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CLNT > SEC Filings for CLNT > Form 10-K on 30-Mar-2016All Recent SEC Filings




Annual Report



We are currently engaged in three business segments:

? the dyeing and finishing equipment segment, in which we manufacture and sell textile dyeing and finishing machines;

? the forged rolled rings and related components segment, in which we manufacture and sell high precision forged rolled rings, shafts, flanges, and other forged components; and

? the petroleum and chemical equipment segment, in which we manufacture and sell equipment, such as reaction kettle, heat exchangers, separators, tanks, towers and other components, to the petroleum and chemical industries. Sales in this segment commenced in the first quarter of 2015. We did not operate in the petroleum and chemical equipment segment during 2014.

The following table sets forth information as to revenues of our dyeing and finishing equipment, forged rolled rings and related components, and petroleum and chemical equipment segments in dollars and as a percent of revenues (dollars in thousands):

                                                         Year Ended December 31,
                                                     2015                      2014
                                               Dollars         %         Dollars         %
Dyeing and finishing equipment               $  29,011        58.5 %   $  42,209        55.6 %
Forged rolled rings and related components   $  12,081        24.4 %   $  33,750        44.4 %
Petroleum and chemical equipment                 8,474        17.1 %           -           -
Total                                        $  49,566       100.0 %   $  75,959       100.0 %

In 2015, challenging economic conditions, falling steel prices and limited availability of credit in China and well as challenges in operating in a new segment - the petroleum and chemical equipment segment, presented numerous challenges for our business. In our dyeing and finishing equipment segment, we experienced softer demand for our low-emission airflow dyeing machines as many of our customers already upgraded to newer models last year and much of our remaining customer base does not have the ability to make significant capital expenditures at this time. Our forged rolled rings and related products segment in particular experienced a significant reduction in sales and operated at a loss during 2015.

We began to deliver parts and equipment in our petroleum and chemical equipment segment in 2015, which helped offset the decreases in revenue from our other two segments. In December 2015, we received a letter from this customer, pursuant to which the customer claimed that we were in breach of agreement because we were delinquent in the delivery of the products and those products that were delivered did not meet the required quality standards. The customer claimed that it is entitled to damages of RMB 36,103,640, or approximately $5,806,778 at December 31, 2015. As a result of the dispute with this customer, the Company, at December 31, 2015:

? Recognized a loss from sales contract dispute of $5,806,778, which is reflected as an operating expense relating to the liability claimed by the customer in its letter;

? Increased our accounts receivable reserve to fully reserve the approximately $1,759,000 due from this customer;

? Increased our reserve for obsolete inventory by approximately $836,000, representing the remaining inventory manufactured to the specifications of this customer; and

? Recorded an impairment charge of approximately $1,900,000 relating to the manufacturing equipment which is specially designed to manufacture products for petroleum and chemical customer and is not otherwise used by the Company.

We are engaged in discussions with this customer, but cannot predict the results of these discussions. We are also evaluating our ability to continue in the petroleum and chemical segment, and we cannot assure you that we will be able to continue to operate in this segment or that we will not suffer an impairment charge in 2016.

We conducted an impairment assessment to determine the estimated fair market value of property and equipment as of December 31, 2015 and 2014. Such analysis considered future use of such equipment, consultation with equipment resellers, and other industry factors. Upon completion of the 2015 and 2014 impairment analysis, we determined that the carrying value exceeded the fair market value on certain equipment used in these segments. Accordingly, in connection with the impairment of such equipment and equipment held for sale, we recorded an impairment charge of approximately $7,000.000 and $3,800,000 in December 2015 and 2014, respectively. The charge for 2015 reflected impairment charges of approximately $5,100,000 relating to the forged rolled rings and related products segment, of which approximately $400,000 related to the equipment held for sale, and approximately $1,900,000 relating to the petroleum and chemical equipment segment, as described above. All of the impairment charges for 2014 related to the equipment held for sale.

The factors that affected our revenue, gross margin and net income in our segments during the year ended December 31, 2015, including the factors which resulted in significant declines in revenues in both our dyeing and finishing equipment segment and our forged rolled rings and related components segments, which are described below, are likely to continue to affect our operations in the near future. 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 alternative energy such as wind power, which affect our products for these industries. Our business is also affected by general economic conditions, and we cannot assure you that we will be able to increase our revenues in any segment 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.

Dyeing and Finishing Equipment Segment

Revenues from our dyeing and finishing equipment segment decreased $13.2 million, or 31.3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, and in 2015, dyeing and finishing equipment segment revenues accounted for 58.5% of our total revenues. In order to reduce our business risk, we tightened our credit review policies in 2015.

Additionally, we experienced a slowdown in shipments of our low-emission airflow dyeing machines as many companies in the dyeing industry had already replaced older dyeing equipment with new equipment, and orders for new low-emission airflow dyeing machines slowed down in 2015.

We expect our revenue from dyeing and finishing equipment segment will remain at or near the current yearly level for the near future.

Forged Rolled Rings and Related Components Segment

Through our forged rolled rings and other related components division, we produce precision forged rolled rings and other forged components to the wind power and other industries. Our forged rolled rings and other related components are sold to manufacturers of industrial equipment. Forged rolled rings and other forged components for the wind industry are used in wind turbines, which are used to generate wind power.

Revenues from our forged rolled rings and related components segment decreased $21.7 million, or 64.2%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The demand for products used in manufacturing in general, including wind power industry and other industries, is uncertain. Although we believe that over the long term, the forged rolled rings and related components segment will expand, and the government of the PRC has announced its desire to increase the use of wind power as an energy source, in the short term, other factors, such as economic factors and the availability of credit, may affect the requirements of our customers and potential customers for our products. To the extent that the demand for our forged rolled rings and related components declines, our revenue and net income will be affected. We believe that there is a degree of market saturation for forged rolled rings and related components for wind power and other industries and this market saturation, combined with the effects of lower oil and gas prices, has reduced the demand for construction of wind power facilities, and we expect that our revenues from forged rolled rings and related components will continue to decrease in the near future.

We believe that wind power will see its share of China's national energy mix gradually increase. While interest in wind power is increasing in many countries, we do not have the infrastructure and personnel to market our products in countries other than China, and we are continuing to limit our sales and marketing efforts to China to wind power and other industries customers.

We are evaluating the viability of this segment on an ongoing basis and, if we determine that it is not likely that we will be able to operate this segment profitably, we may discontinue operating in this segment. However, we have not completed our evaluation as of the date of this report. If we discontinue this segment, we anticipate that we may incur further impairment charges with respect to assets used in this segment.

Petroleum and Chemical Equipment Segment

Through our petroleum and chemical equipment division, we produce and sell equipment such as coal chemical equipment, formaldehyde plant and downstream products, reaction kettle, heat exchangers, separators, tanks, towers to petroleum and chemical industries. We started to sell our petroleum and chemical equipment in February 2015. Revenue from our petroleum and chemical equipment segment was $8.5 million for the year ended December 31, 2015. The market for petroleum products is mainly dominated by three major Chinese petroleum companies, and their capital expenditure and purchasing policy will have a significant effect both upon our ability to generate revenue from this segment and the gross margins which we can generate. Furthermore, because we sell our petroleum and chemical equipment products to a very small number of customers, the change in the purchasing policies of one or two customers could have a significant effect on our revenues from this segment. Sales to a large state-owned enterprise for parts and equipment to be used on a major chemical project in Xinjiang, which was generated in the year ended December 31, 2015, accounted for approximately $6.2 million, or 73.4% of the petroleum and chemical equipment segment revenue for the year ended December 31, 2015.

As discussed above, in December 2015, we received a notice of contract termination in writing from our largest customer in this segment, which was our largest customer, accounting for approximately 13% or our consolidated revenues for 2015, alleging breach of contract for late delivery of product and for delivery of product with quality defects. Pursuant to the sales contract, this customer demanded payment of a penalty of 20% of the contract price plus penalties for late delivery and damages in the amounts of 36,103,640 RMB. In connection with this contingent liability, we recorded a loss from sales contract dispute of $5,806,778 which has been reflected as a loss from sale contract dispute in operating expenses on the accompanying statements of operations and comprehensive loss and has been reflected in accrued expenses at December 31, 2015. Additionally, in December 2015, we increased our allowance for doubtful accounts by approximately $1,759,000 which represents this customer's full amount of outstanding accounts receivable. We are currently discussing this issue with the customer and we are unable to determine if the accounts receivable balance will be collected. Also, we increased our reserve for obsolete inventories by approximately $836,000 for all remaining inventories manufactured to the specifications of such customer and not readily saleable to other customers, and we incurred an impairment charge of approximately $1,900,000 for equipment used for this customer's products which did not have other uses.

We expect that our revenues from petroleum and chemical equipment segment will significantly decrease in 2016 and beyond due to the loss of this customer.

We are evaluating the viability of this segment on an ongoing basis and, if we determine that it is not likely that we will be able to operate this segment profitably, we may discontinue operating in this segment. However, we have not completed our evaluation as of the date of this report. Any discontinuation of this segment may result in further impairment charges relating to the assets associated with this segment.

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. Three major suppliers provided approximately 47% and 49% of our purchases of inventories for the years ended December 31, 2015 and 2014, respectively. No other supplier accounted for 10% or more of our purchases during the years ended December 31, 2015 and 2014.

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, 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.

The Huayang Companies are considered VIEs, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with the Huayang Companies pursuant to which we shall receive 100% of the Huayang Companies' net income. In accordance with these agreements, the Huayang Companies 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 the Huayang Companies.

The accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies sales are included in our total sales, their 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 the Huayang Companies that require consolidation of the Huayang Companies 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, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or market 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:

                                                     Useful Life
                Building and building improvements   5 - 20 Years
                Manufacturing equipment              5 - 10 Years
                Office equipment and furniture         5 Years
                Vehicles                               5 Years

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.

Included in property and equipment is construction-in-progress which consists of factories and office buildings under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

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.

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, forged rolled rings and other components, petroleum and chemical 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 2015 and 2014, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal.

Rental income is recognized on a straight-line basis over the term of the operating lease and is presented net of depreciation.

All other product sales with customer specific acceptance provisions, including the forged rolled rings, 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 laws of the PRC and the United States. Income taxes are accounted for pursuant to ASC 740 "Accounting for Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred 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 changed 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.

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 period the employee or director is required to perform the services in exchange for the award. 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. 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 subsidiaries. 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.

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