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Leases

9 Months Ended

Sep. 30, 2022

Financing with Sale-Leaseback [Abstract]

(7) Leases

Financing with Sale-Leaseback

The Company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with TAC Leasing Co., Ltd.(“TLCL”) on August 6, 2020, for a total financing proceeds in the amount of RMB 16 million (approximately US$2.5 million). Under the sale-leaseback arrangement, Hebei Tengsheng sold the Leased Equipment to TLCL for 16 million (approximately US$2.5 million). Concurrent with the sale of equipment, Hebei Tengsheng leases back the equipment sold to TLCL for a lease term of three years. At the end of the lease term, Hebei Tengsheng may pay a nominal purchase price of RMB 100 (approximately $16) to TLCL and buy back the Leased Equipment. The Leased Equipment in amount of $2,349,452 was recorded as right of use assets and the net present value of the minimum lease payments was recorded as lease liability and calculated with TLCL’s implicit interest rate of 15.6% per annum and stated at $567,099 at the inception of the lease on August 17, 2020.

Hebei Tengsheng made payments due according to the schedule. The balance of Leased Equipment net of amortization was $1,940,586 and $2,286,459 as of September 30, 2022 and December 31, 2021, respectively. The lease liability was $181,187 and $362,394, and its current portion in the amount of $181,187 and $210,161 as of September 30, 2022 and December 31, 2021, respectively.

Amortization of the Leased Equipment was $38,486 and $41,208 for the three months ended September 30, 2022 and 2021. Amortization of the Leased Equipment was $120,464 and $123,663 for the nine months ended September 30, 2022 and 2021. Total interest expenses for the sale-leaseback arrangement was $8,439 and $17,026 for the three months ended September 30, 2022 and 2021.Total interest expenses for the sale-leaseback arrangement was $32,808 and $56,376 for the nine months ended September 30, 2022 and 2021.

As a result of the sale and leaseback, a deferred gain in the amount of $430,695 was recorded. The deferred gain is amortized over the lease term and as an offset to amortization of the Leased Equipment.

The future minimum lease payments of the capital lease as of September 30, 2022 were as follows:

September 30,	Amount
2023		194,372
Less: unearned discount		(13,185	)
		181,187
Less: Current portion lease liability		(181,187	)
	$	-

Operating lease

The Company leases space under non-cancelable operating leases for office and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

The leases include option to renew in condition that it is agreed by the landlord before expiry. Therefore, the majority of renewals to extend the lease terms are not included in its right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluate the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.

As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The components of the Company’s lease expense are as follows:

	Nine Months Ended
	2022
	RMB

Operating lease cost		23,475
Short-term lease cost		-
Lease cost		23,475

Supplemental cash flow information related to its operating leases was as follows for the period ended September 30, 2022:

	Nine Months Ended
	2022
	RMB
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases		140,849

Maturities of its lease liabilities for all operating leases are as follows as of September 30, 2022:

September 30,	Amount
2023		140,849
2024		140,849
2025		140,849
2026		140,849
2027		140,849
Thereafter		140,849
Total operating lease payments	$	845,094
Less: Interest		(185,182	)
Present value of lease liabilities		659,912
Less: current portion, record in current liabilities		(90,960	)
Present value of lease liabilities		568,952

The weighted average remaining lease terms and discount rates for all of its operating leases were as follows as of September 30, 2022:

	September 30,
	2022
	RMB
Remaining lease term and discount rate:
Weighted average remaining lease term (years)		5.9
Weighted average discount rate		7.56	%