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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F/A

(Amendment No.2)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended December 31, 2021

OR

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

ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission file number 000-22113

EURO TECH HOLDINGS COMPANY LIMITED
(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

Unit D, 18/F., Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong

(Address of principal executive offices)

David YL Leung

FAX:852-28734887

Unit D, 18/F., Gee Chang Hong Centre

65 Wong Chuk Hang Road

Hong Kong

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Ordinary Shares, no par value |  | CLWT |  | NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None.

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None.

(Title of Class)

Indicate the number of issued and outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report 7,732,132 Ordinary Shares

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posed on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

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

Large accelerated filer | ☐ | Non-accelerated Filer | ☒
Accelerated filer | ☐ | Emerging Growth Company | ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

†The term “new or revised financial accounting standards” refers to any update by the Financial Accounting Standards Board to its accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP | ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ | Other | ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

EXPLANATORY NOTE

Euro Tech Holdings Company Limited (the “Company”) is filing this Amendment No. 2 on Form 20-F/A (this “Amendment”) to the Annual Report on Form 20-F for the fiscal year ended December 31, 2021 (the “Original Filing”), which was originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 16, 2022 (the “Original Filing Date”), and subsequently amended by an Amendment No.1 on Form 20-F/A filed with the SEC on September 23, 2022 (as amended, the “Amended Report”), to revise Item 15 “Controls and Procedures” and to file a revised Report of Independent Registered Public Accounting Firm of Union Power HK CPA Limited.

This Amendment speaks as of the Original Filing Date (unless otherwise noted or as the context otherwise requires). Except as described above, no changes have been made to the Amended Report, and this Amendment does not modify, amend or update the financial or other information contained in the Amended Report. This Amendment does not reflect any events that have occurred on or after the Original Filing Date. Among other things, the Company has not revised forward-looking statements made in the Original Filing to reflect events that occurred or facts that became known to the Company after the Original Filing Date. Accordingly, this Amendment should be read in conjunction with the Original Filing, the Amended Report and the Company’s other filings with the SEC subsequent to the filing of the Original Filing. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment also includes certifications under the Sarbanes-Oxley Act of 2002.

TABLE OF CONTENTS

Explanatory Note |  |  |
ITEM 15. | CONTROLS AND PROCEDURES |  | 4 |
ITEM 18. | FINANCIAL STATEMENTS |  | 5 |
ITEM 19. | EXHIBITS |  | 5 |

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ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 20-F/A.

Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include controls and procedures designed to ensure that information is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective to accomplish their objectives at the reasonable assurance level. In light of this fact, our management has performed additional analyses, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting described below, the consolidated financial statements for the periods covered by and included in this Annual Report on Form 20-F/A fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, they used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management have concluded that, as of December 31, 2021, our internal control over financial reporting was ineffective because of the material weakness described below.

The material weakness that was identified is our lack of sufficient financial reporting and accounting personnel with appropriate levels of knowledge, experience and training in the application of U.S. GAAP and SEC reporting requirements commensurate with our financial reporting requirements.

Management is in the process of re-assessing the design of certain control activities and developing its remediation plan for the above identified weaknesses. The Company’s actions are subject to ongoing senior management review, as well as Audit Committee oversight. The Company will implement following remedial measures within its resources as soon as practicable: establishing an internal audit function or engaging an external consulting firm, to assist with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal controls and implement regular U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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ITEM 18. FINANCIAL STATEMENTS

The consolidated financial statements of each of Euro Tech Holdings Company Limited and Zhejiang Tianlan Environmental Protection Technology Company Limited are included at the end of this annual report.

ITEM 19. EXHIBITS

Lists of Exhibits

Exhibit No. |  | Description
3.1 |  | Amended and Restated Memorandum and Articles of Association (1)
3.2 |  | Amendments to Exhibit 3.1 ( 2)
4.11 |  | Registrant’s Audit Committee Charter (3)
4.13 |  | Euro Tech Holdings Company Limited 2019 Stock Option and Incentive Plan (4)
8.1 |  | List of Subsidiaries*
12.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
12.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
13.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
13.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101 .INS* |  | XBRL Instance Document
101 .SCH* |  | XBRL Taxonomy Extension Schema Document
101 .CAL* |  | XBRL Taxonomy Extension Calculation Linkbase Document
101 .DBF* |  | XBRL Taxonomy Extension Definition Linkbase Document
101 .LAB* |  | XBRL Taxonomy Extension Label Linkbase Document
101 .PRE* |  | XBRL Taxonomy Extension Presentation Linkbase Document

* Filed with this Amendment.

1. | Incorporated by reference, previously filed as an Exhibit to Registrant’s Form 6-K on November 30, 2011.
2. | Incorporated by reference, previously filed as an Exhibit to Registrant’s Form 6-K on February 6, 2012.
3. | Incorporated by reference, previously filed as an Exhibit to Registrant’s Form 20-F filed on August 19, 2002.
4. | Incorporated by reference, previously filed as an Exhibit to Registrant’s Form 6-K on April 25, 2019.

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorize the undersigned to sign this annual report on its behalf.

| EURO TECH HOLDINGS COMPANY LIMITED |
| (REGISTRANT) |
February 6, 2023 | By: | /s/ David YL Leung |
|  | David YL Leung |
|  | Chief Executive Officer |
|  | (Principal Executive Officer) |

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EURO TECH HOLDINGS COMPANY LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|  | Page |
Report of Independent Registered Public Accounting Firm (PCAOB ID 3004) |  | F-2 to F-3 |
Consolidated Balance Sheets as of December 31, 2021 and 2020 |  | F-4 |
Consolidated Statements of Operations and Comprehensive Income / (Loss) for the years ended December 31, 2021, 2020 and 2019 |  | F-5 to F-6 |
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 |  | F-7 |
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019 |  | F-8 |
Notes to the Consolidated Financial Statements |  | F-9 to F-45 |

F-1
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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

Euro Tech Holdings Company Limited

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Euro Tech Holdings Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income / (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2021 and 2020, and the results of its consolidated operations and its consolidated cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Restatement of the 2021 Consolidated Financial Statements

As discussed in Note 2 (ai) to the consolidated financial statements, the 2021 consolidated financial statements have been restated to correct a misstatement.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-2
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Report of Independent Registered Public Accounting Firm (Cont’d)

To the Board of Directors and Shareholders of

Euro Tech Holdings Company Limited

Critical Audit Matter (Cont’d)

Revenue Recognition

As described further in Note 2 to the consolidated financial statements, revenues derived from long-term contracts in the engineering segments are recognized as the performance obligations are satisfied over time. The Group uses output method to recognize revenue. The Group’s contracts may include variable consideration related to contract modifications through change orders or claims, and management must also estimate the variable consideration the Group expects to receive in order to estimate the total contract revenue. We identified revenue recognized over time to be a critical audit matter.

The principal considerations for our determination that revenue recognized over time is a critical audit matter is that auditing management’s estimate of the progress toward completion of its projects was complex and subjective. In addition, auditing the Group’s measurement of variable consideration is also complex and highly judgmental and can have a material effect on the amount of revenue recognized.

Our audit procedures related to revenue recognized over time included the following, among others.

· | We obtained an understanding and evaluated the design on the operating effectiveness of the Group’s processes and controls related to contract revenue recognition;
· | We tested the estimated variable consideration by evaluating the appropriate application of the most likely amount method, and tracing amounts to supporting documentation;
· | We evaluated management’s ability to reasonably estimate costs by performing a comparison of the actual costs to prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the estimated costs;
· | We evaluated management’s methodologies and the consistency of management’s methodologies over the life of the contracts;
· | We tested the original estimated costs and profit margins on engineering projects that were commenced and completed during the year ended December 31, 2021, by obtaining the original estimates, compare to the actual costs and profit margin for the completed contracts and investigate significant changes; and
· | We tested the estimated costs to complete engineering projects that were not completed during the year ended December 31, 2021 by comparing the estimated cost to complete at December 31, 2021 to actual cost incurred subsequent to December 31, 2021.

/s/ Union Power HK CPA Limited

We have served as the Company’s auditor since 2018.

Hong Kong, the People’s Republic of China

May 13, 2022, except for the effects of the restatement discussed in Note 2 (ai) to the consolidated financial statements, as to which the date is September 23, 2022

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EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Assets |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  |  | 5,269 |  |  |  | 3,519 |
Restricted cash |  |  | 1,411 |  |  |  | 1,672 |
Accounts receivable, net |  |  | 3,631 |  |  |  | 3,199 |
Prepayments and other current assets |  |  | 572 |  |  |  | 1,514 |
Contract assets |  |  | 74 |  |  |  | 202 |
Inventories |  |  | 547 |  |  |  | 342 |
Total current assets |  |  | 11,504 |  |  |  | 10,448 |
Property, plant and equipment, net |  |  | 215 |  |  |  | 259 |
Investments in affiliates |  |  | 8,077 |  |  |  | 8,084 |
Goodwill |  |  | 1,071 |  |  |  | 1,071 |
Operating lease right-of-use assets |  |  | 238 |  |  |  | 233 |
Deferred tax assets |  |  | 145 |  |  |  | - |
Total non-current assets |  |  | 9,746 |  |  |  | 9,647 |
Total assets |  |  | 21,250 |  |  |  | 20,095 |
Liabilities and shareholders’ equity |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Bank borrowings |  |  | 376 |  |  |  | 361 |
Accounts payable |  |  | 3,151 |  |  |  | 2,394 |
Contract liabilities |  |  | 1,076 |  |  |  | 1,063 |
Other payables and accrued expenses |  |  | 1,585 |  |  |  | 1,593 |
Current portion of long-term operating lease obligations |  |  | 175 |  |  |  | 118 |
Income tax payable |  |  | 42 |  |  |  | 4 |
Total current liabilities |  |  | 6,405 |  |  |  | 5,533 |
Deferred tax liabilities |  |  | 3 |  |  |  | 5 |
Long-term operating lease obligations, net of current maturities |  |  | 41 |  |  |  | 94 |
Total non-current liabilities |  |  | 44 |  |  |  | 99 |
Total liabilities |  |  | 6,449 |  |  |  | 5,632 |
Commitments and contingencies (Note 21) |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |
Ordinary share, 20,000,000 shares authorized as of December 31, 2021 and 2020, respectively 7,899,832*no par value shares issued as of December 31, 2021 and 2020 |  |  | 123 |  |  |  | 123 |
Additional paid-in capital |  |  | 9,670 |  |  |  | 9,615 |
Treasury stock, 167,700 shares at cost as of December 31, 2021 and 2020, respectively |  |  | (786 | ) |  |  | (786 | )
PRC statutory reserves |  |  | 316 |  |  |  | 316 |
Accumulated other comprehensive income |  |  | 787 |  |  |  | 851 |
Retained earnings |  |  | 3,774 |  |  |  | 3,816 |
Total shareholders’ equity attributable to Euro Tech Holdings Company Limited |  |  | 13,884 |  |  |  | 13,935 |
Non-controlling interests |  |  | 917 |  |  |  | 528 |
Total shareholders’ equity |  |  | 14,801 |  |  |  | 14,463 |
Total liabilities and shareholders’ equity |  |  | 21,250 |  |  |  | 20,095 |

* Retroactively restated for effect of the stock splits effected in the form of bonus shares

The accompanying notes form an integral part of these consolidated financial statements.

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EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Revenues |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 9,619 |  |  |  | 9,476 |  |  |  | 11,877 |
Engineering |  |  | 11,769 |  |  |  | 3,881 |  |  |  | 5,522 |
Total revenues |  |  | 21,388 |  |  |  | 13,357 |  |  |  | 17,399 |
Cost of revenues |  |  |  |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | (6,938 | ) |  |  | (7,048 | ) |  |  | (9,285 | )
Engineering |  |  | (8,755 | ) |  |  | (2,624 | ) |  |  | (3,697 | )
Total cost of revenues |  |  | (15,693 | ) |  |  | (9,672 | ) |  |  | (12,982 | )
Gross profit |  |  | 5,695 |  |  |  | 3,685 |  |  |  | 4,417 |
Finance costs |  |  | (3 | ) |  |  | (12 | ) |  |  | (4 | )
Selling and administrative expenses |  |  | (4,911 | ) |  |  | (5,374 | ) |  |  | (4,853 | )
(Loss) / Gain on disposal of property, plant and equipment |  |  | (10 | ) |  |  | 1,429 |  |  |  | (5 | )
Operating income / (loss) |  |  | 771 |  |  |  | (272 | ) |  |  | (445 | )
Interest income |  |  | 23 |  |  |  | 28 |  |  |  | 83 |
Other income , net |  |  | 127 |  |  |  | 307 |  |  |  | 52 |
Equity in income of affiliates |  |  | 355 |  |  |  | 435 |  |  |  | 137 |
Net income / (loss) before income taxes |  |  | 1,276 |  |  |  | 498 |  |  |  | (173 | )
Income taxes credit / (expense) |  |  | 90 |  |  |  | (96 | ) |  |  | (37 | )
Net income / (loss) |  |  | 1,366 |  |  |  | 402 |  |  |  | (210 | )
Net (income) / loss attributable to non-controlling interests |  |  | (377 | ) |  |  | 367 |  |  |  | 64 |
Net income / (loss) attributable to Euro Tech Holdings Company Limited’s shareholders |  |  | 989 |  |  |  | 769 |  |  |  | (146 | )
Other comprehensive income / (loss) |  |  |  |  |  |  |  |  |  |  |  |
Net income / (loss) |  |  | 1,366 |  |  |  | 402 |  |  |  | (210 | )
Foreign exchange translation adjustments |  |  | (52 | ) |  |  | (31 | ) |  |  | (8 | )
Comprehensive income / (loss) |  |  | 1,314 |  |  |  | 371 |  |  |  | (218 | )
Comprehensive (income) / loss attributable to non-controlling interests |  |  | (389 | ) |  |  | 350 |  |  |  | 78 |
Comprehensive income / (loss) attributable to the Company |  |  | 925 |  |  |  | 721 |  |  |  | (140 | )

The accompanying notes form an integral part of these consolidated financial statements.

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EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS) (CONT’D)

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Net income / (loss) per ordinary share attributable to Euro Tech Holdings Company Limited’s shareholders* |  |  |  |  |  |  |  |  |
- Basic |  | $ | US0.13 |  |  | $ | US0.10 |  |  | $ | US(0.02) |
- Diluted |  | $ | US0.13 |  |  | $ | US0.10 |  |  | $ | US(0.02) |
Weighted average number of ordinary shares outstanding* |  |  |  |  |  |  |  |  |  |  |  |
- Basic |  |  | 7,732,132 |  |  |  | 7,732,132 |  |  |  | 7,732,132 |
- Diluted |  |  | 7,732,132 |  |  |  | 7,732,132 |  |  |  | 7,732,132 |

* Retroactively restated for effect of the stock splits effected in the form of bonus shares

The accompanying notes form an integral part of these consolidated financial statements.

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EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net income / (loss) |  |  | 989 |  |  |  | 769 |  |  |  | (146 | )
Adjustments to reconcile net income / (loss) to net cash (used in) / provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Depreciation |  |  | 38 |  |  |  | 49 |  |  |  | 69 |
Loss / (gain) on disposal of property, plant and equipment |  |  | 10 |  |  |  | (1,429 | ) |  |  | 5 |
Stock-based compensation expense |  |  | 55 |  |  |  | 54 |  |  |  | 10 |
Non-controlling interests in income / (loss) of subsidiaries |  |  | 377 |  |  |  | (367 | ) |  |  | (64 | )
Equity in profit of affiliates |  |  | (355 | ) |  |  | (435 | ) |  |  | (137 | )
Deferred tax (credit) / expenses |  |  | (145 | ) |  |  | 92 |  |  |  | 37 |
Changes in non-current assets and liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Long-term operating lease obligations |  |  | (53 | ) |  |  | (122 | ) |  |  | 216 |
Operating lease right-of-use assets |  |  | (5 | ) |  |  | 173 |  |  |  | (406 | )
Decrease / (increase) in current assets: |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable, net |  |  | (432 | ) |  |  | 387 |  |  |  | 1,503 |
Prepayments and other current assets |  |  | 942 |  |  |  | (766 | ) |  |  | (201 | )
Contract assets |  |  | 128 |  |  |  | 239 |  |  |  | 458 |
Inventories |  |  | (205 | ) |  |  | 244 |  |  |  | (185 | )
Increase / (decrease) in current liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable |  |  | 757 |  |  |  | (1,520 | ) |  |  | (986 | )
Other payables and accrued expenses |  |  | (8 | ) |  |  | 451 |  |  |  | (108 | )
Contract liabilities |  |  | 13 |  |  |  | 194 |  |  |  | (501 | )
Income tax payable |  |  | 38 |  |  |  | 4 |  |  |  | - |
Current portion of long-term operating lease obligations |  |  | 57 |  |  |  | (52 | ) |  |  | 170 |
Net cash provided by / (used) in operating activities |  |  | 2,201 |  |  |  | (2,035 | ) |  |  | (266 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Purchase of property, plant and equipment |  |  | (4 | ) |  |  | (11 | ) |  |  | (21 | )
Proceeds from sale of property, plant and equipment |  |  | - |  |  |  | 1,835 |  |  |  | - |
Dividend received from affiliates |  |  | 362 |  |  |  | 71 |  |  |  | - |
Proceeds from sale of long-term investment |  |  | - |  |  |  | 148 |  |  |  | - |
Purchase of long-term investment |  |  | - |  |  |  | - |  |  |  | (148 | )
Net cash provided by / (used in) investing activities |  |  | 358 |  |  |  | 2,043 |  |  |  | (169 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Dividend paid |  |  | (1,031 | ) |  |  | (1,299 | ) |  |  | - |
Proceeds from bank borrowings |  |  | 782 |  |  |  | 804 |  |  |  | 565 |
Repayments to bank borrowings |  |  | (767 | ) |  |  | (1,008 | ) |  |  | - |
Net cash (used in) / provided by financing activities |  |  | (1,016 | ) |  |  | (1,503 | ) |  |  | 565 |
Effect of exchange rate changes on cash and cash equivalents |  |  | (54 | ) |  |  | (34 | ) |  |  | (7 | )
Net increase / (decrease) in cash and cash equivalents and restricted cash |  |  | 1,489 |  |  |  | (1,529 | ) |  |  | 123 |
Cash, cash equivalents and restricted cash at beginning of year |  |  | 5,191 |  |  |  | 6,720 |  |  |  | 6,597 |
Cash, cash equivalents and restricted cash at end of year |  |  | 6,680 |  |  |  | 5,191 |  |  |  | 6,720 |
Cash breakdown |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 5,269 |  |  |  | 3,519 |  |  |  | 5,991 |
Restricted cash |  |  | 1,411 |  |  |  | 1,672 |  |  |  | 729 |
|  |  | 6,680 |  |  |  | 5,191 |  |  |  | 6,720 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Supplemental disclosure of consolidated cash flow information: |  |  |  |  |  |  |  |  |  |  |  |
Cash paid during the period for income taxes |  |  | 20 |  |  |  | - |  |  |  | - |
Cash paid during the period for interest |  |  | 3 |  |  |  | 12 |  |  |  | 4 |
Operating leases (disclosed in accompanying Note 3) |  |  |  |  |  |  |  |  |  |  |  |
Non-cash items: |  |  |  |  |  |  |  |  |  |  |  |
Right-of-use assets obtained in exchange for new operating lease obligations |  |  | - |  |  |  | - |  |  |  | 460 |

The accompanying notes form an integral part of these consolidated financial statements.

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EURO TECH HOLDINGS COMPANY LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

|  | EURO TECH HOLDINGS COMPANY LIMITED’S SHARHOLDERS |  |  |  |  |  |  |
|  | Number of o rdinary Shares* |  |  | Ordinary Amount |  |  | Additional paid-in capital |  |  | Treasury stock |  |  | Accumulated other com- prehensive income |  |  | PRC statutory reserves |  |  | Retained earnings |  |  | Non- controlling interest s |  |  | Total |
|  |  |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Balance at December 31, 2018 |  |  | 7,899,832 |  |  |  | 123 |  |  |  | 9,551 |  |  |  | (786 | ) |  |  | 893 |  |  |  | 316 |  |  |  | 4,492 |  |  |  | 956 |  |  |  | 15,545 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (146 | ) |  |  | (64 | ) |  |  | (210 | )
Foreign currency translation adjustments |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | (14 | ) |  |  | (8 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 10 |
Balance at December 31, 2019 |  |  | 7,899,832 |  |  |  | 123 |  |  |  | 9,561 |  |  |  | (786 | ) |  |  | 899 |  |  |  | 316 |  |  |  | 4,346 |  |  |  | 878 |  |  |  | 15,337 |
Net income / (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 769 |  |  |  | (367 | ) |  |  | 402 |
Foreign currency translation adjustments |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (48 | ) |  |  | - |  |  |  | - |  |  |  | 17 |  |  |  | (31 | )
Dividend paid |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,299 | ) |  |  | - |  |  |  | (1,299 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 54 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 54 |
Balance at December 31, 2020 |  |  | 7,899,832 |  |  |  | 123 |  |  |  | 9,615 |  |  |  | (786 | ) |  |  | 851 |  |  |  | 316 |  |  |  | 3,816 |  |  |  | 528 |  |  |  | 14,463 |
Net income / (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 989 |  |  |  | 377 |  |  |  | 1,366 |
Foreign currency translation adjustments |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (64 | ) |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | (52 | )
Dividend paid |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,031 | ) |  |  | - |  |  |  | (1,031 | )
Stock-based compensation expense |  |  | - |  |  |  | - |  |  |  | 55 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 55 |
Balance at December 31, 2021 |  |  | 7,899,832 |  |  |  | 123 |  |  |  | 9,670 |  |  |  | (786 | ) |  |  | 787 |  |  |  | 316 |  |  |  | 3,774 |  |  |  | 917 |  |  |  | 14,801 |

* Retroactively restated for effect of the stock splits effected in the form of bonus shares

The accompanying notes form an integral part of these consolidated financial statements.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Organization and business

Euro Tech Holdings Company Limited (the “Company”) was incorporated in the British Virgin Islands on September 30, 1996.

Euro Tech (Far East) Limited (“Far East”) is the principal operating subsidiary of the Company. It is principally engaged in the marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems in Hong Kong and in the People’s Republic of China (the “PRC”).

The Group’s principal subsidiaries at December 31, 2021 and 2020 are set out below.

Name of entity |  | Ownership interest held by the Group |  |  | Place of incorporation and principal place of operation |  | Principal activities |
|  | 2021 |  |  | 2020 |  |  |  |  |  |
Euro Tech (Far East) Limited |  |  | 100 | % |  |  | 100 | % |  | Hong Kong |  | Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems |
Euro Tech Trading (Shanghai) Limited |  |  | 100 | % |  |  | 100 | % |  | The PRC |  | Inactive |
Shanghai Euro Tech Limited |  |  | 100 | % |  |  | 100 | % |  | The PRC |  | Manufacturing of analytical and testing equipment |
Shanghai Euro Tech Environmental Engineering Company Limited |  |  | - |  |  |  | 100 | % |  | The PRC |  | Inactive |
Euro Tech (China) Limited |  |  | - |  |  |  | - |  |  | Hong Kong |  | Inactive |

This company was dissolved on July 2, 2021.

This company was deregistered on April 3, 2020.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

1 Organization and business (Cont’d)

The Group’s principal subsidiaries at December 31, 2021 and 2020 are set out below (Cont’d).

Name of entity |  | Ownership interest held by the Group |  |  | Place of incorporation and principal place of operation |  | Principal activities |
|  | 2021 |  |  | 2020 |  |  |  |  |  |
Yixing Pact Environmental Technology Co., Ltd. |  |  | 58 | % |  |  | 58 | % |  | The PRC |  | Design, manufacturing and operation of water and waste water treatment machinery and equipment |
Pact Asia Pacific Limited |  |  | 58 | % |  |  | 58 | % |  | The British Virgin Islands |  | Selling of environmental protection equipment, undertaking environment protection projects and providing relevant technology advice, training and services |
Affiliate: |  |  |  |  |  |  |  |  |  |  |  |  |
Zhejiang Tianlan Environmental Protection Technology Co. Ltd. (“Blue Sky”) |  |  | 19.4 | %* |  |  | 19.4 | %* |  | The PRC |  | Design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted |

* The Group’s interest in Blue Sky has been counted for as an affiliate using the equity method as the Group has representation on both the Board and Executive Committee of Blue Sky, and the ability to participate in the decision-making process and exercise significant influence.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies

(a) Basis of presentation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

(b) Basis of consolidation

The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

(c) Subsidiaries

Subsidiaries are all entities over which the Group has control; has the power to appoint or remove the majority of the members of the board of directors; has the right to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

(d) Investments in affiliates

We account for our interest in an investment using the equity method of accounting per Accounting Standards Codification (“ASC”) No. 323, “Investments - Equity Method and Joint Ventures” if we are not the primary beneficiary of a VIE or do not have a controlling interest. The investment is recorded at cost and the carrying amount is adjusted periodically to recognize our proportionate share of income or loss, additional contributions made and dividends and capital distributions received. We record the effect of any impairment or other than temporary decrease in the value of the investment.

In the event a partially owned equity affiliate were to incur a loss and our cumulative proportionate share of the loss exceeded the carrying amount of the equity method investment, application of the equity method would be suspended and our proportionate share of further losses would not be recognized unless we committed to provide further financial support to the affiliate. We would resume application of the equity method once the affiliate became profitable and our proportionate share of the affiliate’s earnings equals our cumulative proportionate share of losses that were not recognized during the period the application of the equity method was suspended.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(e) Revenue recognition

Our revenue is derived from long-term contracts for customers in our engineering segment, as well as short-term contracts for customers in our trading and manufacturing segment. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customer), is as follows:

Performance obligations satisfied over time (Engineering services)

Recognition of performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering service projects typically span between several days to over 5 years. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, is not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (engineering).

Revenues are recognized as our obligations are satisfied over time, by reference to the progress towards complete satisfaction of that performance obligation.

If the Group expects the reference to progress certificates issued by the customers, with additional adjustments where necessary, depicts the Group’s performance in transferring control of goods or services promised to customers for individual projects, the Group satisfies the performance obligation over time and therefore, recognizes revenue over time in accordance with the output method for measuring progress. Under output method, revenue recognition is based on the stage of completion of the contracts, provided that the stage of contract completion and the gross billing value of contracting work can be measured reliably. The stage of completion of a contract is established by reference to the construction works certified by customers.

Remaining performance obligations (“RPOs”)

RPOs represent the amount of revenues we expect to recognize in the future from our contract commitments on projects and are hereafter referred to as “Backlog”. Backlog includes the entire expected revenue values for subsidiary we consolidate. Backlog may not be indicative of future operating results, and projects included in Backlog may be canceled, modified or otherwise altered by customers.

The Group had the following backlog:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Engineering segment |  |  | 5,400 |  |  |  | 11,581 |

Unrecognized contract revenue which is expected to be recognized in next 12 months is approximately US$5,400,000 (2020: US$11,581,000).

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(e) Revenue recognition (Cont’d)

Performance obligations satisfied over time (Engineering services) (Cont’d)

Variable consideration

Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration service provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

The Group estimates variable consideration for a performance obligation at the most likely amount to which the Group expects to be entitled (or the most likely amount the Group expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Group will be entitled (or will be incurred in the case of liquidated damages). The Group includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Group’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Group.

The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Group’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.

Performance obligations satisfied at a point-in-time (Trading and manufacturing)

Revenue for our trading and manufacturing contracts is recognized at a point in time. Sales are recognized when control of the products has transferred, being when the products are delivered to the customer. Delivery occurs when the products have been delivered to the point of receipt by customer.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(e) Revenue recognition (Cont’d)

Classification of contract assets and liabilities

For revenue recognized associated with its contracts with customers over time, for which the Group has an enforceable right to receive compensation. Many of our contracts contain specific provisions that determine when the Group can bill for its work performed under these contracts.

Any revenue earned on a contract that has not yet been billed to the customer is recorded as a contract asset on the Group’s consolidated balance sheets.

The Group’s consolidated balance sheets present contract liabilities that contain deferred revenue that represent any costs incurred on contracts in process for which revenue has not yet been recognized.

Rental income

Rental income from operating leases is recognized in consolidated statements of operations and comprehensive income /(loss) on a straight-line basis over the term of the relevant lease.

(f) Research and development costs

Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately US$61,000, US$497,000 and US$35,000 for the years ended December 31, 2021, 2020 and 2019 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).

(g) Advertising and promotional expenses

Advertising and promotional expenses (“A&P” expenses) are expensed as incurred. The A&P expenses amounted to approximately US$7,000, US$7,000 and US$13,000 for the years ended December 31, 2021, 2020 and 2019 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(h) Income taxes

The Group follows the liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. The Group also evaluates whether the recorded deferred tax assets and valuation allowances can be realized and, when necessary, reduces the amounts to what is expected to be realized.

The accounting guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Group does not believe it has any uncertain tax positions through the periods ended December 31, 2021, 2020 and 2019 respectively which would have a material impact on the Group’s consolidated financial statements.

Interest and penalties related to uncertain income tax positions are included in income tax expense on the Group’s consolidated statements of operations and comprehensive income / (loss). Interest and penalties actually incurred are charged to interest expense and the other income, respectively if applicable.

The Group files tax returns in Hong Kong and the PRC. The tax returns for 2021, 2020 and 2019 are subject to examination by Hong Kong and PRC taxing authorities, commencing with the first year filed.

(i) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, and bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal. There were no cash equivalents as of December 31, 2021 and 2020.

(j) Restricted cash

Restricted cash represents cash deposits retained with banks in the PRC for issuance of performance bonds and guarantees to the customers and cash deposited by the Group into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.

(k) Accounts receivable and allowance for doubtful accounts

The Group does not charge interest to its customers and carries its customer receivables at their face amounts, less an allowance for doubtful accounts. As is common practice in the industry, the Group classifies all accounts receivable as current assets.

The Group grants trade credit, on a non-collateralized basis, to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Group analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(l) Inventories

Inventories are measured using the first-in, first-out method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity. Allowance is made for obsolete, slow moving or defective items, where appropriate.

(m) Property, p lant and e quipment

Property, plant and equipment is carried at cost. Major modifications or refurbishments which extend the useful life of the assets are capitalized and depreciated over the adjusted remaining useful life of the assets. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in consolidated income from operations. The cost of maintenance and repairs is charged to expense as incurred. Property, plant and equipment is reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of property, plant and equipment exceeds its fair value, an impairment charge would be recorded in the consolidated statement of operations.

Depreciation of property, plant and equipment are computed using the straight-line method over the assets’ estimated useful lives as follows:

Office premises | 47 to 51 years
Leasehold improvements | over terms of the leases or the useful lives whichever is less
Furniture, fixtures and office equipment | 3 to 5 years
Motor vehicles | 4 years
Testing equipment | 3 years

(n) Long-term investment

The Group has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Group’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the investee.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

2 Summary of significant accounting policies (Cont’d)

(o) Leases arrangements

In the ordinary course of business, the Group enters into a variety of operating lease arrangements.

Operating right-of-use leases are included in operating lease right-of-use assets, current portion of long-term operating lease obligations and long-term operating lease obligations, net of current maturities on the Group’s consolidated balance sheets, as appropriate. Operating lease right-of-use 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 Group’s leases do not provide an implicit rate to calculate present value, the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

(p) G oodwill

Goodwill is not amortized. The Group performs either a qualitative or quantitative assessment to review goodwill for impairment on an annual basis. This assessment is performed at the beginning of the fourth quarter, or when circumstances change, such as a significant adverse change in the business climate or the decision to sell a business, both of which would indicate that impairment may have occurred.

A qualitative assessment considers financial, industry, segment and macroeconomic factors, if the qualitative assessment indicates a potential for impairment, a quantitative assessment is performed to determine if impairment exists. The quantitative assessment begins with a comparison of the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of the goodwill allocated to the reporting unit. If the carrying value of goodwill exceeds its implied fair value, an impairment charge would be recorded in the consolidated statements of operations and comprehensive income / (loss).

As a result of the annual qualitative review process in 2021 and 2020, the Group determined it was not necessary to perform a quantitative assessment.

(q) F oreign currency translation

The assets and liabilities of the Group’s subsidiaries denominated in currencies other than U.S. dollars are translated into U.S. dollars using the applicable exchange rates at the consolidated balance sheet date. For consolidated statements of operations and comprehensive income/(loss)’ items, amounts denominated in currencies other than U.S. dollars were translated into U.S. dollars using the average exchange rate during the period. Equity accounts were translated at their historical exchange rates. Net gains and losses resulting from translation of foreign currency on consolidated financial statements are included in the consolidated statements of stockholders’ equity as accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in the consolidated statements of operations and comprehensive income / (loss).

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

2 Summary of significant accounting policies (Cont’d)

(r) Comprehensive income / (loss)

We account for comprehensive income in accordance with ASC No. 220, “Comprehensive Income”, which specifies the computation, presentation and disclosure requirements for comprehensive income / (loss). Comprehensive income / (loss) consists of net income / (loss) and foreign currency translation adjustments, primarily from fluctuations in foreign currency exchange rates of our foreign subsidiaries with a functional currency other than the U.S. dollar.

(s) Ordinary s hare

On November 22, 2011, the Company filed Amended and Restated Memorandum and Articles of Association with the Registry of Corporate Affairs of the BVI Financial Services Commission that on November 29, 2011 became effective as of the filing date to amend the Company’s ordinary shares of US$0.01 par value capital stock to no par value capital stock. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis.

On October 8, 2019, the Company had stock split in the form of bonus shares at the rate of one ordinary share for every two ordinary shares held, creating 1,030,950 new shares of common stock.

On March 3, 2021, the Company had stock split in the form of bonus shares at the rate of two ordinary shares for every three ordinary shares held, creating 2,061,900 new shares of common stock.

The effect of the above stock splits have been reflected retroactively in the financial statements and net income per ordinary share computations.

(t) Net income per ordinary share

The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Euro Tech Holdings Company Limited are computed by dividing net income attributable to Euro Tech Holdings Company Limited by the weighted average number of ordinary shares outstanding during the period. The Group reports both basic earnings per share, which is based on the weighted average number of ordinary shares outstanding, and diluted earnings per share, which is based on the weighted average number of ordinary shares outstanding and all dilutive potential ordinary shares outstanding.

Outstanding stock options are the only dilutive potential shares of the Company.

(u) Stock-based compensation

The Group determines compensation expense for stock-based awards based on the estimated fair values at the grant date and recognizes the related compensation expense over the vesting period. The Group uses the straight-line amortization method to recognize compensation expense related to stock-based awards that have only service conditions. This method recognizes stock compensation expense on a straight-line basis over the requisite service period for the entire award.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

2 Summary of significant accounting policies (Cont’d)

(v) Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from engineering contracts over time, the valuation of goodwill, and contract assets and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

(w) Related p arties

Related parties are affiliates of the Group; entities for which investments are accounted for by the equity method by the Group; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the Group; its management; members of the immediate families of principal owners of the Group and its management; and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

(x) Segment i nformation

The Group reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Group’s reportable segments. The Group categorises its operations into two business segments: Trading and manufacturing, and Engineering.

(y) Concentration

Financial instruments that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable, net. The Group maintains substantially all of its cash and cash equivalent balances with large financial institutions which are believed to be high quality institutions.

The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top customers accounting for more than 5% of the Group’s revenue generated approximately 15%, 23%, and 34% of consolidated revenues for the years ended December 31, 2021, 2020 and 2019, respectively.

The Group grants trade credit under contractual payment terms, generally without collateral, to its customers, which include high credit quality electric utilities, general contractors, owners and managers of industrial properties and government departments.

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EURO TECH HOLDINGS COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

2 Summary of significant accounting policies (Cont’d)

(y) Concentration (Cont’d)

Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2021, three (2020: three) of the Group’s customers individually exceeded 10.0% of accounts receivable, net. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.

(z) Finance costs

Interest relating to loans repaid is expensed in the period the repayment occurs.

(aa) Warranties

The suppliers of the Group offer a standard one-year warranty to end customers of the Group. The Group only provides labour service to repair or replace parts. The Group does not maintain a general warranty reserve because historically labour costs for such repair or replacement have been de minimis.

(ab) Shipping and handling costs

Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.

(ac) Statutory reserves

The Group is required to make appropriation to reserve funds, comprising the statutory reserve fund and statutory staff welfare fund, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”).

Appropriations to the statutory reserve fund is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve fund is equal to 50% of the entities’ registered capital.

(ad) Fair value measurements

The Group uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2021 and 2020, the Group determined that the carrying values of cash and cash equivalents, restricted cash, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, contract liabilities, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

2 Summary of significant accounting policies (Cont’d)

(ae) Recent accounting pronouncements

Changes to GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Group considers the applicability and impact of all ASUs. The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements.

Recently adopted accounting pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The Group adopted this ASU in January 2021 and there was no effect on the consolidated financial statements or disclosures.

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),” an amendment clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivative instruments. The Group adopted this guidance in January 2021 and there was no effect on the consolidated financial statements or disclosures.

Recently issued accounting pronouncements not yet adopted

In October 2020, the FASB issued ASU 2020-10, “Codification Improvements,” this ASU affects a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early application of the amendments is permitted for and varies based on the entity. The amendments should be applied retrospectively and at the beginning of the period that includes the adoption date. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.

(af) Reclassification

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

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2 Summary of significant accounting policies (Cont’d)

(ag) Non-controlling interests

For entities that are consolidated, but not 100% owned, a portion of the income or loss and equity is allocated to owners other than the Group. The aggregate of the income or loss and corresponding equity that is not owned by the Group is included within non-controlling interests in the consolidated financial statements.

Non-controlling interests is presented as a separate component of equity in the consolidated balance sheets. Net income includes the net income attributable to the holders of non-controlling interests in the consolidated statements of operations and comprehensive income / (loss). Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.

(ah) Impairment of long lived assets

Long-lived assets such as property, plant and equipment with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. There was no impairment of long lived assets during 2021, 2020 and 2019, respectively.

(ai) Effect of the Restatement on the Consolidated Financial Statements for the year ended December 31, 2021

Subsequent to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2021 on May 13, 2022, certain errors were identified,

| (i) | (loss) / gain on disposal of property, plant and equipment not included in operating income / (loss)
| (ii) | bonus share issuances were not accounted for and disclosed as stock splits in the consolidated statements of shareholders' equity, earnings per share computations for all periods presented

The impact of the restatement on the December 31, 2021 financial statements is reflected in the following tables:

CONSOLIDATED BALANCE SHEETS

|  | December 31, 2021 |
|  | As Previously Reported |  |  | As Restated |
|  | US$’000 |  |  | US$’000 |
Ordinary share |  | 5,322,459 no par value shares issued as of December 31, 2021 (2020: 3,260,559) |  |  | 7,899,832 no par value shares issued as of December 31, 2021 and 2020 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

2 Summary of significant accounting policies (Cont’d)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / (LOSS)

|  | December 31 |
|  | As Previously Reported |  |  | As Restated |
|  | US$’000 |  |  | US$’000 |
Operating income / (loss) |  |  |  |  |  |
2021 |  |  | 781 |  |  |  | 771 |
2020 |  |  | (1,701 | ) |  |  | (272 | )
2019 |  |  | (440 | ) |  |  | (445 | )
Net income / (loss) per ordinary share attributable to Euro Tech Holdings Company Limited’s shareholders |  |  |  |  |  |  |  |
- Basic |  |  |  |  |  |  |  |
2021 |  | $ | US0.19 |  |  | $ | US0.13 |
2020 |  | $ | US0.25 |  |  | $ | US0.10 |
2019 |  | $ | US(0.06 | ) |  | $ | US(0.02 | )
- Diluted |  |  |  |  |  |  |  |
2021 |  | $ | US0.19 |  |  | $ | US0.13 |
2020 |  | $ | US0.25 |  |  | $ | US0.10 |
2019 |  | $ | US(0.06) |  |  | $ | US(0.02 | )
Weighted average number of ordinary shares outstanding |  |  |  |  |  |  |  |
- Basic |  |  |  |  |  |  |  |
2021 |  |  | 5,154,759 |  |  |  | 7,732,132 |
2020 |  |  | 3,092,859 |  |  |  | 7,732,132 |
2019 |  |  | 2,301,993 |  |  |  | 7,732,132 |
- Diluted |  |  |  |  |  |  |  |
2021 |  |  | 5,154,759 |  |  |  | 7,732,132 |
2020 |  |  | 3,092,859 |  |  |  | 7,732,132 |
2019 |  |  | 2,301,993 |  |  |  | 7,732,132 |

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

|  | December 31 |
|  | As Previously Reported |  |  | As Restated |
|  | US$’000 |  |  | US$’000 |
Number of ordinary share |  |  |  |  |  |
Balance at December 31, 2018 |  |  | 2,229,609 |  |  |  | 7,899,832 |
Balance at December 31, 2019 |  |  | 3,260,559 |  |  |  | 7,899,832 |
Balance at December 31, 2020 |  |  | 3,260,559 |  |  |  | 7,899,832 |
Balance at December 31, 2021 |  |  | 5,322,459 |  |  |  | 7,899,832 |

Commensurate adjustments have been made to Notes 2 (s), 11, 16 and 24 to the consolidated financial statements.

3 Lease obligations

The Group has operating leases primarily for office space. The Group’s leases have remaining lease terms of several months to two years.

The components of lease expense are as follows:

|  | Years ended December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Operating lease cost |  |  | 243 |  |  |  | 257 |
Short-term lease cost |  |  | 62 |  |  |  | 64 |
Total lease cost |  |  | 305 |  |  |  | 321 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

3 Lease obligations (Cont’d)

Supplemental consolidated cash flow information related to leases is as follows:

|  | Years ended December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |
Operating cash flows from operating leases |  |  | 196 |  |  |  | 195 |
Right-of-use assets obtained in exchange for lease obligations (noncash): |  |  |  |  |  |  |  |
Operating leases |  |  | - |  |  |  | - |

Supplemental consolidated balance sheet information related to leases is as follows:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Operating leases |  |  |  |  |  |
Operating lease right-of-use assets |  |  | 238 |  |  |  | 233 |
Current portion of long-term operating lease obligations |  |  | 175 |  |  |  | 118 |
Long-term operating lease obligations, net of current maturities |  |  | 41 |  |  |  | 94 |
|  |  | 216 |  |  |  | 212 |
Total operating lease liabilities |  |  |  |  |  |  |  |
Weighted average remaining lease term |  |  |  |  |  |  |  |
Operating leases |  |  | 23 months |  |  |  | 16 months |
Weighted average discount rate |  |  |  |  |  |  |  |
Operating leases |  |  | 5 | % |  |  | 5 | %

Maturities of lease liabilities are as follows:

|  | Operating leases |
|  | US$’000 |
Year ending December 31, |  |  |
2022 |  |  | 181 |
2023 |  |  | 42 |
Total lease payments |  |  | 223 |
Less: imputed interest |  |  | (7 | )
Total |  |  | 216 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

4 Accounts r eceivable, net

Accounts receivable, net consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Contract receivables |  |  | 3,661 |  |  |  | 3,229 |
Less: allowance for doubtful accounts |  |  | (30 | ) |  |  | (30 | )
|  |  | 3,631 |  |  |  | 3,199 |

The roll-forward of activity in the allowance for doubtful accounts was as follows for the years ended December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Balance at beginning of period |  |  | 30 |  |  |  | 36 |
Less : reversal in allowances |  |  | - |  |  |  | (6 | )
Balance at end of period |  |  | 30 |  |  |  | 30 |

The following is an aging analysis of accounts receivable, net at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Current |  |  | 1,441 |  |  |  | 2,014 |
Past due |  |  |  |  |  |  |  |
1-30 days |  |  | 1,570 |  |  |  | 85 |
31-60 days |  |  | 495 |  |  |  | 202 |
61-90 days |  |  | 108 |  |  |  | 41 |
Greater than or equal to 91 days |  |  | 17 |  |  |  | 857 |
|  |  | 2,190 |  |  |  | 1,185 |
|  |  | 3,631 |  |  |  | 3,199 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

5 Prepayments and other current assets

Prepayment and other current assets mainly represent deposits paid for purchases and services, rental and utilities deposits, and prepaid expenses.

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Deposits paid |  |  | 243 |  |  |  | 838 |
Prepayments |  |  | 104 |  |  |  | 168 |
Other receivables |  |  | 222 |  |  |  | 250 |
Other tax recoverable |  |  | 3 |  |  |  | 258 |
|  |  | 572 |  |  |  | 1,514 |

6 Contract assets and liabilities

Contracts with customers usually stipulate the timing of payment, which is defined by the terms found within the various contracts under which work was performed during the period. Therefore, contract assets and liabilities are created when the timing of costs incurred on work performed does not coincide with the billing terms.

The Group’s consolidated balance sheets present contract assets which contains earned unbilled revenue associated with contract work that has been completed but not paid by customers, that are generally due once the job is completed and approved.

Contract assets consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Unbilled revenue |  |  | 74 |  |  |  | 202 |

The Group’s consolidated balance sheets present contract liabilities which contains deferred revenue (previously identified as billings in excess of costs and estimated earnings on uncompleted contracts).

Contract liabilities consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Deferred revenue |  |  | 1,076 |  |  |  | 1,063 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

6 Contract assets and liabilities (Cont’d)

The following table provides information about contract assets and contract liabilities from contracts with customers:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Contract assets |  |  | 74 |  |  |  | 202 |
Contract liabilities |  |  | (1,076 | ) |  |  | (1,063 | )
Net contract liabilities |  |  | (1,002 | ) |  |  | (861 | )

The difference between the opening and closing balances of the Group’s contract assets and contract liabilities primarily results from the timing of the Group’s billings in relation to its performance of work. The amounts of revenue recognized in the period that were included in the opening contract liability balances were US$79,000 and US$1,214,000 for the years ended December 31, 2021 and 2020, respectively. The revenue consists primarily of work performed on previous billings to customers.

The net liabilities position for contracts in process consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Costs incurred in contracts in process |  |  | 169 |  |  |  | 1,904 |
Estimated earnings |  |  | 59 |  |  |  | - |
Cost and estimated earnings on uncompleted contracts |  |  | 228 |  |  |  | 1,904 |
Less: billings to date |  |  | (1,230 | ) |  |  | (2,765 | )
|  |  | (1,002 | ) |  |  | (861 | )

The net liabilities position for contracts in process is included within the contract asset and contract liability in the accompanying consolidated balance sheets as follows at December 31:

|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Unbilled revenue |  |  | 74 |  |  |  | 202 |
Deferred revenue |  |  | (1,076 | ) |  |  | (1,063 | )
|  |  | (1,002 | ) |  |  | (861 | )

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

6 Contract assets and liabilities (Cont’d)

Disaggregated revenue from contracts

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Revenue |  |  |  |  |  |  |  |  |
Trading and manufacturing (revenue recognized at point in time) |  |  | 9,619 |  |  |  | 9,476 |  |  |  | 11,877 |
Engineering (revenue recognized over time) |  |  | 11,769 |  |  |  | 3,881 |  |  |  | 5,522 |
|  |  | 21,388 |  |  |  | 13,357 |  |  |  | 17,399 |

7 Inventories

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Raw materials |  |  | 89 |  |  |  | 63 |
Work in progress |  |  | 20 |  |  |  | 20 |
Finished goods |  |  | 438 |  |  |  | 259 |
|  |  | 547 |  |  |  | 342 |

Management continuously reviews obsolete and slow moving inventories and assesses the inventory valuation to determine if the write-down of inventories is deemed appropriate. For the years ended December 31, 2021, and 2020, write-down of inventories amounted to US$55,000 and US$13,000, respectively, which were charged to cost of revenue in consolidated statements of operations and comprehensive income / (loss).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

8 Property, plant and equipment, net

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Office premises* |  |  | 673 |  |  |  | 673 |
Leasehold improvements |  |  | 125 |  |  |  | 157 |
Furniture, fixtures and office equipment |  |  | 439 |  |  |  | 557 |
Motor vehicles |  |  | 175 |  |  |  | 175 |
Testing equipment |  |  | 37 |  |  |  | 37 |
|  |  | 1,449 |  |  |  | 1,599 |
Less: Accumulated depreciation |  |  | (1,234 | ) |  |  | (1,340 | )
|  |  | 215 |  |  |  | 259 |

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Depreciation charge |  |  | 38 |  |  |  | 49 |  |  |  | 69 |

* Far East earns rental income from a property in Beijing, PRC for which it does not hold the title. Far East is investigating various ways in which to obtain the title but has not formulated a specific plan as of the date of issuance of these consolidated financial statements. The net book value of the property at December 31, 2021 is approximately US$88,000 (2020: US$92,000).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

9 Investments in affiliates

Investments in affiliates are accounted for using the equity method of accounting.

|  | December 31, |
|  | 2021 |  |  | 2020 |
Zhejiang Tianlan Environmental Protection Technology Co. Ltd. |  |  |  |  |  |
Interest held |  |  | 19.4 | % |  |  | 19.4 | %
|  | US$’000 |  |  | US$’000 |
Long-term investment, at cost, less impairment |  |  | 5,540 |  |  |  | 5,540 |
Share of undistributed profits |  |  | 2,537 |  |  |  | 2,544 |
|  |  | 8,077 |  |  |  | 8,084 |

Far East is holding 19.4% (2020: 19.4%) equity interests in Blue Sky, a company incorporated in the PRC, with total cost of investment of US$5,540,000. Blue Sky provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants since 2000.

Blue Sky has listed its shares on the New Third Board in the PRC since November 17, 2015 and suspended trading from August 15, 2017 and resumed trading on February 2, 2018 and suspended trading from November 24, 2020 and resumed trading on January 6, 2021.

The Group’s interest in Blue Sky has been counted for as an affiliate using the equity method as the Group has representation on both the Board and Executive Committee of Blue Sky, and the ability to participate in the decision-making process and exercise significant influence.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

9 In vestments in affiliates(Cont’d)

A summary of the financial information of the affiliate, Blue Sky, is set forth below:

|  | December 31, |
|  | 2021 |  |  | 2020 |
Balance Sheet: |  | US$’000 |  |  | US$’000 |
Current assets |  |  | 42,510 |  |  |  | 44,918 |
Non-current assets |  |  | 15,172 |  |  |  | 15,258 |
Total assets |  |  | 57,682 |  |  |  | 60,176 |
Total liabilities |  |  | (27,376 | ) |  |  | (30,889 | )
Total shareholders’ equity |  |  | 30,306 |  |  |  | 29,287 |

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |
Operating results: |  | US$’000 |  |  | US$’000 |
Net sales |  |  | 51,280 |  |  |  | 43,933 |
Operating income |  |  | 1,997 |  |  |  | 2,214 |
Net income |  |  | 2,105 |  |  |  | 1,946 |

10 Other payables and accrued expenses

Other payables and accrued expenses mainly represent deposits received from customers and accruals for operating expenses.

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Dividend payables |  |  | 86 |  |  |  | 84 |
Deposits received from customers |  |  | 6 |  |  |  | - |
Rental deposit received |  |  | 3 |  |  |  | 4 |
Accruals for operating expenses |  |  | 1,360 |  |  |  | 1,500 |
Other tax payables |  |  | 130 |  |  |  | 5 |
|  |  | 1,585 |  |  |  | 1,593 |

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(CONT’D)

11 Ordinary share

On October 8, 2019, the Company had stock split in the form of bonus shares at the rate of one ordinary share for every two ordinary shares held, creating 1,030,950 new shares of common stock.

During the year ended December 31, 2020, there was no movement with the Company’s issued ordinary shares and outstanding shares.

On March 3, 2021, the Company had stock split in the form of bonus shares at the rate of two ordinary shares for every three ordinary shares held, creating 2,061,900 new shares of common stock.

On January 24, 2022, the Company had stock split in the form of bonus shares at the rate of one ordinary shares for every two ordinary shares held, creating 2,577,373 new shares of common stock, as described in Note 24 to the consolidated financial statements.

Number of outstanding shares at year end of:

|  | 2021 |  |  | 2020 |
Shares issued |  |  | 7,899,832 | * |  |  | 7,899,832 | *
Less: shares under treasury stock |  |  | (167,700 | ) |  |  | (167,700 | )
|  |  | 7,732,132 |  |  |  | 7,732,132 |

* Retroactively restated for effect of the stock splits effected in the form of bonus shares

12 Goodwill

Reporting units - The Group’s reporting units consist of its trading and manufacturing and engineering segments. Goodwill is not amortized, but instead is reviewed for impairment at least annually during the fourth quarter of each year at the reporting level, absent any interim indicators of impairment or other factors requiring an assessment.

Annual impairment assessment - For our 2021 and 2020 annual impairment test we performed a qualitative assessment, using information as of December 31, 2021 and 2020, respectively. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. We determined there were no factors indicating the need to perform a quantitative goodwill impairment test and concluded that it is more likely than not the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill. As of December 31, 2019, the Group completed the annual impairment test by comparing the carrying amount of the net assets, including goodwill, with the fair value of Yixing Pact Environmental Technology Co., Ltd and Pact Asia Pacific Limited as of December 31, 2019

In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No impairments were recorded to our goodwill during the years ended December 31, 2021, 2020 and 2019. No material events or changes occurred between the testing date and year end to trigger a subsequent impairment review.

At December 31, 2021 and 2020, we had goodwill for our engineering segment with a carrying amount of US$1,071,000 and US$1,071,000, respectively.

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13 PRC statutory reserves

Under the relevant PRC laws and regulations, the PRC subsidiaries are required to appropriate a certain percentage of their respective net income to two statutory funds i.e. the statutory reserve fund and the statutory staff welfare fund. The PRC subsidiaries can also appropriate certain amount of its net income to the enterprise expansion fund.

(i) Statutory reserve fund

Pursuant to applicable PRC laws and regulations, the PRC subsidiaries are required to allocate at least 10% of its net income to the statutory reserve fund until such fund reaches 50% of its registered capital. The statutory reserve fund can be utilised upon the approval by the relevant authorities, to offset accumulated losses or to increase its registered capital, provided that such fund be maintained at a minimum of 25% of its registered capital.

Under the PRC laws and regulations, the PRC subsidiaries are restricted in their ability to transfer certain of its net assets in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$2,452,000 as at December 31, 2021 (2020: US$3,174,000 and 2019: US$3,174,000).

(ii) Statutory staff welfare fund

Pursuant to applicable PRC laws and regulations, the PRC subsidiaries are required to allocate a certain amount of its net income to the statutory staff welfare fund determined by it. The statutory staff welfare fund can only be used to provide staff welfare facilities and other collective benefits to its employees. This fund is non-distributable other than upon liquidation of the PRC subsidiaries. The balances as at December 31, 2021 and 2020 include in statutory reserves were US$12,000.

(iii) Enterprise expansion fund

The enterprise expansion fund shall only be used to make up losses, expand the PRC subsidiaries’ production operations, or increase the capital of the subsidiaries. The enterprise expansion fund can be utilised upon approval by relevant authorities, to convert into registered capital and issue bonus capital to existing investors, provided that such fund be maintained at a minimum of 25% of its registered capital. The balances as at December 31, 2021 and 2020 include in statutory reserves were US$408,000.

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14 Other income, net

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Exchange gain / (loss), Other income, netnet |  |  | 77 |  |  |  | 101 |  |  |  | (30 | )
Rental income |  |  | 50 |  |  |  | 59 |  |  |  | 82 |
Government subsidies – Employment Support Scheme * |  |  | - |  |  |  | 147 |  |  |  | - |
|  |  | 127 |  |  |  | 307 |  |  |  | 52 |

* The amount represents salaries and wage subsidies granted under Anti-Epidemic Fund by the Government of the Hong Kong Special Administrative Region for the use of paying wages of employees from June to November 2020.

15 Income taxes

No income tax arose in the United States of America by the Group for the years ended December 31, 2021, 2021 and 2020.

The Company and Pact Asia Pacific Limited are exempt from taxation in the British Virgin Islands (“BVI”).

Far East and Euro Tech (China) Limited provided for Hong Kong profits tax at a rate of 8.25% on assessable profits up to US$256,000; and 16.5% on any part of assessable profits over US$256,000 in year 2021 and 2020 (2019: 16.5%) on the basis of their income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for profits tax purposes.

Euro Tech Trading (Shanghai) Limited (“ETTS”), a subsidiary of Far East, provides for PRC Enterprise Income Tax (“EIT”) at a rate of 25% (2020 and 2019: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2021, ETTS had an assessable loss carried forward of US$18,000 as agreed by the local tax authority to offset its profit for the forth coming years (2020: US$604,778 and 2019: US$518,328). Such loss will expire in 5 years.

Shanghai Euro Tech Limited (“SET”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2020 and 2019: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2021, SET had an assessable loss carried forward of US$678,000 as agreed by the local tax authority to offset its profit for the forth coming years (2020: US$658,733 and 2019: US$444,192). Such loss will expire in 5 years.

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15 Income taxes(Cont’d)

Shanghai Euro Tech Environmental Engineering Company Limited (“SETEE”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2020 and 2019: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2021, SETEE had an assessable loss carried forward of US$Nil as agreed by the local tax authority to offset its profit for the forth coming years (2019: US$34,032 and 2018: US$380,591).

Yixing Pact Environmental Technology Co. Ltd. (“Yixing”), a subsidiary of Far East, provides for PRC Enterprise Income Tax at a rate of 25% (2020 and 2019: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC Enterprise Income Tax purposes. As of December 31, 2021, Yixing had an assessable loss carried forward of US$1,759,000 as agreed by the local tax authority to offset its profit for the forth coming years (2020: US$2,304,828 and 2019: US$1,664,275). Such loss will expire in 5 years.

Under the New Enterprise Income Tax Law and the implementation rules, profits of the PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries to foreign holding company are subject to a withholding tax at a rate of 10% unless reduced by tax treaty. Aggregate undistributed earnings of Far East’s subsidiaries located in the PRC that are available for distribution to Far East of approximately US$0.6 million at December 31, 2021 (2020: US$0.6 million and 2019: US$0.6 million) are intended to be reinvested, and accordingly, no deferred taxation has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to Far East. Distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax.

The Company and its subsidiaries are based in Hong Kong and PRC and file Hong Kong profits tax return and PRC EIT return, respectively. The components of the (provision) / credit for income taxes (expense) / credit were as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Current taxes (expense ) |  |  |  |  |  |  |  |  |
Hong Kong profits tax and the PRC EIT |  |  | (57 | ) |  |  | (4 | ) |  |  | - |
Income tax expense |  |  | (57 | ) |  |  | (4 | ) |  |  | - |
Deferred tax credit / (expenses) |  |  |  |  |  |  |  |  |  |  |  |
Hong Kong and the PRC |  |  | 147 |  |  |  | (92 | ) |  |  | (37 | )
Total deferred tax credit / (expenses) |  |  | 147 |  |  |  | (92 | ) |  |  | (37 | )
Total credit / (expense) |  |  | 90 |  |  |  | (96 | ) |  |  | (37 | )

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

15 Income taxes (Cont’d)

The items comprising the difference between income taxes computed at the Hong Kong profits tax and PRC EIT statutory tax rates in effect for 2021, 2020 and 2019 and our effective tax rates were as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Income / (loss) before income taxes |  |  | 1,276 |  |  |  | 498 |  |  |  | (173 | )
Computed tax using respective companies’ statutory tax rates |  |  | 158 |  |  |  | 133 |  |  |  | 69 |
Change in valuation allowances |  |  | 349 |  |  |  | 48 |  |  |  | 30 |
Under-provision for income taxes in prior years |  |  | (12 | ) |  |  | - |  |  |  | (5 | )
Non-deductible expenses |  |  | (405 | ) |  |  | (277 | ) |  |  | (131 | )
Income taxes credit / (expense) at effective tax rate |  |  | 90 |  |  |  | (96 | ) |  |  | (37 | )

The components of deferred tax assets / (liabilities) are as follows:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Tax losses |  |  | 614 |  |  |  | 901 |
Temporary differences |  |  | (3 | ) |  |  | (5 | )
Less: Valuation allowances |  |  | (469 | ) |  |  | (901 | )
Net deferred tax assets / (liabilities) |  |  | 142 |  |  |  | (5 | )

Uncertain tax positions

As a result of the Group’s analysis, management has determined that the Group does not have any material uncertain tax positions.

16 Net income per ordinary share

The calculation of the basic and diluted net income per ordinary share is based on the following data:

|  | December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | Number of shares |
Weighted average number of ordinary shares for the purposes of basic and diluted net income per share |  |  | 7,732,132 |  |  |  | 7,732,132 |  |  |  | 7,732,132 |

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17 Stock options

2019 Stock Option and Incentive Plan

In April 2019, the Board of Directors approved the adoption of the 2019 Stock Option and Incentive Plan (the “Plan”). The Plan was also subsequently approved under a resolution of the Company's shareholders. The Plan provides for the granting of up to 300,000 (500,000 after bonus shares adjustment) Ordinary Shares (the “Share Limit”), in the form of options to Officers, Directors and Key Employees who perform services which contribute to the successful performance of the Company and its subsidiaries. In addition, the Plan provides that, on the first day of each fiscal year commencing on January 1, 2020, the Share Limit shall automatically be increased by that number of shares equal to 5% of the number of Ordinary Shares outstanding as of such date.

The Board of Directors or a committee (the “Committee”) appointed by the Board of Directors administers the Plan.

Appropriate adjustment in the maximum number of Ordinary Shares issuable pursuant to this Plan, the maximum number of Ordinary Shares with respect to which options may be granted within any 12-month period to any participant during the duration of this Plan, the number of shares subject to options granted under this Plan, and the exercise price with respect to options, shall be made to give effect to any increase or decrease in the number of issued Ordinary Shares resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, division of shares, reverse share split, spin-off, split-off, spin-out, or other distribution of assets to shareholders, issue of bonus shares or combination of shares, assumption and conversion of outstanding options due to an acquisition by the Company of the shares, stock or assets of any other company or corporation, other increase or decrease in the number of such shares outstanding effected, without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate.

The purchase price per share of the Ordinary Shares to be paid upon the exercise of the option must be at least 100% of the fair market value of an Ordinary Shares on the date on which the option was granted. Under the Plan, if the Ordinary Shares are principally traded on a national securities exchange or the Nasdaq Global Market or Capital Market at the time of grant, the Company is required to use, at fair market value, the average of the closing prices of the Ordinary Shares for the ten consecutive trading days immediately before the date of grant. If the Ordinary Shares are traded on a national securities exchange or the Nasdaq Stock Global Market or Capital Market, but no closing prices are reported for such ten-day period, or if the Ordinary Shares are principally traded in the over-the-counter market, the Company is required to use, as fair market value, the average of the mean between the bid and asked prices reported for the Company’s Ordinary Shares at the close of trading during such ten-day period before the date of grant. If the Ordinary Shares are traded neither on a national securities exchange, one of the Nasdaq’s Markets nor in the over-the-counter market or if bid and asked prices are otherwise not available, the fair market value of the Ordinary Shares on the date of grant will be determined in good faith by the Committee or the Board of Directors, as the case may be.

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17 Stock options (Cont’d)

2019 Stock o ption and i ncentive p lan (Cont’d)

The Board of Directors or the Committee, as the case may be, determines, at the time of grant, when each option granted under the Plan will become exercisable. Notwithstanding the foregoing, all options held by a key employee of the Company or its subsidiaries become immediately exercisable, whether or not exercisable at the time, upon the death or disability, and shall be exercisable within twelve (12) months after the date of death or disability, but in no event later than the expiration date of such Options.

No option is to be exercisable more than ten years from the date the option is granted.

Payment of Exercise Price for Options. Under the Plans, payment for shares purchased upon exercise of an option may be made by any of the following methods, subject to certain requirements: (i) in cash, (ii) in Ordinary Shares which have been held by the participant for not less than six months prior to the exercise of the option, valued at its Fair Market Value (as defined) on the date of exercise, (iii) in cash by a broker-dealer to whom the holder of the option has submitted an exercise notice consisting of a fully endorsed option, or (iv) by such other medium of payment as the Board or the Committee, as applicable, in its sole discretion, shall authorize, or by any combination of (i), (ii), or (iii), at the sole discretion of the Board or the Committee, as applicable, or in any manner provided in the option agreement, except by directing the Company to withhold Ordinary Shares otherwise issuable upon the exercise of the Option in payment of the exercise price.

Transfer of Options. Under the Plans, an option may not be sold, assigned or otherwise transferred except to:

| · | the spouse or lineal descendant of a plan participant;
| · | the trustee of a trust for the primary benefit of a plan participant’s spouse or lineal descendant;
| · | a partnership of which a plan participant and lineal descendants are the only partners; or
| · | a tax exempt organization.

These assignments are only permitted if the assigning option holder does not receive any compensation in connection with the assignment and the assignment is expressly approved by the Board or Committee, as the case may be.

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17 Stock options (Cont’d)

2019 Stock o ption and i ncentive p lan (Cont’d)

The Company indemnifies the members of any Committee and its delegates and the Chief Executive Officer against (a) the reasonable expenses (as such expenses are incurred), including attorneys’ fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein), to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any option granted under the Plan; and (b) all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or delegatee, as applicable, is liable for gross negligence or gross misconduct in the performance of his or her duties; provided that within 60 days after institution of any such action, suit or proceeding a Committee member or delegatee shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same.

The Board may terminate, suspend, or amend the Plan at any time without the authorization of shareholders to the extent allowed by law or the rules of any market on which the Company’s shares are then listed or quoted.

During the year ended December 31, 2019, the Company granted such options to its officers, directors and employees, which allow them to purchase up to 51,000 ordinary shares. The exercise price of all options granted is US$2.60 per share. The stock options granted are exercisable on January 1, 2022 and terminate on April 18, 2029.

The Company estimate the fair value of the options granted under the Binomial pricing model at US$2.324 per share.

Changes in outstanding options under various plans mentioned above were as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | Number of options |  |  | Weighted average exercise price |  |  | Number of options |  |  | Weighted average exercise price |  |  | Number of options |  |  | Weighted average exercise price |
|  |  |  |  | US$ |  |  |  |  |  | US$ |  |  |  |  |  | US$ |
Outstanding, beginning of year |  |  | 51,000 |  |  |  | 2.60 |  |  |  | 51,000 |  |  |  | 2.60 |  |  |  | - |  |  |  | - |
Granted |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 51,000 |  |  |  | 2.60 |
Bonus shares adjustment |  |  | 34,000 |  |  |  | (1.04 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Outstanding, end of year |  |  | 85,000 |  |  |  | 1.56 |  |  |  | 51,000 |  |  |  | 2.60 |  |  |  | 51,000 |  |  |  | 2.60 |
Exercisable, end of year |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |

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17 Stock options(Cont’d)

As of December 31, 2021, 2020 and 2019, there was no unrecognized stock-based compensation expense related to unvested stock options. The compensation expense for the year is approximately US$55,000 (2020: US$54,000; 2019: US$10,000).

The Group applies the provisions of ASC No. 718-10, which requires to recognise expense related to the fair value of stock-based compensation awards, including employee stock options.

The Binomial option-pricing model is used to estimate the fair value of the options granted. This requires the input of subjective assumptions, including the expected volatility of stock price, expected option term, expected risk-free rate over the expected option term and expected dividend yield rate over the expected option term. Because changes in subjective input assumptions can materially affect the fair value estimate, in directors’ opinion, the existing model may not necessarily provide a realisable measure of the fair value of the stock options. Expected volatility is based on historical volatility in the 180 days prior to the issue of the options. Expected option term and dividend yield rate are based on historical trends. Expected risk-free rate is based on US Treasury securities with similar maturities as the expected terms of the options at the date of grant.

18 Pension plan

Prior to December 1, 2000, Far East had only one defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions plus 50% to 100% of individual fund account balances contributed by Far East, depending on their years of service with Far East. Far East was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company.

With the introduction of the Mandatory Provident Fund Scheme (“MPF scheme”), a defined contribution scheme managed by an independent trustee on December 1, 2000, Far East and its employees who joined Far East subsequently make monthly contributions to the scheme at 5% of the employee’s cash income as defined under the Mandatory Provident Fund Schemes Ordinance. Under the MPF scheme, the employer and its employees are each required to make contributions to the plan at 5% of the employees' relevant income, subject to a cap of monthly relevant income of HK$30,000. Contributions to the plan vest immediately.

During the years ended December 31, 2021, 2020 and 2019, the aggregate contributions of the Group to the aforementioned pension plans and retirement benefit schemes were approximately US$225,000, US$104,000 and US$332,000 respectively.

As stipulated by the rules and regulations in the PRC, the PRC’s subsidiaries contributes to state-sponsored retirement plans for its employees in Mainland China. PRC’s subsidiaries’ contribution approximately 16% of the basic salaries of its employees, and have no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

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19 Risk factors

Financial risk factors

The Group’s activities expose it to a variety of financial risks: credit risk and foreign exchange rate risk.

(i) Credit risk

The Group has no significant concentration of credit risk, cash in banks in Hong Kong and PRC is insured with limit of approximately US$64,000 and US$72,000, respectively per bank per each depositor. Uninsured cash in banks and restricted cash balances in Hong Kong and PRC are of approximately US$5,327,000 (2020: US$4,594,000). Cash transactions are limited to high credit quality banks.

(ii) Foreign exchange rate risk

The Group operates in Hong Kong, the PRC and trades with both local and overseas customers and suppliers, and is exposed to foreign exchange rate risk arising from various currency exposures, primarily with respect to purchases in Hong Kong dollars, Renminbi and Euros. Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders and sales orders, recognized assets and liabilities, and net investment in the PRC operations.

20 Risk and uncertainty

The outbreak of COVID-19 worldwide and the various public health measures put in place in many countries to prevent the spread of COVID-19 have disrupted the overall business of the Group at different levels of time and regions in 2020. After the Chinese new year in February 2020, the Group’s domestic businesses were affected by the lock-down of various cities implemented in PRC, resulting in the forced suspension of some local operations until the gradual resumption of work beginning from late March to early April 2020. Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Group’s consolidated financial position, results of its operations, the specific impact is not readily determinable as of the date of these consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

21 Related party transactions

Other than compensation to directors and stock options available to the directors and disposal of long-term investment to associate Blue Sky for a total consideration of approximately US$148,000 with nil gain or loss on disposal during the year ended December 31, 2020, there were no transactions with other related parties in the years 2021, 2020 and 2019.

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22 Commitments and contingencies

(i) Banking facilities

As at December 31, 2021 and 2020, the Group had various banking facilities available for overdraft and import and export credits from which the Group can draw up to approximately US$897,000 and US$897,000 respectively, of which approximately US$605,000 and US$596,000 were utilised for issuance of bank guarantees as security for the performance of various contracts with customers and import loans. The various banking facilities are secured by a bank deposit of approximately US$897,000 and various blanket counter indemnities and counter indemnities. The Group undertakes to maintain its tangible net worth not at any time less than approximately US$3,846,000 and was in compliance with the covenant. The weighted average interest rate for import loans as at December 31, 2021 was 5% per annum (December 31, 2020: 4.9% per annum). For the years ended December 31, 2021 and 2020, the average dollar amount of the bank borrowings was approximately US$219,000 and US$457,000 respectively and average interest rates were approximately 5% and 4.9% per annum respectively for the years ended December 31, 2021 and 2020.

(ii) Non-controlling interest put option

The Group granted the non-controlling interest of Yixing Pact Environmental Technology Co., Ltd. and Pact Asia Pacific Limited a put option, which is effective from 2009, requiring the Group to acquire part or all remaining shares of these two companies at a purchase price per share calculated by 5.2 times of their average net income for the three prior fiscal years divided by total number of shares outstanding at the time of exercise of such option. Such put option did not have an expiry date.

(iii) Insurance

The Group carries insurance policies to cover various risks, primarily general liability, automobile liability, workers’ compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid.

(iv) Purchase commitments

To manage the risk of changes in material prices and subcontracting costs used in tendering bids for engineering contracts, most of the time, the Group obtains firm quotations from suppliers and subcontractors before submitting a bid. These quotations do not include any quantity guarantees. As soon as the Group is advised that its bid is successful, the Group enters into firm contracts with most of its materials suppliers and sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.

(v) Litigations

The Group is now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the consolidated financial statements of the Group. There are no significant unresolved legal issues as of December 31, 2021 and 2020.

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22 Commitments and contingencies (Cont’d)

(vi) Contingencies

The Group accounts for loss contingencies in accordance with ASC Topic 450 and other related guidelines. As of December 31, 2021 and 2020, the Group’s management is of the opinion that there are no commitments and contingencies to account for.

23 Segment information

(i) The Group reports under two segments: Trading and manufacturing, and Engineering.

Operating income represents total revenues less operating expenses, excluding other expense, interest and income taxes. The identifiable assets by segment are those used in each segment’s operations. Intersegment transactions are not significant and have been eliminated to arrive at consolidated totals.

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Revenue |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 9,619 |  |  |  | 9,476 |  |  |  | 11,877 |
Engineering |  |  | 11,769 |  |  |  | 3,881 |  |  |  | 5,522 |
|  |  | 21,388 |  |  |  | 13,357 |  |  |  | 17,399 |
Operating income / (loss) |  |  |  |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 140 |  |  |  | (488 | ) |  |  | (102 | )
Engineering |  |  | 846 |  |  |  | (1,027 | ) |  |  | (158 | )
Unallocated corporate expenses |  |  | (205 | ) |  |  | (186 | ) |  |  | (180 | )
|  |  | 781 |  |  |  | (1,701 | ) |  |  | (440 | )

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Depreciation: |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 32 |  |  |  | 39 |  |  |  | 54 |
Engineering |  |  | 6 |  |  |  | 10 |  |  |  | 15 |
|  |  | 38 |  |  |  | 49 |  |  |  | 69 |
Capital expenditures, gross |  |  |  |  |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 1 |  |  |  | 2 |  |  |  | 17 |
Engineering |  |  | 3 |  |  |  | 9 |  |  |  | 4 |
|  |  | 4 |  |  |  | 11 |  |  |  | 21 |

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23 Segment information (Cont’d)

(i) The Group reports under two segments: Trading and manufacturing, and Engineering. (Cont’d)

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Assets |  |  |  |  |  |
Trading and manufacturing |  |  | 7,969 |  |  |  | 7,877 |
Engineering |  |  | 13,281 |  |  |  | 12,218 |
|  |  | 21,250 |  |  |  | 20,095 |
Liabilities |  |  |  |  |  |  |  |
Trading and manufacturing |  |  | 3,428 |  |  |  | 2,645 |
Engineering |  |  | 3,021 |  |  |  | 2,987 |
|  |  | 6,449 |  |  |  | 5,632 |

(ii) Geographical analysis of revenue by customer location is as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | US$’000 |  |  | US$’000 |  |  | US$’000 |
Revenue - |  |  |  |  |  |  |  |  |
The PRC |  |  | 13,217 |  |  |  | 5,072 |  |  |  | 6,886 |
Hong Kong |  |  | 7,937 |  |  |  | 8,024 |  |  |  | 10,169 |
Others |  |  | 234 |  |  |  | 261 |  |  |  | 344 |
|  |  | 21,388 |  |  |  | 13,357 |  |  |  | 17,399 |

(iii) Long-lived assets (1)

Geographical analysis of long-lived assets is as follows:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | US$’000 |  |  | US$’000 |
Hong Kong |  |  | 25 |  |  |  | 47 |
The PRC |  |  | 190 |  |  |  | 212 |
|  |  | 215 |  |  |  | 259 |

(1) Long-lived assets represent property, plant and equipment, net.

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23 Segment information(Cont’d)

(iv) Major suppliers

Details of individual suppliers accounting for more than 5% of the Group’s purchases are as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
Supplier A |  |  | 42 | % |  |  | 30 | % |  |  | 53 | %
Supplier B |  |  | 13 | % |  |  | 10 | % |  |  | 7 | %
Supplier C |  |  | 6 | % |  |  | 9 | % |  |  | 6 | %
Supplier D |  |  | 6 | % |  |  | 6 | % |  |  | 6 | %
Supplier E |  |  | 5 | % |  |  | 5 | % |  |  | - |
Supplier F |  |  | - |  |  |  | 12 | % |  |  | - |

(v) Major customers

Details of individual customers accounting for more than 5% of the Group’s revenue are as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
Customer A |  |  | 15 | % |  |  | 9 | % |  |  | 19 | %
Customer B |  |  | - |  |  |  | 8 | % |  |  | - |
Customer C |  |  | - |  |  |  | 6 | % |  |  | 10 | %
Customer D |  |  | - |  |  |  | - |  |  |  | 5 | %

24 Subsequent event

On December 16, 2021, the Company announced that the Company’s board of directors authorized the issuance of bonus shares (the “Bonus Shares”), which are issuable on January 21, 2022 to shareholders of record as of January 7, 2022 (the “Record Date”). Shareholders of record on the Record Date will receive one (1) ordinary share for every two (2) ordinary shares held. All issuances resulting in a fractional share will be rounded down to the next whole share. The common stock began trading on a split-adjusted basis on January 24, 2022. The effect of the stock split in form of bonus shares has been reflected retroactively in the financial statements and net income per ordinary share computations.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION

TECHNOLOGY COMPANY LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|  | Page |
Reports of Independent Registered Public Accounting Firm |  | F-47 to F-48 |
Consolidated Balance Sheets as of December 31, 2021 and 2020 |  | F-49 |
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 |  | F-50 |
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 |  | F-51 |
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019 |  | F-52 |
Notes to the Consolidated Financial Statements |  | F-53 to F-76 |

F-46
Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Zhejiang Tianlan Environmental Protection Technology Company Limited

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Zhejiang Tianlan Environmental Protection Technology Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) as of December 31, 2021 and 2020, the related consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2021 and 2020, and the results of its consolidated operations and its consolidated cash flows for each of the three years ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the management and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Report of Independent Registered Public Accounting Firm (Cont’d)

To the Board of Directors and Shareholders of

Zhejiang Tianlan Environmental Protection Technology Company Limited

Critical Audit Matter (Cont’d)

Revenue Recognition

As described further in Note 2 to the consolidated financial statements, revenues derived from long-term contracts are recognized as the performance obligations are satisfied over time. The Group uses a ratio of project costs incurred to estimated total costs for each contract to recognize revenue. Under the cost-to-cost approach, the determination of the progress towards completion requires management to prepare estimates of the costs to complete. In addition, the Group’s contracts may include variable consideration related to contract modifications through change orders or claims, and management must also estimate the variable consideration the Group expects to receive in order to estimate the total contract revenue. We identified revenue recognized over time to be a critical audit matter.

The principal considerations for our determination that revenue recognized over time is a critical audit matter is that auditing management’s estimate of the progress toward completion of its projects was complex and subjective. This is due to the considerable judgement required to evaluate management’s determination of the forecasted costs to complete its long-term contracts as future results may vary significantly from past estimates due to changes in facts and circumstances. In addition, auditing the Group’s measurement of variable consideration is also complex and highly judgmental and can have a material effect on the amount of revenue recognized.

Our audit procedures related to revenue recognized over time included the following, among others.

· | We obtained an understanding, evaluated the design of the operating effectiveness of the Group’s processes and controls related to contract revenue recognition;
· | We tested the Group’s cost-to-cost estimates by evaluating the appropriate application of the cost-to-cost method, testing the significant assumptions used to develop the estimated cost to complete and testing the completeness and accuracy of the underlying data;
· | We tested the estimated variable consideration by evaluating the appropriate application of the most likely amount method, and tracing amounts to supporting documentation;
· | We evaluating management’s ability to reasonably estimate costs by performing a comparison of the actual costs to prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the estimated costs;
· | We evaluate management’s methodologies and the consistency of management’s methodologies over the life of the contracts;
· | We tested the original estimated costs and profit margins on projects that were commenced and completed during the year ended December 31, 2021, by obtaining the original estimates, compare to the actual costs and profit margin for the completed contracts and investigate significant changes; and
· | We tested the estimated costs to complete projects that were not completed during the year ended December 31, 2021 by comparing the estimated cost to complete at December 31, 2021 to actual cost incurred subsequent to December 31, 2021

s/ Union Power HK CPA Limited

We have served as the Company’s auditor since 2018.

Hong Kong, the People’s Republic of China

May 13, 2022

F-48
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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED BALANCE SHEETS

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Assets |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash |  |  | 54,976 |  |  |  | 50,969 |
Accounts receivable, net |  |  | 106,022 |  |  |  | 118,621 |
Prepayments and other current assets |  |  | 33,498 |  |  |  | 28,387 |
Contract assets, net |  |  | 72,310 |  |  |  | 94,494 |
Inventories |  |  | 3,386 |  |  |  | 2,389 |
Total current assets |  |  | 270,192 |  |  |  | 294,860 |
Property, plant and equipment, net |  |  | 74,063 |  |  |  | 79,257 |
Intangible assets, net |  |  | 1,865 |  |  |  | 2,120 |
Land use right, net |  |  | 4,997 |  |  |  | 5,147 |
Deferred tax assets |  |  | 14,305 |  |  |  | 13,639 |
Long-term investments |  |  | 1,200 |  |  |  | - |
Total non-current assets |  |  | 96,430 |  |  |  | 100,163 |
Total assets |  |  | 366,622 |  |  |  | 395,023 |
Liabilities and shareholders’ equity |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Bank borrowings |  |  | 13,518 |  |  |  | 20,029 |
Accounts payable |  |  | 93,962 |  |  |  | 97,795 |
Other payables and accrued expenses |  |  | 18,428 |  |  |  | 17,747 |
Contract liabilities |  |  | 37,481 |  |  |  | 47,135 |
Other taxes payable |  |  | 6,724 |  |  |  | 15,169 |
Total current liabilities |  |  | 170,113 |  |  |  | 197,875 |
Deferred government grant |  |  | 3,889 |  |  |  | 4,894 |
Total non-current liabilities |  |  | 3,889 |  |  |  | 4,894 |
Total liabilities |  |  | 174,002 |  |  |  | 202,769 |
Commitments and contingencies (Note 21) |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |
Share capital 82,572,000 no par value shares authorised, issued and outstanding, as of December 31, 2021 and 2020, respectively |  |  | 82,572 |  |  |  | 82,572 |
Capital reserve |  |  | 35,761 |  |  |  | 35,761 |
PRC statutory reserve |  |  | 16,582 |  |  |  | 15,670 |
Retained earnings |  |  | 52,409 |  |  |  | 55,248 |
Total shareholders’ equity attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited |  |  | 187,324 |  |  |  | 189,251 |
Non-controlling interests |  |  | 5,296 |  |  |  | 3,003 |
Total shareholders’ equity |  |  | 192,620 |  |  |  | 192,254 |
Total liabilities and shareholders’ equity |  |  | 366,622 |  |  |  | 395,023 |

The accompanying notes form an integral part of these consolidated financial statements.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Revenues |  |  | 330,841 |  |  |  | 304,710 |  |  |  | 277,581 |
Cost of revenue s |  |  | (275,455 | ) |  |  | (261,478 | ) |  |  | (227,632 | )
Gross profit |  |  | 55,386 |  |  |  | 43,232 |  |  |  | 49,949 |
Selling and administrative expenses |  |  | (52,161 | ) |  |  | (60,393 | ) |  |  | (43,739 | )
Operating income / (loss) |  |  | 3,225 |  |  |  | (17,161 | ) |  |  | 6,210 |
Interest income |  |  | 46 |  |  |  | 30 |  |  |  | 50 |
Interest expense |  |  | (747 | ) |  |  | (1,676 | ) |  |  | (2,258 | )
Other income |  |  | 11,594 |  |  |  | 39,646 |  |  |  | 6,276 |
Other losses |  |  | (1,238 | ) |  |  | (5,481 | ) |  |  | (5,624 | )
Net i ncome before income tax |  |  | 12,880 |  |  |  | 15,358 |  |  |  | 4,654 |
Income tax credit / (expense) |  |  | 698 |  |  |  | (1,858 | ) |  |  | (296 | )
Net income |  |  | 13,578 |  |  |  | 13,500 |  |  |  | 4,358 |
Net (income) / loss attributable to non-controlling interests |  |  | (2,293 | ) |  |  | 2,032 |  |  |  | 484 |
Net income attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited’s shareholders |  |  | 11,285 |  |  |  | 15,532 |  |  |  | 4,842 |
Net income per ordinary share attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited’s shareholders |  |  | RMB 0.14 |  |  |  | RMB 0.19 |  |  |  | RMB 0.06 |
Weighted average ordinary shares outstanding |  |  | 82,572,000 |  |  |  | 82,572,000 |  |  |  | 82,572,000 |

The accompanying notes form an integral part of these consolidated financial statements.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net income |  |  | 13,578 |  |  |  | 13,500 |  |  |  | 4,358 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Amortization of intangible assets |  |  | 255 |  |  |  | 142 |  |  |  | 152 |
Amortization of land use right |  |  | 150 |  |  |  | 159 |  |  |  | 149 |
Bad debts written off |  |  | - |  |  |  | - |  |  |  | 5,383 |
Depreciation |  |  | 6,466 |  |  |  | 6,359 |  |  |  | 6,556 |
Gain on disposal of property, plant and equipment |  |  | (39 | ) |  |  | - |  |  |  | (39 | )
Impairment loss on contract assets |  |  | 1,238 |  |  |  | 1,399 |  |  |  | - |
Impairment loss on long-term investments |  |  | - |  |  |  | 1,340 |  |  |  | - |
Impairment loss on property, plant and equipment |  |  | - |  |  |  | 2,742 |  |  |  | - |
Increase in allowance for doubtful accounts |  |  | - |  |  |  | - |  |  |  | 2,437 |
Investment loss |  |  | - |  |  |  | - |  |  |  | 241 |
Proceeds from deferred government grant |  |  | - |  |  |  | - |  |  |  | 2,349 |
Property, plant and equipment written off |  |  | - |  |  |  | - |  |  |  | 14 |
Reversal of allowance for doubtful accounts |  |  | (183 | ) |  |  | (6,463 | ) |  |  | - |
Change in non-current assets and liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Deferred government grant |  |  | (1,005 | ) |  |  | 2,545 |  |  |  | - |
Deferred tax (liabilities) / assets |  |  | (666 | ) |  |  | 331 |  |  |  | 268 |
Decrease / (increase) in current assets: |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable, net |  |  | 12,782 |  |  |  | 26,620 |  |  |  | 11,432 |
Prepayments and other current assets |  |  | (5,111 | ) |  |  | 24,472 |  |  |  | (6,369 | )
Contract assets, net |  |  | 20,946 |  |  |  | (14,932 | ) |  |  | 20,033 |
Inventories |  |  | (997 | ) |  |  | 3,366 |  |  |  | 6,208 |
Short-term investments |  |  | - |  |  |  | 800 |  |  |  | - |
Increase/(decrease) in current liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable |  |  | (3,833 | ) |  |  | 8,423 |  |  |  | (17,272 | )
Other payables and accrued expenses |  |  | 681 |  |  |  | 10,164 |  |  |  | (8,795 | )
Contract liabilities |  |  | (9,654 | ) |  |  | (8,763 | ) |  |  | 14,852 |
Other taxes payable |  |  | (8,596 | ) |  |  | 5,638 |  |  |  | (1,577 | )
Current portion of long-term finance lease obligations |  |  | - |  |  |  | (11,263 | ) |  |  | - |
Tax refund / (paid) |  |  | 151 |  |  |  | (9,223 | ) |  |  | (4,299 | )
Net cash provided by operating activities |  |  | 26,163 |  |  |  | 57,356 |  |  |  | 36,081 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Proceeds from investment |  |  | - |  |  |  | 295 |  |  |  | - |
Proceeds from sale of long-term investments |  |  | - |  |  |  | - |  |  |  | - |
Proceeds from sale of partial shareholding in a subsidiary |  |  | - |  |  |  | 137 |  |  |  | 510 |
Proceeds from sale of property, plant and equipment |  |  | 148 |  |  |  | - |  |  |  | 50 |
Proceeds from sale of subsidiaries |  |  | - |  |  |  | - |  |  |  | - |
Purchase of intangible assets |  |  | - |  |  |  | (1,350 | ) |  |  | - |
Purchase of long-term investments |  |  | (1,200 | ) |  |  | - |  |  |  | - |
Purchase of property, plant and equipment |  |  | (1,381 | ) |  |  | (577 | ) |  |  | (1,584 | )
Purchase of short-term investments |  |  | - |  |  |  | - |  |  |  | (800 | )
Purchase of subsidiary |  |  | - |  |  |  | (5,100 | ) |  |  | - |
Net cash used in investing activities |  |  | (2,433 | ) |  |  | (6,595 | ) |  |  | (1,824 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Repayments of bank borrowings |  |  | (20,000 | ) |  |  | (36,800 | ) |  |  | (63,000 | )
Payment of principal obligations under long-term finance lease |  |  | - |  |  |  | - |  |  |  | (29,668 | )
Proceeds from bank borrowings |  |  | 13,500 |  |  |  | 30,000 |  |  |  | 44,841 |
Dividend paid to shareholders and interest paid |  |  | (13,223 | ) |  |  | (4,606 | ) |  |  | - |
Net cash used in financing activities |  |  | (19,723 | ) |  |  | (11,406 | ) |  |  | (47,827 | )
Net increase/(decrease) in cash and cash equivalents |  |  | 4,007 |  |  |  | 39,355 |  |  |  | (13,570 | )
Cash and cash equivalents at beginning of year |  |  | 50,969 |  |  |  | 11,614 |  |  |  | 25,184 |
Cash and cash equivalents at end of year |  |  | 54,976 |  |  |  | 50,969 |  |  |  | 11,614 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Supplemental disclosure of consolidated cash flow information: |  |  |  |  |  |  |  |  |  |  |  |
Cash paid during the period for income tax |  |  | - |  |  |  | - |  |  |  | 5,237 |
Cash paid during the period for interest |  |  | 680 |  |  |  | 1,716 |  |  |  | 2,258 |

The accompanying notes form an integral part of these consolidated financial statements.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

|  | ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED’S SHAREHOLDERS |  |  |  |  |  |  |
|  | Share capital |  |  | Capital reserve |  |  | PRC statutory reserve |  |  | Retained earnings |  |  | Non-controlling interest s |  |  | Total |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Balance at December 31, 2018 |  |  | 82,572 |  |  |  | 35,566 |  |  |  | 13,903 |  |  |  | 42,099 |  |  |  | 3,862 |  |  |  | 178,002 |
Net income / (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,842 |  |  |  | (484 | ) |  |  | 4,358 |
Appropriation of reserves |  |  | - |  |  |  | - |  |  |  | 518 |  |  |  | (518 | ) |  |  | - |  |  |  | - |
Others |  |  | - |  |  |  | (56 | ) |  |  | - |  |  |  | - |  |  |  | 565 |  |  |  | 509 |
Balance at December 31, 2019 |  |  | 82,572 |  |  |  | 35,510 |  |  |  | 14,421 |  |  |  | 46,423 |  |  |  | 3,943 |  |  |  | 182,869 |
Net income / (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,532 |  |  |  | (2,032 | ) |  |  | 13,500 |
Dividend paid |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,890 | ) |  |  | - |  |  |  | (2,890 | )
Others |  |  | - |  |  |  | 251 |  |  |  | (436 | ) |  |  | (3,968 | ) |  |  | (269 | ) |  |  | (4,422 | )
Appropriation of reserves |  |  | - |  |  |  | - |  |  |  | 1,685 |  |  |  | (1,685 | ) |  |  | - |  |  |  | - |
Consolidation of companies under common control |  |  | - |  |  |  | 3,600 |  |  |  | - |  |  |  | 1,836 |  |  |  | 2,122 |  |  |  | 7,558 |
Ordinary shares injected by shareholders |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (761 | ) |  |  | (761 | )
Utilization of reserve |  |  | - |  |  |  | (3,600 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,600 | )
Balance at December 31, 2020 |  |  | 82,572 |  |  |  | 35,761 |  |  |  | 15,670 |  |  |  | 55,248 |  |  |  | 3,003 |  |  |  | 192,254 |
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11,285 |  |  |  | 2,293 |  |  |  | 13,578 |
Dividend paid |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (13,212 | ) |  |  | - |  |  |  | (13,212 | )
Appropriation of reserves |  |  | - |  |  |  | - |  |  |  | 912 |  |  |  | (912 | ) |  |  | - |  |  |  | - |
Balance at December 31, 2021 |  |  | 82,572 |  |  |  | 35,761 |  |  |  | 16,582 |  |  |  | 52,409 |  |  |  | 5,296 |  |  |  | 192,620 |

The accompanying notes form an integral part of these consolidated financial statements.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 Organization and business

Zhejiang Tianlan Environmental Protection Technology Company Limited (the “Company”) was incorporated in Hangzhou City, Zhejiang Province, the People's Republic of China (“PRC”) on May 18, 2000. The Company is a limited liability company limited by shares with an operating period up to long term.

The Company provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants since 2000.

The Company has listed its shares on the New Third Board in the PRC since November 17, 2015 and suspended trading from August 15, 2017 and resumed trading on February 2, 2018 and suspended trading from November 24, 2020 and resumed trading on January 6, 2021.

The Group’s principal subsidiaries at December 31, 2021 and 2020 are set out below.

Name of entity |  | Ownership interest held by the Group |  |  | Place of incorporation and principal place of operation |  | Principal activities |
|  | 2021 |  |  | 2020 |  |  |  |  |  |
Zhejiang Tianlan Environmental Protection Engineering Company Limited |  |  | 100 | %* |  |  | 100 | %* |  | PRC |  | Design, general contract, installation and operating management of environmental protection projects |
Hangzhou Tianlan Environmental Protection Equipment Company Limited |  |  | 51 | % |  |  | 51 | % |  | PRC |  | Manufacturing and installation services of environmental protection equipment |
Hangzhou Tianlan Pure Environmental Protection Technology Company Limited |  |  | 38.25 | % |  |  | 38.25 | % |  | PRC |  | Manufacturing of environmental protection equipment |
Hangzhou Tiancan Environmental Technology Company Limited |  |  | 80 | % |  |  | 80 | % |  | PRC |  | Manufacturing of environmental protection equipment |

* This company was acquired in August 2020.

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ZHEJIANG TIANLAN ENVIRONMENTAL PROTECTION TECHNOLOGY COMPANY LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT’D)

1 Organization and business (Cont’d)

The outbreak of COVID-19 worldwide and the various public health measures put in place in many countries to prevent the spread of COVID-19 have disrupted the overall business of the Group at different levels of time and regions in 2020. After the Chinese new year in February 2020, the Group’s domestic businesses were affected by the lock-down of various cities implemented in PRC, resulting in the forced suspension of some local operations until the gradual resumption of work beginning from late March to early April 2020. Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Group’s consolidated financial position, results of its operations, the specific impact is not readily determinable as of the date of these consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2 Summary of significant accounting policies

(a) Basis of presentation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

(b) Basis of consolidation

The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

(c) Subsidiaries

Subsidiaries are all entities over which the Group has control; has the power to appoint or remove the majority of the members of the board of directors; has the right to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

(d) Revenue recognition

Our revenue is derived from long-term contracts for customers, as well as short-term contracts for customers. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers), is as follows:

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(d) Revenue recognition (Cont’d)

Performance o bligations s atisfied o ver t ime (Design, installation and operation management s ervices)

Recognition of performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering projects typically span between 12 to 36 months. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design, installation and operation management services).

Revenues are recognized as our obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being installed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Group for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material, labor, subcontract and other costs.

Items excluded from cost-to-cost

Pre-contract costs are generally not material and are charged to expense as incurred, but in certain cases pre-contract recognition may be deferred if specific probability criteria are met.

Variable consideration

Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

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(d) Revenue recognition (Cont’d)

The Group estimates variable consideration for a performance obligation at the most likely amount to which the Group expects to be entitled (or the most likely amount the Group expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Group will be entitled (or will incur in the case of liquidated damages). The Group includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Group’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Group.

The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Group’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.

Performance obligations satisfied at a point-in-time (Sales of equipment)

Revenue for our sales contracts is recognized at a point in time. Sales are recognized when control of the products has transferred, being when the products are delivered to the customer. Delivery occurs when the products have been delivered to the point of receipt by customer.

(e) Research and development costs

Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately 23,419,000, RMB28,589,000 and RMB19,018,000 for the years ended December 31, 2021, 2020 and 2019 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.

(f) Income tax

The Group follows the liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. The Group also evaluates whether the recorded deferred tax assets and valuation allowances can be realized and, when necessary, reduces the amounts to what is expected to be realized.

The accounting guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Group does not believe it has any uncertain tax positions through the periods ended December 31, 2021, 2020 and 2019 respectively which would have a material impact on the Group’s consolidated financial statements.

The Group files tax returns in the PRC. The tax returns for 2021, 2020 and 2019 are subject to examination by the PRC taxing authorities, commencing with the first year filed.

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(g) Cash and cash equivalents

Cash and cash equivalents consist of bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal and uninsured. There were no cash equivalents as of December 31, 2021 and 2020.

(h) Accounts receivable and allowance for doubtful accounts

The Group does not charge interest to its customers and carries its customer receivables at their face amounts, less an allowance for doubtful accounts. As is common practice in the industry, the Group classifies all accounts receivable as current assets.

The Group grants trade credit, on a non-collateralized basis, to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Group analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.

(i) Classification of contract assets, net and liabilities

For revenue recognized associated with its contracts with customers over time, for which the Group has an enforceable right to receive compensation. Many of our contracts contain specific provisions that determine when the Group can bill for its work performed under these contracts.

Any revenue earned on a contract that has not yet been billed to the customer is recorded as a contract asset on the Group’s consolidated balance sheets.

The Group’s consolidated balance sheets present contract liabilities that contain deferred revenue that represent any costs incurred on contracts in process for which revenue has not yet been recognized.

(j) Inventories

Inventories are measured using the weighted average method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity.

(k) Property, plant and equipment and land use right, net

Property, plant and equipment is carried at cost. Major modifications or refurbishments which extend the useful life of the assets are capitalized and depreciated over the adjusted remaining useful life of the assets. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in consolidated income from operations. The cost of maintenance and repairs is charged to expense as incurred. Property, plant and equipment is reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of property, plant and equipment exceeds its fair value, an impairment charge would be recorded in the consolidated statement of operations.

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(k) Property, plant and equipment and land use right, net (Cont’d)

Land in the PRC is owned by the PRC government. The government in the PRC, according to PRC Law, may sell the right to use the land for a specific period of time. Thus, all of the Group’s land purchases in the PRC are considered to be leasehold land and are classified as land use right.

Depreciation of property, plant and equipment and amortization of land use right are computed using the straight-line method over the assets’ estimated useful lives as follows:

Land use right | Over terms of the leases
Buildings and leasehold improvements | 11 to 50 years, with 5% residual value
Furniture, fixtures and office equipment | 5 years, with 5% residual value
Motor vehicles | 5 years, with 5% residual value
Plant and machineries | 5 to 10 years, with 5% residual value

(l) Intangible assets, net

The Group is currently amortizing its acquired intangible assets, consisted of patents and others, with finite-lived over periods generally ranging between three to twenty years.

(m) Impairment of long lived assets

Long-lived assets such as property, plant and equipment and intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. The impairment of long-lived assets amounted to approximately RMB Nil, RMB2,742,000 and RMB Nil for the years ended December 31, 2021, 2020 and 2019 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.

(n) Government grant income

Government grant income consists of receipt of funds to subsidize the investment cost of technical development in China. No present or future obligation arises from the receipt of such amount.

Government grants are recognized in the consolidated balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as income in the consolidated statement of operations on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in the consolidated statements of operations over the useful life of the asset by way of reduced depreciation expenses.

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(o) Leases arrangements

The Group adopted ASU No. 2016-02, Leases (Topic 842). The Group leases certain equipment under finance leases. The economic substance of the leases is a financing transaction for acquisition of the equipment. Accordingly, the right-of-use assets for these leases are included on the Group’s consolidated balance sheets in property, plant and equipment, net of accumulated depreciation, amortization and impairment losses, with a corresponding amount recorded in current portion of long-term finance lease obligations. The finance lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The financing component associated with finance lease obligations is included in interest expense. Generally, for the Group’s finance leases an implicit rate to calculate present value is provided in the lease agreement, however if a rate in not provided the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments.

The Group determines if an arrangement is a lease at inception. Lease liabilities are the Group’s obligation to make lease payments arising from a lease and are measured on a discounted basis.

(p) Share capital

Paid in capital refers to the registered capital paid up by the shareholders of the Company.

At December 31, 2021, there were 82,572,000 shares (2020: 82,572,000 shares) issued.

(q) Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from contracts over time, contract assets, net and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

(r) Related parties

Entities are considered to be related to the Group if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Group. Related parties also include principal owners of the Group, its management, members of the immediate families of principal owners of the Group and its management and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

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(s) Net income per ordinary share

The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited are computed by dividing net income attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited by the weighted average number of ordinary shares outstanding during the period.

(t) Warranties

The suppliers of the Group offer a standard one-year warranty to end customer of the Group. The Group only provides labour service to repair or replace parts. The Group does not maintain a general warranty reserve because historically labour costs for such repair or replacement have been de minimis.

(u) Shipping and handling costs

Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.

(v) Finance costs

Interest relating to loans repaid is expensed in the period the repayment occurs.

(w) Concentrations

Financial instruments that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable, net. The Group maintains substantially all of its cash and cash equivalent balances with large financial institutions which are believed to be high quality institutions.

The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top five customers accounted for approximately 35%, 39%, and 40% of consolidated revenues for the years ended December 31, 2021, 2020 and 2019, respectively. For the years ended December 31, 2021, 2020 and 2019, one customer accounted for 16%, 16% and 17% of annual revenues, respectively.

The Group grants trade credit under contractual payment terms, generally without collateral, to its customers, which include high credit quality electric utilities, general contractors, owners and managers of industrial properties.

Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2021 and 2020, none of the Group’s customers individually exceeded 10.0% of accounts receivable. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.

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(x) Statutory reserve

The Group is required to make appropriation to reserve, comprising the PRC statutory reserve, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”).

Appropriations to the PRC statutory reserve are required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital.

(y) Fair value measurements

The Group uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2021 and 2020, the Group determined that the carrying values of cash, and cash equivalents, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, other payables and accrued expenses and contract liabilities approximate their fair values because of the short-term nature of these instruments.

(z) Short-term and long-term investments

The Group has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Group’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the investee.

(aa) Recent accounting pronouncements

Changes to GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Group considers the applicability and impact of all ASUs. The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements.

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposures. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.

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(aa) Recent accounting pronouncements (Cont’d)

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The Group adopted this ASU in January 2020 and there was no effect on the consolidated financial statements or disclosures.

Recently issued accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Group must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of this standard is not expected to have a material impact on the Group’s consolidated financial statements or disclosures.

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),” an amendment clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivative instruments. The guidance is effective for fiscal years beginning after December 15, 2020. ASU 2020-01 will become effective for the Group in fiscal 2022. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, “Codification Improvements,” this ASU affects a wide variety of Topics in the Codification. They apply to all reporting entities within the scope of the affected accounting guidance. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early application of the amendments is permitted for and varies based on the entity. The amendments should be applied retrospectively and at the beginning of the period that includes the adoption date. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.

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(ab) Non-controlling interests

For entities that are consolidated, but not 100% owned, a portion of the income or loss and equity is allocated to owners other than the Group. The aggregate of the income or loss and corresponding equity that is not owned by the Group is included within non-controlling interests in the consolidated financial statements.

Non-controlling interests is presented as a separate component of equity in the consolidated balance sheets. Net income includes the net income attributable to the holders of non-controlling interests in the consolidated statements of operations and comprehensive income / (loss). Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.

3 Lease obligations

The Group has finance leases primarily for equipment.

The components of lease expense are as follows:

|  | Years ended December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Finance lease cost: |  |  |  |  |  |
Amortization of right-of-use assets |  |  | - |  |  |  | 5,837 |
Interest on lease liabilities included under cost of revenue and selling and administrative expenses |  |  | - |  |  |  | 1,244 |
Total finance lease cost |  |  | - |  |  |  | 7,081 |

Supplemental consolidated cash flow information related to leases is as follows:

|  | Years ended December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |
Finance cash flows from finance leases |  |  | - |  |  |  | 11,263 |
Right-of-use assets obtained in exchange for lease obligations (noncash): |  |  |  |  |  |  |  |
Finance leases |  |  | - |  |  |  | - |

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3 Lease obligations (Cont’d)

Supplemental consolidated balance sheet information related to leases is as follows:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Finance leases |  |  |  |  |  |
Property, plant and equipment, at cost |  |  | - |  |  |  | - |
Accumulated depreciation and impairment losses |  |  | - |  |  |  | - |
Property, plant and equipment, net |  |  | - |  |  |  | - |
Current maturities of long-term debt |  |  | - |  |  |  | - |
Total finance lease liabilities |  |  | - |  |  |  | - |
Weighted average remaining lease term |  |  |  |  |  |  |  |
Finance leases |  |  | - |  |  |  | - |
Weighted average discount rate |  |  |  |  |  |  |  |
Finance leases |  |  | 5.9 | % |  |  | 5.9 | %

4 Accounts receivable, net

Accounts receivable, net consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Contract receivables |  |  | 148,889 |  |  |  | 160,803 |
Less: allowance for doubtful accounts |  |  | (42,867 | ) |  |  | (42,182 | )
|  |  | 106,022 |  |  |  | 118,621 |

The roll-forward of activity in the allowance for doubtful accounts was as follows for the years ended December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Balance at beginning of period |  |  | 42,182 |  |  |  | 26,484 |
Add: provision for allowances |  |  | 868 |  |  |  | 22,161 |
Less: Reversal of provision for doubtful accounts |  |  | (183 | ) |  |  | (6,463 | )
Balance at end of period |  |  | 42,867 |  |  |  | 42,182 |

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4 Accounts receivable, net (Cont’d)

The following is an aging analysis of accounts receivable, net at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Within 1 year |  |  | 82,534 |  |  |  | 76,590 |
1 year - 2 years |  |  | 12,144 |  |  |  | 31,389 |
2 years - 3 years |  |  | 5,111 |  |  |  | 6,128 |
3 years - 4 years |  |  | 5,141 |  |  |  | 3,678 |
4 years - 5 years |  |  | 1,092 |  |  |  | 836 |
|  |  | 106,022 |  |  |  | 118,621 |

At December 31, 2021, the accounts receivable, net pledged as security for the Company’s bank loans and third party loans amounted to RMB Nil (2020: RMB Nil).

5 Prepayments and other current assets

Prepayments and other current assets mainly represent deposits paid for bidding projects, purchases, services and finance leases and prepaid expenses.

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Prepayments |  |  | 22,717 |  |  |  | 16,632 |
Deposits paid for bidding projects and temporary payments |  |  | 7,030 |  |  |  | 10,448 |
Other current assets |  |  | 3,751 |  |  |  | 1,307 |
|  |  | 33,498 |  |  |  | 28,387 |

6 Contract assets, net and liabilities

Contracts with customers usually stipulate the timing of payment, which is defined by the terms found within the various contracts under which work was performed during the period. Therefore, contract assets and liabilities are created when the timing of costs incurred on work performed does not coincide with the billing terms.

The Group’s consolidated balance sheets present contract assets, net which contains earned unbilled revenue associated with contract work that has been completed but not paid by customers, that are generally due once the job is completed and approved.

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6 Contract assets, net and liabilities (Cont’d)

Contract assets, net consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Unbilled revenue |  |  | 72,310 |  |  |  | 94,494 |

The Group’s consolidated balance sheets present contract liabilities which contain deferred revenue (previously identified as billings in excess of costs and estimated earnings on uncompleted contracts).

Contract liabilities consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Deferred revenue |  |  | 37,481 |  |  |  | 47,135 |

The following table provides information about contract assets, net and contract liabilities from contracts with customers at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Contract assets |  |  | 72,310 |  |  |  | 94,494 |
Contract liabilities |  |  | (37,481 | ) |  |  | (47,135 | )
Net contract assets |  |  | 34,829 |  |  |  | 47,359 |

The difference between the opening and closing balances of the Group’s contract assets, net and contract liabilities primarily results from the timing of the Group’s billings in relation to its performance of work.

The net asset position for contracts in process consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Estimated earnings on uncompleted contracts |  |  | 503,434 |  |  |  | 406,064 |
Less: billings to date |  |  | (468,605 | ) |  |  | (358,705 | )
|  |  | 34,829 |  |  |  | 47,359 |

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6 Contract assets, net and liabilities (Cont’d)

Contract assets, net consisted of the following at December 31:

|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Gross contract assets |  |  | 81,198 |  |  |  | 102,144 |
Less: allowance for doubtful accounts |  |  | (8,888 | ) |  |  | (7,650 | )
|  |  | 72,310 |  |  |  | 94,494 |

7 Inventories

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Raw materials |  |  | 2,381 |  |  |  | 341 |
Finished goods |  |  | 1,005 |  |  |  | 2,048 |
|  |  | 3,386 |  |  |  | 2,389 |

8 Short-term and l ong-term investments

The Group's short-term investments consist of wealth management products and long-term investments consist of minority ownership interests in Chongqing Zhongtian Haizhi Ecological Environment Technology Co., Ltd (2020: Nil) limited liability company, generally from private equity arrangements. These investments are carried under the equity method of accounting, with changes in the carrying value reported as realized gains or losses in the consolidated financial statements.

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9 Property, plant and equipment

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Building and leasehold improvements |  |  | 167,874 |  |  |  | 167,874 |
Furniture, fixtures and office equipment |  |  | 3,694 |  |  |  | 3,658 |
Motor vehicles |  |  | 4,647 |  |  |  | 4,808 |
Plant and machineries |  |  | 10,097 |  |  |  | 9,399 |
Total |  |  | 186,312 |  |  |  | 185,739 |
Less: Accumulated depreciation and amortization |  |  | (76,008 | ) |  |  | (70,241 | )
Accumulated impairment losses |  |  | (36,241 | ) |  |  | (36,241 | )
Total |  |  | (112,249 | ) |  |  | (106,482 | )
Net |  |  | 74,063 |  |  |  | 79,257 |

|  | Year ended December 31,
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Depreciation charge |  |  | 6,466 |  |  |  | 6,359 |  |  |  | 6,556 |

At December 31, 2021, the net book value of property, plant and equipment pledged as security for the Company’s bank loans and third party loans amounted to approximately RMB1,524,000 (2020: RMB34,403,000).

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10 Intangible assets, net

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Amortizable i ntangible a ssets |  |  |  |  |  |
Gross carrying amount |  |  |  |  |  |
Patents |  |  | 3,750 |  |  |  | 3,750 |
Others |  |  | 165 |  |  |  | 165 |
|  |  | 3,915 |  |  |  | 3,915 |
Less: Accumulated amortization |  |  | (2,050 | ) |  |  | (1,795 | )
Net carrying amount |  |  | 1,865 |  |  |  | 2,120 |

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Amortization expense |  |  | 255 |  |  |  | 142 |  |  |  | 152 |

At December 31, 2021, estimated future intangible assets amortization expense for each of the next five years and thereafter was as follows:

|  | Future amortization expense |
|  | RMB’000 |
2022 |  |  | 255 |
2023 |  |  | 255 |
2024 |  |  | 255 |
2025 |  |  | 255 |
2026 |  |  | 255 |
Thereafter |  |  | 590 |
Total |  |  | 1,865 |

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10 Intangible assets, net (Cont’d)

At December 31, 2020, estimated future intangible assets amortization expense for each of the next five years and thereafter was as follows:

|  | Future amortization expense |
|  | RMB’000 |
2021 |  |  | 142 |
2022 |  |  | 142 |
2023 |  |  | 142 |
2024 |  |  | 142 |
2025 |  |  | 142 |
Thereafter |  |  | 1,410 |
Total |  |  | 2,120 |

11 Land use right, net

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Gross carrying amount |  |  |  |  |  |
Land use right |  |  | 7,361 |  |  |  | 7,361 |
Less: Accumulated amortization |  |  | (2,364 | ) |  |  | (2,214 | )
Net carrying amount |  |  | 4,997 |  |  |  | 5,147 |

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Amortization expense |  |  | 150 |  |  |  | 159 |  |  |  | 149 |

At December 31, 2021, the land use right pledged as security for the Company’s bank loans and third party’s loans amounted to approximately RMB 1,463,000 (2020: RMB4,463,000).

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11 Land use right, net (Cont’d)

As December 31, 2021, estimated future land use right amortization expense for each of the next five years and thereafter was as follows:

|  | Future amortization expense |
|  | RMB’000 |
2022 |  |  | 150 |
2023 |  |  | 150 |
2024 |  |  | 150 |
2025 |  |  | 150 |
2026 |  |  | 150 |
Thereafter |  |  | 4,247 |
Total |  |  | 4,997 |

As December 31, 2020, estimated future land use right amortization expense for each of the next five years and thereafter was as follows:

|  | Future amortization expense |
|  | RMB’000 |
2021 |  |  | 159 |
2022 |  |  | 159 |
2023 |  |  | 159 |
2024 |  |  | 159 |
2025 |  |  | 159 |
Thereafter |  |  | 4,352 |
Total |  |  | 5,147 |

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12 Bank borrowings

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Bank loans borrowed by the Company (note i) |  |  | 8,511 |  |  |  | 10,014 |
Bank loans borrowed by subsidiaries of the Company (note ii) |  |  | 5,007 |  |  |  | 10,015 |
|  |  | 13,518 |  |  |  | 20,029 |

(i) | The bank loans are denominated in Renminbi and are repayable within 1 year. The bank loans borrowed by the Company as of December 31, 2021 bears interest at fixed rates of 4.35% to 5% (2020: 4.79%) per annum. Interest paid during the year ended December 31, 2021 was approximately RMB253,000 (2020: RMB1,377,000 and 2019: RMB1,991,000).
(ii) | The bank loans are denominated in Renminbi and are repayable within 1 year. The bank loans borrowed by subsidiaries of the Company as of December 31, 2021 bears interest at a fixed rate ranging from 4.35% to 5% (2020: a fixed rate ranging from 4.5% to 4.79%) per annum and are secured by the subsidiary’s office premises and leasehold improvements and land use right. Interest paid during the year ended December 31, 2021 was approximately RMB427,000 (2020: RMB287,000 and 2019: RMB246,000).

13 Other payables and accrued expenses

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Accrued expenses |  |  | 8,315 |  |  |  | 7,629 |
Output VAT |  |  | 5,468 |  |  |  | 6,529 |
Deposits received and temporary receipts |  |  | 4,645 |  |  |  | 3,589 |
|  |  | 18,428 |  |  |  | 17,747 |

14 Other taxes payable

Other taxes payable mainly comprise Valued-Added Tax (“VAT”). The Group is subject to output VAT levied at the rate of 3% to 13 % (2020: 3% to 13%) of the revenue from sales of equipment. The input VAT paid on purchases of materials and other direct inputs can be used to offset the output VAT levied on operating revenue to determine the net VAT payable or recoverable.

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15 Capital reserve

Capital reserve represents capital contributions from shareholders in excess of the paid-in capital amount and capitalization of gain on disposal of subsidiaries to the shareholders in previous years.

16 Other income and other losses

Other income

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Compensation income |  |  | - |  |  |  | 22,548 |  |  |  | - |
Gain on disposal of property, plant and equipment |  |  | 39 |  |  |  | - |  |  |  | 39 |
Investment income |  |  | 531 |  |  |  | 266 |  |  |  | - |
Amounts waived by payees |  |  | 3,061 |  |  |  | 4,535 |  |  |  | 280 |
Reversal of allowance for doubtful accounts |  |  | 183 |  |  |  | 6,463 |  |  |  | - |
Subsidy income from PRC government |  |  | 7,780 |  |  |  | 5,834 |  |  |  | 5,957 |
|  |  | 11,594 |  |  |  | 39,646 |  |  |  | 6,276 |

Other losses

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Bad debts written off |  |  | - |  |  |  | - |  |  |  | 5,383 |
Impairment loss on contract assets |  |  | 1,238 |  |  |  | 1,399 |  |  |  | - |
Impairment loss on long-term investments |  |  | - |  |  |  | 1,340 |  |  |  | - |
Impairment loss on property, plant and equipment |  |  | - |  |  |  | 2,742 |  |  |  | - |
Investment loss |  |  | - |  |  |  | - |  |  |  | 241 |
|  |  | 1,238 |  |  |  | 5,481 |  |  |  | 5,624 |

17 Income tax(credit)/expense

According to relevant PRC tax laws and regulations, entities incorporated in the PRC are subject to Enterprise Income Tax (“EIT”) at a statutory rate of 25% or reduced national EIT rates of 15% for certain High and New Technology Enterprises (“HNTE”) on PRC taxable income. Zhejiang Tianlan Environmental Protection Technology Company Limited and Hangzhou Tianlan Environmental Protection Equipment Company Limited are classified as HNTE which enjoy a preferential tax rate of 15%.

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17 Income tax(credit)/expense (Cont’d)

During the years ended December 31, 2021 and 2020, the PRC tax laws and regulations have launched a tax reduction scheme for small enterprises, Hangzhou Tianlan Pure Environmental Protection Technology Company Limited, Hangzhou Tiancan Environmental Technology Company Limited, Zhejiang Tianlan Environmental Engineering and Design Company Limited and Zhejiang Tianlan Environmental Protection Engineering Company Limited are entitled to enjoy this tax benefit. As such, they are subjects to Enterprise Income Tax rate of 20% only.

The Company and its subsidiaries are based in the PRC and file an EIT return. The components of the provision for income tax expense/(credit) were as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Current tax (credit)/expense |  |  |  |  |  |  |  |  |
PRC EIT |  |  | (32 | ) |  |  | 757 |  |  |  | 28 |
Income tax (credit)/expense |  |  | (32 | ) |  |  | 757 |  |  |  | 28 |
Deferred tax (credit)/expense |  |  | (666 | ) |  |  | 1,101 |  |  |  | 268 |
Total deferred tax (credit)/expense |  |  | (666 | ) |  |  | 1,101 |  |  |  | 268 |
Total (credit)/expense |  |  | (698 | ) |  |  | 1,858 |  |  |  | 296 |

The items comprising the difference between income tax computed at the EIT statutory rates in effect for 2021, 2020 and 2019 and our effective tax rates were as follows:

|  | Year ended December 31, |
|  | 2021 |  |  | 2020 |  |  | 2019 |
|  | RMB’000 |  |  | RMB’000 |  |  | RMB’000 |
Income before income tax |  |  | 12,880 |  |  |  | 15,358 |  |  |  | 4,654 |
Computed tax using respective companies’ statutory tax rates |  |  | 1,932 |  |  |  | 2,304 |  |  |  | 642 |
(Over)-provision for income tax in prior years |  |  | (39 | ) |  |  | (48 | ) |  |  | - |
Temporary differences |  |  | 401 |  |  |  | 182 |  |  |  | 202 |
Tax effect of expenses not deductible for tax purposes |  |  | 286 |  |  |  | 2,306 |  |  |  | 693 |
Tax effect of special deduction for research and development costs |  |  | (3,263 | ) |  |  | (3,001 | ) |  |  | (2,103 | )
Others |  |  | (15 | ) |  |  | 115 |  |  |  | 862 |
Income taxes (credit)/expense at effective tax rate |  |  | (698 | ) |  |  | 1,858 |  |  |  | 296 |

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17 Income tax(credit)/expense (Cont’d)

The components of deferred tax assets are as follows:

|  | December 31, |
|  | 2021 |  |  | 2020 |
|  | RMB’000 |  |  | RMB’000 |
Allowance for doubtful accounts |  |  | 6,188 |  |  |  | 6,184 |
Deferred government grant |  |  | 583 |  |  |  | 750 |
Impairment losses on assets |  |  | 6,940 |  |  |  | 6,705 |
Tax losses |  |  | 594 |  |  |  | - |
Total deferred tax assets |  |  | 14,305 |  |  |  | 13,639 |

Uncertain tax positions

As a result of the Group’s analysis, management has determined that the Group does not have any material uncertain tax positions.

18 Pension plan

As stipulated by the rules and regulations in the PRC, the Group contributes to state-sponsored retirement plans for its employees in Mainland China. The Group contributes approximately 12% to 14% of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

During the years ended December 31, 2021, 2020 and 2019, the aggregate contributions of the Group to the aforementioned pension plans and retirement benefit schemes were approximately RMB6,003,000, RMB5,645,000 and RMB5,449,000 respectively.

19 Risk factor s

Financial risk factors

The Group’s activities expose it mainly to credit risk.

Credit risk

The Group has no significant concentration of credit risk, cash in banks in PRC is insured with limit of approximately RMB500,000, per bank per each depositor. Uninsured cash in banks and restricted cash balances in PRC are of approximately RMB48,855,000 (2020: RMB44,494,000). Cash transactions are limited to high credit quality banks.

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20 Related party transaction

There were purchase of a subsidiary from shareholders of the Company with total consideration of approximately RMB Nil (2020: RMB4,590,000), engineering service income from an investment of approximately RMB273,000 (2020: RMB2,518,000) and remuneration to key management personnel of approximately RMB1,209,000 (2020: RMB 1,400,000).

21 Commitments and contingencies

(i) Insurance

The Group carries insurance policies to cover various risks, primarily general liability, automobile liability, workers’ compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid.

(ii) Purchase commitments

To manage the risk of changes in material prices and subcontracting costs used in tendering bids for contracts, most of the time, the Group obtains firm quotations from suppliers and subcontractors before submitting a bid. These quotations do not include any quantity guarantees. As soon as the Group is advised that its bid is successful, the Group enters into firm contracts with most of its materials suppliers and sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.

(iii) Litigation

The Group is now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the consolidated financial statements of the Group. There are no significant unresolved legal issues as of December 31, 2021 and 2020.

(v) Contingencies

The Group accounts for loss contingencies in accordance with ASC Topic 450 and other related guidelines. As of December 31, 2021 and 2020, the Group’s management is of the opinion that there are no commitments and contingencies to account for.

(vi) Operating leases

The Group has no operating leases expense during the year ended December 31, 2021 (2020 and 2019: RMB Nil). At December 31, 2021, the Group has no future minimum lease payments under non-cancellable operating leases.

22 Subsequent event

On April 22, 2022, the director of the Company proposed a cash dividend of an aggregate of approximately RMB9,082,000, which dividend was paid to all holders of record subject to approval in shareholders’ annual general meeting.

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