services for all of our products and based on historical experience, maintenance and repair service calls have been minimal. Moreover, we provide customers in the Jiangsu and Zhejiang Provinces, our top markets, with on-site support which is generally provided within 24 hours of receiving a request. However, many of our competitors have longer operating histories and significantly greater financial or technological resources than we do and presently enjoy greater brand recognition.

However, in trying to market our equipment to smaller textile companies, competition may be based more on price than quality, and we may not be able to price competitively without seriously eroding our margins. It may be necessary for us to develop lower price machinery to meet the price needs of the smaller textile manufacturers.

Further, as Chinese textile companies face competition from countries with a lower labor cost, the Chinese market for our equipment may decrease and we may not be able to market successfully to textile manufacturers in other countries.

The global sharing economy continues to evolve, and we face competition from technology companies, both large and small, throughout the world. The Company aims to become a pioneer in the development of sharing economy solutions. The group is developing different sharing economy applications with a common user and transaction processing engine, which will become a sharing economy ecosystem for the convenience of users as well as allowing the group to effectively share technologies and business data. Our different sharing economy solutions will have the ability to collaborate with each other, allowing us to provide one-stop combined solutions to the market. We believe the ability to leverage and collaborate between our different sharing businesses will increase our market competitiveness.

Source of Supply

In our dyeing and finishing business, stainless steel and other metals are the principal raw material for the manufacture of all of our products. We purchase stainless steel tubes from Wuxi City Zhongtian Stainless Steel Co., Ltd. and stainless steel plates from Wuxi City Fanshun Materials Co., Ltd. While we do not have long-term contracts with these suppliers, we have long-term business relationship with them, and these companies have generally met our supply requirements. For the textile machinery business, the price of steel can have more significant impact. Any significant rise in the price of or demand for stainless steel could have an adverse effect on our results of operations. Inflation has recently affected raw materials generally, and inflationary pressures could have a significant effect on our business. Other raw materials, such as stainless steel planks and transducers, are readily available from a number of suppliers on commercially reasonable terms.

In our sharing economy business, IT development resources are crucial for the near-term development of our sharing platforms. We are in the process of signing fixed man-day service contracts with our external development consultants to ensure the availability of IT development resources under a fixed pricing scheme for the near future. We will continue to expand our IT development support resources cross regionally to avoid the dependency on a single or small number of sources.

Research and Development

In our dyeing and finishing business, we incurred research and development expense in the amount of $420,000 and $304,000 related to the development and improvement of our new dyeing machinery in 2017 and 2016, respectively. We are continuing product development with respect to the new dyeing machinery.

In our sharing economy business, we have established both in-house engineering teams and engaged with external technology partners and advisors to develop a common underlying information and transaction platform which can be used by different sharing economy vertical applications. Our technical teams and partners include experts in blockchain, artificial intelligence, big data, digital imaging and video technologies, eCommerce and UI/UX, among others. Given the early stage of the sharing economy business, we did not incur any R&D expenses in 2017. We expect this to increase in 2018 as we work on building this business and the associated IT and transaction platforms.

Government Regulations

Environmental Regulations

Our manufacturing processes generate noise, waste water, gaseous and other industrial wastes, and we use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our operations. As a result, we are required to comply with all national and local regulations regarding protection of the environment. Our operations are subject to regulations promulgated by China’s Environmental Protection Administration, Jiangsu Province Environmental Protection Administration and the Wuxi City Environmental Administration. We are also subject to periodic monitoring by local environmental protection authorities in Wuxi. We have installed various types of anti-pollution equipment in our facilities to reduce, treat, and, where feasible, recycle the wastes generated in our manufacturing processes. We believe that our manufacturing facilities and equipment are in substantial compliance with all applicable environmental regulations. Based on the requirement of present law, we do not expect that any additional measures that may be required to maintain compliance will materially affect our capital expenditures, competitive position, financial position or results of operations.

The Chinese government has expressed a concern about pollution and other environmental hazards. Although we believe that we comply with current national and local government regulations, if it is determined that we are in violation of these regulations, we can be subject to financial penalties as well as the loss of our business license, in which event we would be unable to continue in business. Further, if the national or local government adopts more stringent regulations, we may incur significant costs in complying with such regulations. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations.

Our products must also comply with applicable environmental regulations, and we believe we are in material compliance with all applicable environmental laws and regulations applicable to our products.

Business Licenses

Dyeing has been issued a business license with the appropriate municipal and provincial government which specifically authorizes it to operate its business. The business license, which is subject to annual review by the issuing agency, is current as of the date of this annual report. No additional approval or license is required for the manufacturing and sale of the textile dyeing and finishing machines.

We believe our sharing economy businesses are properly licensed with the appropriate government entities. However, because BuddiGo’s business model provides inner-city peer-to-peer delivery services, we could be identified as a member of the logistics industry by the governments of some countries where we conduct business. This could trigger additional licensing requirements.

ISO Certification

Our dyeing and finishing business received the certificate to manufacture D1 and D2 levels of pressure vessels, which includes our current line of dyeing machines, from the Quality and Technical Supervision Bureau of Jiangsu Province. We received the certificate on December 7, 2007 and renewed it on December 21, 2015. This certificate expires on December 20, 2019.

Circular 106 Compliance and Approval

On May 31, 2007, the State Administration of Foreign Exchange, or SAFE, issued an official notice known as “Circular 106,” which requires the owners of any Chinese companies to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, in early September 2007, the owners of 100% of the equity in the Huayang Companies, namely Jianhua Wu and his wife, Lihua Tang, submitted their application to SAFE. On October 11, 2007, SAFE approved their application, permitting them to establish an offshore company, Fulland, as a “special purpose vehicle” for any foreign ownership and capital raising activities by the Huayang Companies. After SAFE’s approval, Mr. Wu and Ms. Tang became the majority owners of Fulland on October 11, 2007. Fulland was acquired by us in November 2007.

Draft Foreign Investment Law

On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) published a draft version of a proposed Foreign Investment Law with an explanatory note. The draft Foreign Investment Law, if and when promulgated, will replace and integrate the three existing laws over foreign investment, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Wholly Foreign-owned Enterprise Law and the Sino-foreign Cooperative Enterprise Law. The draft Foreign Investment Law was formulated with a view to opening wider to the outside, promoting and regulating foreign investment, protecting the legitimate rights and interests of foreign investors, safeguarding national security and public interests, and facilitating the healthy development of the socialist market economy. MOFCOM has requested comments from the public on the draft Law by February 17, 2015.

Some of the more significant concepts in the draft Foreign Investment Law include the following:

Actual Control

The proposed law has adopted the concept of actual control in the foreign investment area. The draft Foreign Investment Law notes that a company established in China but controlled by foreign investors shall be deemed a foreign investor while entities set up in foreign jurisdictions but controlled by Chinese investors can, in some circumstances, be deemed Chinese domestic investors. According to the draft Foreign Investment Law, “control” refers to several circumstances including the contractual control by imposing decisive influences on the operation, finance, personnel or technology of the enterprise by contract, trust or other means.

Special Administrative Measures

Most foreign investments will not need pre-approval as was previously required. It means that the Chinese market could be more open and efficient in some sectors to set up foreign invested companies. However, the draft Foreign Investment Law sets out a catalogue of special administrative measures, which is classified into a catalogue of prohibitions and a catalogue of restrictions. Foreign investors are not allowed to invest in any sector set out in the catalogue of prohibitions. Further, a catalogue of restrictions will note those sectors with restrictions imposed on foreign investors. The use of catalogue of special administrative measures represents a method of management or administration of foreign investments.

How domestic VIEs, potentially deemed to be foreign enterprises under the draft Foreign Investment Law and currently operating in sectors in the catalogue of prohibitions, will be treated is unclear.

National Security Reviews

The draft Foreign Investment Law also establishes a united foreign investment national security review system which will conduct examinations on the foreign investments that endangers or may endanger the national security.

Information Reporting System

The draft Foreign Investment Law establishes a foreign investment information reporting system. The new rules include submission of a foreign investment report (such as when setting up a company), a report of any changes of foreign investment (any adjustments of investment) and an annual report. Generally, reporting obligations arise when a foreign investor purchases not less than 10% of the stock of a domestic listed company, or less than 10% but the purchase results in a change of control of the domestic listed company.

Supervision and Inspection

The draft Foreign Investment Law establishes a mechanism for the supervision and inspection of foreign investors and foreign invested enterprises from industrial and commercial, taxation, foreign exchange, auditing and other administrative departments. The government’s eye on foreign investments and foreign investment management has shifted from the approval prior to a foreign invested company being established to the supervision and inspection after it is set up.

Intellectual Property Rights

We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. In addition to 24 other patents held by us, the eight Chinese patents, all of which relate to our dyeing products, are our principal patents. The patents were issued by the State Intellectual Property Office of the People’s Republic of China in November 2012, as to the first patent, and June 2013 as to the other five and September 2014 as to the last two.

The following table sets forth information concerning our eight principal patents.

In August 2016, we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment.

We intend to apply for more patents to protect our core technologies. We also have confidentiality and non-competition policies in place as part of our company employment guideline which is given to each employee, and we enter into nondisclosure agreements with third parties. However, we cannot assure you that we will be able to protect or enforce our intellectual property rights.

Employees

Dyeing and Finishing Business

As of April 10, 2018, we had 137 full time employees, comprised of ten executives, managers and administrative staff, three accounting staff, two quality control staff, seven marketing and salespeople, one purchasing staff, five designers, five logistic and cafeteria staff, eight factory overhead staff and 96 manufacturing staff.

Our manufacturing employees usually work in two shifts, based upon our manufacturing requirements. We may also send our engineers and technicians to our customers’ work sites to provide after-sale customer service for them.

All of these employees are members of a union, organized by the Union for Huishan District, Wuxi City, as mandated by the PRC Union Law. We have not experienced a work strike. We believe that our relations with our employees are good.

Sharing Economy Business

As of March 15, 2018, we had seven employees and forty-three consultants who are engaged with us either individually or as a business entity.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision, and you should only consider an investment in our common stock if you can afford to sustain the loss of your entire investment. You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. If any of the following risks occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

For the year ended December 31, 2017, we incurred losses from continuing operations of $12.8 million, we cannot assure you that our losses will not continue and we believe that these matters raise substantial doubt about our ability to continue as a going concern for twelve months from the issuance date of this report.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, we had a loss from continuing operations of $12,828,393 for the year ended December 31, 2017. The net cash used in operations was $409,791 for the year ended December 31, 2017. Additionally, during the year ended December 31, 2017, revenues decreased by 22.1% as compared to the year ended December 31, 2016. Management believes that these matters, among others, raise substantial doubt about our ability to continue as a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or continue to be cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining our business strategy for twelve months from the date of this report.

We may seek to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of equity and from bank loans, there is no assurance that we will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need to curtail or cease operations. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Our auditors have issued a “going concern” audit opinion.

Our independent auditors have indicated in their report on our December 31, 2017 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We incurred loss from continuing operations and revenues decreased significantly. These conditions raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance date of this report. We cannot provide assurance that we will ultimately achieve profitable operations or continue to be cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining our business strategy for twelve months from the date of this report.

We will require additional funds to expand our operations.

In view of both our decline in revenues, our loss from continuing operations for 2017 and 2016, and in connection with any expansion projects for our business, we will incur significant capital and operational expenses. We do not presently have any funding commitments other than our present credit arrangements which we do not believe are sufficient to enable us to expand our business. If we are unable to generate cash flow from operations and obtain necessary bank or other financing to pay for significant capital or operational expenses, we may be unable to finance our business, which may impair our ability to operate profitably. Because of our stock price and the worldwide economic situation, we may not be able to raise any additional funds that we require on favorable terms, if any. The failure to obtain necessary financing may impair our ability to expanse or business and remain profitable.

We rely on short term financing to fund our operations.

We have historically financed our operations through short-term bank loans, which have been refinanced upon maturity. At December 31, 2017, we had outstanding short-term bank loans of $2.1 million. We cannot assure you that we would be able to obtain alternative financing in the event that our lenders did not renew our short-term loans. Our failure to have the bank loans refinanced could materially impair our ability to operate our business.

You may suffer significant dilution if we raise additional capital.

If we need to raise additional capital to expand or continue operations, it may be necessary for us to issue additional equity or convertible debt securities. If we issue equity or convertible debt securities, our net tangible book value per share may decrease, and the percentage ownership of our current stockholders would be diluted, and any equity securities we may issue may have rights, preferences or privileges senior or more advantageous to our common stockholders.

Risks related to our Dyeing and Finishing Business

A decrease in supply or increase in cost of the materials used in our products could impair our ability to generate profitable operations.

Any restrictions on the supply or the increase in the cost of the materials used by us in manufacturing our products, especially steel, could significantly reduce our profit margins. Efforts to mitigate restrictions on the supply or price increases of materials by entering into long-term purchase agreements, by implementing productivity improvements or by passing cost increases on to our customers may not be successful. Increased competition may affect our ability to pass on to our customers’ price increases in raw materials, particularly, stainless steel, which is our principal raw material for all of our products. Our profitability depends largely on the price and continuity of supply of the materials used in the manufacture of our products, which in many instances are supplied by a limited number of sources.

Inflationary and competitive pressures may affect our ability to maintain our margins.

In recent years, raw materials, including steel, which is our principal raw material, have been subject to significant price fluctuation. The Chinese government has expressed concern about inflation in certain segments of the economy. We cannot predict the extent or effect of inflationary pressures with respect to steel and steel products. To the extent that we have to raise our prices to maintain our margins, our sales may suffer. If we are unable to raise prices, either because of competitive factors or customer resistance, our margins and net income may suffer. We cannot assure you that our business will not be impaired by inflation.

The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.

Customers use some of our products in potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. In addition, some of our products are integral to the production process for some end-users and any failure of our products could result in a suspension of operations. We cannot be certain that our products will be completely free from defects. Moreover, we do not have any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments.

If we fail to introduce enhancements to our existing products or to keep abreast of technological changes in our markets, our business and results of operations could be adversely affected.

We believe our future success depends in part on our ability to enhance our existing products and develop new products in order to continue to meet customer demands. Although we are seeking to address these requirements, our failure to introduce and develop a market for these and any other new or enhanced products on a timely and cost-competitive basis, as well as the development of processes that make our existing technologies or products obsolete, could harm our business and results of operations.

The market for our dyeing and finishing equipment is depending upon the competitiveness of the Chinese textile industry.

With consumers looking for lower prices in textile products, Chinese textile manufactures complete with manufacturers in other countries that have a lower labor cost than China. We only sell our dyeing and finishing equipment in China, and we may not be able to develop any market for our equipment outside of China. To the extent that Chinese textile companies either lose business or potential business to other countries or seek to manufacture in those countries, the market for our equipment may decline significantly.

Because we face intense competition from companies that have greater resources than we do, we may not be able to compete successfully and we may lose or be unable to gain market share.

The markets for products are intensely competitive. Many of our competitors have established more prominent market positions as well as existing relationship with potential customers, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to increase our sales. Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices, as well as securing supplies at times of shortages. Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our competitors have well-established relationships with our current and potential distributors and have extensive knowledge of our target markets. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations. Further, from time to time, we have had to adjust the prices of our products to remain competitive. Because many of the smaller textile manufactures may not have the funds or credit availability to purchase our products, unless we can develop a cheaper model we may not be able to maintain margins if we are to increase sales.

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

As our manufacturing processes generate noise, wastewater, gaseous and other industrial wastes, we are required to comply with all national and local regulations regarding protection of the environment. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our activities. Any failure by us to control the use of or to restrict adequately, the discharge of hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. We do not have insurance to cover any liability which we may incur as a result of personal injury or property damages resulting from emissions of toxic material into the environment.

Our ISO certifications expire in 2019, and our failure to maintain these certifications could impair our ability to obtain customers for our products.

Since our ISO certifications expire in 2019, we need to complete the renewal process in order to continue to maintain these certifications. The renewal process requires an inspection of our facilities by an independent inspection company. Our failure to maintain, or any delay in obtaining, a continuation of our ISO certification could impair our ability to attract business which could affect both our revenue and our gross margin.

Our products are subject to PRC regulations, which may materially adversely affect our business.

Government regulations influence the design, components or operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may restrict our ability to sell our products in the PRC. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.

The success of our businesses will depend on our ability to effectively develop and implement strategic business initiatives.

In connection with the development and implementation of our growth plans, we will incur additional operating expenses and capital expenditures. The development and implementation of these plans also requires management to divert a portion of its time from day-to-day operations. These expenses and diversions could have a significant impact on our operations and profitability, particularly if our plans for any new initiative prove to be unsuccessful. Moreover, if we are unable to implement any of our plans in a timely manner, or if those plans turn out to be ineffective or are executed improperly, our business and operating results would be adversely affected.

Failure to successfully reduce our production costs may adversely affect our financial results.

A significant portion of our strategy relies upon our ability to successfully rationalize and improve the efficiency of our operations. If we are not able to implement cost reduction measures, especially in times of either an economic downturn or inflationary pressures, or if these efforts do not generate the level of cost savings that we expect going forward or result in higher than expected costs, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

If we are unable to make necessary capital investments or respond to pricing pressures, our business may be harmed.

In order to remain competitive, we need to invest in product development, manufacturing, customer service and support, and marketing. We do not have any significant research and development activities. We may not have available sufficient financial or other resources to continue to make investments necessary to maintain our competitive position. Currently, our research and development is not significant.

Unforeseen or recurring operational problems at our facilities may cause significant lost production, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our manufacturing processes could be affected by operational problems that could impair our production capability. Our facilities contain complex and sophisticated machines that are used in our manufacturing process. Disruptions at our facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of our machines; the effect of noncompliance with material environmental requirements or permits; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, earthquakes or other catastrophic disasters; labor difficulties; or other operational problems. Any prolonged disruption in operations at our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business depends substantially on the continuing efforts of our executive officers and our ability to maintain a skilled labor force, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our executive officers, especially Mr. Jianhua Wu, our chief executive officer and the chairman of our board of directors. We do not maintain key man life insurance on any of our executive officers. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers. Our chief executive officer is a party to contractual agreements as described elsewhere in our annual report.

A substantial part of our business is conducted through Dyeing, which is owned by our chief executive officer and his wife.

In 2017, substantially all of our revenues were generated by Dyeing, which is a variable interest entity that is owned by our chief executive officer and his wife and whose financial results are included with ours because Dyeing is deemed as variable interest entity and we are the sole beneficiary of their operations. The variable interest entity relationship is derived from a series of agreements between us and our chief executive officer and his wife, as the sole stockholders of the Huayang Companies. Pursuant to these agreements, we are responsible for the operations of the Dyeing and receive the benefits of those operations. However, in the event that we have to seek to enforce these agreements, such enforcement would be sought in Chinese courts, and we cannot assure you that we will prevail or that we will be able to obtain the benefits intended by these agreements. Any inability to enforce our rights under these agreements would materially impair our operations, financial position and cash flows.

If we are unable to attract, train and retain technical and financial personnel, our business may be materially and adversely affected.

Our future success depends, to a significant extent, on our ability to attract, train and retain technical and financial personnel. Recruiting and retaining capable personnel, particularly those with expertise in our industries and in the industries to which we market, are vital to our success. There is substantial competition for qualified technical and financial personnel, and there can be no assurance that we will be able to attract or retain our technical and financial personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

We rely primarily on trade secret and contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate and we may not be able to protect our intellectual property under Chinese laws. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others and the enforcement of intellectual property rights in China may be difficult. We cannot assure you that the outcome of any litigation will be in our favor. Intellectual property litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Implementation of China’s intellectual property-related laws has historically been lacking, primarily because of ambiguities in China’s laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Although we have received patents for our new dyeing machines, we cannot assure you that these patents will provide us with protection against infringers or other parties who design around our patents.

We do not have business liability or disruption insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. We do not carry any insurance policy covering our capital assets. In accordance with customary practice in China, we do not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have a material adverse effect on our operating performance if such losses or payments are not fully insured.

Risks Related to our Equity Method Investment in Shengxin

With our investment in Shengxin, we will be dependent upon the efforts of a third party to generate income.

In December 26, 2016, we formed Shengxin with Xue Miao, an independent third party. Shengxin plans to develop, construct and maintain photovoltaic power generations projects, known as solar farms, in China. We have no experience in the development, construction or operation of solar farm and we will be relying entirely on the ability of Mr. Xue to identify, obtain rights to, develop, construct and maintain the solar farms and identify and hire the necessary key personnel and executives to conduct such business profitably, if at all. We cannot assure you that Shengxin will ever operate profitably or that we will generate any return on our investment. In the event that Shengxin does not develop a significant stream of earnings for us, it may be necessary for us to write down our investment in Shengxin.

The solar farm business is capital intensive and we may be required to make additional capital contributions.

The solar farm business is capital intensive and we may be required to make further investments in either Shengxin and in any subsidiary which Shengxin may form for a specific project. In order to construct a solar farm in China, it is necessary to obtain a permit for a specific project. Typically, the solar farm company forms a separate subsidiary to hold the permit and construct the solar farm project. Each project is separately funded, and we cannot estimate whether our initial investment will be sufficient to enable Shengxin to complete any solar farm projects. We presently do not have the funds or borrowing ability to enable us to make further investment in Shengxin. If we are required to make additional capital contributions and do not have the ability to do so, our interest in Shengxin or in any specific project may be significantly reduced.

Shengxin may not be successful in developing its solar farm project business in China.

In order to conduct the solar farm project business in China, Shengxin will need to:

In the event that Shengxin is not able to satisfy any of these conditions, it may not be able to generate income, and it may be necessary for Shengxin to suspend or terminate these operations. Further, the development of solar projects also may be adversely affected by many other factors outside of our or Shengxin’s control, such as inclement weather, acts of God, and delays in regulatory approvals or in third parties’ delivery of equipment or other materials, shortages of skilled labor. We cannot assure you that Shengxin will be able to engage in the solar farm business successfully. Shengxin’s failure to operate this business successfully will materially impair our financial condition and the results of our operations.

Delays in construction of solar farms could increase Shengxin’s costs and impair its revenue stream, which would impair our ability to generate income from our investment in Shengxin.

In the development and construction of solar farm projects, Shengxin will incur significant costs prior to completion. Any delay in completing a project would delay Shengxin’s generation of revenues as well as its recognition of revenue from the project. Delays can result from a number of factors, many of which are beyond our or Shengxin’s control, and include, but are not limited to:

Shengxin is dependent upon Mr. Xue to operate its business.

Shengxin’s business is largely dependent upon the continued efforts of Mr. Xue. Shengxin does not have an employment agreement with Mr. Xue and Mr. Xue has interests in other companies in the solar farm business. The loss of Mr. Xue or his failure or inability to devote significant time to Shengxin’s business could affect its ability to operate profitably. The loss of Mr. Xue could have a material adverse effect upon Shengxin’s ability to develop and operate its business. Shengxin’s failure to develop senior management personnel will impair Shengxin’s ability to generate revenue and operating income which could impair our overall operations and financial condition.

Because Mr. Xue has other interests in the solar farm business, he may have a conflict of interest with Shengxin.

Because Mr. Xue has an interest in Shengxin as well as other companies in the solar farm business, he may be in a position to determine whether Shengxin or another company makes a bid for a specific permit and he may have the ability to place competing bids for the same project. Further, our agreement with Mr. Xue contemplates that projects will be completed within two years. There is no agreement with respect any projects that would be developed after the two year period. We cannot assure you that Mr. Xue will continue with us regardless of whether we complete the initial projects or whether the projects are successful and generate revenue.

Changes in the PRC Government policies on solar power and industry conditions could affect Shengxin’s ability to generate business in China.

Shengxin’s ability to develop business in China is dependent upon the continuation of government policies relating to solar power and the relationship between the solar farm owner and the local utility. Any changes in the policies or practices that affect the solar power industry could make the construction and operation of a solar farm less desirable. Delays in payments from the utilities or difficulties in connecting with the grid could also make solar farms less attractive. We cannot assure you that changes in law or practices will not impair Shengxin’s ability to conduct its business.

Shengxin’s business is dependent on the continuation of government benefits.

In many areas in China, solar farms, particularly on-grid photovoltaic systems, would not be commercially viable without government subsidies or economic incentives. The cost of generating electricity from solar energy in these markets currently exceeds, and very likely will continue to exceed for the foreseeable future, the cost of generating electricity from conventional or other renewable energy sources. These subsidies and incentives have been primarily in the form of set electricity prices and performance incentive programs, to solar farm operators. To the extent that these incentives are not available, it may not be economical for Shengxin to develop and operate solar farms in these regions.

Shengxin competes with other firms for a limited number of available permits.

In China permits for solar farms are granted by the local government agency and a list of available permits is published by the agency. There is a limited number of potential customers as well as a limited number of permits available and Shengxin will compete with other firms in seeking to obtain permits. In seeking permits, Shengxin will compete with other companies, many of which have significantly greater financial resources and are better known than Shengxin. Further, many of Shengxin’s competitors may have or can develop relationships with both the government officials who issue the permits as well as the buyers of the projects. We cannot assure you that Shengxin will be able to obtain the necessary permits or enter into agreements with end users. Shengxin’s failure to obtain the permits and enter into agreements would impair its ability to generate revenue from this business.

Because of the amount of land required for a solar farm, it may be difficult to obtain the necessary land use rights, which may increase the cost of the land.

There is no private ownership of land in China, and the owner or operator of a solar farm must obtain the necessary land use rights from the applicable government agency. Solar farms require a substantial amount of land, which could be in the range of 800 to 3,500 acres, for the construction of the solar farm. It is also crucial to have a land parcel close to the grid connection point in order both to control the cost for the construction of transmission line and to avoid the electricity transmission loss. The shortage of available land may also result in an increase in the cost of the land use rights as well as increased completion for the land use rights. Further, since the land is owned by the government, the government has the ability to determine the best use of the limited available land and it might determine that the land could be used for other purposes that solar farms. If Shengxin cannot obtain sufficient land use rights at a reasonable cost, it may be reluctant to make the investment in solar farms. Further, changes in the size of a project may result in increased costs as well as construction difficulties. 

Shengxin may fail to comply with laws and regulations regarding the development, construction and operation of solar power projects and photovoltaic production projects in China.

The development, construction and operation of solar power projects and photovoltaic production projects are highly regulated activities. Shengxin’s operations are governed by different laws and regulations, including national and local regulations relating to urban and rural planning, building codes, safety, environmental protection, fire control, utility transmission, engineering and metering and related matters. Shengxin’s failure to obtain or maintain any required approvals, permits, licenses, filings or to comply with the conditions associated therewith could result in fines, sanctions, suspension, revocation or non-renewal of approvals, permits or licenses, or even criminal penalties, which could have a material adverse effect on its business, financial condition and results of operations. Any new government regulations pertaining to solar power projects may result in significant additional expenses to the development, construction and operation of solar power projects and, as a result, could cause a significant reduction in demand for solar power projects and services. We cannot assure you that Shengxin will be able to promptly and adequately respond to changes of laws and regulations, or that its employees and contractors will act in accordance with our internal policies and procedures. Failure to comply with laws and regulations where Shengxin develops, constructs and operates solar power projects may materially adversely affect its business, financial condition and results of operations.

Risks Related to Conducting Business in the PRC

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements with our affiliated Chinese entities, the Huayang Companies, and its shareholders. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

The PRC government restricts foreign investment in businesses in China. Accordingly, we operate our business in China through the Huayang Companies and, recently through a wholly-owned subsidiary which is a wholly foreign owned entity known as a WFOE. The Huayang Companies and the subsidiary hold the licenses and approvals necessary to operate our businesses in China. We have contractual arrangements with the Huayang Companies and its shareholders that allow us to substantially control the Huayang Companies. We cannot assure you, however, that we will be able to enforce these contracts.

Although we believe we comply with current PRC regulations, we cannot assure you that the PRC government would agree that these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If the PRC government determines that we do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business.

There are significant uncertainties under the Draft Foreign Investment Law relating to the status of businesses in China controlled by foreign invested enterprises primarily through contractual arrangements, such as our business.

On January 19, 2015, MOFCOM published a draft of the PRC Law on Foreign Investment (Draft for Comment), or the Draft Foreign Investment Law, which is open for public comments until February 17, 2015. At the same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by foreign invested enterprises, or FIEs, primarily through contractual arrangements. The draft Foreign Investment Law utilizes the concept of “actual control” for determining whether an entity is considered to be a foreign-invested enterprise, and defines “control” broadly to include, among other things, voting or board control through contractual arrangements.

The draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The proposed draft Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “negative list.” Because the negative list has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The draft Foreign Investment Law also provides that only FIEs operating in industries on the negative list will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIE’s operating in industries on the negative list may not be able to continue to conduct their operations through contractual arrangements. It states that entities established in China but controlled by foreign investors will be treated as foreign-invested enterprises, while entities set up outside of China which are controlled by PRC persons or entities, would be treated as domestic enterprises after completion of market entry procedures.

There is substantial uncertainty regarding the draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. While such uncertainty exists, we cannot assure you that the new foreign investment law, when it is adopted and becomes effective, will not have a material and adverse effect on our ability to conduct our business through our contractual arrangements.

If the draft Foreign Investment Law is enacted and goes into effect in its current form, if we are deemed to have a non-PRC entity as a controlling shareholder, the provisions regarding control through contractual arrangements could reach our VIE arrangements, and as a result our VIEs could become subject to restrictions on foreign investment, which may materially impact the viability of our current corporate structure and operations. Specifically, we may be required to modify our corporate structure, change our current scope of operations, obtain approvals or face penalties or other additional requirements, compared to entities which do have PRC controlling shareholders.

PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

Regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.

In July 2014, SAFE promulgated the Circular on Issues Concerning Foreign Exchange Administration over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75. Circular 37 requires PRC residents to register with SAFE or its local branches in connection with their direct establishment or indirect control of an offshore entity, referred to in Circular 37 as a “special purpose vehicle” for the purpose of overseas investment or financing. Circular 37 further requires amendment to a PRC resident’s registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease in the capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under these regulations, PRC residents’ failure to comply with specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent entity, as well as restrictions on capital inflows from the offshore parent entity to the PRC entity, including restrictions on its ability to contribute additional capital to its PRC subsidiaries. Further, failure to comply with the SAFE registration requirements could result in penalties under PRC law for evasion of applicable foreign exchange regulations.

As there is uncertainty concerning the reconciliation of these regulations with other approval requirements, it is unclear how these regulations will be interpreted and implemented by relevant governmental authorities. In addition, different local SAFE branches may have different views and procedures as to the interpretation and implementation of the SAFE regulations, and it may be difficult for our ultimate shareholders or beneficial owners who are PRC residents to provide sufficient supporting documents required by the SAFE or to complete the required registration with the SAFE in a timely manner, or at all. Any failure by any of our shareholders who is a PRC resident, or is controlled by a PRC resident, to comply with relevant requirements under these regulations could subject us to fines or sanctions imposed by the PRC government, including restrictions on WFOE’s ability to pay dividends or make distributions to us and on our ability to increase our investment in the WFOE.

If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation.

U.S. public companies that have substantially all of their operations in China, particularly companies like us that have completed so-called reverse acquisition transactions, 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 and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. 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 our company. This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our stock.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.

Our contractual arrangements with the Dyeing and its shareholders may not be as effective in providing control over these entities as direct ownership.

Since the law of the PRC limits foreign equity ownership in companies in China, we operate our business through the Dyeing. The equity in Dyeing is owned by our chief executive officer and his wife, and we have no equity ownership interest in Dyeing. We rely on contractual arrangements to control and operate such businesses. These contractual arrangements may not be effective in providing control over Dyeing as direct ownership. For example, Dyeing could fail to take actions required for our business despite its contractual obligation to do so. If Dyeing fails to perform under its agreements with us, we may have to incur substantial costs and resources to enforce such arrangements and may have to rely on legal remedies under the law of the PRC, which may not be effective. In addition, we cannot assure you that Dyeing’s shareholders would always act in our best interests.

Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

Our dyeing and finishing business operations are conducted in and substantially all of our revenues are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy, and the worldwide economic downturn has affected China. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by our customers and potential customers, which in turn could reduce demand for our products. Furthermore, in response to the worldwide economic downturn, the Chinese government may seek to increase its control over businesses which could affect our business.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of renewable energy investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

We conduct substantially all of our business through our Chinese subsidiaries and affiliates, which are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. China’s legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and China’s legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

We rely on dividends and working capital advances paid by our subsidiaries and VIEs for our cash needs.

We conduct our operations through Dyeing, a variable interest entity. We rely on dividends and working capital advances from our subsidiaries for our cash needs, including the funds necessary to pay any dividends which we may declare and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends and working capital advances by entities organized in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each subsidiary and VIE entity is also required to set aside at least 10% of its after-tax profit based on China’s accounting standards each year to its general reserves until the accumulated amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. Our subsidiaries are also required to allocate a portion of their after-tax profits to their staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. In addition, if our subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

China’s Unified Corporate Income Tax Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.

Our reporting currency is the U.S. dollar and our operations in the PRC use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Renminbi. Accordingly, we are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on PRC government policies and the PRC’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, in July 2005, the PRC government changed its policy of pegging the value of Renminbi to the U.S. dollar. Under the new policy, Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Renminbi appreciated more than 20% against the U.S. dollar in the following three years. Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On June 19, 2010, the People’s Bank of China, or the PBOC, announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. It is difficult to predict how this new policy may impact the Renminbi exchange and the Renminbi may not be stable against the U.S. dollar or any other foreign currency.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

Under China’s existing foreign exchange regulations, our Chinese subsidiaries are able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, we cannot assure you that the Chinese government will not take further measures in the future to restrict access to foreign currencies for current account transactions. Foreign exchange transactions by our Chinese subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of China’s governmental authorities, including the SAFE. In particular, if a subsidiary borrows foreign currency loans from us or other foreign lenders, these loans must be registered with the SAFE, and if we finance the subsidiary by means of additional capital contributions, these capital contributions must be approved by certain government authorities including the Ministry of Commerce or its local counterparts. These limitations could affect the ability of our subsidiaries to obtain foreign exchange through debt or equity financing.

Due to various restrictions under PRC laws on the distribution of dividends by PRC operating companies or contractual provisions in future debt instruments, we may not be able to pay dividends to our shareholders.

The Wholly-Foreign Owned Enterprise Law (1986), as amended, The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by Wholly-Foreign Owned Enterprises, or WFOEs. Under these regulations, WFOEs may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, they are required to set aside each year 10% of its net profits, if any, based on PRC accounting standards, to fund a statutory surplus reserve until the accumulated amount of such reserve reaches 50% of their respective registered capital. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the profits of our WFOE.

Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the economic value from the operations of our PRC subsidiary through contractual or dividend arrangements, we may be unable to pay dividends on our ordinary shares.

Because our principal assets are located outside of the United States and our directors and officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States federal securities laws against us and our officers and directors in the United States or to enforce foreign judgments or bring original actions in the PRC or Hong Kong against us or our management.

All of our officers and directors reside outside of the United States. In addition, our operating subsidiaries and VIEs are located in the PRC or Hong Kong and all of their assets are located outside of the United States. The PRC does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts. Therefore, it may be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts.

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (i) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership; (ii) adding requirements relating to the source of the PRC resident’s funds used to establish or acquire the offshore entity; (iii) covering the use of existing offshore entities for offshore financings; (iv) purporting to cover situations in which an offshore special purpose vehicle establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (v) making the domestic affiliate of the special purpose vehicle responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore special purpose vehicle jointly responsible for these filings. In the case of an special purpose vehicle which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the special purpose vehicle and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the special purpose vehicle’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the special purpose vehicle, or from engaging in other transfers of funds into or out of China. We cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.

Risk related to our Sharing Economy Businesses

Our Sharing Economy Businesses are in early-stage development with a limited operating history and a relatively new business model, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

We started our business transition and operations in June 2017. Our limited operating history and relatively new business model may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by companies in a rapidly changing market, including challenges in accurate financial planning and forecasting. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results and financial condition. You should consider our business and prospects in light of the risks and difficulties we may encounter as an early-stage company.

Our operating results may fluctuate.

Our operating results may fluctuate as a result of a number of factors, many of which are beyond our control. The following factors may affect our operating results:

Because our business is changing and evolving, our current operating results may not be useful to you in predicting our future operating results. In addition, online sharing economy markets have recently emerged, which may not provide you with relevant industry data for evaluating our business.

For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance. Quarterly and annual expenses as a percentage of net revenues may be significantly different from historical or projected rates. Our operating results in future quarters may fall below expectations, which could cause our stock price to fall.

If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our operating results could suffer.

Our success depends on our ability to provide products and services to users looking for a high quality rental and services experience. Our competitors are constantly developing innovations in rental classified or transaction services to people. As a result, we must continue to invest significant resources in research and development in order to enhance our products and services, and introduce new high-quality products and services that people will use. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose users. Our operating results would also suffer if our innovations are not responsive to the needs of our users and advertisers, are not appropriately timed with market opportunity or are not effectively brought to market. As web and mobile application technology continues to develop, our competitors may be able to offer matching and communication features that are, or that are perceived to be, substantially similar or better than those generated by our platform and application services. This may force us to compete on bases other than quality of products and services and to expend significant resources in order to remain competitive.

Our business depends on a successful change in consumer behavior, and if such trend does not grow, our business and operating results would be harmed.

The growth and adaptation of sharing economy is a major factor for our platform to attract more users and advertisers. If the trend of sharing economy does not grow as predicted by the market, this will affect our business and operating results. As a result, we may need to change our business model accordingly.

If we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.

Our performance will largely be dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense. If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively.

System failures could harm our business.

Our systems are vulnerable to damage or interruption from earthquakes, hurricanes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our system, and similar events. Some of our data centers are located in areas with high risk of major earthquakes. Our data centers are also subject to break-ins, sabotage and international acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice or other unanticipated problems at our data centers could result in lengthy interruptions in our service. Any damage to or failure of our systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our system is unreliable.

Acquisitions could result in operating difficulties, dilution and other harmful consequences.

We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. From time to time, we may engage in discussions regarding potential acquisitions. Any of these transactions could be material to our financial condition and results of operations. In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures and is risky. The areas where we may face risks include:

Also, the anticipated benefit of many of our acquisitions may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

As a distributor and host of Internet content, we will face potential liability and expense for legal claims based on the nature and content of the materials that we distribute or create, or that are accessible via our website.

As a distributor and host of original content and user-generated content, we will face potential liability based on a variety of theories, including defamation, libel, negligence, copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information, and under various laws, including the Lanham Act, the Copyright Act, the Federal Trade Commission Act, the Digital Millennium Copyright Act, Section 230 of the Communications Decency Act, and the European Union E-Commerce Directive. We may also be exposed to similar liability in connection with content that users post to our website through forums, blogs, comments, and other social media features. In addition, it is possible that visitors to our websites could make claims against us for losses incurred in reliance upon information provided via our websites. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. If we become subject to these or similar claims and are not successful in our defense, we may be forced to pay substantial damages. There is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content available on our website. Should the content distributed through our website violate the rights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business and financial performance.

Loss of trust in our brand would harm our reputation and adversely affect our business, financial condition and results of operations. Our success depends on attracting a large number of users to our website and retaining such users. In order to attract and retain users, we must remain a valuable source of listings. Because of our reliance on user-generated content, we must continually manage and monitor our content and detect incorrect or fraudulent information. If a significant amount of inaccurate or fraudulent information were not detected and removed by us in a timely manner, or if a significant amount of information was deemed by users or the media to be inaccurate or fraudulent, our brand, business and reputation could be harmed. Any damage to our reputation could harm our ability to attract and retain users, employees and advertisers, which would adversely affect our business and financial performance. In addition, significant adverse news reports or media, industry or consumer coverage of us would reflect poorly on our brands and could have an adverse effect on our business and financial performance.

We are subject to risks associated with information disseminated through our services.

Online services companies may be subject to claims relating to information disseminated through their services, including claims alleging defamation, libel, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, among other things. The laws relating to the liability of online services companies for information disseminated through their services are subject to frequent challenges both in the United States and foreign jurisdictions. Any liabilities incurred as a result of these matters could require us to incur additional costs and harm our reputation and our business.

Our potential liability to third parties for the user-provided content on our sites, particularly in jurisdictions outside the United States where laws governing Internet transactions are unsettled, may increase. If we become liable for information provided by our users and carried on our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability, including expending substantial resources or discontinuing certain service offerings, which could harm our business.

Failure to deal effectively with fraudulent activities on our platforms would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

We face risks with respect to fraudulent activities on our platforms and periodically receive complaints from users who may not have received the rental items or services or payment for the items or services. While we can, in some cases, suspend the accounts of users who fail to fulfill their payment or delivery obligations to other users, we do not have the ability to require users to make payment or deliver rental items or services, or otherwise make users whole. Although we plan to implement measures to detect and reduce the occurrence of fraudulent activities, combat bad user experiences and increase user satisfaction, including evaluating users on the basis of their transaction history and restricting or suspending their activity, there can be no assurance that these measures will be effective in combating fraudulent transactions or improving overall satisfaction among users. Our failure to effectively deal with fraudulent activities on our platform could result in a reduction in the ability to attract new users or retain current users, damage to our reputation, or a diminution in the value of our brand names.

Our BuddiGo Business

BuddiGo leverages a mobile payment solution that may affect BuddiGo’s short-term income

BuddiGo fully embeds a mobile payment solution as its major payment method. However, mobile payments have not yet been fully adopted by consumers in the targeted South East Asia markets, although recent statistics reveal a growing trend of mobile payment usage. Late adoption of mobile payments may possibly influence BuddiGo’s income in the short term.

Changes of government policy and regulations

Supported by a technology platform, BuddiGo provides instant delivery and logistics services by freelance idle human resources within the community. BuddiGo might be identified as a member of the logistics industry by the governments of some countries where we conduct business, which may cause necessary licensing requirements. Despite the majority of similar models that are widely authorized in U.S. and cities in mainland China, local government policies among South East Asia could influence the eligibility of our operations.

Concerns over the legitimacy of goods delivered via a P2P delivery model could potentially damage our reputation

BuddiGo’s business model is for inner-city peer-to-peer delivery services. As with all logistics and courier companies, there is no absolute policy or mechanism to ensure the legitimacy of goods that are being delivered. BuddiGo takes steps to mitigate this risk by requiring all goods’ senders to be registered with an instant messenger/social media account, credit card and mobile number. We also provide a disclaimer in our terms of use. However, should illegitimate or counterfeit goods be delivered using our platform, this could affect our reputation and adversely impact our business.

BuddiGo grocery purchasing service is susceptible to chargebacks associated with customer disputes, which could impact our relationships with banking and financial partners

BuddiGo provides a grocery purchasing service, whereby freelancers must pay in advance on behalf of the customers they are delivering the items to. As such, the BuddiGo model is susceptible to chargebacks associated with customer disputes. Such disputes could occur due to immoral activity, carelessness and/or misdirection from the buying and/or selling parties. These circumstances could potentially cause chargeback activities that result in the suspension of and blacklisting of our online payment account by certain banking or financial partners.

Shortage of supply forces may cause loss of business

BuddiGo makes use of idle human resources within a community to provide a variety of delivery/purchasing services. The majority of our workforce supply is obtained on a freelance basis and there is potential risk of a shortage of the supply of freelancers in certain circumstances, including an unexpected sudden growth of demand, public holidays and inclement weather. If transactions are not completed, this may raise concerns regarding income stability by our workforce supply.

Our 3D Discovery business

There are technical difficulties yet to be solved for the new space capturing mobile app.

The functionality of the space capturing in 3D Discovery is largely dependent on automatic photo stitching calculation. The nature of photo stitching is such that certain monotonous environment may affect the accuracy of the stitching. We are rectifying these issues by using AI technology and hardware accessories. This may delay the launch date of the mobile app and affect our market expansion plans.

The success of international market expansion of the new 3D Discovery mobile app will depend on our strategic partners in various countries.

Our strategy for 3D Discovery on international market expansion will be through partnerships and franchises. If we fail to manage/set standards to potential partners/franchisees, it can lower/delay our market penetration rate.

If we are unable to attract, train and retain technical and financial personnel, the 3D Discovery business may be materially and adversely affected.

Our future success of 3D Discovery depends, to a significant extent, on our ability to attract, train and retain technical personnel. Recruiting and retaining capable personnel, particularly those with expertise in our industries and in the industries to which we market, are vital to our success. There is substantial competition for qualified technical and financial personnel, and there can be no assurance that we will be able to attract or retain our technical personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

We rely primarily on technology secrets and contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate and we may not be able to protect our intellectual property under the laws of various countries. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others and the enforcement of intellectual property rights in some countries may be difficult. We cannot assure you that the outcome of any litigation will be in our favor. Intellectual property litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

3D Discovery faces intense competition from companies that have greater resources than we do, we may not be able to compete successfully and we may lose or be unable to gain market share.

The markets for 3D Discovery products are intensely competitive. Many of our competitors have established more prominent market positions as well as existing relationship with potential customers, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to increase our sales. Many of our existing and potential competitors have substantially greater financial, technical and other resources than we do. Our competitors' greater size in some cases provides them with a competitive advantage with respect to development and operational costs because of their economies of scale. Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations. Further, from time to time, we have had to adjust the prices of our services to remain competitive.

Our AnyWorkspace Business

Anyworkspace business has low barriers to entry.

AnyWorkspace’s business model is asset light but has low barriers to entry to competitors and new players coming into the market and therefore can face strong market competition.

The current business and platform models of Anyworkspace would allow suppliers and users to bypass the platform in subsequent rentals.

The nature of the business is connecting buyer with supplier. Once they are connected both the supplier and buyer could bypass the platform for future businesses. This results in "leakage" and could impact the long-term sustainability and viability of the business model.

Local legal regulations and leasing contractual agreements may prevent subleasing of spaces

Subleasing of working spaces may not be allowed due to contractual terms and local law restrictions.

Risks Related to our Common Stock

Our stock price has been and may continue to be volatile.

The trading price of our common stock has been and is expected to continue to be highly volatile as well as subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

These broad market and industry factors may seriously affect the market price of our Common Stock, regardless of our actual operating performance.

Any failure to meet the Nasdaq continued listing requirements may result in our delisting.

During 2016, our stock failed to meet the NASDAQ continued listing requirement resulting from our failure to maintain a $1.00 bid price and our failure to maintain a minimum market value of publicly held common stock. In order to maintain our listing on Nasdaq Capital Market, on March 20, 2017, we effected a one-for-four reverse split. In the event that our stock price falls below $1.00 per share, we may not be able to maintain our NASDAQ listing, which could have a material adverse effect on the market for and the market price of our common stock.

If we fail to develop and maintain effective internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.

Prior to November 2007, the Huayang Companies operated as private companies without public reporting obligations, and they committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required of a public company. We are continuing to attempt to institute changes to satisfy our obligations in under the Sarbanes-Oxley Act. In Item 9A of this annual report, we report that our disclosure controls and procedures and our internal controls over financial reporting were not effective at December 31, 2017. We are continuing to attempt to institute changes to satisfy our obligations under the Sarbanes-Oxley Act. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

We do not anticipate paying any cash dividends.

We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. We presently intend to retain all earnings, if any, to implement our business plan; and we do not anticipate the declaration of any dividends in the foreseeable future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our main office and our manufacturing facilities are located in Wuxi, China, in seven buildings with approximately 215,000 square feet. We have been issued a land use right certificate for the land until June 7, 2025 by the municipal government of Wuxi City, which may be renewed at our option with no expected capital requirement. The seven buildings are an office building, warehouse, raw material processing hall, metal processing hall, assembling hall, laboratory and quality control, and guard house. We believe that our existing facilities are well maintained and in good operating condition.  

In 2003, we acquired land use rights to a plot of land approximately 5.1 acres from the local government of the Town of Qianzhou in Wuxi City. This land, along with the land use rights acquired from a related party as discussed in the following paragraph, house our new factory and employee housing facilities. The land lease has a term of 50 years, expiring October 30, 2053.

During 2008, we completed the purchase of land use rights for an approximately 100,000 square foot factory, employee housing facilities and other leasehold improvements from a related party, Wuxi Huayang Boiler Company, Ltd. (“Huayang Boiler”) for approximately $10.9 million. The land use rights expire on January 1, 2053. In March 2009, we received the title to the buildings.

On December 23, 2016, we entered into a lease agreement with a third party, to whom we sold the stock of Fulland Wind, whereby we will leave a factory building owned by us to this individual at an annual rental of RMB 680,566 (approximately $98,000). The lease has a ten-year term, commencing January 1, 2017. During the fourth quarter of 2017, Wang Jiahong orally terminated the above lease agreement and the Company is no longer received rental income.

In Hong Kong, we use office space of a related party free of charge.

ITEM 3. LEGAL PROCEEDINGS. 

On or about November 14, 2017, a complaint was filed in the United States District Court for the Eastern District of New York, captioned Morris Ackerman v. Cleantech Solutions International, Inc.  The complaint alleged that the Company's proxy statement, which included a proposal to amend the Company's long-term incentive plan to provide for the grant of incentive and non-qualified options and stock grants to employees and others, did not comply with the disclosure requirements for proxy statements.  The parties reached a confidential settlement on or about December 20, 2017, and the plaintiff voluntarily dismissed the action with prejudice on or about January 2, 2018.

On February 2, 2018, the law firm of Ellenoff Grossman & Schole LLP (“EGS”) filed a complaint against us along with a number of companies and individuals in an effort to recover their legal fees in connection with services provided to the other defendants.  The lawsuit contends that we are the alter ego or successor in interest of those other defendants.  We believe that the lawsuit is without merit and will defend it vigorously. 

Save as reported above, we are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to other claims arising from our ordinary course of business.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.

Our common stock has traded on The NASDAQ Capital Market under the symbol “CLNT” since December 29, 2011. On January 8, 2018, our trading symbol was changed its symbol to “SEII”. The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock by calendar quarters during 2017 and 2016. These prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.  

On April 10, 2018, the last sale price of our common stock as reported by NASDAQ was $3.41 per share.

Shareholders

As of April 10, 2018, we had approximately 1,218 record holders of our common stock.

Transfer Agent

The transfer agent for the common stock is Empire Stock Transfer Inc. The transfer agent’s address is 1859 Whitney Mesa Dr., Henderson, Nevada 89014, and its telephone number is (702) 818-5898.

Dividend Policy

We have not paid cash dividends on our common stock since we became public through reverse acquisition. We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future.

In addition, due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders. The Wholly Foreign Owned Enterprise Law (1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Company’s profits. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.

Equity Compensation Plan Information

The following table summarizes the equity compensation plans under which our securities have been or may be issued as of December 31, 2017.

In September 2016, the Company’s board of directors adopted, and in November 2016, the stockholders approved the Company’s 2016 long-term incentive plan, which covers 125,000 shares of common stock. As of December 31, 2017, there were no shares of common stock available for issuance pursuant to the 2016 plan.

We did not have any equity compensation plans that were not approved by stockholders.

Unregistered Sales of Equity Securities and Use of Proceeds

All unregistered sales of equity securities during financial year ended December 31, 2017 have been previously disclosed on Form 8-K filings made by the Company.

ITEM 6. SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to provide the information called for by Item 6 of Form 10-K.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Historically, our primary operations involved the design, manufacture and distribution of a line of proprietary high and low temperature dyeing and finishing machinery to the textile industry. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets.

We design and produce airflow dyeing machines, which use air instead of water. Water is used in the traditional dyeing process. We believe that our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions. Historically, the Chinese government’s mandate to phase out older machinery in China’s textile industry that does not meet the new environmental standards has benefitted us. However, in recent years, challenging economic conditions, increases in raw materials prices and the Chinese government’s more aggressive stance toward shutting down factories, including textile manufacturers, that are not compliant with emission standards, have adversely impacted our dyeing and finishing businesses.

Currently, we focus on investing in research and development to improve our competitive position. In August 2016, we purchased the technology use right for a patent that covers ozone-ultrasonic textile dyeing equipment. We believe this new patent technology will allow us to develop next generation dyeing and finishing equipment that will appeal to textile manufacturers in China as well as Southeast Asia. Our key finishing products include our after-treatment compacting machine used in the final finishing of knitted material, such as cotton, which is designed to improve the softness, reduce shrinkage and ensure better dimensional stability, and a garment washing machine for denim, which is made of stainless steel and can be customized for use by Chinese jeans manufacturers. We expect our revenue from dyeing and finishing equipment segment will remain at or about its current quarterly level in the near future, although declines are possible.

On December 26, 2016, Dyeing and Xue Miao, an unrelated individual, formed Shengxin, in which Dyeing has a 30% equity interest and the unrelated third party holds a 70% interest, pursuant to an agreement dated December 23, 2016. Shengxin intends to develop, construct and maintain photovoltaic power generation projects, known as solar farms, in China, mainly in the provinces of GuiZhou and YunNan. At December 31, 2017, Shengxin had not yet commenced operations. During the project construction period, we will have the priority to supply components and equipment such as: solar racking and mounting systems for the projects under the same conditions as the other vendors.

At December 31, 2017 our investment in Shengxin amount to approximately $9.0 million. Our investment in Shengxin is subject to a high degree of risk. We cannot give any assurance that Shengxin will be able to obtain any permits, raise any required funding, develop and operate or sell any solar farms or operate profitably or that Dyeing will have the resources to provide any funds that may be required in order to fund any solar farm projects for which Shengxin may obtain permits. There may be a significant delay between the time funds are advanced for any project and the realization of revenue or cash flow from any project.

Through December 30, 2016, we operated in the forged rolled rings and related components segment, in which we manufactured and sold precision forged rolled rings, shafts, flanges, and other forged components for the energy industry including wind power and other industries, On December 30, 2016, we sold the stock in Fulland Wind, the subsidiary that operated our forged rolled rings and related components business, to a non-affiliated third party, as a result of which the forged rolled rings and related components business is reflected as a discontinued operations for all periods presented. As of December 31, 2016, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967) which were still guaranteed by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2016, the buyer of Fulland Wind had not obtained the release by Dyeing, the Company’s chief executive officer and his wife of their guarantees. As of December 31, 2017, these loans had been paid in full by Fulland Wind.

Additionally, during 2016, we operated a petroleum and chemical equipment segment, in which we manufactured and sold petroleum and chemical equipment. Because of a significant decline in revenues from this segment, we determined that we would not continue to operate in this segment and accordingly, the petroleum and chemical equipment segment is reflected as discontinued operations for all periods presented.

Recently, difficult economic conditions, a continuing decline in oil prices and limited availability of credit in China, presented numerous challenges for our business. As a result, we experienced softer demand for our low-emission airflow dyeing machines as many of our potential customers already upgraded to newer models and we believe that much of our remaining potential customer base does not have the ability to make significant capital expenditures at this time. As a result, if we are to sell our products to the smaller textile manufacturers, it may be necessary for us to design and market a cheaper machine that meets the Chinese government requirements or reduce prices which would impact both revenues and gross margin.

Our ability to expand our operations and increase our revenue is largely affected by the PRC government’s policy on such matters as the availability of credit, which affects all of our operations, and its policies relating to the textile industry, environment issues and alternative energy as well as the competitiveness of Chinese textile manufacturers at a time when consumers are looking for lower prices and manufacturers are looking to produce in a country that has lower labor costs than China, all of which affects the market for our dyeing and finishing equipment. Our business is also affected by general economic conditions, and we cannot assure you that we will be able to increase our revenues in the near future, if at all. Because of the nature of our products, our customers’ projection of future economic conditions are an integral part of their decisions as to whether to purchase capital equipment at this time or defer such purchases until a future date.

Recent developments

Throughout 2017, we made significant changes in the overall direction of the Company. Given the headwinds affecting our manufacturing business, we are targeting high growth opportunities and have established new business divisions to focus on the development of sharing economy platforms and related rental businesses. These initiatives are still in the early stages. We did not generate significant revenues from our sharing economy business initiatives in 2017.

Beginning in the second quarter of 2017, we established new business divisions to focus on the development of sharing economy platforms and related rental businesses. We believe a true peer-to-peer sharing economy based on rentals will take significant market share in both the business and consumer markets over the next few years. We have been exploring possible merger and acquisition opportunities that can bring to market more user-friendly platforms and convenient channels that allow people to rent what they need and make their lives easier.

In September 2017, our wholly-owned subsidiary ECPower (HK) commenced offering a mobile power charger rental service through major convenience store networks in over 700 store locations in Hong Kong and over 40 locations in Macau. The rental service allows customers to rent and return mobile power chargers at any of the convenience stores carrying the service. We currently have over 20,000 mobile chargers available for rent and are preparing to expand this business into other retail outlets and other new regions around the world.

In December 2017, our wholly-owned subsidiary, EC Technology & Innovations Limited ("ECTI"), acquired a 51% interest in Inspirit Studio Limited, which develops and runs a sharing economy mobile platform called BuddiGo that allows people to provide courier delivery services during their commuting times.

In January 2018, our wholly-owned subsidiary, EC Technology & Innovations Limited ("ECTI") acquired a 60% interest in 3D Discovery Co. Limited (“3D Discovery”) and our wholly-owned subsidiary, Sharing Economy Investment Limited (“SEI”) acquired an 80% interest in AnyWorkspace Limited (“AnyWorkspace”). 3D Discovery is a digital marketing services provider which provides various solution such as 3D scanning and modeling, website and mobile app development, video production, and graphic design to its clients. Apart from its existing business, 3D Discovery plans to develop a mobile app which allows users to create an interactive virtual tour of a physical space by using a mobile phone camera. AnyWorkspace develops an online, real-time marketplace that connects workspace providers with clients who need temporary office and meeting spaces.

In August 2017, we signed an agreement with ECoin Global Limited ("ECoin") for the future purchase of ECoin redemption codes with an aggregate value of $50 million for total consideration of $20 million. We plan to resell the redemption codes in the form of ECrent gift cards at global locales through reseller channels, such as convenience stores. We are working with InComm, a global pre-payment network and solution provider, to sell the redemption codes with face values of HK$100, HK$300 and HK$500 at major convenience store networks in Hong Kong and Macau with other international locations to follow. Up to December 31, 2017, there was no resale of the redemption codes have been taken place.

We are currently engaged in exclusive discussions with ECrent Capital Holdings Limited ("ECrent"), a private company incorporated in the British Virgin Islands focused on developing and operating a global rental platform to promote sharing economy across 30 countries and regions.

Going forward, we will continue targeting the technology and global sharing economy markets, by developing online platforms and rental business partnerships that will drive the global development of sharing through economical rental business models.

Inventory and Raw Materials

A major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these fluctuations have been significant. In times of increasing prices, we need to try to establish the price at which we purchase raw materials in order to avoid increases in costs which we cannot recoup through increases in sales prices. Similarly, in times of decreasing prices, we may have purchased metals at prices which are high in terms of the price at which we can sell our products, which also can impair our margins. Four major suppliers provided 50% of our purchases of inventories for the year ended December 31, 2017. Three major suppliers provided 41% of our purchases of inventories for the year ended December 31, 2016. Four suppliers accounted for 10% of more of purchase during the year ended December 31, 2017. No other supplier accounted for 10% or more of our purchases during the year ended December 31, 2016.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, the fair value of equity method investment, the fair value of assets held for sale and the valuation of equity transactions.

We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

Variable Interest Entities

Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements the financial statements of variable interest entities (“VIEs”). The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.

Dyeing is considered a VIE, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with the Dyeing pursuant to which we shall receive 100% of Dyeing’s net income. In accordance with these agreements, Dyeing shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, Green Power, and Green Power shall supply the technology and administrative services needed to service Dyeing.

The accounts of the Dyeing are consolidated in the accompanying financial statements. As a VIE, Dyeing’s sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of the Huayang Companies’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Dyeing that require consolidation of the Dyeing’s financial statements with our financial statements.

Accounts Receivable

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

As a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or net realizable value utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

Advances to Suppliers

Advances to suppliers represent the advance payments for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the statements of income and comprehensive income in the year of disposition.

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize 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.

Land Use Rights

There is no private ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual or company. The government grants a land use right that permits the holder of the land use right to use the land for a specified period. Our land use rights were granted with a term of 45 or 50 years. Any transfer of the land use right requires government approval. We have recorded as an intangible asset the costs paid to acquire a land use right. The land use rights are amortized on the straight-line method over the land use right terms.

Patent Use Rights

In August 2016, we purchased a patent technology use right for a ten-year term from a third party. The patent covers ozone-ultrasonic textile dyeing equipment. We amortize the exclusive patent use right over the term of the patent.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured.

We recognize revenues from the sale of dyeing and finishing equipment upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For 2017 and 2016, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal.

All other product sales with customer specific acceptance provisions are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

Income Taxes

We are governed by the Income Tax Law of the PRC, Inland Revenue Ordinance of Hong Kong and the U.S. Internal Revenue Code of 1986, as amended. We account for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is charged to equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.

The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.

Stock-based Compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately if the award is non-forfeitable. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

Currency Exchange Rates

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB and Hong Kong Dollar. Substantially all of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiary. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB and the Hong Kong dollar. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB or HKD against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB or HKD against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

Recent Accounting Pronouncements 

In May 2014, FASB issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on our sources of revenue, we have concluded that ASU 2014-09 will not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers.

In August 2016, the FASB issued ASU 2016-15 which addresses eight cash flow classification issues, eliminating the diversity in practice. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively applied as of the earliest date practicable. The adoption of ASU will not have a material impact on the Company’s consolidated financial statements.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, or ASU 2017-09. ASC 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The adoption of ASU will not have a material impact on our consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features , or ASU 2017-11, which updates the guidance related to the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. Under ASU 2017-11, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for public entities for all annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2017-11 will have on our consolidated financial statements.

On December 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the TCJA).  SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. We have applied this guidance to our financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our consolidated financial condition, results of operations, cash flows or disclosures.

RESULTS OF OPERATIONS

Years Ended December 31, 2017 and 2016

The following table sets forth the results of our operations for the years ended December 31, 2017 and 2016 indicated as a percentage of revenues (dollars in thousands):

Revenues. For the year ended December 31, 2017, revenues from the sale of dyeing and finishing equipment decreased by $3,901,000, or 22.5%, as compared to the year ended December 31, 2016. We experienced an anticipated slowdown in sales of our low-emission airflow dyeing machines as many customers had replaced older dyeing equipment with our low-emission airflow dyeing machine, and we believe that orders for new low-emission airflow dyeing machines have slowed down in 2017 and 2016 because the remaining potential customer base included many companies that did not have the ability to make the significant capital expenditures necessary to upgrade their equipment. Additionally, the textile industry in China has been facing significant headwinds recently. Difficult economic conditions, a continuing decline in oil prices and limited availability of credit in China, presented numerous challenges for our dyeing machine business. Additionally, apparel factories and other factories have been shut down throughout the last year by China’s environmental bureau, which has been cutting electricity and gas supply to determine compliance with China’s environmental laws. Accordingly, our revenues decreased in 2017 as compared to 2016. We expect that our revenues from dyeing and finishing equipment segment will remain at or about its’ current level in the near future, although declines are possible.

During the year ended December 31, 2017, we recognized revenues from our sharing economy business of $58,499 compared to $0 for the year ended December 31, 2016.

Cost of revenues. Cost of revenues includes the cost of raw materials, labor, depreciation and other fixed and variable overhead costs. For the year ended December 31, 2017, cost of revenues was $13,678,000 as compared to $14,818,000 for the year ended December 31, 2016, a decrease of $1,140,000, or 7.7%.

Gross profit (loss) and gross margin. Our gross loss was approximately $(156,000) for the year ended December 31, 2017 as compared to gross profit of $2,546,000 for the year ended December 31, 2016, representing gross margins of (1.2)% and 14.7%, respectively, a decrease year over year. The decrease in our gross margin for 2017 was primarily attributed to the reduced scale of operations resulting from lower revenues, which is reflected in the allocation of fixed costs, mainly consisting of depreciation, to cost of revenues, and an increase in labor and raw material costs. We expect that our gross margin from dyeing and finishing equipment segment will remain at its current levels although a decrease is possible as we try to market our equipment to the smaller textile manufactures.

Operating expenses. For the year ended December 31, 2017, operating expenses were $12,076,000 as compared to $3,858,000 for the year ended December 31, 2016, an increase of $8,218,000, or 212.9%, and consisted of the following:

Depreciation. Depreciation was $3,951,000 and $3,829,000 for the years ended December 31, 2017 and 2016, respectively. Depreciation for the years ended December 31, 2017 and 2016 was included in the following categories (dollars in thousands):

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $3,619,000 for the year ended December 31, 2017, as compared to $1,999,000 for the year ended December 31, 2016, an increase of $1,620,000, or 81.1%. Selling, general and administrative expenses for the years ended December 31, 2017 and 2016 consisted of the following (dollars in thousands):

Bad debt expense. For the years ended December 31, 2017 and 2016, we recorded bad debt expense of $6,474,000 and $1,038,000, respectively. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection history, the write off of uncollectible receivables against the existing reserve, and recent economic events.

Impairment expense. For the years ended December 31, 2017 and 2016, we recorded impairment expense of $462,000 and $0, respectively. Based on the purchase price exceeded the fair value of the net assets acquired by approximately $462,000, which was initially recorded as goodwill. Based on the Company’s annual analysis of goodwill, in December 2017, the Company recorded an impairment expense of $462,000 which is included in operating expenses on the accompanying consolidated statement of operation and comprehensive loss.

Research and development expenses. Research and development expenses were $420,000 for the year ended December 31, 2017, as compared to $304,000 for the year ended December 31, 2016, an increase of $116,000, or 38.1%. The increase in 2017 was primarily attributable to the increase in research and development activities related to the development of new dyeing and finishing products.

Loss from operations. As a result of the factors described above, for the year ended December 31, 2017, loss from operations amounted to $12,232,000, as compared to $1,312,000 for the year ended December 31, 2016.

Other income (expense). Other income (expense) includes interest income, interest expense, foreign currency transaction gain (loss), loss on equity method investment, and other income. For the year ended December 31, 2017, total other expense, net, amounted to $188,000 as compared to $81,000 for the year ended December 31, 2016, an increase of $107,000, or 132.1%. The increase in other expense, net, was primarily attributable to losses incurred in the 2017 periods related to our equity method investment of $130,000.

Income tax provision. Income tax expense was $408,000 for the year ended December 31, 2017, as compared to $0 for the year ended December 31, 2016, an increase of $408,000.

Loss from continuing operations. As a result of the foregoing, our loss from continuing operations was $12,828,000, or $(6.99) per share (basic and diluted), for the year ended December 31, 2017, as compared with loss from continuing operations of $1,393,000, or $(1.17) per share (basic and diluted), for the year ended December 31, 2016, a change of $11,435,000, or 792.3%.

Loss from discontinued operations, net of income taxes. Our loss from discontinued operations was $98,000, or $(0.05) per share (basic and diluted), for the year ended December 31, 2017, as compared with loss from discontinued operations of $10,286,000, or $(8.64) per share (basic and diluted), for the year ended December 31, 2016, a change of $10,188,000 or 99.0%.

The summarized operating result of discontinued operations included our consolidated statements of operations is as follows:

Net loss. As a result of the foregoing, our net loss was $12,926,000, or $(7.04) per share (basic and diluted), for the year ended December 31, 2017, as compared with net loss $11,679,000, or $(9.81) per share (basic and diluted), for the year ended December 31, 2016, a change of $1,247,000, or 10.7%.

Foreign currency translation loss. The functional currency of our subsidiaries and variable interest entities operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $4,047,000 for the year ended December 31, 2017, as compared to a foreign currency translation loss of $4,820,000 for the year ended December 31, 2016. This non-cash loss had the effect of increasing our reported comprehensive loss.

Comprehensive loss. As a result of our foreign currency translation loss, we had comprehensive loss for the year ended December 31, 2017 of $8,879,000, compared to comprehensive loss of $16,499,000 for the year ended December 31, 2016.

Liquidity and Capital Resources

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. At December 31, 2017 and 2016, we had cash balances of $1,019,000 and $1,481,000, respectively. These funds are located in financial institutions located as follows (dollars in thousands):

The following table sets forth a summary of changes in our working capital from December 31, 2016 to December 31, 2017 (dollars in thousands):

Our working capital decreased by $8,000,000 to $13,539,000 at December 31, 2017 from $21,539,000 at December 31, 2016. This decrease in working capital is primarily attributable to:

Offset by:

Because the exchange rate conversion is different for the consolidated balance sheets and the consolidated statements of cash flows, the changes in assets and liabilities reflected on the consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the consolidated balance sheets.

Net cash flow used in operating activities was $410,000 for the year ended December 31, 2017 as compared to net cash flow used in operating activities of $6,949,000 for the year ended December 31, 2016, a change of $6,539,000.

Net cash flow used in investing activities was $1,922,000 for the year ended December 31, 2017 as compared to $10,452,000 for the year ended December 31, 2016. For the year ended December 31, 2017, net cash flow used in purchase of property and equipment of $5,200,000, offset by cash received from sale of Fulland Wind of $2,131,000 and cash received from the sale of assets of discontinued operations of $1,147,000. For the year ended December 31, 2016, net cash flow used in investing activities reflects the purchase of patent use rights of $2,408,000, purchase of property and equipment of $1,209,000, payments made for equity method investment of $9,001,000, offset by cash received from sale of Fulland Wind of $2,168,000.

Net cash flow provided by financing activities was $1,804,000 for the year ended December 31, 2017 as compared to $610,000 for the year ended December 31, 2016. During the year ended December 31, 2017, we received proceeds from bank loans of $1,258,000, received proceeds from note payable of $670,000, received proceeds from the decrease in restricted cash of $303,000, advanced from related party of $348,000 and received proceeds from sale of common stock of $860,000, offset by repayments for bank loans of $1,480,000 and payments for the decrease in bank acceptance notes payable of $155,000. During the year ended December 31, 2016, we received proceeds from bank loans of $3,763,000, received proceeds from the decrease in restricted cash of $60,000, and received proceeds from sale of common stock of $753,000, offset by repayments for bank loans of $3,838,000, payments for the decrease in bank acceptance notes payable of $60,000 and increase in restricted cash – discontinued operations of $68,000.

We have historically funded our capital expenditures through cash flow provided by operations and bank loans. We intend to fund the cost with cash flow from our operations and by obtaining financing mainly from local banking institutions with which we have done business in the past. We believe that the relationships with local banks are in good standing and we have not encountered difficulties in obtaining needed borrowings from local banks.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

We have certain fixed contractual obligations and 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. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of December 31, 2017 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

Off-balance Sheet Arrangements

Except as discussed below, we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Pursuant to an agreement dated December 23, 2016, we sold the stock of our subsidiary, Fulland Wind to a third party. As of December 31, 2016, Fulland Wind had bank loans payable of RMB 4,500,000 (approximately $647,967) which are still guaranteed by Dyeing and the Company’s chief executive officer and his wife. As of December 31, 2016, the buyer of Fulland Wind had not obtained the release by Dyeing, the Company’s chief executive officer and his wife of their guarantees. As of December 31, 2017, these loans had been paid in full by Fulland Wind.

Foreign Currency Exchange Rate Risk

We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the years ended December 31, 2017 and 2016, we had unrealized foreign currency translation gain of approximately $4,047,000 and unrealized foreign currency translation loss of approximately $4,820,000, respectively, because of changes in the exchange rate.

Inflation

The effect of inflation on our revenue and operating results was not significant.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

Not applicable for smaller reporting companies

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 and 2016

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 and 2016

 
CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Sharing Economy International Inc. and subsidiaries (formerly Cleantech Solutions International, Inc.)

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sharing Economy International Inc. and subsidiaries (formerly Cleantech Solutions International, Inc.) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, consolidated statements of changes in stockholders’ equity, and consolidated statements of cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the notes to consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for the years ended December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.

The Company's Ability to Continue as a Going Concern 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had a loss from continuing operations for the year ended December 31, 2017 and expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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.

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

See notes to consolidated financial statements.

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2017 and 2016

See notes to consolidated financial statements.

SHARING ECONOMY INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS