Cn Energy Group. Inc 6-K, filed Sep 30, 2024
Cn Energy Group. Inc. (CNEY)
About this 6-K
Cn Energy Group. Inc filed this 6-K on September 30, 2024.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of September 2024
Commission File Number:
The People’s Republic of China
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒ Form 40-F ☐
EXPLANATORY NOTE
CN Energy Group. Inc. (the “Company”) is furnishing this report of foreign private issuer on Form 6-K to provide the six-month interim financial statements for the period ended March 31, 2024 and incorporate such financial statements into the Company’s registration statement referenced below.
This report of foreign private issuer on Form 6-K is hereby incorporated by reference into the registration statement on Form F-3 of the Company (File Number 333-264579), as amended, and into the prospectus outstanding under the foregoing registration statement, to the extent not superseded by documents or reports subsequently filed or furnished by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Forward Looking Statements
This Report on Form 6-K includes “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ from their expectations, estimates and projections and consequently, you should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believes,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include, without limitation, our expectations with respect to future performance and anticipated financial impacts. These forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from the expected results. Most of these factors are outside our control and are difficult to predict. Factors that may cause such differences include, but are not limited to risks and uncertainties incorporated by reference under “Risk Factors” in the Registrant’s Form 20-F (001-39978) filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2024 (the “Form 20-F”) and in the Registrant’s other filings with the SEC. The Registrant cautions that the foregoing factors are not exclusive. The Registrant cautions readers not to place undue reliance upon any forward-looking statements, which speak only as of the date made. The Registrant does not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based.
| 2 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CN Energy Group. Inc. |
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Date: September 30, 2024 | By: | /s/ Wenhua Liu |
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| Name: | Wenhua Liu |
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| Title: | Interim Chief Executive Officer |
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EXHIBIT INDEX | ||
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Exhibit |
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No. |
| Description |
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| Management’s Discussion and Analysis Of Financial Condition and Results of Operations | |
101 |
| Interactive Data Files (formatted as Inline XBRL) |
104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| 4 |
EXHIBIT 99.1
CN ENERGY GROUP. INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2024 AND 2023
CN ENERGY GROUP. INC.
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Table of contents |
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Unaudited Condensed Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023 |
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| F-5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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| F-1 |
| Table of Contents |
CN ENERGY GROUP. INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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| March 31, |
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| September 30, |
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| 2024 |
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| 2023 |
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ASSETS |
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Current Assets: |
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Cash |
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Accounts receivable, net |
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Inventories, net |
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Advances to suppliers, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Biological assets, net |
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Property, plant and equipment, net |
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Land use right, net |
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Long-term deposits |
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Prepayment for property, plant and equipment |
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Right-of-use assets |
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Intangible assets, net |
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Total Assets |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Short-term loans |
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Long-term loans, current portion |
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Convertible notes |
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Accounts payable |
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Deferred revenue, current |
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Due to related parties |
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Taxes payable |
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Lease liabilities |
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Prepayment from customers |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term loans, non-current portion |
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Deferred revenue, non-current |
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Deferred tax liabilities |
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Total liabilities |
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Commitments and contingencies |
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Shareholders’ Equity: |
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Class A ordinary share, no par value, unlimited number of shares authorized; |
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Class B ordinary share, no par value, unlimited number of shares authorized; |
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Additional paid-in capital |
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Statutory reserves |
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Accumulated deficits |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Total Liabilities and Shareholders’ Equity |
| $ |
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| $ |
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* Retrospectively restated for effect of 1-for-30 reverse share split on January 18, 2024 (see Note 21).
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
| Table of Contents |
CN ENERGY GROUP. INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(UNAUDITED)
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| For the six months ended, March 31 |
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| 2024 |
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| 2023 |
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| (unaudited) |
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Revenues |
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| $ |
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Cost of revenues |
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Gross profit |
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Operating expenses: |
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Allowance for receivables and inventories |
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Selling expenses |
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General and administrative expenses |
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Research and development expenses |
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Total operating expenses |
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Loss from operations |
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Other income (expenses): |
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Interest expense |
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Government subsidy income |
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Interest income |
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Other income |
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Total other (expense) income, net |
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Loss before income taxes |
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Income tax benefits (expenses) |
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Net loss |
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Net loss |
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Other comprehensive (loss) income: |
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Foreign currency translation gain |
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Comprehensive loss |
| ($ |
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| ($ |
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Loss per share |
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Basic |
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Diluted |
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Weighted average shares outstanding* |
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Basic |
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Diluted |
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* Retrospectively restated for effect of 1-for-30 reverse share split on January 18, 2024 (see Note 21).
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
| Table of Contents |
CN ENERGY GROUP. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2024 AND 2023
(UNAUDITED)
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| Retained |
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| Accumulated |
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| Ordinary Shares* |
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| Additional |
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| Earnings |
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| Other |
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| Total |
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| Class A Ordinary Shares |
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| Class B Ordinary Shares |
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| Paid-in |
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| Statutory |
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| (Accumulated |
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| Comprehensive |
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| Shareholders’ |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Reserves |
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| Deficit) |
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| Income (Loss) |
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| Equity |
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Balance as of September 30, 2022 |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| ($ |
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| $ |
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Issuance of ordinary shares for private placement, net |
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| - |
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Issuance of ordinary shares for acquisition |
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| - |
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Issuance of ordinary shares and warrants, net |
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| - |
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Issuance of ordinary share for services |
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| - |
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Net loss for the period |
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| - |
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| - |
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Appropriation to statutory reserve |
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| - |
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| - |
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Foreign currency translation gain |
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| - |
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| - |
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Balance as of March 31, 2023 |
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| $ |
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Balance as of September 30, 2023 |
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| $ |
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| $ |
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Issuance of ordinary shares for convertible notes redemption |
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Issuance of ordinary shares for warrants exercised |
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| - |
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Effect of reverse share split |
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| - |
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Net loss for the period |
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| - |
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| - |
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Appropriation to statutory reserve |
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| - |
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| - |
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Foreign currency translation gain |
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| - |
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| - |
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Balance as of March 31, 2024 |
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| $ |
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| $ |
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| $ |
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| $ |
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* Retrospectively restated for effect of 1-for-30 reverse share split on January 18, 2024 (see Note 21).
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
| Table of Contents |
CN ENERGY GROUP. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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| For the six months ended March 31, |
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| 2024 |
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| 2023 |
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Cash flows from operating activities: |
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Net loss |
| ($ |
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| ($ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Allowance for accounts receivable |
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Allowance for advances to suppliers |
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Allowance for prepaid expenses and other current assets |
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Allowance for inventories |
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Depreciation expense |
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Loss on disposal of property and equipment |
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Amortization of operating lease right-of-use assets |
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Amortization of intangible assets and land use right |
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Depreciation of biological assets |
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Deferred income taxes |
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Amortization of deferred revenue |
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Amortization of debts issuance costs |
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Interest expenses |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Advances to suppliers |
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Prepaid expenses and other current assets |
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Accounts payable |
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Operating lease liabilities |
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Taxes payable |
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Accrued expenses and other current liabilities |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Other receivables |
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Purchase of treasury shares |
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| - |
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Purchase of property, plant and equipment |
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Acquisition of a subsidiary, net of cash |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Proceeds from convertible notes |
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Proceeds from issuance of shares and warrants |
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Proceeds from warrants exercised |
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Proceeds from related parties loans |
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Repayment of bank loans |
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Proceeds from bank loans |
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Net cash provided by financing activities |
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Effect of exchange rate changes on cash |
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Net decrease in cash |
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Cash, beginning of period |
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Cash, end of period |
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Supplemental disclosure information: |
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Cash paid for income tax |
| $ |
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| $ |
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Cash paid for interest |
| $ |
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| $ |
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Supplemental non-cash activities: |
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Issuance of shares for acquisition |
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| $ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-5 |
| Table of Contents |
Note 1 – Organization and nature of business
CN ENERGY GROUP. INC. (“CN Energy”) is a holding company incorporated under the laws of the British Virgin Islands on November 23, 2018. CN Energy, through its subsidiaries (collectively, the “Company”), manufactures and supplies wood-based activated carbon that is primarily used in pharmaceutical manufacturing, industrial manufacturing, water purification, environmental protection, and food and beverage production (“Activated Carbon Production”), and produces of biomass electricity generated in the process of producing activated carbon (“Biomass Electricity Production”).
Reorganization
In connection with its initial public offering, the Company undertook a reorganization of its legal structure (the “Reorganization”). The Reorganization involved: (1) the incorporation of CN Energy, a British Virgin Islands holding company; (2) the incorporation of Clean Energy Holdings Limited (“Energy Holdings”), a Hong Kong holding company; (3) the incorporation of Zhejiang CN Energy Technology Development Co., Ltd. (“Zhejiang CN Energy”) and Manzhouli CN Energy Industrial Co., Ltd. (“Manzhouli CN Energy”), two new wholly foreign-owned enterprises (the “WFOEs,” and each a “WFOE”) formed by Energy Holdings under the laws of the People’s Republic of China (“China” or the “PRC”); (4) the incorporation of Manzhouli CN Energy Technology Co., Ltd. (“Manzhouli CN Technology”), a PRC company, of which
In accordance with Accounting Standards Codification (“ASC”) 805-50-25, the Reorganization has been accounted for as a recapitalization among entities under common control since the same shareholders controlled all these entities prior to the Reorganization. The consolidation of CN Energy and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. Results of operations for the period presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period. By eliminating the effects of intra-entity transactions in determining the results of operations for the period before the Reorganization, those results will be on substantially the same basis as the results of operations for the period after the date of Reorganization.
The effects of intra-entity transactions on current assets, current liabilities, revenue, and cost of sales for periods presented and on retained earnings at the beginning of the periods presented are eliminated to the extent possible. Furthermore, ASC 805-50-45-5 indicates that the financial statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information.
In May and June 2021, the Company conducted another reorganization in order to simplify its corporate structure and make use of supportive government policies. The reorganization consisted of (i) the transfer of
| F-6 |
| Table of Contents |
Note 1 – Organization and nature of business (Continued)
Reorganization (Continued)
CN Energy, the ultimate holding company, currently owns
On March 31, 2022, CN Energy USA Inc (“CN Energy USA”) was incorporated under the laws of the State of Delaware, the United States of America. CN Energy owns 100% of the equity interests in CN Energy USA.
On April 8, 2022, Zhoushan Xinyue Trading Co., Ltd (“Zhoushan Trading”) was incorporated under the laws of the PRC. Hangzhou Forasen owns 100% of the equity interests in Zhoushan Trading.
On April 13, 2022, Ningbo Nadoutong Trading Co., Ltd (“Ningbo Trading”) was incorporated under the laws of the PRC. CN Energy Development owns 100% of the equity interests in Ningbo Trading.
On October 11, 2022, Zhejiang Yongfeng New Material Technology Co., Ltd. (“Zhejiang Yongfeng New Material”) was incorporated under the laws of the PRC. Hangzhou Forasen owns 100% of the equity interests in Zhejiang Yongfeng New Material.
On November 11, 2022, CN Energy completed an acquisition of MZ Mining International Co., Ltd (“MZ HK”), a Hong Kong company that wholly owns MZ Pintai Mining (Zhejiang) Co., Ltd (“MZ Pintai”), which is a Chinese company that wholly owns Yunnan Yuemu Agriculture and Forestry Technology Co., Ltd (“Yunnan Yuemu”), pursuant to an equity transfer agreement (the “Equity Transfer Agreement”) dated September 30, 2022 with Shenzhen Xiangfeng Trading Co., Ltd. (the “Seller”). The Seller is independent from all directors and officers of CN Energy, and the Company itself. Pursuant to the Equity Transfer Agreement, the Seller first transferred 100% of its equity interests in Yunnan Honghao Forestry Development Co., Ltd. (“Yunnan Honghao”), a wholly owned subsidiary of the Seller, to Yunnan Yuemu, and the Seller then sold and transferred, and CN Energy purchased and acquired, 100% of its equity interests in MZ HK for a consideration of $
Currently, CN Energy has subsidiaries in countries and jurisdictions including the PRC, Hong Kong, the British Virgin Islands, and the State of Delaware. Details of the subsidiaries of CN Energy are set out below:
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| F-7 |
| Table of Contents |
Note 2 – Summary of significant accounting policies
Basis of presentation and principles of consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal years ended September 30, 2023 and 2022. Operating results for the six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending September 30, 2024.
The unaudited condensed consolidated financial statements of the Company reflect the principal activities of CN Energy and its subsidiaries. All significant intercompany balances and transactions are eliminated upon consolidation.
Use of estimates
In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include, but are not limited to, the valuation of inventory, accounts receivable, advances to suppliers, notes receivable, other receivables, useful lives of property, plant and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition, and realization of deferred tax assets. Actual results could differ from those estimates.
| F-8 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer payment history, customer’s current credit-worthiness, and current economic trends. Accounts are written off against the allowance after efforts at collection prove unsuccessful.
Inventories
The Company values its inventory at the lower of cost, determined on a weighted average basis, or net realizable value. Costs include the cost of raw materials, freight, direct labor, and related production overhead. Net realizable value is estimated using selling price in the normal course of business less any costs to complete and sell products. The Company reviews its inventory periodically to determine if any reserves are necessary for potential obsolescence or if the carrying value exceeds net realizable value.
The costs of forestry inventories are transferred from biological assets at their costs at the point of harvest. The cost of inventories also includes capitalized production costs, including labor, materials, post-harvest costs, and depreciation. Inventoried costs are transferred to cost of goods sold in the same period as when the products are sold.
Forestry inventories, capitalized production costs, and biological asset adjustments are measured at the lower of cost or net realizable value. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period when the write-down or loss occurs.
Advances to suppliers
Advances to suppliers consist of balances paid to suppliers for services and materials that have not been provided or received. The Company reviews its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance.
Biological assets
The Company’s biological assets consist of forests which are not yet harvested. Biological assets are initially measured at cost and subsequently depreciated on a straight-line basis over its estimated useful lives. The Company capitalizes all related direct and indirect costs of production to the biological assets at costs at each reporting date. At the point of harvest, the biological assets are transferred to inventory at their costs.
| F-9 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Property, plant, and equipment
Property, plant, and equipment are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use.
Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. The estimated useful lives for significant property and equipment are as follows:
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Property and buildings |
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Machinery and equipment |
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Vehicles |
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Office equipment |
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Expenditures for maintenance and repair, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments, which substantially extend the useful life of assets, are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in income from operations in the consolidated statements of income and comprehensive income.
Construction-in-progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction-in-progress is not depreciated. Upon completion and ready for intended use, construction-in-progress is reclassified to the appropriate category within property, plant, and equipment.
Prepayment for property and equipment represents payment made for production line equipment to be installed in the new production plant in Manzhouli City. Prepayment for property and equipment is not depreciated. Upon readiness for intended use, prepayment for property and equipment is reclassified to the appropriate category within property, plant, and equipment.
Land use right
Land use right is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful life which is
Intangible assets
Intangible assets consist primarily of patents and software. Intangible assets are stated at cost less accumulated amortization, which are amortized using the straight-line method with the following estimated useful lives:
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| Useful life |
Purchased patents |
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Software |
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| F-10 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of September 30, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill.
The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date.
The measurement period is the period from the date of acquisition to the date the Company obtains complete information about facts and circumstances that existed as of the acquisition date and is subject to a maximum of one year from acquisition date.
Impairment of long-lived assets
The Company reviews long-lived assets, including definitive-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets as of March 31, 2024 and September 30, 2023.
| F-11 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Leases
The Company accounts for leases following ASC 842, Leases (“Topic 842”).
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and includes initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term. See Note 18 for further discussion.
Fair value of financial instruments
The Company applies ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair value measurement.
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| · | Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| · | Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| · | Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions about what assumptions market participants would use in pricing the asset or liability based on the best available information. |
Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented herein.
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, term deposit, notes receivable, accounts receivable, advances to suppliers, other receivables, prepaid expenses and other current assets, short-term bank loans, long-term bank loans, current accounts payable, deferred revenue, current, due to related parties, taxes payable, and accrued expenses and other current liabilities approximate their recorded values due to their short-term maturities. The fair value of long-term bank loan and operating lease liabilities approximate their recorded values as their stated interest rates approximate the rates currently available.
| F-12 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Revenue recognition
The Company accounts for revenue recognition under Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). Revenue of the Company is mainly from the sale of two types of products, activated carbon and biomass electricity generated in the process of producing activated carbon. For the sale of activated carbon, the Company recognizes revenue when title and risk of loss passes and the customer accepts the products, which occurs at delivery. Product delivery is evidenced by warehouse shipping log as well as signed shipping bills from the shipping company, or by receipt document signed by the customer upon delivery, depending on the delivery term negotiated between the Company and customers on a customer-by-customer basis. For the sale of biomass electricity, revenue is recognized over time as the biomass electricity is delivered, which occurs when the biomass electricity is transmitted from the power plant of the Company to the provincial power grid company. The amount is based on the reading of meters, which occurs on a systematic basis throughout each reporting period and represents the market value of the biomass electricity delivered.
The Company also provides technical service to customers who purchase activated carbon from the Company. The revenue of technical service is recognized on a straight-line basis over the service period as earned.
The transaction price of activated carbon and technical services is determined based on fixed consideration in the Company’s customer contracts. Pursuant to the power purchase agreements entered into between the Company and the respective provincial power grid company, the Company’s sales of biomass electricity were made to the power grid company at the tariff rates agreed upon with the provincial power grid company as approved by the relevant government authorities in the PRC. In determining the transaction price, no significant financing components exist since the timing from when the Company invoices its customers to when payment is received is less than one year.
Revenue is reported net of all value added taxes. The Company generally does not permit customers to return products and historically, customer returns have been immaterial. In the event the Company receives an advance from a customer, such advance is recorded as a liability to the Company. The Company reduces the liability and recognizes revenue after the delivery of goods occurs.
The core principle underlying ASC 606 is that the Company recognizes revenue to represent the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s sales contracts of activated carbon have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Therefore, the sale of activated carbon is recognized at a point in time. The Company’s sales contracts of biomass electricity have a single performance obligation that represents a promise to transfer to the customer a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The Company’s performance obligation is satisfied over time as biomass electricity is delivered.
There were no contract assets as of March 31, 2024 and September 30, 2023. For the six months ended March 31, 2024 and 2023, revenue recognized from performance obligations related to prior periods was insignificant. Revenue expected to be recognized in any future periods related to remaining performance obligations is insignificant.
| F-13 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
The Company has elected the following practical expedients in applying ASC 606:
| · | Unsatisfied Performance Obligations – for all performance obligations related to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606, and therefore is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. |
|
|
|
| · | Contract Costs - all incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration. |
|
|
|
| · | Significant Financing Component - the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. |
|
|
|
| · | Sales Tax Exclusion from the Transaction Price - the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer. |
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|
|
| · | Shipping and Handling Activities - the Company elected to account for shipping and handling activities as a fulfillment cost rather than as a separate performance obligation. |
Refer to Note 20—Segment reporting for details of revenue disaggregation.
Cost of revenue
Cost of revenue includes cost of raw materials purchased, inbound freight cost, cost of direct labor, depreciation expense, and other overhead. Write-down of inventory for lower of cost or net realizable value adjustments is also recorded in cost of revenue.
Research and development expenses
Research and development expenses include costs directly attributable to the conduct of research and development projects, including the cost of salaries and other employee benefits. All costs associated with research and development are expensed as incurred.
Shipping and handling
All shipping and handling costs are expensed as incurred and included in selling expenses. Total shipping and handling expenses were nil and $
Government subsidy income
The Company receives various government grants from time to time. There is no guarantee that the Company will continue to receive such grants in the future. For the six months ended March 31, 2024 and 2023, the Company had subsidy income of $
In January 2014, April 2014, and December 2019, the Company received government subsidies of approximately $
Income taxes
CN Energy’s subsidiaries in the USA, PRC and Hong Kong are subject to the income tax laws of the USA, PRC and Hong Kong, respectively. No taxable income was generated outside the PRC for the six months ended March 31, 2024 and 2023. The Company accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or future deductibility is uncertain.
ASC 740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of March 31, 2024 and September 30, 2023. As of March 31, 2024, the tax returns for the calendar years ended December 31, 2016 through December 31, 2023 for CN Energy’s PRC subsidiaries remain open for statutory examination by PRC tax authorities.
| F-14 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Value added tax (“VAT”)
Sales revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to
Each local tax authority at times may grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. Khingan Forasen and its branch office, Greater Khingan Range Forasen Energy Technology Co., Ltd. Tahe Biopower Plant (“Biopower Plant”), are entitled to
Concentrations of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, term deposit, notes receivable, accounts receivable, advances to suppliers, and other receivables. All of the Company’s cash is maintained with banks within the PRC. Cash maintained in banks within the PRC of less than RMB0.5 million ($
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under U.S. GAAP are recorded as elements of shareholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of foreign currency translation adjustment from the Company not using U.S. dollar as its functional currency.
Foreign currency translation
The Company’s financial information is presented in U.S. dollars. The functional currency of the Company is the Renminbi (“RMB”), the currency of the PRC. Any transactions denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of income as foreign currency transaction gain or loss. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. The financial information is first prepared in RMB and then translated into U.S. dollars at period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
The exchange rate in effect as of March 31, 2024 and September 30, 2023 was US$1 for RMB
| F-15 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Earnings Per Share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, Earnings per Share. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is computed by dividing net income attributable to all classes of ordinary shareholders of the Company by the weighted average number of shares of all classes of ordinary shares outstanding during the applicable period, and is the same amount for the Company’s Class A ordinary shares and Class B ordinary shares. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential ordinary shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There was no anti-dilutive effect for the six months ended March 31, 2024 and 2023.
Statement of cash flows
In accordance with ASC 230, Statement of Cash Flows, cash flows from the Company’s operations are formulated based upon the local currencies, and then translated at average translation rates for the periods. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Risks and uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases, and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. RMB is not freely convertible into foreign currencies under the current law. In the PRC, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of the PRC. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.
The Company does not carry any business interruption insurance, product liability insurance, or any other insurance policy except for a limited property insurance policy. As a result, the Company may incur uninsured losses, increasing the possibility that investors would lose their entire investment in the Company.
| F-16 |
| Table of Contents |
Note 2 – Summary of significant accounting policies (Continued)
Recent accounting pronouncements
The Company considers the applicability and impact of all ASUs. Management periodically reviews new accounting standards that are issued.
In September 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The FASB is issuing the amendments to enhance the transparency and decision usefulness of income tax disclosures. Investors currently rely on the rate reconciliation table and other disclosures, including total income taxes paid, to evaluate income tax risks and opportunities. While investors find these disclosures helpful, they suggested possible enhancements to better (1) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (2) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (3) identify potential opportunities to increase future cash flows. The FASB decided that the amendments should be effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance did not have a material impact on its financial position, results of operations and cash flows.
In July 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in ASU 2023-07 improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance did not have a material impact on its financial position, results of operations and cash flows.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial position, statements of operations, cash flows, and disclosures.
| F-17 |
| Table of Contents |
Note 3 – Accounts receivable, net
Accounts receivable consisted of the following:
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| March 31, |
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| September 30, |
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| 2024 |
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| 2023 |
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| (unaudited) |
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Accounts receivable |
| $ |
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| $ |
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Less: allowance for doubtful accounts |
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| ( | ) |
Accounts receivable, net |
| $ |
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| $ |
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The Company’s accounts receivable primarily include balances due from customers when the Company’s activated carbon products and biomass electricity are sold and delivered to customers.
The movement of allowance for doubtful accounts was as follows:
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| March 31, |
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| September 30, |
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| 2024 |
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| 2023 |
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| (unaudited) |
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Balance as of beginning of period |
| $ |
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| $ |
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Addition |
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Reversal |
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| ( | ) |
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Translation adjustments |
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| ( | ) | |
Balance as of end of period |
| $ |
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| $ |
| ||
Note 4 – Inventory
Inventory consisted of the following:
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| March 31, |
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| September 30, |
| ||
|
| 2024 |
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| 2023 |
| ||
|
| (unaudited) |
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Raw materials |
| $ |
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| $ |
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Finished goods |
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Sub-total |
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Less: allowance for inventory |
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| ( | ) |
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| ( | ) |
Total |
| $ |
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| $ |
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The movement of allowance for inventory was as follows:
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| March 31, |
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| September 30, |
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| 2024 |
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| 2023 |
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|
| (unaudited) |
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Balance as of beginning of period |
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Addition |
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Reversal |
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| ( | ) |
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Translation adjustments |
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|
|
|
| ||
Balance as of end of period |
| $ |
|
| $ |
| ||
Note 5 – Advances to suppliers, net
Advances to suppliers represent prepayments made to ensure continuous high-quality supply and favorable purchase prices. Advances to suppliers consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Advances for raw materials purchase |
| $ |
|
| $ |
| ||
Less: allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Advances to suppliers, net |
| $ |
|
| $ |
| ||
The movement of allowance for doubtful accounts was as follows:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Balance as of beginning of period |
| $ |
|
| $ |
| ||
Addition |
|
|
|
|
| |||
Reversal |
|
| |
|
|
| ( | ) |
Translation adjustments |
|
| ( | ) |
|
|
| |
Balance as of end of period |
| $ |
|
| $ |
| ||
| F-18 |
| Table of Contents |
Note 6 – Biological assets
Biological assets mainly consist forest for future wood harvest and sales, of which the
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Biological assets |
| $ |
|
| $ |
| ||
Less: accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Biological assets, net |
| $ |
|
| $ |
| ||
Depreciation expenses were $
Note 7 – Property, plant, and equipment, net
Property, plant, and equipment, stated at cost less accumulated depreciation, consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Machinery and equipment |
| $ |
|
| $ |
| ||
Property and buildings |
|
|
|
|
|
| ||
Vehicles |
|
|
|
|
|
| ||
Office equipment |
|
|
|
|
|
| ||
Subtotal |
|
|
|
|
|
| ||
Construction in progress |
|
|
|
|
|
| ||
Less: accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Property, plant and equipment, net |
| $ |
|
| $ |
| ||
Depreciation expense was $
| F-19 |
| Table of Contents |
Note 8 – Land use right, net
Land use right, net consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Land use right |
| $ |
|
| $ |
| ||
Less: accumulated amortization |
|
| ( | ) |
|
| ( | ) |
Land use right, net |
| $ |
|
| $ |
| ||
Amortization expense was $
Estimated future amortization expense is as follows:
|
| Amortization |
| |
|
| expense |
| |
Remainder of fiscal 2024 |
| $ |
| |
Fiscal 2025 |
|
|
| |
Fiscal 2026 |
|
|
| |
Fiscal 2027 |
|
|
| |
Fiscal 2028 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
| |
Note 9 – Long-term deposits
Long-term deposits consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Construction deposit (a) |
| $ |
|
| $ |
| ||
Deposit for acquisition of land use rights (b) |
|
|
|
|
|
| ||
Long-term deposits |
| $ |
|
| $ |
| ||
(a) | On June 25, 2020, the Company entered into a construction agreement with a third party, Manzhouli Lancheng Project Management Co., Ltd., for the first stage of construction of the Company’s new facility in Manzhouli City, China. Pursuant to the agreement, the Company made a payment of RMB |
(b) | The Company paid a deposit of RMB |
| F-20 |
| Table of Contents |
Note 10 – Prepayment for property, plant and equipment
As of March 31, 2024, the Company had prepayment in the amount of $
Note 11 – Intangible assets, net
Intangible assets, net consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Software |
| $ |
|
| $ |
| ||
Purchased patents |
|
|
|
|
|
| ||
Subtotal |
|
|
|
|
|
| ||
Less: accumulated amortization |
|
| ( | ) |
|
| ( | ) |
Intangible assets, net |
| $ |
|
| $ |
| ||
Amortization expenses were $
Estimated future amortization expenses are as follows:
|
| Amortization |
| |
|
| expense |
| |
Remainder of fiscal 2024 |
| $ |
| |
Fiscal 2025 |
|
|
| |
Fiscal 2026 |
|
|
| |
Fiscal 2027 |
|
|
| |
Fiscal 2028 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
| |
| F-21 |
| Table of Contents |
Note 12 – Short-term and long-term bank loans
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Short-term loans |
|
|
|
|
|
| ||
Industrial and Commercial Bank of China |
| $ |
|
| $ |
| ||
Bank of Beijing |
|
|
|
|
|
| ||
China Resources Shenzhen Guotou Trust Co., Ltd |
|
|
|
|
|
| ||
China Zheshang Bank Co., Ltd. |
|
|
|
|
|
| ||
Pingan Bank Co., Ltd. |
|
|
|
|
|
| ||
Total short-term loans |
| $ |
|
| $ |
| ||
Long-term loans |
|
|
|
|
|
|
|
|
Long-term loans, current portion |
|
|
|
|
|
|
|
|
Xiaoshan Rural Commercial Bank |
| $ |
|
| $ |
| ||
Kincheng Bank Co., Ltd. |
|
|
|
|
|
| ||
Total long-term loans, current portion |
| $ |
|
| $ |
| ||
Long-term loans, non-current portion |
|
|
|
|
|
|
|
|
Kincheng Bank Co., Ltd. |
|
|
|
| $ |
| ||
Total long-term loans, non-current portion |
|
|
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Total long-term loans |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Total short-term and long-term loans |
| $ |
|
| $ |
| ||
| F-22 |
| Table of Contents |
Note 12 – Short-term and long-term bank loans
The following table summarizing the loan commencement date, loan maturity date, loan amount in RMB and its equivalent to the United States dollar, and the effective interest rate of each secured and unsecured short-term and long-term bank loan:
|
| Loan |
| Loan |
| Loan |
|
| Loan |
|
| Effective |
|
|
| |||||
|
| commencement |
| maturity |
| amount |
|
| amount |
|
| interest |
|
|
| |||||
As of March 31, 2024 |
| date |
| date |
| in RMB |
|
| in USD |
|
| rate |
|
| Note |
| ||||
Secured short-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Industrial and Commercial Bank of China |
| May 25, 2022 |
| April 19, 2024 |
|
| 4,500,000 |
|
| $ |
|
|
| % |
|
| 1,8 |
| ||
Industrial and Commercial Bank of China |
| June 24, 2022 |
| May 28, 2024 |
|
| 5,000,000 |
|
|
|
|
|
| % |
|
| 2,8 |
| ||
Bank of Beijing |
| December 9, 2022 |
| December 8, 2023 |
|
| 5,000,000 |
|
|
|
|
|
| % |
|
| 3,8 |
| ||
Bank of Beijing |
| May 31, 2023 |
| May 30, 2024 |
|
| 3,500,000 |
|
|
|
|
|
| % |
|
| 3,8 |
| ||
China Zheshang Bank Co., Ltd. |
| June 29, 2023 |
| June 28, 2024 |
|
| 4,900,000 |
|
|
|
|
|
| % |
|
| 4,8 |
| ||
Pingan Bank Co., Ltd. |
| December 7, 2022 |
| December 5, 2023 |
|
| 3,000,000 |
|
|
|
|
|
| % |
|
| 5,8 |
| ||
Total secured short-term loans |
|
|
|
|
|
| 25,900,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
Unsecured short-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Resources Shenzhen Guotou Trust Co., Ltd |
| July 3, 2023 |
| June 13, 2024 |
|
| 5,000,000 |
|
| $ |
|
|
| % |
|
| 8 |
| ||
Industrial and Commercial Bank of China |
| December 7, 2022 |
| November 22, 2023 |
|
| 1,500,000 |
|
|
|
|
|
| % |
|
| 8 |
| ||
Industrial and Commercial Bank of China |
| December 8, 2022 |
| November 22, 2023 |
|
| 1,500,000 |
|
|
|
|
|
| % |
|
| 8 |
| ||
Total unsecured short-term loans |
|
|
|
|
|
| 8,000,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term loans |
|
|
|
|
|
| 33,900,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured long-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kincheng Bank Co., Ltd. |
| November 30, 2022 |
| December 1, 2024 |
|
| 1,083,333 |
|
|
|
|
|
| % |
|
| 6,8 |
| ||
Xiaoshan Rural Commercial Bank |
| July 19, 2022 |
| July 17, 2025 |
|
| 3,000,000 |
|
|
|
|
|
| % |
|
| 7,8 |
| ||
Total long-term loans |
|
|
|
|
|
| 4,083,333 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term loans |
|
|
|
|
|
| 37,983,333 |
|
| $ |
|
|
|
|
|
|
|
|
| |
| F-23 |
| Table of Contents |
Note 12 – Short-term and long-term bank loans
|
| Loan |
| Loan |
| Loan |
|
| Loan |
|
| Effective |
|
|
| |||||
|
| commencement |
| maturity |
| amount |
|
| amount |
|
| interest |
|
|
| |||||
As of September 30, 2023 |
| date |
| date |
| in RMB |
|
| in USD |
|
| rate |
|
| Note |
| ||||
Secured short-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Industrial and Commercial Bank of China |
| May 25, 2022 |
| April 19, 2024 |
|
| 4,500,000 |
|
| $ |
|
|
| % |
|
| 1 |
| ||
Industrial and Commercial Bank of China |
| June 24, 2022 |
| May 28, 2024 |
|
| 5,000,000 |
|
|
|
|
|
| % |
|
| 2 |
| ||
Bank of Beijing |
| December 9, 2022 |
| December 8, 2023 |
|
| 5,000,000 |
|
|
|
|
|
| % |
|
| 3 |
| ||
Bank of Beijing |
| May 31, 2023 |
| May 30, 2024 |
|
| 3,500,000 |
|
|
|
|
|
| % |
|
| 3 |
| ||
China Zheshang Bank Co., Ltd. |
| June 29, 2023 |
| June 28, 2024 |
|
| 4,900,000 |
|
|
|
|
|
| % |
|
| 4 |
| ||
Pingan Bank Co., Ltd. |
| December 7, 2022 |
| December 5, 2023 |
|
| 3,000,000 |
|
|
|
|
|
| % |
|
| 5 |
| ||
Total secured short-term loans |
|
|
|
|
|
| 25,900,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
Unsecured short-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Resources Shenzhen Guotou Trust Co., Ltd |
| July 3, 2023 |
| June 13, 2024 |
|
| 5,000,000 |
|
| $ |
|
|
| % |
|
|
|
| ||
Industrial and Commercial Bank of China |
| December 7, 2022 |
| November 22, 2023 |
|
| 1,500,000 |
|
|
|
|
|
| % |
|
| 8 |
| ||
Industrial and Commercial Bank of China |
| December 8, 2022 |
| November 22, 2023 |
|
| 1,500,000 |
|
|
|
|
|
| % |
|
| 8 |
| ||
Total unsecured short-term loans |
|
|
|
|
|
| 8,000,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term loans |
|
|
|
|
|
| 33,900,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured long-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kincheng Bank Co., Ltd. |
| November 30, 2022 |
| December 1, 2024 |
|
| 1,250,000 |
|
|
|
|
|
| % |
|
| 6 |
| ||
Xiaoshan Rural Commercial Bank |
| July 19, 2022 |
| July 17, 2025 |
|
| 3,000,000 |
|
|
|
|
|
| % |
|
| 7 |
| ||
Total long-term loans |
|
|
|
|
|
| 4,250,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term and long-term loans |
|
|
|
|
|
| 38,150,000 |
|
| $ |
|
|
|
|
|
|
|
|
| |
(1) | The loan is guaranteed by a third party, Heilongjiang Xinzheng Financing Guarantee Group Co., Ltd., for up to 80% of the outstanding principal and normal interest balance. |
|
|
(2) | The loan is guaranteed by a third party, Heilongjiang Xinzheng Financing Guarantee Group Co., Ltd., for up to |
|
|
(3) | The loan is guaranteed by a third party, Hangzhou High Tech Financing Guarantee Co., Ltd, Mr. Wenhua Liu, Ms. Yefang Zhang, principal shareholder, and Mr. Zhengyu Wang, former CEO and spouse of principal shareholder, for up to |
|
|
(4) | The loan is guaranteed by Ms. Yefang Zhang, principal shareholder, Ms. Xinyang Wang, former CEO of the Company and CN Energy Development, a subsidiary of the Company. |
|
|
(5) | The loan is guaranteed by Mr. Wenhua Liu, a director of CN Energy, for up to RMB6.5 million ($ |
|
|
(6) | The loan is guaranteed by Mr. Wenhua Liu, a director of CN Energy, for up to RMB6.5 million ($ |
|
|
(7) | The loan is guaranteed by a subsidiary of the Company, CN Energy Development. |
|
|
(8) | These loans are overdue and in default. The Company plans to divest these affected subsidiaries to third parties by September 30, 2024 to resolve the loan issues. |
| F-24 |
| Table of Contents |
Note 13 - Convertible note
On December 30, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company issued to the Investor an unsecured convertible note, on December 30, 2022, in the original principal amount of $
Under the Agreement, the Investor has the right to redeem the Note sixty (60) days after the purchase price of the Note was delivered by the Investor to the Company, and redemptions may be satisfied in cash or Class A Ordinary Shares, at the Company’s election. However, the Company will be required to pay the redemption amount in cash, if there is an Equity Conditions Failure (as defined in the Note). If the Company elects to satisfy a redemption in Class A Ordinary Shares, such Class A Ordinary Shares shall be issued at a redemption conversion price of the lower of (i) $
The Note does not contain a floor price for the possible future redemption conversions into Class A Ordinary Shares, and a future conversion pursuant to the Agreement could potentially result in a substantial dilutive effect on the existing shareholders of the Company. Pursuant to the relevant Nasdaq Listing Rule guidance, the Nasdaq Staff has stated its position that, in determining whether the issuance of a future priced security raises public interest concerns, Nasdaq Staff will consider, among other things, whether a future priced security includes features to limit the potential dilutive effect of its conversion or exercise, including floors on the conversion or exercise price. To limit the potential dilutive effect of a redemption conversion on the existing shareholders of the Company, the board of directors of the Company approved on February 15, 2023 that the Company shall repay the Note in cash in the event any redemption conversions would result in the aggregate effective conversion price falling below $
On November 29, 2023, the Company entered into a forbearance agreement (the “Agreement”) with the Investor, pursuant to which the Investor agreed to refrain and forbear from bringing any action to enforce any remedies against the Company for failure to deliver the cash amount in accordance to a certain redemption notice delivered to the Company by the Lender on November 20, 2023 (the “Forbearance”). In exchange for the Forbearance, the Company agreed to pay the Lender a forbearance fee equal to 3.25% of the outstanding balance as of the date of the Agreement.
The Forbearance will terminate immediately upon the Company’s failure to comply with certain terms and conditions set forth in the Agreement. Upon termination of the Forbearance, the Investor may seek all recourse available to it under the terms of the Note, the Agreement, any other documents entered into in conjunction therewith, or applicable laws. In addition, except as expressly set forth in the Agreement, the Forbearance does not constitute a waiver of, or an amendment to, any right, power, or remedy of the Investor under the Note or all other documents entered into in conjunction therewith as in effect prior to the date of the Agreement.
On December 1, 2023,
| F-25 |
| Table of Contents |
Note 14 – Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Advances from third parties |
| $ |
|
| $ |
| ||
Payroll payable |
|
|
|
|
|
| ||
Interest payable |
|
|
|
|
|
| ||
Accrued expenses |
|
|
|
|
|
| ||
Accrued expenses and other current liabilities |
| $ |
|
| $ |
| ||
Advances from third parties are unsecured with no interest and are repayable on demand.
Note 15 – Related party transactions
The relationship and the nature of related party transactions are summarized as follow:
Name of Related Party | Relationship to the Company | Nature of Transactions |
Yefang Zhang | Principal shareholder | Providing personal guarantee as an additional security for loans, payables and receivables, providing personal guarantee for a lawsuit for potential losses |
Zhengyu Wang | Former CEO, spouse of Ms. Yefang Zhang | Providing personal guarantee as an additional security for loans |
Xinyang Wang | Former CEO of the Company | Providing personal guarantee as an additional security for loans |
Hangzhou Forasen Energy Technology Co., Ltd. | Controlled by Mr. Zhengyu Wang, spouse of Ms. Yefang Zhang | Lease of office space to the Company |
Wenhua Liu | A director of the Company and Interim Chief Executive Officer | Providing personal guarantee as an additional security for loans |
Jinwu Huang | Chief Financial Officer | Providing advances for working capital. |
Due to a related party
As of March 31, 2024 and September 30, 2023, the Company owed Yefang Zhang $
As of March 31, 2024 and September 30, 2023, the Company owed Jinwu Huang $
Operating lease from related parties
On October 8, 2021, Zhejiang New Material entered into a lease agreement with Zhejiang Forasen Energy Technology Co., Ltd., a PRC company controlled by Mr. Zhengyu Wang, to lease approximately
Guarantees provided by related parties
The Company’s related parties provide guarantees for the Company’s short-term and long-term loans (see Note 12).
| F-26 |
| Table of Contents |
Note 16 – Taxes
Corporation Income Tax
The Company is subject to income taxes on an entity basis on income derived from the location in which each entity is domiciled.
CN Energy is incorporated in the British Virgin Islands as an offshore holding company and is not subject to tax on income or capital gain under the laws of the British Virgin Islands.
Under the Hong Kong tax laws, an entity, that incorporated under the laws of Hong Kong China, is not subject to income tax if no revenue is generated in Hong Kong.
Under the Enterprise Income Tax (“EIT”) Law of the PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified
The following table reconciles the statutory rate to the Company’s effective tax rate:
|
| For the six months ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
China Statutory income tax rate |
|
| % |
|
| % | ||
Effect of PRC preferential tax rate and tax exemption |
|
| % |
|
|
| ||
Research and development (“R&D”) tax credit |
|
| % |
|
| % | ||
Effect of non-taxable government subsidy income |
|
|
|
|
| % | ||
Non-PRC entities not subject to PRC tax |
| ( |
|
| ( |
| ||
Change in valuation allowance |
|
| % |
|
| % | ||
Others |
| ( |
|
| ( |
| ||
Effective tax rate |
|
| % |
| ( |
| ||
| F-27 |
| Table of Contents |
Note 16 – Taxes (Continued)
The income tax expenses consisted of the following:
|
| For the six months ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Current income tax expenses |
| $ |
|
| $ |
| ||
Deferred income tax expenses |
|
| ( | ) |
|
|
| |
Income tax expenses |
| ($ |
|
| $ |
| ||
Deferred tax liabilities and assets attributable to different tax jurisdictions are not offset. Components of deferred tax assets and liabilities were as follows:
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
Deferred tax assets: |
| (unaudited) |
|
|
| |||
Net operating loss carryforwards |
| $ |
|
| $ |
| ||
Allowance on receivables |
|
|
|
|
|
| ||
Allowance on inventory |
|
|
|
|
|
| ||
Valuation allowance on net operating loss |
|
| ( | ) |
|
| ( | ) |
Total |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accelerated depreciation of equipment |
| $ |
|
| $ |
| ||
Total |
| $ |
|
| $ |
| ||
The Company’s PRC subsidiaries had cumulative net operating loss of approximately $
As of each reporting date, management considers evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. On the basis of this evaluation, valuation allowance of $
Note 17 – Concentration of major customers and suppliers
For the six months ended March 31, 2024, three major customers accounted for approximately
As of March 31, 2024, three major customers accounted for
For the six months ended March 31, 2024, two major suppliers accounted for approximately
As of March 31, 2024, four suppliers accounted for approximately
| F-28 |
| Table of Contents |
Note 18 – Leases
On October 8, 2021, Zhejiang New Material entered into a lease agreement with Hangzhou Forasen Energy Technology Co., Ltd., a PRC company controlled by Mr. Zhengyu Wang, spouse of Ms. Yefang Zhang, to lease approximately
As of March 31, 2024 and September 30, 2023, the remaining average lease term was an average of
Supplemental balance sheet information related to operating leases was as follows:
|
| As of |
|
| As of |
| ||
|
| March 31, |
|
| September 30, |
| ||
|
| 2024 |
|
| 2023 |
| ||
|
| (unaudited) |
|
|
| |||
Right-of-use assets under operating leases |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Operating lease liabilities, current |
|
|
|
|
|
| ||
Total operating lease liabilities |
|
|
|
| $ |
| ||
| F-29 |
| Table of Contents |
Note 19 – Commitments and contingencies
(a) Capital expenditure commitments
As of March 31, 2024, the Company had contractual obligations of approximately $
(b) Contingencies
The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Biopower Plant has not paid adequate social insurance for all its employees, and the Company’s PRC subsidiaries have not made adequate housing provident fund payments for all their employees. The relevant PRC authorities may order the Company to make up the contributions to these plans. In addition, failure to make adequate social insurance payments on time may subject the Company to
Note 20 – Segment reporting
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments, and major customers in financial statements for details on the Company’s business segments. The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker makes operating decisions and assesses performance solely based on activated carbon sales orders received. In addition, the production of activated carbon and the biomass electricity are one integrated process and inseparable. Therefore, the Company has determined that it has only one operating segment and therefore one reportable segment as defined by ASC.
The following table presents revenue by major product categories for the six months ended March 31, 2024 and 2023, respectively:
|
| For the six months ended March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Activated carbon |
| $ |
|
| $ |
| ||
Biomass electricity |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
All of the Company’s long-lived assets are located in the PRC. All of the Company’s products are sold in the PRC.
| F-30 |
| Table of Contents |
Note 21 – Shareholders’ equity
Ordinary shares
CN Energy is a holding company established under the laws of the British Virgin Islands on November 23, 2018. The Company had an unlimited number of Class A ordinary shares of no par value and an unlimited number of Class B ordinary shares of no par value.
Share consolidation or reverse share split
On January 18, 2024,
As of March 31, 2024 and September 30, 2023, the Company has
Public offering, warrants, and pre-funded warrants
On January 30, 2023, CN Energy entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), pursuant to which CN Energy agreed to sell to the Underwriter in a firm commitment
The Pre-funded Warrants are exercisable immediately (subject to the beneficial ownership cap) and may be exercised at any time in perpetuity until all of the Pre-funded Warrants are exercised in full. The warrants are exercisable immediately and expire five years, i.e. January 29, 2028, after their issuance date on January 30, 2023.
As a result of reverse share split on January 18, 2024, the exercise price was adjusted from $
For the six months ended March 31, 2024 and 2023,
| F-31 |
| Table of Contents |
Note 21 – Shareholders’ equity (Continued)
Issuance of shares for repayment of convertible note
On December 30, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company issued to the Investor an unsecured convertible note, on December 30, 2022, in the original principal amount of $
Under the Agreement, the Investor has the right to redeem the Note 60 days after the purchase price of the Note was delivered by the Investor to the Company, and redemptions may be satisfied in cash or Class A Ordinary Shares, at the Company’s election. However, the Company will be required to pay the redemption amount in cash, if there is an Equity Conditions Failure (as defined in the Note). If the Company elects to satisfy a redemption in Class A Ordinary Shares, such Class A Ordinary Shares shall be issued at a redemption conversion price of the lower of(i) $2.00 per share, subject to adjustment as provided in the Note, and (ii) 80% of the Nasdaq Minimum Price (as defined in the Note).
The Note does not contain a floor price for the possible future redemption conversions into Class A Ordinary Shares, and a future conversion pursuant to the Agreement could potentially result in a substantial dilutive effect on the existing shareholders of the Company. Pursuant to the relevant Nasdaq Listing Rule guidance, the Nasdaq Staff has stated its position that, in determining whether the issuance of a future priced security raises public interest concerns, Nasdaq Staff will consider, among other things, whether a future priced security includes features to limit the potential dilutive effect of its conversion or exercise, including floors on the conversion or exercise price. To limit the potential dilutive effect of a redemption conversion on the existing shareholders of the Company, the board of directors of the Company approved on February 15, 2023 that the Company shall repay the Note in cash in the event any redemption conversions would result in the aggregate effective conversion price falling below $
For the six months ended March 31, 2024 and 2023,
| F-32 |
| Table of Contents |
Note 21 – Shareholders’ equity (Continued)
Statutory reserves and restricted net assets
CN Energy’s ability to pay dividends primarily depends on CN Energy receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by CN Energy’s subsidiaries incorporated in the PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of CN Energy’s subsidiaries.
CN Energy’s PRC subsidiaries are required to set aside at least
Note 22 – Subsequent events
On September 12, 2024, the Company, through its wholly owned subsidiary CN Energy Development, entered into a Share Transfer Agreement (the “Agreement No. 1”) with Zhejiang Sentuo Industrial Holding Group., Ltd. (“Sentuo”). Pursuant to the Agreement No. 1, CN Energy Development agreed to transfer all of its equity interest in Hangzhou Forasen, which constituted
On September 25, 2024, the Company, through its wholly owned subsidiaries in China, Zhejiang CN Energy and Manzhouli CN Energy, entered into a Share Transfer Agreement (the “Agreement No. 2”) with Xinbaocheng Industrial Group Co., Ltd. (“Xinbaocheng”). Pursuant to the Agreement No. 2, Zhejiang CN Energy agreed to transfer 90% of its equity in CN Energy Development, and Manzhouli CN Energy agreed to transfer its
| F-33 |
EXHIBIT 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our company’s financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Results of Operations for the Six Months Ended March 31, 2024 and 2023
The following table summarizes our results of operations for the six months ended March 31, 2024 and 2023:
|
|
| For the six months ended, March 31 |
|
| Variance |
| ||||||||||
|
|
| 2024 |
|
| 2023 |
|
| Amount |
|
| % |
| ||||
| Revenues |
| $ | 31,285,396 |
|
| $ | 22,675,117 |
|
| $ | 8,610,279 |
|
|
| 38.0 | % |
| Cost of revenues |
|
| (31,220,004 | ) |
|
| (21,876,277 | ) |
|
| 9,343,727 |
|
|
| 42.7 | % |
| Gross profit |
|
| 65,392 |
|
|
| 798,840 |
|
|
| (733,448 | ) |
| (91.8) | % | |
| Allowance for receivables and inventories |
|
| (995,155 | ) |
|
| (2,005,902 | ) |
|
| (1,010,747 | ) |
| (50.4) | % | |
| Selling expenses |
|
| - |
|
|
| (44,082 | ) |
|
| (44,082 | ) |
| (100.0) | % | |
| General and administrative expenses |
|
| (1,659,355 | ) |
|
| (2,521,813 | ) |
|
| (862,458 | ) |
| (34.2) | % | |
| Research and development expenses |
|
| (133,290 | ) |
|
| (589,090 | ) |
|
| (455,800 | ) |
| (77.4) | % | |
| Loss from operations |
|
| (2,722,408 | ) |
|
| (4,362,047 | ) |
|
| (1,639,639 | ) |
| (37.6) | % | |
| Interest expense |
|
| (285,371 | ) |
|
| (274,696 | ) |
|
| 10,675 |
|
|
| 3.9 | % |
| Government subsidy income |
|
| 40,936 |
|
|
| 426,629 |
|
|
| (385,693 | ) |
| (90.4) | % | |
| Interest income |
|
| 358 |
|
|
| 282 |
|
|
| 76 |
|
|
| 27.0 | % |
| Other income |
|
| 2,183 |
|
|
| 42,795 |
|
|
| (40,612 | ) |
| (94.9) | % | |
| Loss before income taxes |
|
| (2,964,302 | ) |
|
| (4,167,037 | ) |
|
| (1,202,735 | ) |
| (28.9) | % | |
| Income tax expenses |
|
| 8,935 |
|
|
| (4,141 | ) |
|
| 13,076 |
|
|
| 315.8 | % |
| Net loss |
| $ | (2,955,367 | ) |
| $ | (4,171,178 | ) |
| $ | (1,215,811 | ) |
| (29.1) | % | |
Revenue
Revenue for the six months ended March 31, 2024 increased by $8.6 million, or 38.0%, to $31.3 million from $22.7 million for the same period of last year. The increase was mainly due to an increase in sales volume of activated carbon from 15,036 tons in 2023 to 25,496 tons in 2024.
Cost of revenues
Cost of activated carbon increased by $9.3 million, or 42.7%, to $31.2 million for the six months ended March 31, 2024 from $21.9 million for the same period of last year. The increase was mainly due to the increased sales volume of activated carbon from 15,036 tons in 2023 to 25,496 tons in 2024, which contributed to an increase in cost of activated carbon by $15.2 million. The increase was partially offset by a decrease in the average unit cost of activated carbon by $227, or 15.6%, to $1,225 per ton in 2024 from $1,451 per ton in 2023, which contributed to a decrease of cost of activated carbon by $5.7 million. The decrease in the average unit cost was mainly due to: (1) the decreased purchase price of activated carbon from external suppliers as compared to the same period in the prior year; and (2) lower costs for the main raw materials used in the production of activated carbon, such as wood chips.
| 2 |
Gross profit
Gross profit was $65,392 for the six months ended March 31, 2024, a decrease by $0.7 million, or 91.8%, from $0.8 million for the same period of last year. Gross profit margin was 0.2% in 2024, as compared with 3.5% in 2023. The decrease by 3.3% points was primarily attributable to competition in the market which caused a decrease in average selling price and, in turn, gross profit margin for activated carbon.
Allowance for receivables and inventories
Allowance for receivables and inventories decreased by $1.0 million to $1.0 million for the six months ended March 31, 2024 from $2.0 million for the same period of last year. The decrease was primarily due to the decrease in ageing of certain accounts receivable.
Selling expenses
Selling expenses decreased by $44,082, or 100%, to nil for the six months ended March 31, 2024 from $44,082 for the same period of last year. The decrease was primarily due to a lower shipping expenses as most of the customers chose to pick up the activated carbon products themselves instead of having the operating entities ship the products to them.
General and administrative expenses
General and administrative expenses decreased by $0.9 million, or 34.2%, to $1.7 million for the six months ended March 31, 2024 from $2.5 million for the same period of last year. The decrease was primarily attributable to reduction of headcount of $0.4 million, and decrease in legal and other professional expenses of $0.6 million.
Research and Development Expenses
Research and development expenses include costs directly attributable to the conduct of research and development projects, including raw materials, equipment parts, salaries, and other employee benefits. Research and development expenses decreased by $0.5 million, or 77.4%, to $0.1 million for the six months ended March 31, 2024, from $0.6 million for the same period of last year as the Company reduced spending in research and development expenses.
Interest expenses
Interest expenses increased by $10,675, or 3.9%, to $0.3 million for the six months ended March 31, 2024 from $0.3 million for the same period of last year. The increase was minimal and insignificant.
Government subsidy income
The operating entities receive various government subsidies from time to time, such as the “VAT refund” and “Special Fund Subsidy.” Their government subsidies were all granted by local governments in recognition of their achievements. We cannot predict the likelihood or amount of any future subsidies.
| 3 |
Our subsidiary Khingan Forasen and its branch office, Tahe Biopower Plant, are entitled to obtain a 70% VAT refund as they meet the requirements of national comprehensive utilization of resources program. There is no guarantee that the Company will continue to receive such grants in the future. For the six months ended March 31, 2024 and 2023, the Company had subsidy income of $40,936 and $426,629, including $40,936 and $121,142 for equipment of energy projects grants, and nil and $305,487 of value-added tax refund, respectively.
In January 2014, April 2014, and December 2019, the Company received government subsidies of approximately $840,000, $140,000 and $140,000 for equipment of energy projects, respectively. These subsidies were one-time grants, and the Company recognizes the income over the useful lives of the equipment. As of March 31, 2024 and September 30, 2023, the balance of unrecognized government grants was $220,212 and $202,165, respectively, which was recorded in deferred revenue.
Net loss
As a result of the foregoing, net loss for the six months ended March 31, 2024 and 2023 was $3.0 million and $4.2 million, respectively.
| 4 |
B. Liquidity and Capital Resources
The principal source of liquidity is our operations. The primary drivers and material factors impacting our liquidity and capital resources include our ability to generate sufficient cash flows from our operations. We plan to support our future operations primarily from cash generated from our operations. We may require additional cash due to business expansion or other future developments. If our future cash is insufficient to meet our requirements, we may further to seek to issue debt or equity securities or obtain additional credit facilities.
As of March 31, 2024, we had cash of $0.1 million, and total working capital of $52.7 million. In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments.
We are a holding company incorporated in the British Virgin Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. We have relied on direct payments of expenses by our revenue generating subsidiaries to meet our obligations to date. Furthermore, cash transfers from our PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to their parent companies outside of China, or otherwise satisfy their foreign currency denominated obligations.
Cash flows for the six months ended March 31, 2024, and 2023
Cash Flows
The following table sets forth a summary of our cash flows for the period indicated:
|
|
| For the six months ended March 31, |
| |||||
|
|
| 2024 |
|
| 2023 |
| ||
| Net cash used in operating activities |
| $ | (579,200 | ) |
| $ | (29,286,121 | ) |
| Net cash provided by (used in) investing activities |
|
| 24,448 |
|
|
| (1,009,107 | ) |
| Net cash provided by financing activities |
|
| 483,690 |
|
|
| 11,704,858 |
|
| Effect of exchange rate changes on cash |
|
| 1,976 |
|
|
| 1,219,847 |
|
| Net decrease in cash |
|
| (69,086 | ) |
|
| (17,370,523 | ) |
| Cash, beginning of period |
|
| 195,502 |
|
|
| 18,046,872 |
|
| Cash, end of period |
| $ | 126,416 |
|
| $ | 676,349 |
|
| 5 |
Operating activities
Net cash used in operating was $0.6 million for the six months ended March 31, 2024. The net cash used in operating activities was primarily attributable to the following:
| · | Net loss of $3.0 million; |
| · | Reduction of accounts receivable of $3.7 million due to collection; |
| · | Reduction of accounts payable of $2.7 million due to payment to creditors, |
The decrease was partially offset by an increase in advances to suppliers of $8.9 million.
Investing activities
Net cash provided by investing activities of $24,448 for the six months ended March 31, 2024 was primarily attributable to the collection of other receivables of $25,000.
Financing activities
Net cash provided by financing activities of $0.5 million for the six months ended March 31, 2024 was primarily attributable to proceeds from warrants exercised of $0.1 million and proceeds from related parties loans of $0.4 million.
Contractual Obligations
As of March 31, 2024, contractual obligations were as follows:
| Contractual obligations |
| Total |
|
| 2024 |
|
| 2025 |
| |||
| Short-term loans |
| $ | 4,695,096 |
|
| $ | 4,695,096 |
|
|
| - |
|
| Long-term loans |
|
| 565,535 |
|
|
| 565,535 |
|
|
| - |
|
| Total |
| $ | 5,260,631 |
|
| $ | 5,260,631 |
|
|
| - |
|
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ 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. Moreover, we do not have any variable interest in any unconsolidated entity that we provide financing, liquidity, market risk, or credit support to or engages in hedging or research and development services with us.
| 6 |