As
filed
with the Securities and Exchange Commission on
October
1
, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 4
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
(
Exact
name of registrant as specified in its charter
)
Nevada
(
State
or other jurisdiction of incorporation or organization
)
3433
(
Primary
Standard Industrial Classification Code Number
)
95-3819300
(
I.R.S.
Employer Identification Number
)
Building
3 No 28, Feng Tai North Road,
Beijing
China 100071
+86-10-63850516
(
Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices
)
United
Corporate Services, Inc.
202
South Minnesota Street
Carson
City, Nevada 89703
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to
:
Darren
Ofsink, Esq.
GUZOV
OFSINK LLC
600
Madison Avenue, 14
th
Floor,
New
York, NY 10022
Approximate
date of commencement of proposed sale to the public
: From
time to time after the Registration Statement has been declared
effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
o
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of earlier effective registration statement
for the same offering.
o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definitions of a “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
accelerated filer
¨
|
|
Accelerated
filer
¨
|
|
|
|
Non-accelerated
filer
¨
(Do not check if a smaller reporting company)
|
|
Smaller
reporting company
x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to be
registered
|
|
Amount to
be
registered
(1)
|
|
Proposed
maximum
offering
price per
share (2)
|
|
Proposed
maximum
aggregate
offering
price
|
|
Amount of
registration
fee
|
|
Common
stock, par value $.001 per share
|
|
|
4,691,499
|
|
$
|
1.93
|
|
$
|
9,054,593
|
|
$
|
356
|
|
Common
stock, par value $.001 per share, underlying warrants
|
|
|
469,150
|
(3)
|
$
|
1.93
|
|
$
|
905,460
|
|
$
|
36
|
|
Total
|
|
|
5,160,649
|
|
|
1.93
|
|
$
|
9,960,053
|
|
$
|
392
|
*
|
*
Previously Filed
|
(1)
|
Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended,
there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to
prevent
dilution resulting from stock splits, stock dividends or similar
transactions
|
|
(2)
|
The
registration fee was calculated pursuant to Rule 457(c). As of the
date of
this prospectus, our common stock is quoted under the symbol "CSOL.OB"
on
the Over-the-Counter Bulletin Board (“OTCBB”). On April 7, 2008, the last
reported bid price was $1.91 per share and the last reported asked
price
was $1.95 per share. The average of the bid and asked price was $1.93
per
share. Accordingly, the registration fee is $392 based on $1.93 per
share.
|
|
(3)
|
Includes
shares of common stock underlying five year warrants to
purchase 469,150 shares of common stock with an exercise price of
$2.88 per share (subject to
adjustment).
|
The
Registrant amends this registration statement on such date or dates as may
be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities
Act
of 1933, or until the registration statement shall become effective on such
date
as the Commission, acting pursuant to Section 8(a), may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED OCTOBER 1, 2008
PRELIMINARY
PROSPECTUS
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
4,691,499
Shares
of Common Stock
Offered
by Selling Stockholders
This
prospectus relates to the sale by the selling stockholders identified in this
prospectus of up to 4,691,499 shares of our common stock. The shares of
common stock were issued to the selling stockholders in a private placement
completed on February 29, 2008.
The
selling stockholders may offer all or part of their shares for resale from
time
to time through public or private transactions, at either prevailing market
prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of the shares by the selling stockholders. We will pay
all of the registration expenses incurred in connection with this offering
(estimated to be approximately $86,000) but the selling stockholders will pay
all of the selling commissions, brokerage fees and related
expenses.
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
"CSOL.OB". As of September 25, 2008, the closing price was $1.30 per
share.
There
is
a limited trading market for our common stock. We cannot give you any assurance
that a more active trading market in our common stock will develop, or if such
a
market does develop, that it will continue.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 6 for a discussion of certain risk factors that you should
consider.
You
should read the entire prospectus before making an investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is October __, 2008
TABLE
OF CONTENTS
Prospectus
Summary
|
|
2
|
Risk
Factors
|
|
6
|
About
This Prospectus
|
|
19
|
Cautionary
Note Regarding Forward Looking Statements and Other Information Contained
in this Prospectus
|
|
19
|
Selling
Stockholders
|
|
20
|
Plan
of Distribution
|
|
23
|
Use
of Proceeds
|
|
24
|
Market
Price of and Dividends of our Common Stock and Related Stockholder
Matters
|
|
24
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
27
|
Business
|
|
41
|
Properties
|
|
62
|
Security
Ownership of Certain Beneficial Owners and Management
|
|
63
|
Directors
and Executive Officers
|
|
65
|
Executive
Compensation
|
|
67
|
Certain
Relationships and Related Transactions
|
|
68
|
Description
of Securities to be Registered
|
|
69
|
Legal
Matters
|
|
70
|
Interests
of Named Experts and Counsel
|
|
70
|
Changes
in and Disagreements with Accountants
|
|
71
|
Financial
Statements
|
|
72
|
Where
You Can Find More Information
|
|
72
|
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus, including
"Risk Factors" and the consolidated financial statements and the related notes
before making an investment decision. Except as otherwise specifically stated
or
unless the context otherwise requires, the “Company,” we," "our" and "us" refers
collectively to
|
(i)
|
China
Solar & Clean Energy Solutions, Inc. ("China Solar") formerly known
as Deli Solar (USA)
Inc.;
|
|
(ii)
|
Deli
Solar Holding Ltd. ("Deli Solar (BVI)"), a wholly-owned subsidiary
of China Solar and a limited liability company organized under the
International Business Companies Act of the British Virgin
Islands;
|
|
(iii)
|
Bazhou
Deli Solar Energy Heating Co., Ltd. ("Deli Solar Bazhou”), a wholly-owned
subsidiary of Deli Solar (BVI) and a limited liability company organized
under the laws of the PRC;
|
|
(iv)
|
Beijing
Deli Solar Technology Development Co. (“Deli Solar
(Beijing)”
),
a
wholly-owned subsidiary of China Solar and a limited liability
company organized under the laws of the
PRC;
|
|
(v)
|
Shenzhen PengSangPu
Solar Industrial Products Corporation
(“
SZPSP”),
a wholly - owned subsidiary of Deli Solar (Beijing); and
|
|
(vi)
|
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”), a majority -
owned subsidiary of Deli Solar
(Beijing).
|
The
Company
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou) and Deli Solar (Beijing) and our recently acquired indirect
operating subsidiaries SZPSP and Tianjin Huaneng.
We
have
three reportable segments namely solar heater/boiler related products , heat
pipe related products and energy-saving projects. The solar heater/boiler
related products are mainly sold by Deli Solar (Bazhou), the heat pipe related
products are energy-savings projects sold by Tianjin Huaneng and the
energy-savings projects are mainly sold by SZPSP.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heaters, including coal-fired boilers for residential use. Deli Solar
(Bazhou) also sells component parts for its systems, and provides after-sales
maintenance and repair services.
Most
end
users of Deli Solar (Bazhou)’s products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Deli
Solar (Bazhou)’s coal-fired boilers, furnaces and heating stoves are also used
as primary household space heaters during cold weather and as cooking
stoves.
Tianjin
Huaneng, acquired in July 2007, manufactures and installs waste heat recovery
systems primarily for use in manufacturing facilities whose manufacturing
processes require the generation of large amounts of heat, such as steel and
chemical plants. The waste heat can be used to generate hot water at the
manufacturing facilities. Tianjin Huaneng’s products include heating pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. Products and systems manufactured and sold by Tianjin
Huaneng during the period from July 1, 2007 (the date of acquisition) through
December 31, 2007 represented 19% of our sales revenues for the fiscal year
ended December 31, 2007. Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore and Taiwan.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the
manufacture of solar hot water systems for commercial use. Its customers include
factories, hospitals, schools and hotels. SZPSP’s solar energy saving projects
involve installation of flat plate solar collectors and heat exchangers and
after sales services.
Approximately
4
8
%
of our
sales revenues for the six month period ended June 30, 2008 were derived from
sales of our solar water heaters and boiler related products and approximately
42
%
were
derived from sales of heat pipe related products and
10
%
derived
from sales of energy-saving projects
Approximately
96.3% of our sales revenues for the six months ended June 30, 2008 were derived
from sales made to PRC based customers. Approximately
3.7%
of our
sales revenues were derived from the international market, all of which were
sales of heat pipe related products made by Tianjin Huaneng.
Products
Solar
Hot Water Heaters and Boilers
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters. Our solar water heaters are
primarily used to generate hot water for residential use. Among evacuated
tubular solar water heaters, regular evacuated tubular solar water heaters
using
all-glass vacuum collectors are our best selling product, comprising
approximately 85% of our total solar water heater revenues for 2007. This type
of solar water heater can generate hot water even in cold weather and therefore
can be used throughout the year. Further, these water heaters are relatively
easy and inexpensive to produce compared to other solar hot water heaters using
other types of vacuum collectors. Because our primary market is in rural areas
of the PRC, our regular evacuated tubular solar water heaters annually account
for most of our sales.
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Sales
of
our hot water heaters and boilers comprised approximately 4
8
%
of our
sales revenues for the six months ended June 30, 2008 compared to approximately
72% of our total sales revenues for 2007.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately
42
%
for the
six months ended June 30, 2008 compared to 19% of our total sales revenues
in
2007. Sales of these products were included in our consolidated revenues
commencing July 1, 2007.
Energy-savings
projects
SZPSP
is
principally engaged in the manufacture of solar hot water systems for commercial
use. Its customers include factories, hospitals, schools and hotels. SZPSP’s
solar energy saving projects involve istallation of compounding flat plate
solar
collectors, heat exchangers and after sales services
Employees
As
of August 18, 2008 we had approximately 1,103 full time employees and
67 part time employees.
Executive
Offices
Our
executive offices are located at Building 3, No. 28 Feng Tai North Road,
Beijing, China, 100071 and our telephone number is
+86-10-63850516.
The
Offering
Offering
by Selling Stockholders
This
prospectus relates to the resale by the selling stockholders identified in
this
prospectus of up to 4,691,499 shares of our common stock. The shares of common
stock were purchased by the selling stockholders in a private placement made
exclusively to accredited investors on February 29, 2008. The shares may be
offered for sale by the selling stockholders from time to time. No shares are
being offered for sale by the Company.
Common
stock outstanding prior to Offering
|
|
15,599,450
shares outstanding as of September 25, 2008
|
|
|
|
Common
stock offered by the Company
|
|
0
|
|
|
|
Total
shares of common stock offered by selling stockholders
|
|
4,691,499
representing approximately 30% of the shares of common stock currently
outstanding.
|
|
|
|
Common
stock to be outstanding after the offering
|
|
15,599,450
|
|
|
|
Total dollar
value of common stock being registered
|
|
The
closing market price for the common stock on February 29, 2008,
the date
of the sale of the 4,691,499 shares of common stock in the private
placement was $2.71. Using this value the dollar value of the shares
of
common stock being registered is $12,713,962.
The
closing market price for the common stock on September 25, 2008 was
$1.30. Using this value the total dollar value of the 4,691,499
shares of
common stock being registered is $6,098,949
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any of the proceeds from the sales of the shares
by the
selling stockholders.
|
|
|
|
Our
OTC Bulletin Board Trading Symbol
|
|
CSOL.OB
|
|
|
|
Risk
Factors
|
|
See
"Risk Factors" beginning on page 6 and other information included
in this
prospectus for a discussion of factors you should consider before
deciding
to invest in shares of our common
stock.
|
Background
On
February 29, 2008, we completed a private placement of 4,691,499 shares of
our
common stock for price per share of $2.40 or an aggregate purchase price of
approximately $11,300,000. We received $9,995,156 as net proceeds from this
financing.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of approximately $790,000 (7% of the
gross proceeds of the transaction). Roth paid vFinancing $153,000 as a
selling agent fee and transferred to them and their affiliates warrants to
purchase 106,250 shares of common stock. On February 29, 2008, the closing
price
of the common stock as quoted on the OTCBB was $2.71. For more information
relating to the terms of this private placement, reference is made to “Selling
Stockholders - Background.”
In
connection with the private placement we entered into a registration rights
agreement with the investors on February 25, 2008 which requires us to file
with
the SEC a "resale" registration statement providing for the resale of (i) all
of
the 4,691,499 shares of common stock sold to the investors, (ii) the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the Securities
Act of 1933, as amended.
We
agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to register
for resale all of the registrable securities (other than the 2,000,000
make good
shares and the 469,150 shares underlying the placement agent warrants)
and to
cause that registration statement to be declared effective within 150 days
after
the closing date (i.e. July 28, 2008). On July 28, 2008, the Company incurred
liquidated damages equal to $112,596 which represents 1% of $11,259,587
(the
aggregate of investment amount by the investors) due to the fact that the
Company failed to have the registration statement declared effective on
or prior
to that date. The liquidated damages continue to accrue per diem through
August
28, 2008 at the monthly rate of 1%. Accordingly, the Company has incurred
$225,192 in liquidated damages for failing to have the registration statement
declared effective by July 28, 2008.
We
have
also agreed to file additional registration statements covering all of the
remaining registrable securities (or such lesser number as the SEC deems
appropriate) if any registrable securities could not be registered in the
initial registration statement, by
the
15th
day following the date we are able to effect the registration of such securities
in accordance with any SEC restrictions.
Our
failure to meet this schedule and other timetables provided in the registration
rights agreement could result in the imposition of liquidated damages. No
liquidated damages will accrue on any registrable securities which the SEC
has
requested (due to the application of Rule 415) us to remove from the
registration statement and the required effectiveness date for such securities
will be tolled until such time as we are able to effect the registration of
those securities in accordance with any SEC restrictions.
Reference
is made to “Selling Stockholders - Background
”
in
this prospectus for disclosure of the material terms of the other agreements
entered into by us on February 25, 2008 in connection with the private
placement.
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common
stock.
Risks
Related to our Business
Our
profit margins on sales of our solar water heaters have been
declining
Although
our gross profits have been increasing due to increased sales, prior to the
acquisition of Tianjin Huaneng our profit margins had been decreasing. However,
gross profit for the six months ended June 30, 2008 was $6,912,042, an increase
of $4,237,063, or approximately 158%, as compared to $2,674,979 for the same
period in the prior year and our gross margin (gross profit as a percentage
of
sales) in the first six months in 2008 was approximately 26% compared to
approximately 22% in the same period last year. This increase is primarily
due
to the increase in the volume of sales of higher margin products such as heat
pipe related products due to the acquisition of Tianjin Huaneng. The profit
margins on sales of our solar water heaters have been decreasing due to market
pressure to keep our prices competitive, a trend which we expect to continue
going forward. However we expect this trend to be more than offset by sales
of
products with higher gross profit margins sold by Tianjin Huaneng. If our
expectation is not correct our business and financial condition would be
harmed.
Competition
in the solar water heater industry in rural areas has recently intensified
causing us to lower our prices resulting in lower sales
revenues.
We
manufacture and market solar hot water heaters and other products. According
to
statistics from the Chinese Energy Research Association, there are currently
over 3,500 solar hot water heater manufacturers producing products under more
than 3,000 brands. Many of our competitors are better capitalized and more
experienced, and have deeper ties in the PRC marketplace. While most solar
hot
water manufacturers focus on the urban markets, we have always focused on the
rural markets. Competition in the solar water heater industry in rural areas
has
recently intensified causing us to lower our prices resulting in lower sales
revenues. We expect this trend to continue in the immediate future.
We
rely on our sales agents to distribute our solar water heater products and
to
expand our business we must attract new sales agents; we could lose a
substantial portion of our sales if we are not able to effectively monitor
the
activities of our sales agents.
We
believe that our success relies, to a large degree, on our distribution network.
The PRC is a geographically vast country and it is critical that we market
our
products in a number of different regions. Presently, we sell our products
primarily in the rural areas of the north-east part of the PRC including Hebei,
Beijing, Tianjin, Heilongjiang, and Liaoning. In order to expand our business
into others regions, we will need to increase our distribution network by adding
more sales agents, distributors, wholesalers and retailers who will carry our
products. We may not be able to grow our distribution network, as our
competitors may offer better products and commissions to distributors and sales
agents, and, even if we can grow our distribution network, we may not be able
to
operate it efficiently or manage it effectively, as our internal resources
are
limited.
We
may not be able to effectively control and manage our
growth
Sales
revenues increased to $26,930,274 during the first six months of 2008 as
compared to $12,414,023 for the same period in 2007, an increase of $14,516,251
or 117%. Our sales revenues have increased from $9,504,394 for 2004 to
$37,072,346 for 2007. Our sales revenues for 2007 increased by approximately
73%
over sales revenues of $21,468,313 for 2006. If our business and markets
continues to grow and develop, it will be necessary for us to finance and manage
our expansion in an orderly fashion. In addition, we may face challenges in
managing expanding product offerings and in integrating any acquired businesses
with our own. This will increase demands on our existing management, workforce
and facilities. Failure to effectively deal with these increased demands could
interrupt or adversely affect our operations and cause production backlogs,
longer product development time frames, and administrative
inefficiencies.
The
protection of intellectual property rights in the PRC is not as effective as
in
the United States or other countries.
Our
trademarked brands have gained recognition in the northeast part of the PRC.
The
protection of intellectual property rights in the PRC however is not as
effective or enforced to the same degree as in the United States or other
countries. The unauthorized use of our brands could enable other manufacturers
to take unfair advantage, which could harm our business and competitive
position.
We
do not have any long-term supply contracts with our suppliers of raw materials;
any significant fluctuation in the price of raw materials may have a material
adverse effect on our manufacturing costs.
Stainless
steel and glass tubing are two major raw materials that we use to manufacture
our solar water heaters. The prices of these are subject to market conditions.
We do not have long-term contracts or arrangements with our suppliers. While
these raw materials are generally available and we have not experienced any
raw
material shortage in the past, we cannot assure you that prices will not rise
because of changes in market conditions. An increase in component or raw
material costs relative to our product prices could have a material adverse
effect on our gross margins and earnings.
We
have to outsource our production to third party manufacturers during the peak
sales season due to our limited manufacturing
capacity.
Our
manufacturing capacity is not able to meet the demand for our products during
the peak season. Accordingly, we are required to have products representing
between 30% to 40% of our total sales revenues during our peak season
manufactured through Original Equipment Manufacturer ("OEM") arrangements.
Under
an OEM arrangement, we contract with other manufacturers to produce our products
and authorize these manufacturers to put our brand names or trademarks on these
products. We cannot assure you that we will continue to find qualified
manufacturers on acceptable terms in the areas where our customers are located
and, if we do, we cannot assure you that product quality will continue to be
acceptable.
We
may engage in future acquisitions that could dilute the ownership interests
of
our stockholders, cause us to incur debt and assume contingent
liabilities.
On
March
31, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) from its three shareholders. SZPSP is principally engaged
in the manufacture of solar hot water systems for commercial use. Its customers
include factories, hospitals, schools and hotels. $4,087,832 (RMB 28,800,000)
of
the purchase price was paid in cash. In addition to the cash purchase price,
the
parties agreed to an appraised value of RMB 20 million for SZPSP’s intangible
assets. The purchase price for these intangible assets was paid in 1,419,729
shares of our common stock. If on March 31, 2009 (the first anniversary of
the
closing) our common stock price is lower than $2, we will make up the
difference. In addition, as part of the purchase price the sellers were issued
five year warrants to purchase 141,973 shares of common stock at an exercise
price of $2.50 per share (subject to adjustment for stock splits and stock
dividends).
On
July
1, 2007 Deli Solar (Beijing) purchased 51% of the equity in Tianjin Huaneng
Group Energy Equipment Co., Ltd. (“Tianjin Huaneng”) for a purchase price of
approximately $1,689,741. In addition to the purchase price we paid a finder’s
fee of approximately $769,418. Deli Solar (Beijing) assumed 51% of the
liabilities of Tianjin Huaneng and contributed RMB 20,000,000
(approximately $2,613,400) as working capital to the acquired company. Deli
Solar (Beijing) also agreed to employ the 550 current Tianjin Huaneng employees
pursuant to new three year employment contracts.
As
part
of our growth strategy, we review acquisition and strategic investment prospects
that we believe would complement our current product offerings, increase our
market coverage or enhance our technical capabilities, or otherwise offer growth
opportunities. From time to time we review investments in new businesses and
we
expect to make investments in, and to acquire, businesses, products, or
technologies in the future. In the event of any future acquisitions, we
could:
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issue
equity securities which would dilute current stockholders’ percentage
ownership;
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incur
substantial debt;
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assume
contingent liabilities; or
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expend
significant cash.
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These
actions could harm our operating results or the price of our common stock.
Moreover, even if we do obtain benefits in the form of increased sales and
earnings, there may be a lag between the time when the expenses associated
with
an acquisition are incurred and the time when we recognize such benefits.
Acquisitions and investment activities also entail numerous risks,
including:
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difficulties
in the assimilation of acquired operations, technologies and/or
products;
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unanticipated
costs associated with the acquisition or investment
transaction;
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the
diversion of management’s attention from other business
concerns;
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adverse
effects on existing business relationships with suppliers and
customers;
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risks
associated with entering markets in which we have no or limited prior
experience;
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the
potential loss of key employees of acquired organizations;
and
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substantial
charges for the amortization of certain purchased intangible assets,
deferred stock compensation or similar
items.
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We
cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we have acquired or might acquire in the future,
and our failure to do so could harm our business, operating results and
financial condition.
We
may need additional capital to fund our future operations and, if it is not
available when needed, we may need to reduce our planned development and
marketing efforts, which may reduce our sales revenues
.
We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next
12
months. However, if cash from future operations is insufficient, or if cash
is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. Under the terms of the securities purchase agreement entered
into on June 13, 2007 with the investors in the June private placement we
cannot, prior to June 13, 2010, issue any convertible debt or any shares of
convertible preferred stock, have any debt outstanding in an amount greater
than
twice EBITDA from continuing operations for the prior four quarters. Those
investors also have right of first refusal with respect to any subsequent
financing. There are also restrictive covenants in the securities purchase
agreements entered into with the investors in the February 2008 private
placement. These restrictive covenants may inhibit our ability to raise
additional financing. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires
a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue
to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital,
if
required, will be available on acceptable terms, or at all. If we are unable
to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
The
relative lack of public company experience of our management team may put us
at
a competitive disadvantage.
Our
internal controls over financial reporting may not be effective, and our
independent auditors may not be able to certify as to their effectiveness,
which
could have a significant and adverse effect on our
business.
Our
management
team lacks public company experience, which could impair our ability to comply
with legal and regulatory requirements such as those imposed by Sarbanes-Oxley
Act of 2002. The individuals who now constitute our senior management have
never
had responsibility for managing a publicly traded company. These
responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may not be able
to
implement programs and policies in an effective and timely manner that
adequately respond to such increased legal, regulatory compliance and reporting
requirements. Our failure to comply with all applicable requirements could
lead
to the imposition of fines and penalties and distract our management from
attending to the growth of our business.
Moreover,
rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act
of
2002 require annual assessment of our internal control over financial reporting,
and attestation of this assessment by our company's independent registered
public accountants. The SEC extended the compliance dates for “non-accelerated
filers,” like us. Accordingly, the annual assessment of our internal controls
requirement first applied to our annual report for the 2007 fiscal year and
the
attestation requirement of management's assessment by our independent registered
public accountants will first apply to our annual report for the 2009 fiscal
year. The standards that had to be met for management to assess the internal
control over financial reporting as effective are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards. Our lack of familiarity with Section 404 may have diverted
management’s time and resources in executing the business plan. If, in the
future, management identifies one or more material weaknesses, or our external
auditors are unable to attest that our management’s report is fairly stated or
to express an opinion on the effectiveness of our internal controls, this could
result in a loss of investor confidence in our financial reports, have an
adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.
We
do not have key man insurance on our President and CEO, Mr. Du, on whom we
rely
for the management of our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Deli Du, our CEO.
The
loss of the services of Mr. Du, for any reason, may have a material adverse
effect on our business and prospects. We cannot assure you that we will be
able
to find a suitable replacement for Mr. Du. We do not carry key man life
insurance for any of our key personnel.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire these personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected
.
Competition
for senior management and senior technology personnel in the PRC is intense,
the
pool of qualified candidates in the PRC is very limited, and we have had
difficulty in attracting and retaining the services of senior executives and
may
continue to do so in the future. This failure could harm our future growth
and
financial condition.
We
do not presently maintain fire, theft, product liability or any other property
insurance, which leaves us with exposure in the event of loss or damage to
our
properties or claims filed against us.
We
do not
maintain fire, theft, product liability or other insurance of any kind. We
bear
the economic risk with respect to loss of or damage or destruction to our
property and to the interruption of our business as well as liability to third
parties for personal injury or damage or destruction to their property that
may
be caused by our personnel or products. This liability could be substantial
and
the occurrence of such loss or liability may have a material adverse effect
on
our business, financial condition and prospects. However product liability
lawsuits in the PRC are rare, and we have never experienced significant failure
of our products.
Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.
The
solar
hot water industry is subject to rapid technological change. Our future success
will depend on our ability to respond to rapidly changing technologies and
improve the quality of our products. Our failure to adapt to these changes
could
harm our business. Our future plans to market our products to urban areas
require our products to be innovative. If we are slow to develop new products
and technologies that are attractive to people in these urban areas, we may
not
be successful in capturing a significant share of this market. For example,
most
of our current products rely on a tubular structure while urban customers prefer
a flat plate collector for aesthetic purposes. If we fail to keep up with rapid
technological changes to remain competitive in our rapidly evolving industry,
our future marketing and expansion may be adversely affected.
Most
of our warranty services are performed by our independent sales agents and
distributors whose deposit may not cover total warranty
claims.
We
typically offer a three-year warranty for our products. During the first year
of
this warranty program, we cover any defects and product malfunctions. Most
of
our warranty services are performed by our independent sales agents and
distributors in return for a 1-2% discount of the purchase price they pay for
our products. We normally require our new sales agents and distributors to
pay
us a deposit (varying from RMB5,000 to 20,000 depending on their represented
areas) which we believe will ensure their performance of the necessary warranty
services. Our financial statements do not provide for a reserve for product
warranties and these expenses have not been significant to date. Although we
have not experienced any significant product returns or repairs, we cannot
assure you that these sales agents and distributors will perform the warranty
services when required, and if they fail to do so, we cannot assure you that
the
agents' deposits will be sufficient to cover the costs associated with the
warranty services to be performed on the products sold by these sales agents
and
distributors.
We
lease some of the real property on which our business center and exhibition
center and other facilities are located and there is no guarantee that our
lease
will be renewed.
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the PRC government grants landholders a "land use right."
Our
business center in Bazhou City and our exhibition center in Beijing are located
on leased land as are our manufacturing facilities. There is no assurance that
we may renew the leases on acceptable terms. The failure to obtain the renewal
of the leases on reasonable terms could cause us to incur extra expenses and
costs for alternative land and for the reconstruction of our
buildings.
Our
acquisition of the land use rights from villagers is subject to announcement
and
approval procedures and we cannot assure you that they will be
successful.
On
March
16, 2006, Deli Solar (Bazhou) entered into an agreement with the Governance
Commission of Beijiahe Village Chaheji County Bazhou City (the "Village
Governance Commission") to acquire land use rights to a piece of land comprising
61,530 square meters (the "Land") at a price of approximately $919,858, subject
to the procedures as mentioned below. The previous users of the Land were
villagers and the Land was used for agricultural purposes. According to the
relevant PRC regulations, the Village Governance Commission is required to
announce its intention to transfer the land use rights to Deli Solar (Bazhou)
(the "Announcement Procedure") and provide the villagers with reasonable
compensation to acquire the land use rights from them. The conversion of land
use from agricultural to non-agricultural purposes requires the approval of
the
local government. In addition, once the approval from the local government
has
been obtained, the new holder of the land use rights will have to be registered
with the land administration bureau. We cannot guarantee that the Village
Governance Commission will carry out the Announcement Procedure and provide
reasonable compensation to the villagers as prescribed. We cannot guarantee
that
the application to change the purpose of land use will be approved by the local
government or that the new holder of the land use rights would be able to be
registered with the land administration bureau.
Effect
of the Issuance of the Preferred Stock and Warrants in June 2007 and Common
Stock in February 2008
The
resale in the public market of the shares underlying the Preferred Stock and
Warrants acquired in the June 2007 financing and the resale in the public market
of the common stock acquired in the February 2008 private placement may have
an
adverse impact on the market value of our common
stock.
On
February 7, 2008, our registration statement was declared effective by
the SEC.
In that registration statement we registered for resale by the investors
in the
June 2007 private placement 508,734 shares of common stock and 508,734
shares
underlying class A warrants. In addition under new Rule 144, which became
effective in February 14, 2008, non affiliates, such as the investors in
the
June financing, may sell their shares without any volume restrictions if
they
hold their shares for at least 6 months and we are current in our reporting
obligations at the time of sale. After 12 months non affiliates may sell
their
shares under Rule 144 without any restriction. Under the “tacking” rules in Rule
144 the holding period for the all of the shares of common stock underlying
the
preferred stock issued in June 2007 commenced in June 2007. Accordingly,
all of
the 1,774,194 shares of common stock underlying the Series A Preferred
Stock may
now be sold under Rule 144 to the extent held by non-affiliates. As of
September
25, 2008, 1,200,628 of these shares have been sold under Rule 144. We believe
that sales by these investors have caused the market price of our shares
to fall
significantly over the last few months. In addition, the 1,734,194 class
A
warrants and the 1,774,194 class B warrants currently outstanding may now
be
exercised by and sold by non affiliates in a cashless exercise under Rule
144.
As of September 25, 2008, 40,000 of the class A warrants have been exercised.
The resale of the additional 573,566 shares of common stock issuable on
conversion of the Series A Preferred Stock outstanding on September 25,
2008 and
the 3,508,388 shares of common stock issuable on exercise of the class
A and
class B warrants, or even the possibility of their resale, may adversely
affect the trading market for our common stock and adversely affect the
prevailing market price of our common stock.
The
resale of the 4,691,499 shares of common stock being registered in this
prospectus or even the possibility of their resale, may adversely affect
the trading market for our common stock and adversely affect the prevailing
market price of our common stock
On
February 29, 2008 the closing sale price of our common stock was $2.71
per
share. On September 25, 2008 the closing sale price of the common
stock was $1.30. We believe that sales by the June 2007 investors have
caused
the market price of our shares to fall significantly over the last few
months.
The
Series A Preferred Stock and the Warrants have anti-dilution protection which
may have an adverse impact on the market value of our common stock and out
ability to raise additional financing.
The
holders of the Series A Preferred Stock have full ratchet anti dilution
protection and the holders of the class A and class B warrants have weighted
average anti-dilution protection. This may prove a hindrance to our efforts
to raise future equity and debt funding, and the exercise of such rights will
dilute the percentage ownership interest of our stockholders and will dilute
the
value of their stock.
The
Series A Preferred Stock and Warrants may adversely affect our financial
and operational flexibility.
The
terms
of the June 13, 2007 financing imposed restrictions on us that may affect
our ability to successfully operate our business. The transaction
documents contain a number of covenants that may restrict our ability to
operate, including, among other things, covenants that restrict our
ability:
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to
incur additional indebtedness;
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to
pay dividends on our capital stock;
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to
redeem or repurchase our common stock or any class or series of capital
stock that is junior or on a parity with the Series A Preferred
Stock;
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to
enter into any transaction that has any reset feature that could
result in
additional shares being issued.
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enter into any subsequent
financing.
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Risk
Related to Our Industry
A
drop in the retail price of conventional energy or non-solar alternative energy
or any improvement to the rural household's electricity supply system in the
PRC
may have a negative effect on our business.
A
customer's decision to purchase our solar power products is primarily driven
by
the poor electricity supply system in the rural areas of the PRC, as well as
the
energy savings from our solar power products. An improvement in the power supply
infrastructure in the rural areas of the PRC could adversely affect the demand
for our products. In addition, fluctuations in economic and market conditions
that impact the viability of conventional and non-solar alternative energy
sources, such as decreases in the prices of oil and other fossil fuels could
cause the demand for our solar power heaters to decline. Although we believe
that current retail energy prices support a reasonable return on investment
for
our products, there can be no assurance that future retail pricing of
conventional energy and non-solar alternative energy will remain at such
levels.
Existing
regulations and changes to existing regulations may present technical,
regulatory and economic barriers to the purchase and use of solar power
products, which may significantly reduce demand for our
products
Our
solar
power products and their installation are subject to oversight and regulation
in
accordance with national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and metering and
related matters. We are responsible for knowing the requirements of individual
cities and must design equipment to comply with varying standards. Any new
government regulations or utility policies that relate to our solar power
products may result in significant additional expenses to us, our resellers
and
their customers and, as a result, could cause a significant reduction in demand
for our solar power products.
If
solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than
we anticipate, our sales would not significantly increase and we would be unable
to sustain profitability.
The
market for solar power products is emerging and rapidly evolving, and its future
success is uncertain. If solar power proves to be unsuitable for widespread
commercial or residential use or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to sustain
profitability. In addition, demand for solar powered products in the new markets
and geographic regions that we target may not develop at all or may develop
more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products,
including:
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cost-effectiveness
of solar power technologies as compared with conventional and non-solar
alternative energy technologies;
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performance
and reliability of solar power products as compared with conventional
and
non-solar alternative energy technologies;
and
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capital
expenditures by customers that tend to decrease if the PRC or global
economy slows down.
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Risks
Related to Doing Business in the PRC.
Changes
in the policies of the PRC government could have a significant impact upon
the
business we may be able to conduct in the PRC and the profitability of our
business.
The
PRC's
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe
that
this trend will continue, there can be no assurance that this will be the
case.
A
change
in policies by the PRC government could adversely affect our interests by,
among
other factors: changes in laws, regulations or the interpretation thereof,
confiscatory taxation, restrictions on currency conversion, imports or sources
of supplies, or the expropriation or nationalization of private enterprises.
Although the PRC government has been pursuing economic reform policies for
more
than two decades, there is no assurance that the government will continue to
pursue such policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or political
disruption, or other circumstances affecting the PRC's political, economic
and
social life.
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in these PRC laws and regulations may harm
our business.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including the laws
and regulations governing our business, or the enforcement and performance
of
our arrangements with customers in the event of the imposition of statutory
liens, death, bankruptcy and criminal proceedings. We and any future
subsidiaries are considered foreign persons or foreign funded enterprises under
PRC laws, and as a result, we are required to comply with PRC laws and
regulations. These laws and regulations are sometimes vague and may be subject
to future changes, and their official interpretation and enforcement involves
substantial uncertainty. New laws and regulations that affect existing and
new
businesses may also be applied retroactively. We cannot predict what effect
the
interpretation of existing or new PRC laws or regulations may have on our
businesses.
A
slowdown or other adverse developments in the PRC economy may harm our customers
and the demand for our services and our products.
All
of
our operations are conducted in the PRC and a significant portion of our
revenues are generated from sales in the PRC. Although the PRC economy has
grown
significantly in recent years, we cannot assure you that this growth will
continue. The solar hot water and renewable energy industry in the PRC is
relatively new and growing, but we do not know how sensitive we are to a
slowdown in economic growth or other adverse changes in the PRC economy which
may affect demand for solar hot water heaters and boilers and our other
products. A slowdown in overall economic growth, an economic downturn, a
recession or other adverse economic developments in the PRC could significantly
reduce the demand for our products and harm our business.
Inflation
in the PRC could negatively affect our profitability and
growth.
.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability. In order to control inflation in the past, the PRC government
has
imposed controls on bank credit, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. Repeated rises in interest rates by the central bank
would likely slow economic activity in China which could, in turn, materially
increase our costs and also reduce demand for our products.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi, which is currently not
a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing
PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
The
PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents
us
from obtaining sufficient foreign currency to satisfy our currency demands,
we
may not be able to pay certain of our expenses as they come due.
The
fluctuation of the Renminbi may harm your investment.
The
value
of the Renminbi against the U.S. dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely almost entirely on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect our
cash flows, revenues and financial condition. For example, to the extent that
we
need to convert U.S. dollars we receive from an offering of our securities
into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar would diminish the value of the proceeds of the offering and this could
harm our business, financial condition and results of operations. Conversely,
if
we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our common shares or for other business purposes
and
the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent
of
the Renminbi we convert would be reduced. In addition, the depreciation of
significant U.S. dollar denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
On
July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in significant
appreciation of the Renminbi against the U.S. dollar. While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar.
PRC
State Administration of Foreign Exchange ("SAFE") Regulations regarding offshore
financing activities by PRC residents may increase the administrative burden
we
face. The failure by our shareholders who are PRC residents to make any required
applications and filings required by such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
SAFE,
issued a public notice ("SAFE #75") effective from November 1, 2005, which
requires our PRC resident shareholders to register with SAFE. If they do not
register the PRC entity cannot remit any of its profits out of the PRC as
dividends or otherwise. Our PRC resident largest shareholder, Mr. Du, has taken
all necessary steps required by the local SAFE branch at Bazhou City to comply
with SAFE #75 by filing a disclosure form regarding his ownership status;
however, we cannot assure you that this disclosure document will be sufficient.
It is also unclear exactly whether our other PRC resident shareholders must
make
disclosure to SAFE. While our PRC counsel has advised us that only the PRC
resident shareholders who receive ownership of the foreign holding company
in
exchange for ownership in the PRC operating company are subject to SAFE #75,
there can be no assurance that SAFE will not require our three other PRC
resident shareholders to register and make the applicable disclosure. In
addition, SAFE #75 requires that any monies remitted to PRC residents outside
of
the PRC be returned within 180 days; however, there is no indication of what
the
penalty will be for failure to comply or if shareholder non-compliance will
be
considered to be a violation of SAFE #75 by us or otherwise affect
us.
In
the
event that the proper procedures are not followed under SAFE #75, we could
lose
the ability to remit monies outside of the PRC and would therefore be unable
to
pay dividends or make other distributions. Our PRC resident shareholders could
be subject to fines, other sanctions and even criminal liabilities under the
PRC
Foreign Exchange Administrative Regulations promulgated January 29, 1996, as
amended.
The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
The
PRC
legal and judicial system may negatively impact foreign investors. In 1982,
the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge
in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making
is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that
is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that
a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will
not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business
and
prospects.
The
practical effect of the PRC legal system on our business operations in the
PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly,
the
PRC accounting laws mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear
less
clear than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the
same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although
no
assurances can be given, the Chinese legal infrastructure, while different
in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Because
our principal assets are located outside of the United States and all of our
directors and officers reside outside the United States, it may be difficult
for
you to enforce your rights based on U.S. Federal Securities Laws against us
and
our officers and some directors in the U.S. or to enforce a U.S. court judgment
against us or them in the PRC.
All
of
our directors and officers reside outside the United States. In addition, our
operating subsidiaries, Deli Solar (Bazhou), Deli Solar (Beijing), Tianjin
Huaneng and SZPSP are located in the PRC and substantially all of their assets
are located outside of the United States. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC and, even if civil judgments are obtained
in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement against us or our officers and directors
of
criminal penalties, under the U.S. Federal securities laws or
otherwise.
We
may have difficulty hiring and retaining qualified senior management and in
establishing adequate management, legal and financial controls in the
PRC.
Western
style of management, financial reporting concepts and practices, modern banking,
computer and other control systems are relatively new to the PRC. In the past
we
have had difficulties in hiring and retaining qualified senior management and
we
may continue to have difficulty in hiring and retaining a sufficient number
of
senior management and other qualified employees. Accordingly, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards.
Risks
Related to Our Common Stock.
We
are not likely to pay cash dividends in the foreseeable
future.
We
intend
to retain any future earnings for use in the operation and expansion of our
business. We do not expect to pay any cash dividends in the foreseeable future
as we are contractually restricted from doing so. As a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt
of
dividends or other payments from our operating subsidiaries based in the PRC.
Our PRC based operating subsidiaries are subject to restrictions on their
ability to make distributions to us, including restrictions on the conversion
of
local currency into U.S. dollars.
Our
common stock is thinly traded, so you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Prior
to
the reverse merger our shares were not publicly traded although shares
of the
shell into whom we merged were thinly traded. Through the reverse merger,
we
have essentially become public without the typical initial public offering
procedures which usually include a large selling group of broker-dealers
who may
provide market support after going public. We have undertaken efforts to
develop
market recognition for our stock, including through the retention of a
public
relations firm. As of September 25, 2008, there were 15,599,450 shares
of our
common stock issued and outstanding, and there were 2,529 holders of record
of
our outstanding shares of common stock. The market capitalization as of
September 25, 2008 (excluding shares held by our affiliates) was approximately
$12 million. As a result, there is limited market activity in our stock
and we
are too small to attract the interest of many brokerage firms and analysts.
We
cannot give you any assurance that a broader or more active public trading
market for our common stock will develop or be sustained. Currently our
common
stock is quoted in the OTC Bulletin Board market and the trading volume
we will
develop may be limited by the fact that many major institutional investment
funds, including mutual funds, as well as individual investors follow a
policy
of not investing in Bulletin Board stocks and certain major brokerage firms
restrict their brokers from recommending Bulletin Board stocks because
they are
considered speculative, volatile and thinly traded. The Bulletin Board
market is
an inter-dealer market much less regulated than the major exchanges and
our
common stock is subject to abuses and volatilities and shorting. Thus there
is
currently no broadly followed and established trading market for our common
stock. An established trading market may never develop or be maintained.
Active
trading markets generally result in less price volatility and more efficient
execution of buy and sell orders. Absence of an active trading market reduces
the liquidity of the shares traded there.
The
trading volume of our common stock has been limited and sporadic. As a result
of
this trading activity, the quoted price for our common stock on the Bulletin
Board may not necessarily be a reliable indicator of its fair market value.
Further, if we cease to be quoted, holders would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of our
common stock and as a result, the market value of our common stock likely would
decline.
Our
common stock is currently subject to the "penny stock" rules which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale.
Our
common stock is currently subject to regulations prescribed by the SEC
relating
to “penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in
such
regulations) of less than $5 per share, subject to certain exceptions.
On
September 25, 2008 the last sale price of our common stock was $1.30 per
share. These regulations impose additional sales practice requirements
on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets
in excess
of $5,000,000 and individuals with a net worth in excess of $1,000,000
or annual
income exceeding $200,000 (individually) or $300,000 (jointly with their
spouse)). For transactions covered by these rules, the broker-dealer must
make a
special suitability determination for the purchase of these securities
and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny
stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for
the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on
the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the common stock and may
affect
the ability of investors to sell their common stock in the secondary
market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or
us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large number of shares will be eligible for future sale and this may depress
our
stock price.
This
is
an offering of 4,691,499 shares of our common stock by the selling stockholders.
As of September 25, 2008, there were 15,599,450 shares of our common stock
issued and outstanding and 573,566 shares of Series A Preferred Stock (excluding
900,000 shares which are held in escrow and which are in the process of being
released to the company). Assuming (i) exercise of the 469,150 shares that
may
be acquired on exercise of all of the outstanding placement agent warrants,
(ii)
conversion of the 573,566 shares of Series A Preferred Stock issued in June
13,
2007 financing which have not yet been converted, and (iii) the exercise of
the other outstanding warrants to purchase an aggregate of 4,041,698 shares
of
common stock, there will be 20,683,864 shares of common stock outstanding.
Of
these 20,683,864 shares (i) 4,691,499 shares are being registered for resale
in
this prospectus, (ii) all of the 573,566 shares of Series A Preferred Stock
outstanding may be sold without restriction under Rule 144 by non affiliates,
(iii) 3,952,025 shares were registered for resale in a registration statement
declared effective on July 18, 2006, (iv) the 4,067,964 issued in the reverse
merger may be sold subject to the requirements of Rule 144, and (v) 508,734
shares underlying the class A warrants were registered for resale in the
registration statement declared effective on February 7, 2008 and all of
the
1,734,194 shares underlying the class A warrants currently outstanding and
all
of the 1,774,194 shares underlying the class B warrants may now be resold
if
purchased by way of a cashless exercise.
Sales
of
substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then current market price of the common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity
securities.
We
are authorized to issue "blank check" preferred stock, which can be issued
without stockholder approval and may adversely affect the rights of holders
of
our common stock.
We
are
authorized to issue 25,000,000 shares of preferred stock, of which 3,500,000
shares have been designated as Series A Preferred Stock. As of September
25, 2008 there were 573, 566 shares of Series A Preferred Stock (excluding
900,000 shares which are held in escrow and which are in the process of being
released to the company). The Board of Directors is authorized under our
Restated Articles of Incorporation to provide for the issuance of additional
shares of preferred stock by resolution, and by filing a certificate of
designations under Nevada law, to fix the designation, powers, preferences
and
rights of the shares of each such series and the qualifications, limitations
or
restrictions thereof without any further vote or action by the stockholders.
Any
shares of preferred stock so issued are likely to have priority over the
common
stock (but not the Series A Preferred Stock) with respect to dividend or
liquidation rights. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or
preventing a change in control, which could have the effect of discouraging
bids
for our company and thereby prevent stockholders from receiving the maximum
value for their shares. We have no present intention to issue any shares
of its
preferred stock in order to discourage or delay a change of control. However,
there can be no assurance that preferred stock will not be issued at some
time
in the future.
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have
not
authorized anyone to provide you with information other than that contained
in
this prospectus. The selling stockholders are offering to sell and seeking
offers to buy shares of our common stock, only in jurisdictions where offers
and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery
of
this prospectus or of any sale of our common stock. The prospectus will be
updated and updated prospectuses made available for delivery to the extent
required by the federal securities laws.
No
person
is authorized in connection with this prospectus to give any information or
to
make any representations about us, the selling stockholders, the securities
or
any matter discussed in this prospectus, other than the information and
representations contained in this prospectus. If any other information or
representation is given or made, such information or representation may not
be
relied upon as having been authorized by us or any selling stockholder. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy the securities in any circumstances under which the offer or solicitation
is unlawful. Neither the delivery of this prospectus nor any distribution of
securities in accordance with this prospectus shall, under any circumstances,
imply that there has been no change in our affairs since the date of this
prospectus. The prospectus will be updated and updated prospectuses made
available for delivery to the extent required by the federal securities
laws.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS
This
prospectus contains some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical
or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things,
(a)
our projected sales, profitability and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and
(e)
our anticipated needs for working capital. They are generally identifiable
by
use of the words "may," "will," "should," "anticipate," "estimate," "plans,"
“potential," "projects," "continuing," "ongoing," "expects," "management
believes," "we believe," "we intend" or the negative of these words or other
variations on these words or comparable terminology. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
In particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such
as legal proceedings, and financial results.
Any
or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or
by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
Currency
Unless
otherwise noted, all currency figures in this filing are in U.S.dollars.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
Renminbi). According to xe.com as of September 25, 2008, $1 = 6.84450
yuan.
SELLING
STOCKHOLDERS
This
prospectus relates to the offer and sale of our common stock by the selling
stockholders identified in the table below. Each of the selling stockholders
acquired the shares of our common stock pursuant to our private placement
transaction completed on February 29, 2008. Each investor was an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act.
Except
as
set forth below none of the selling stockholders has held a position as
an
officer or director of the Company, nor has any selling stockholder had
a
material relationship of any kind with the Company. As of September 25,
2008,
(i) Ardsley and its affiliates and (ii) The Quercus Trust may be deemed
to be an
“affiliate” by virtue of the fact that it is the beneficial owner of in excess
of 10% of the outstanding common stock.
The
table
set forth below lists the names of the selling stockholders as well as the
number of shares of common stock acquired by the selling stockholder in the
February 29, 2008 private placement which are being registered. Each selling
stockholder may offer for sale all or part of the shares from time to time.
The
table below assumes that the selling stockholders will sell all of the shares
offered for sale. A selling stockholder is under no obligation, however, to
sell
any shares pursuant to this prospectus.
We
have
not in the past been engaged in any prior securities transaction with any of
the
selling stockholders, any affiliates of the selling stockholders, or, after
due
inquiry and investigation, to the knowledge of the Company’s management, any
person with whom any selling stockholder has a contractual relationship
regarding the transaction (or any predecessors of those persons)
.
After
due
inquiry and investigation and based on information provided by the selling
stockholders, none of the selling stockholders has an existing short position
in
our stock and other than Ancora Greater China Fund LP, none of the selling
stockholders is a broker-dealer or an affiliate of a broker-dealer. Ancora
is an
affiliate of a broker dealer. At the time of purchase Ancora represented to
us
that it bought the securities in the ordinary course of business and they had
no
agreement or understanding directly or indirectly with any persons to distribute
the shares held by them being registered.
Other
than as described in this prospectus, the Company has not in the past three
years engaged in any securities transaction with any of the selling
stockholders, any affiliates of the selling stockholders, or, after due inquiry
and investigation, to the knowledge of the management of the Company, any person
with whom any selling stockholder has a contractual relationship regarding
the
transaction (or any predecessors of those persons). In addition, other than
in
connection with the contractual obligations set forth in the securities purchase
agreement (and the related registration rights agreement) entered into between
the Company on one hand and each of the selling stockholders on the other hand,
we do not have any agreement or arrangement with any selling stockholder with
respect to the performance of any current or future obligations.
Name and Address of Selling Stockholder
|
|
Number
of
Shares of
Common
Stock
owned
prior to
the
Offering
|
|
Percentage
Of Shares
Beneficially
Owned
Prior to
Offering
(1) (2)
|
|
Maximum
Number
of Shares
of
Common
Stock to be
resold
|
|
Total
Number
Of
Shares
Beneficially
Owned
after resale
|
|
Percentage
Ownership
after
resale
|
|
David Gelbaum
and Monica Chavez as trustees of The Quercus Trust, 1235 Newport
Blvd
Costa Mesa, CA 92627
|
|
|
1,949,283
|
|
|
12.5
|
%
|
|
1,583,333
|
|
|
365,950
|
|
|
2.3
|
%
|
Peter
Corsell 450 Alton Road, Apt 4002 Miami Beach, FL 33139
|
|
|
41,667
|
|
|
*
|
|
|
41,667
|
|
|
0
|
|
|
0
|
|
Hua-Mei
21
st
Century Partners, LP c/o Guerrilla Capital Management,
LLC 237 Park Avenue, 9
th
Floor New York, NY 10017 (3)
|
|
|
425,000
|
|
|
2.7
|
%
|
|
425,000
|
|
|
0
|
|
|
0
|
|
Guerrilla
Partners, LP c/o Guerrilla Capital Management, LLC 237 Park Avenue,
9
th
Floor New York, NY 10017 (3)
|
|
|
200,000
|
|
|
1.3
|
%
|
|
200,000
|
|
|
0
|
|
|
0
|
|
Ancora
Greater China Fund, LP Ancora Advisors, LLC One Chagrin Highlands
2000
Auburn Drive Suite 300 Cleveland, OH 44122 (4)
|
|
|
166,666
|
|
|
1.1
|
%
|
|
166,666
|
|
|
0
|
|
|
0
|
|
Ardsley
Offshore Fund, Ltd. c/o Ardsley Partners 262 Harbor Drive Stamford
CT
06902 (5)
|
|
|
491,500
|
|
|
3.2
|
%
|
|
491,500
|
|
|
0
|
|
|
0
|
|
Marion
Lynton c/o Ardsley Partners 262 Harbor Drive Stamford CT 06902
(5)
|
|
|
17,500
|
|
|
*
|
|
|
17,500
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Institutional Fund, L.P. c/o Ardsley Partners 262 Harbor
Drive
Stamford CT 06902 (5)
|
|
|
455,000
|
|
|
2.9
|
%
|
|
455,000
|
|
|
0
|
|
|
0
|
|
Ardsley
Partners Fund II, L.P c/o Ardsley Partners 262 Harbor Drive Stamford
CT
06902 (5)
|
|
|
702,500
|
|
|
4.7
|
%
|
|
702,500
|
|
|
0
|
|
|
0
|
|
Chestnut
Ridge Partners, LP c/o Chestnut Ridge Capital, LLC 50 Tice Boulevard
Woodcliff Lake, NJ 07677 (6)
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Fund, LP 5410 West 61
st
Place Suite 100 Mission
KS 66205 (7)
|
|
|
195,993
|
|
|
1.3
|
%
|
|
195,993
|
|
|
0
|
|
|
0
|
|
Jayhawk
Private Equity Co-Invest Fund, LP 5410 West 61
st
Place Suite
100 Mission KS 66205 (8)
|
|
|
12,340
|
|
|
*
|
|
|
12,340
|
|
|
0
|
|
|
0
|
|
The
USX China Fund c/o
Parr Financial Group 5100 Poplar Avenue Suite 3117 Memphis, TN
38137 (9)
|
|
|
200,000
|
|
|
1.3
|
%
|
|
200,000
|
|
|
0
|
|
|
0
|
|
Punch
Micro Cap Partners, LLC c/o Punch Associates Investment Management
3610 W
76
th
St, Ste 225 Edina, MN 55435 (10)
|
|
|
155,000
|
|
|
*
|
%
|
|
100,000
|
|
|
55,000
|
|
|
*
|
|
*
Less
than 1%.
(1)
Under
applicable SEC rules, a person is deemed to beneficially own securities which
the person as the right to acquire within 60 days through the exercise of any
option or warrant or through the conversion of another security. Also under
applicable SEC rules, a person is deemed to be the “beneficial owner” of a
security with regard to which the person directly or indirectly, has or shares
(a) the voting power, which includes the power to vote or direct the voting
of
the security, or (b) the investment power, which includes the power to dispose,
or direct the disposition, of the security, in each case, irrespective of the
person’s economic interest in the security. Each listed selling stockholder has
the sole investment and voting power with respect to all shares of common stock
shown as beneficially owned by such selling stockholder, except as otherwise
indicated in the table.
(2)
As of
September 25, 2008 there were 15,599,450 shares of our common stock issued
and
outstanding. In determining the percent of common stock beneficially owned
by a
selling stockholder on September 25, 2008, (a) the numerator is the number
of
shares of common stock beneficially owned by such selling stockholder,
and (b)
the denominator is the sum of (i) the 15,599,450 shares outstanding on
September
25, 2008 and (ii) the number of shares of common stock which each of the
selling
stockholders has the right to acquire within 60 days of September 25,
2008.
(3)
These
entities are affiliated with each other. Peter Siris and Leigh S. Curry have
shared voting and dispositive power over these shares.
(4)
John
P. Micklitish has sole voting and dispositive power over the shares held
by
Ancora.
(5)
These
entities are affiliated with each other. These entities in the aggregate
are the
beneficial owners of 1,666,500 shares of common stock (or approximately 11.9%).
Ardsley Advisory Partners, a New York general partnership ("Ardsley") serves
as
investment manager to, and has investment discretion over the securities
held by
Ardsley Offshore and the Marion Lynton, and serves as investment adviser
to
Ardsley II and Ardsley Institutional. Phillip J. Hempleman and Ardsley Partners
I, a New York general partnership ("Ardsley Partners") serve as the general
partners of Ardsley II and Ardsley Institutional. Ardsley Partners also serves
as the general partner of Ardsley. Philip J. Hempleman has ultimate voting
and
dispositive power over these securities.
(6)
Kenneth Pasternak has sole voting and dispositive power over the shares held
by
Chestnut Ridge.
(7)
Kent
C. McCarthy is the Managing Member of Jayhawk Capital Management LLC, which
is
the General Partner of Jayhawk Private Equity GP, LP, which is the General
Partner of Jayhawk Private Equity Fund, L.P. and has voting power and investment
power over securities held by Jayhawk Private Equity Fund,
L.P.
(8)
Kent
C. McCarthy is the Managing Member of Jayhawk Capital Management LLC, which
is
the General Partner of Jayhawk Private Equity GP, LP, which is the General
Partner of Jayhawk Private Equity Co-Invest Fund, L.P. and has voting power
and
investment power over securities held by Jayhawk Private Equity Co-Invest
Fund,
L.P.
(9)
Stephen L. Parr has sole voting and dispositive power over the shares held
by
USX China Fund.
(10)
Howard Punch has sole voting and dispositive power over the shares held by
Punch.
Background
On
February 25, 2008 we entered into a securities purchase agreement with the
selling stockholders providing for the sale of 4,691,499 shares of common
stock for an aggregate purchase price of approximately $11,300,000 (or $2.40
per
share).
In
connection with that transaction we issued to the placement agent warrants
to
purchase 469,150 shares of common stock exercisable for a period of five years
at an exercise price equal to $2.88 per share and a paid them a transaction
fee
of approximately $791,000 (representing 7% of the gross proceeds of the
transaction).
As
of
February 29, 2007 the closing sale price of our common stock was $2.71.
As
of September 25, 2008 the last sale price of our common stock was $1.30.
The
agreements entered into with the investors include a securities purchase
agreement, and a registration rights agreement and various ancillary agreements
each dated February 25, 2007. The following is a summary of the material
terms.
Securities
Purchase Agreement
Representations;
Warranties; Indemnification
: The
securities purchase agreement contains representations and warranties by us
and
the investors which are customary for transactions of this type. The securities
purchase agreement also obligates us to indemnify the investors for any losses
arising out of any breach of the agreement or failure by us to perform with
respect to the representations, warranties or covenants in the
agreement.
Covenants
:
The
securities purchase agreement contains certain covenants on our part, including
the following:
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o
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we
are required to deliver 1,000,000 additional shares of common stock
to the
investors on a pro rata basis for no additional consideration in
the event
that the Company’s after-tax net income for the fiscal year ending
December 31, 2008 is less than $4.8
million;
|
|
o
|
we
are required to deliver 1,000,000 additional shares of common stock
to the
investors on a pro rata basis for no additional consideration in
the event
that the Company’s after-tax net income for the fiscal year ending
December 31, 2009 is less than $8
million;
|
|
o
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we
must use the proceeds of the financing for working capital purposes
and
not to repay any outstanding debt or to redeem or repurchase any
equity
securities;
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o
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we
are required to hire a new full-time chief financial officer who
is fluent
in English and an expert in (x) GAAP and (y) auditing procedures
and
compliance for United States public companies within 45 days of the
closing;
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o
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during
the six months following the closing date, we may not issue any “future
priced securities” as such term is described by NASD
IM-4350-1.
|
Registration
Rights Agreement
For
a
description of the material terms of the registration rights agreement reference
is made “Summary - Offering by Selling Stockholders - Background.”
Plan
of Distribution
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any
one
or more of the following methods when selling shares:
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oo
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
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oo
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
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oo
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
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oo
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
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oo
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privately
negotiated transactions;
|
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oo
|
to
cover short sales made after the date that this registration statement
is
declared effective by the SEC;
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oo
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broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
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oo
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a
combination of any such methods of sale;
and
|
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oo
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any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon
us
being notified in writing by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of common stock were sold, (iv) the commissions paid or
discounts or concessions allowed to such broker-dealer(s), where applicable,
(v)
that such broker-dealer(s) did not conduct any investigation to verify the
information set out in this prospectus, and (vi) other facts material to the
transaction. In addition, upon the Company being notified in writing by a
selling stockholder that a donee or pledgee intends to sell more than 500 shares
of common stock, a supplement to this prospectus will be filed if then required
in accordance with applicable securities law.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
securities will be paid by the selling stockholder and/or the purchasers. Each
selling stockholder has represented and warranted to us that it acquired the
securities subject to this registration statement in the ordinary course of
such
selling stockholder’s business and, at the time of its purchase of such
securities such selling stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such
securities.
We
have
advised each selling stockholder that it may not use shares registered on this
registration statement to cover short sales of common stock made prior to the
date on which this registration statement shall have been declared effective
by
the SEC. If a selling stockholder uses this prospectus for any sale of the
common stock, it will be subject to the prospectus delivery requirements of
the
Securities Act. The selling stockholders will be responsible to comply with
the
applicable provisions of the Securities Act and Exchange Act, and the rules
and
regulations thereunder promulgated, including, without limitation, Regulation
M,
as applicable to such selling stockholders in connection with resales of their
respective shares under this registration statement.
We
are
required to pay all fees and expenses incident to the registration of the shares
(estimated to be approximately $86,000), but we will not receive any proceeds
from the sale of the shares of common stock. The selling stockholders will
pay
all of the selling commissions, brokerage fees and related expenses. We have
agreed to indemnify the selling stockholders against certain liabilities,
including liabilities under the Securities Act.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sales of the shares of common stock
by
the selling stockholders.
MARKET
PRICE OF AND DIVIDENDS OF COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market
Information
Our
common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under
the symbol "CSOL.OB". There has never been any active public market for shares
of our common stock and it is characterized by low volume and high
volatility.
The
following table sets forth the high and low bid prices, in the over-the-counter
market, as reported and summarized by the OTCBB, for each fiscal quarter during
each of the fiscal years ended December 31, 2006 and December 31, 2007 and
for
the quarters ended March 31, 2008 and June 30, 2008. These prices are based
on
inter-dealer prices, without retail markup, markdown or commission and may
not
represent actual transactions.
Quarter Ended
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High
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|
Low
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03/31/2006
|
|
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11
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7.5
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|
06/30/2006
|
|
|
11
|
|
|
11
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|
09/30/2006
|
|
|
6.50
|
|
|
1.3
|
|
12/31/2006
|
|
|
2.50
|
|
|
0.7
|
|
|
|
|
|
|
|
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|
03/31/2007
|
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|
3.73
|
|
|
3.50
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|
06/30/2007
|
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|
2.60
|
|
|
1.81
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|
09/30/2007
|
|
|
3.45
|
|
|
1.75
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|
12/31/2007
|
|
|
4.50
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
03/31/2008
|
|
|
3.70
|
|
|
1.50
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|
06/30/2008
|
|
|
2.36
|
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1.65
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|
As
of
September 25, 2008, the last reported sale price of our common stock was
$1.30
per share.
Since
the
completion of the reverse merger, our common stock has traded sporadically
and
with high volatility. Consequently, our historical prices may not be an accurate
indication of the future prices of our common stock.
Holders
As
of
September 25, 2008, there were 15,599,450 shares of our common stock issued
and
outstanding, and there were approximately 2,528 holders of record of our
outstanding shares of common stock. This does not reflect the number of
persons
or entities who held stock in nominee or "street" name through various
brokerage
firms.
Dividends
We
have
never declared or paid any cash dividends on our common stock and are restricted
from paying dividends both contractually and by virtue of the fact that we
are a
holding company. We currently intend to retain all earnings, if any, for use
in
business operations and we do not anticipate declaring any dividends in the
near
future.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing), Tianjin Huaneng and
SZPSP to obtain approval to send monies out of the PRC. The PRC's national
currency, the Yuan, is not a freely convertible currency. The PRC government
imposes controls on the convertibility of Renminbi into foreign currencies
and,
in certain cases, the remittance of currency out of the PRC. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans.
We
currently do not have any equity compensation plans.
Penny
Stock Regulations
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. As of September
25, 2008, the last reported sale price of our common stock was $1.30 per
share.
Our common stock falls within the definition of penny stock and is subject
to
rules that impose additional sales practice requirements on broker-dealers
who
sell such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual
incomes exceeding $200,000 or $300,000, together with their
spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the common stock and may affect the ability of investors to sell their
common stock in the secondary market.
Shares
Eligible for Future Sale
There
is
no established trading market for our common stock. Future sales of substantial
amounts of our common stock in the trading market could adversely affect market
prices.
This
is
an offering of 4,691,499 shares of our common stock by the selling stockholders.
As of September 25, 2008, there were 15,599,450 shares of our common stock
issued and outstanding and 573,566 shares of Series A Preferred Stock (excluding
900,000 shares which are held in escrow but are in the process of being returned
to the Company). Assuming (i) exercise of all of the 469,150 shares that
may be
acquired on exercise of the placement agent warrants, (ii) conversion of
the
573,566 shares of Series A Preferred Stock issued in June 13, 2007 financing
which have not yet been converted, (iii) the exercise of the other outstanding
warrants to purchase an aggregate of 4,041,698 shares of common stock, there
will be 20,683,864 shares of common stock outstanding. Of these 20,683,864
shares (i) 4,691,499 shares are being registered for resale in this prospectus,
(ii) all of the 573,566 shares of Series A Preferred Stock outstanding may
be
sold without restriction under Rule 144 by non affiliates, (iii) 3,952,025
shares were registered for resale in a registration statement declared effective
on July 18, 2006, (iv) the 4,067,964 issued in the reverse merger may be
sold
subject to the requirements of Rule 144, (v) 508,734 shares underlying the
class
A warrants were registered for resale in the registration statement declared
effective on February 7, 2008 and all of the 1,734,194 shares underlying
the
class A warrants currently outstanding and all of the 1,774,194 shares
underlying the class B warrants may now be sold if purchased by way of a
cashless exercise.
Rule
144
In
general, under Rule 144 as currently in effect, a person other than an
affiliate, who has beneficially owned shares of common stock of a reporting
issuer for at least six months is entitled to sell such shares without further
limitations,
provided,
that
current
public information is available for such issuer for at least another six months.
Other
Registration Rights
Other
than the registration rights granted to (i) the investors and placement agent
in
the February 2008 private placement and (ii) the June 07 investors (and the
placement agent in that transaction) we have no other obligation to register
under the Securities Act any of our shares of common stock. The registration
rights granted to the June 07 investors require us to register all of the shares
underlying the class A warrants and the class B warrants.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis ("MD&A") includes
"forward-looking statements". All statements, other than statements of
historical facts, included in this MD&A regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many
of
which are outside of the Company's control, which could cause actual results
to
materially differ from such statements. While the Company believes that the
assumptions concerning future events are reasonable, it cautions that there
are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the prospects for future
acquisitions; the competition in the solar water heaters and boilers industry
and the impact of such competition on pricing, revenues and margins;
uncertainties surrounding budget reductions or changes in funding priorities
of
existing government programs and the cost of attracting and retaining highly
skilled personnel.
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou) and Deli Solar (Beijing) and our recently acquired indirect
majority owned subsidiary Tianjin Huaneng Group Energy Equipment Co., Ltd.
(“Tianjin Huaneng”) and indirect subsidiary Shenzhen PengSangPu Solar Industrial
Products Corporation (“SZPSP”).
The
Company has three reportable segments namely solar heater/boiler related
products, heat pipe related products and energy-saving projects.
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the
solar heater/boiler related products are mainly sold by Deli Solar
(Bazhou)
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|
the
heat pipe related products are mainly sold by Tianjin Huaneng
|
|
|
energy-savings
projects are mainly sold by SZPSP.
|
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heaters, including coal-fired boilers for residential use. Deli Solar
(Bazhou) also sells component parts for its products and provides after-sales
maintenance and repair services.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including Beijing. However,
so
far there is nil revenue derived from Deli solar (Beijing).
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
SZPSP
is
principally engaged in the manufacture of solar hot water systems for commercial
use. Its customers include factories, hospitals, schools and hotels. SZPSP’s
solar energy saving projects comprise of flat plate solar collectors, heat
exchangers , installation services and after sales services.
Approximately
54% of our sales revenues for the three month period ended June 30, 2008 were
derived from sales of our solar water heaters and boiler related products,
approximately 31% derived from sales of heat pipe related products and 15%
derived from sales of energy-saving projects.
About
99%
of our sales revenues for the six month period ended June 30, 2008 were derived
from sales made to PRC based customers. Approximately 0.05% of our sales
revenues were derived from the international market, all of which were sales
of
heat pipe related products made by Tianjin Huaneng.
Recent
Developments
Additional
Capital
February
2008 Private Placement
On
February 25, 2008 we raised gross proceeds of approximately $11,300,000 in
a
private placement providing from the sale to investors of 4,691,499 shares
of
common stock at a price of $2.40 per share.
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
April
1, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of SZPSP from its three shareholders. SZPSP was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993.
Cash
Purchase Price
:
$4,087,832 (RMB 28,800,000) of the purchase price was paid in cash. This cash
portion was based on an appraisal of SZPSP. The three shareholders agreed to
loan the cash portion back to SZPSP to be used as working capital. Fifty (50%)
of the principal amount of this loan is required to be repaid within one year
of
entry of the complementary agreement and the remaining balance is required
to be
paid off within two years.
Stock
Purchase Price
.
In
addition to the cash portion of the purchase price, the parties agreed to an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of SZPSP’s intangible assets. The purchase price
for these intangible assets is required to be paid 1,419,729 shares of our
common stock (based on the average closing price of the common stock for the
30
days immediately preceding the execution of the Complementary Agreement (the
“Share Price”), provided that if on March 31, 2009 (the first anniversary of the
closing) the common stock price is lower than the Share Price, the Company
will
pay the difference. Fifty percent (50%) of these shares are transferable and
unrestricted after March 31 2009 and the remaining fifty percent (50%)
transferable after March 31, 2010. The shares are required to be transferred
to
SZPSP within 180 days of the closing.
Warrants.
In
addition, as part of the purchase price the sellers were issued five year
warrants to purchase 141,973 shares of common stock at an exercise price of
$2.50 per share (subject to adjustment).
RESULTS
OF OPERATIONS
The
sales
and operating income amounts related to the acquisition of Tianjin Huaneng
Group
Energy Equipment Co., Ltd are separately stated under Heat Pipe Related Products
as this is now a separate product line of the company. We believe that
presenting the operating results of this product line separately from other
product lines results in greater clarity on the reasons for changes in operating
results. In reference to the non-GAAP measures, we revised the disclosure to
indicate that the results of the three product lines were separately shown
to
indicate the business reasons for the change in sales and operating results
for
the periods presented.
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
Sales
Revenues
An
analysis of the Company’s revenues and gross profits for each segment are as
follows:
|
|
Three months ended June 30,
|
|
Revenue
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
9,996,713
|
|
$
|
9,418,160
|
|
Heat-pipe
related products
|
|
$
|
5,847,069
|
|
$
|
|
|
Energy-saving
projects
|
|
$
|
2,786,416
|
|
$
|
|
|
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
Overall:
Sales
revenues for the three months ended June 30, 2008 were $18,630,198 as compared
to $9,418,160 for the same period last year, an increase of $9,212,038 or 98%
compared to the same period in 2007. The overall increase in sales is primarily
attributed to the acquisitions of Tianjin Huaneng and SZPSP. Our organic sales
growth for the second quarter of 2008 was 6%.
Solar
Heater/Boiler Related Products
:
Sales
revenues for these products for the three months ended June 30, 2008 were
$9,996,713 as compared to $9,418,160 for the same period last year, a increase
of $578,553, or 6%. The increase in sales of solar heaters and boiler related
products was a result of higher sales volume resulting from sales promotion
in
the solar heater segment. The decrease in average selling price was the result
of increased competition. We had expected a decrease in sales of solar heaters
and boiler related products due to lower prices and lower sales volume resulting
from increased competition in the solar heater segment. We expect price
competition to continue for the remainder of 2008.
Heat
Pipe Related Products:
Sales
revenues for the three months ended June 30, 2008 were $5,847,069 compared
to
nil for the same period last year. The sales of heat pipe related products
are
attributed to the acquisition of Tianjin Huaneng completed in July 1, 2007
and
our commencement to sell heat pipe related products.
Energy
saving projects:
Sales
revenues for the three months ended June 30, 2008 were $2,786,416 compared
to
nil for the same period last year. The sales of energy saving projects are
attributed to the acquisition of SZPSP completed in April 1, 2008.
Gross
Profit
|
|
Three months ended June 30,
|
|
Gross Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
2,045,428
|
|
$
|
1,928,031
|
|
Heat-pipe
related products
|
|
$
|
1,901,524
|
|
$
|
-
|
|
Energy-saving
projects
|
|
$
|
510,030
|
|
$
|
-
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
Overall
:
Gross
profit for the three months ended June 30, 2008 was $4,456,982 an increase
of
$2,528,952 or approximately 131%, compared to $1,928,031 for the three months
ended June 30, 2007. Our gross margin (gross profit as a percentage of sales)
in
the second quarter of 2008 was approximately 24% compared to approximately
20%
in the same period last year. This is primarily due to the increase in the
volume of sales of higher margin products such as heat pipe related products
due
to the acquisition of Tianjin Huaneng. The 24% gross margin for three months
ended June 30, 2008 decreased from 30% for the prior quarter was mainly due
to
the changes in our sales structure, which means that the sales of heat-pipe
related products (which has higher gross margin) was 31%, down from 66% for
the
prior quarter.
Solar
Heater/Boiler Related Products
:
Gross
profit was $2,045,428 an increase of $117,397 or 6% compared to the same period
in the prior year. The increase in gross profit is caused by increased revenue
due to increased sales volume. However, sales prices decreased slightly. Gross
margin for the three month period ended June 30, 2008 was approximately 20%
compared to approximately 20% in the same period last year. We expect price
competition to continue for the rest of 2008 and as a result we expect gross
profit and gross margin on these products to decrease for the rest of
2008.
Heat
Pipe Related Products:
Gross
profit for the three months ended June 30, 2008 was $1,901,525 compared to
nil for the same period last year. Gross profit of heat pipe related
products is attributed to the acquisition of Tianjin Huaneng completed in
July 1, 2007 and our commencement of the sale of their products. Gross margin
(gross profit as a percentage of sales) on these products in the second quarter
of 2008 was approximately 33 % compared to 34% for the first quarter.
Energy
saving projects:
Gross
profit for the three months ended June 30, 2008 was $510,030 compared to nil
for
the same period last year. Gross profits of energy saving projects are
attributed to the acquisition of SZPSP completed in April 1, 2008. Gross margin
(gross profit as a percentage of sales) on these products in the second quarter
of 2008 was approximately 18 %.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2008 were $2,405,993 as compared
to
$1,143,216 for the same period in 2007, an increase of $1,262,777 or 110%.
The
overall increase in operating expenses was primarily due to the acquisitions
or
Tianjin Huaneng and SZPSP as well as increased sales and marketing expenses
detailed below.
Depreciation
and amortization expense increased to $132,216 or 271% from $35,630 for the
same
period last year. The increase was mainly due to an increased depreciation
and
amortization expense of $83,732 as a result of the acquisition of Tianjin
Huaneng and SZPSP as well as increased depreciation expense of $12,854 as a
result of new equipment used.
Selling
and distribution expense increased to $1,118,041 or 371%, from $237,502 for
the
same period last year. The increase was mainly due to increased expenses
incurred on the development of sales network and promotion programs. Selling
expenses consisted of sales promotion expense ($233,656), travelling and
transportation expenses ($364,501), agency administration expenses ($409,584)
and after sales service ($110,300).
General
and administrative expenses were $1,155,736 for the three months ended June
30,
2008 (or approximately 6.2% of sales) compared to $870,084 (or approximately
9.2% of sales) for the same period in 2007. The net increase of $285,652 was
mainly due to the acquisition of Tianjin Huaneng and SZPSP which together had
general and administrative expenses of $757,021.
General
and administrative expenses include the advertising expenses and salaries and
benefits described below.
Advertising
expenses for the three months ended June 30, 2008 were $176,750 as compared
to
$518,619 for the same period in 2007, a decrease of $341,869 or approximately
66%. The decrease in advertising expense was a result of lower TV advertising.
Management believes expensive advertising on TV is not the only effective method
to increase market share in the face of severe competition. This year, we have
focused more on print and internet advertising.
Salaries
and benefits increased to $239,140 for the three months ended June 30, 2008
from
$109,641 for the same period in 2007, an increase of $129,499 or 118%. The
increase reflects both increased salaries and benefits and the number of
management and employees as a result of the Tianjin Huanengand SZPSP
acquisitions.
Solar
Heater/Boiler Related Products
:
Operating
expenses for the three months ended June 30, 2008 were $924,140 compared to
$1,143,216 for the same period in 2007, a decrease of $219,076, or approximately
19%. The decrease in operating expenses was primarily due to decreased general
and administrative expenses explained below.
General
and administrative expense decreased to $274,791, or 68%, from $870,084 for
the
same period last year. General and administrative expenses mainly include
advertising expenses, salaries and benefits of management, business travel
expenses, office expenses and other general and administrative expenses.
Advertising
expenses for the three months ended June 30, 2008 were $108,936 as compared
to
$518,619 for the same period last year, a decrease of $409,683, or approximately
79%. The decrease in advertising expense was the result of our reduced
advertising on TV and with more focus on print and internet advertising.
Other
general and administrative expenses for the three months ended June 30, 2008
were $165,855 (including office expense ($57,410), salary and benefits
($67,420), business travel expense ($15,669) and miscellaneous payments
($25,356)), compared to $351,465 for the same period last year, a decrease
of
$185,610 or approximately 53%, resulting mainly from our increased focus on
controlling our expenses.
Depreciation
and amortization expense increased to $48,484, an increase of 12,854 or
36% from $35,630 for the same period last year. The additional expense
was incurred by Deli Solar (Bazhou) in connection with manufacturing property
which it began using at the end of 2007.
Selling
and distribution expense increased to $600,865, or approximately 153%, from
$237,502 for the same period last year. The increased expense was due to the
development of new and existing distribution networks as well as additional
sales promotion expenses.
Heat
pipe related products
:
Operating
expenses for the three months ended June 30, 2008 were $852,810 compared to
nil
for the same period in 2007. The increase in operating expenses was primarily
due to the acquisition of Tianjin Huaneng completed in July 1, 2007. Operating
expenses included selling expenses ($496,949), depreciation and amortization
expenses ($64,286) and general and administrative expenses ($291,575).
Energy-saving
projects
:
Operating
expenses for the three months ended June 30, 2008 were $505,119 compared to
nil
for the same period in 2007. The increase in operating expenses was primarily
due to the acquisition of SZPSP completed in April 1, 2008.
Operating
expenses included selling expenses ($20,227), depreciation and amortization
expenses ($19,446) and general and administrative expenses
($465,446).
Income
from Operations
Income
from operations for the three months ended June 30, 2008 was $2,050,989 an
increase of $1,266,174 or approximately 161% as compared to $784,815 for the
three months ended June 30, 2007. The increased income was mainly due to the
increased sales revenue attributable to the acquisition of Tianjin Huaneng
and
SZPSP and our commencement of the sale of their respective
products.
Net
Income
Net
income was $1,096,213 for the three months ended June 30, 2008, compared with
$646,820 in the same period last year, an increase of $449,393 or approximately
69%. The increase was primarily due to the increased sales attributable to
our
acquisitions of Tianjin Huaneng and SZPSP.
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
Key
Items during first six months of 2008
Significant
financial items during the first six months of 2008 include:
|
o
|
|
Completed
acquisition of SZPSP.
|
|
o
|
|
Overall
net sales increased 117% to
$26,930,274.
|
|
o
|
|
Net
income increased by 61% to $1,485,864
|
|
|
|
|
|
o
|
|
Operating
income increased by 207%
|
Sales
Revenues
An
analysis of the Company’s revenues for each segment follows:
|
|
Six months ended June 30,
|
|
Revenue
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
12,826,528
|
|
$
|
12,414,023
|
|
Heat-pipe
related products
|
|
$
|
11,317,330
|
|
$
|
|
|
Energy
saving projects
|
|
$
|
2,786,416
|
|
$
|
|
|
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
Overall:
Sales
revenues increased to $26,930,274 during the first six months of 2008 as
compared to $12,414,023 for the same period in 2007, an increase of $14,516,251
or 117%.
The
overall increase in sales is the result of (i) the acquisitions of Tianjin
Huaneng and SZPSP, which companies together contributed $14,103,746 to our
sales
revenues and (ii) our investment in marketing, sales promotion of our solar
water heaters and the development of a more extensive sales distribution network
for our solar water heaters and our boiler related products discussed below.
Solar
Heater/Boiler Related Products
:
Sales
revenues of this product segment during the first six months of 2008 increased
to $12,826,528 from $12,414,023 for the same period in 2007, an increase of
$412,505 or approximately 3%. Approximately $8.16 million were derived from
sales of solar hot water heaters, a 3% increase from the same period in 2007;
approximately $4.66 million was derived from sales of coal-fired boilers and
space heating products, about a 3% increase as compared to the same period
in
2007.
The
increase in sales of solar heaters and boiler related products was a result
of
our investment in marketing and sales promotion and the development of a more
extensive sales distribution network for these products. The increase in sales
revenues was not associated with a one time event. The increase in sales is
not
the result of an increase in sales prices of our products but the result of
increased sales volume. On the contrary the sales prices for our solar heater
and boiler related products have been declining due to increased competition.
Going forward we believe that the continued organic growth of revenue of this
segment will be negatively impacted by increased competition in the solar heater
segment which is causing us to lower our prices. We expect price competition
to
continue for the next year and we expect sales revenues on this product segment
to increase slightly.
Heat
Pipe Related Products
:
Sales
revenues during the first six months of 2008 were $11,317,330 compared to nil
for the same period last year. The sales of heat pipe related products are
attributed to the acquisition of Tianjin Huaneng completed in July 1, 2007
and
our commencement to sell heat pipe related products.
Energy
saving projects
:
Sales
revenues during the first six months of 2008 were $2,786,416 compared to nil
for
the same period last year. The sales of energy-saving projects are attributed
to
the acquisition of SZPSP completed in April 1, 2008 and our commencement to
sell
these products.
Gross
Profit
|
|
Six months ended June 30,
|
|
Gross Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
2,620,321
|
|
$
|
2,674,979
|
|
Heat-pipe
related products
|
|
$
|
3,781,692
|
|
$
|
-
|
|
Energy-saving
projects
|
|
$
|
510,029
|
|
$
|
-
|
|
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
Overall
:
Gross
profit during the first six months of 2008 was $6,912,042 compared to $2,674,979
for the same period last year. The increase in gross profit is the result of
the
acquisitions of Tianjin Huaneng and SZPSP, two companies together contributed
$4,291,721 to our gross profit, accounting for 62% of our overall gross profit.
Gross
margin (gross profit as a percentage of sales) during the first six months
of
2008 was approximately 26% compared to approximately 22% in the same period
in
2007. The profit margin during the first six months of 2008 increased over
the
same period in 2007 due to the acquisition of Tianjin Huaneng whose products
have higher profit margins than our other products. The profit margins on our
solar heaters have been falling because of market pressure to keep our prices
competitive (down by 2% compared to the same period last year). We are facing
severe price competition in the traditional solar water heater market. We expect
price competition to continue through the end of 2008. As a result, we expect
our gross profit margin for our solar water heaters to continue to decrease.
However, we anticipate that Tianjin Huaneng’s energy saving boilers and
environmental protection equipment will generate better gross profit margins
to
offset the decline in our profit margins for solar water heaters and residential
boilers. The gross margin on the sale of the Tianjin Huaneng’s products was 33%
during the first six months of 2008.
Solar
Heater/Boiler Related Products
:
Gross
profit was approximately $2,620,321 during the first six months of 2008, about
a
2% decrease compared to the same period of prior year of approximately
$2,674,979.
The
decrease in gross profit is due to the decrease in sales price of products.
The
number of units sold actually increased. During the first six months of 2008,
we
sold approximately 63,134 solar water heaters and 50,113 boiler heaters compared
to 53,220 solar water heaters and 45,320 boiler heaters in the same period
in
2007.
Gross
profit margin for this segment decreased slightly during the first six months
of
2008 to 20.43% compared to the approximately 21.55% in the same period in 2007.
The profit margins on our solar heaters have been falling because of increased
competition causing us to lower our prices. We are facing severe price
competition in the traditional solar water heater market. We expect price
competition to continue through the end of 2008. As a result we expect gross
profit margin for our solar water heaters to continue decrease. Accordingly,
to
deal with this trend management intends to invest more in R & D to develop a
new high tech product and focus on flat-plate solar panels for commercial and
industrial customers instead of traditional evacuated tube solar water heaters
for residential customers. We are going to use the new high tech product
(flat-plate solar panels) on energy saving projects and the revenue in the
energy saving project segment is expected to be doubled in the next quarter
with
higher gross margin.
Heat
Pipe Related Products:
Gross
profit on the sale of heat pipe related products was $3,781,692 which was
attributed to the acquisition of Tianjin Huaneng. Gross margin (gross profit
as
a percentage of sales of these products) was approximately 33%. We anticipate
that Tianjin Huaneng’s energy saving boilers and environmental protection
equipment will generate better gross profit margins to offset the decline in
our
profit margins for solar water heaters and residential boilers.
Energy-saving
projects:
Gross
profit on the sale of energy-saving projects was $510,029 which was attributed
to the acquisition of SZPSP. Gross margin (gross profit as a percentage of
sales
of these products) was approximately 18%. However, we anticipate that SZPSP’s
energy saving projects will generate better gross profit margins for the rest
of
the year and the following years, as we expect to sign more contracts with
higher price and higher gross margin as a result of the excellent marketing
of
our products and brands.
Segment
assets
Assets
in
solar heater were $18,277,522, about a 9% increase as compared to the same
period in 2007 of approximately $18,690,225. The increase is in line with
increase in sales generated from solar heater.
Assets
in
heat pipe were $21,484,078 compared with $9,029,994 balance in the same period
in 2007, the increase was mainly due to acquisition of Tianjin
Huaneng.
Assets
in
energy-saving project segment were $6,653,407 compared with nil balance in
the
same period in 2007; the increase was mainly due to acquisition of
SZPSP.
Corporate
assets were $2,418,805, principally referring to cash from the proceeds of
the
February 2008 private placement.
Operating
Expenses
Operating
expenses increased to $3,659,376 during the first six months of 2008 as compared
to $1,616,539 for the same period in 2007. This represented an increase of
$2,042,837 or about 126%. The overall increase in operating expenses was
primarily due to the acquisition of Tianjin Huaneng and SZPSP (whose operating
expenses together amounted to $2,152,823) as well as increased selling and
distribution expenses described below.
Selling
and distribution expenses increased to $1,620,604 from $281,532 for the same
period in 2007 (or 6% of sales) an increase of $1,339,072, or 476%. These
selling and distribution expenses consisted primarily of non cash sales
promotion expenses ($233,656), traveling and transportation expenses ($507,779),
and agency administration expenses ($630,281) and after sales services
($248,888). The increase in selling and distribution expenses was primarily
the
result of our acquisition of Tianjin Huaneng and SZPSP (whose selling and
distribution expenses together were $875,255.)
General
and administrative expenses were $1,757,389 during the first six months of
2008
(or approximately 6.53% of sales) compared to $1,264,041 (or approximately
10%
of sales) for the same period in 2007. The net increase of $493,348 was mainly
due to the acquisition of Tianjin Huaneng and SZPSP which together had general
and administrative expenses of $1,054,770. This was offset by the decrease
in
general and administrative expenses by Deli Solar (Bazhou) of approximately
$546,422.
General
and administrative expenses include advertising expenses and salaries and
benefits.
Advertising
expenses during the first six months of 2008 were $349,030 as compared to
$660,093 for the same period in 2007, a decrease of $311,063 or approximately
47%. The decrease in advertising expense was a result of lower advertising
expenses incurred in TV advertising. Management believes expensive TV
advertising is not the only effective method to increase market share in the
face of severe competition. This year, we have been more focussed on print
and
internet advertising.
Salaries
and benefits increased from $109,641 for the same period in 2007 to $385,151
during the first six months of 2008, an increase of $275,510 or 251% from the
same corresponding period last year. The increase reflects both increased
salaries and benefits level and increased employees as a result of the Tianjin
Huaneng acquisition and SZPSP acquisition.
Depreciation
and amortization expense during the first six months of 2008 increased by
$210,417 to $281,383 or 297% from $70,966 for the same period in 2007. The
increase was due to an increased depreciation and amortization expense of
$192,798 as a result of the acquisition of Tianjin Huaneng and SZPSP as well
as
increased depreciation expense of $17,619 as a result of new equipment used.
Income
from Operations
Income
from operations during the first six months of 2008 was $3,252,666, an increase
of $2,194,226 or 207% as compared to $1,058,440 for the same period in 2007.
The
increased operating income was due to the increased sales revenue and the
acquisition of Tianjin Huaneng and SZSPS and our commencement of the sale of
their respective products. As a percentage of sales, operating income was
approximately 12% during the first six months of 2008 as compared to
approximately 8.5% for the same period in 2007. Our organic operating income
was
$1,237,693 or approximately 10% of sales. The increase in operating income
as a
percentage of sales was substantially due to the increase in sales and
controlling selling expenses during the six months ended June 30, 2008.
Net
Income
Net
income was $1,485,864 during the first six months of 2008, compared with
$922,102 for the same period in 2007, an increase of $563,762 or approximately
61%. The increase was primarily due to increase in sales volume of the exiting
products and increased sales attributable to our acquisition of Tianjin Huaneng.
Minority
Interests
Minority
interests increased $859,031 during the first six months of 2008 primarily
due
to share of profits by minority interests from consolidation with Tianjin
Huaneng. Minority interests shown on the balance sheet were $1,879,303 which
refers to the equity interest of minority shareholders in Tianjin Huaneng as
of
June 30, 2008.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during the first six months of 2008 or the same period in 2007. Therefore,
no
provision for U.S. federal income taxes or tax benefits on the undistributed
earnings and/or losses has been made.
Currently,
Most PRC companies are subject to enterprise income tax at the rate of 25%,
value added tax at the rate of 17% for most of the goods sold, and business
tax
on services at a rate ranging from 3% to 5% annually. However, pursuant to
the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are entitled
to an exemption from the PRC enterprise income tax for two years commencing
from
its first profitable year, after loss carry-forwards from the previous five
years have been recovered. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss during the first six months of 2008. Consequently, it did not
incur income tax. Tianjin Huaneng is domestically owned and subject to the
Corporate Income Tax governed by the Income Tax Law of the People’s Republic of
China, at a statutory rate of 25%
2007
Compared to 2006
Because
our fiscal year is the calendar year, throughout this section we refer to the
fiscal years ended December 31, 2007 and 2006 as “2007” and “2006,”
respectively.
Key
Items in 2007
Significant
financial items during 2007 include:
|
o
|
|
Completed
acquisition of Tianjin Huaneng.
|
|
o
|
|
Overall
net sales increased 73% to $37,072,346 in
2007.
|
|
o
|
|
Net
income for 2007 increased by 104% to $2,525,141 compared to
2006.
|
|
o
|
|
Operating
income for 2007 increased by 163% compared to
2006.
|
Sales
Revenues
An
analysis of the Company’s revenues for each segment follows:
|
|
Fiscal Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
0
|
|
Other
segments
|
|
|
3,376,481
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
Overall:
Sales
revenues increased to $37,072,346 for 2007 as compared to $21,468,313 for 2006,
an increase of $15,604,033 or 73%.
The
overall increase in sales is the result of (i) the acquisition of Tianjin
Huaneng and the commencement by us of the sale of their products which
contributed $7,002,015 to our sales revenues and (ii) our investment in
marketing, sales promotion of our solar water heaters and the development of
a
more extensive sales distribution network for our solar water heaters and our
boiler related products discussed below.
Solar
Heater/Boiler Related Products
:
Sales
revenues of this product segment for 2007 increased to $26,693,850 from
$21,468,313 for 2006, an increase of about $5,225,537 or 24% over $21,468,313
for 2006. Approximately $17 million were derived from sales of solar hot water
heaters, a 35% increase from 2006; approximately $9 million was derived from
sales of coal-fired boilers and space heating products, about a 9% increase
as
compared to 2006.
The
increase in sales of solar heaters and boiler related products was a result
of
our investment in marketing and sales promotion and the development of a more
extensive sales distribution network for our solar water heaters and our boiler
related products. The increase in sales revenues was not associated with a
one
time event. The increase in sales is not the result of an increase in sales
prices of our products but the result of increased sales volume. On the contrary
the sales prices for our solar heater and boiler related products have been
declining due to increased competition. Going forward we believe that the
continued organic growth of revenue of this segment will be negatively impacted
by increased competition in the solar heater segment which is causing us to
lower our prices. We expect price competition to continue for the next year
and
we expect sales revenues on this product segment to decrease.
Heat
Pipe Related Products:
Sales
revenues for 2007 were $7,002,015 compared to nil for the same period last
year.
The sales of heat pipe related products are attributed to the acquisition of
Tianjin Huaneng completed in July 1, 2007 and our commencement to sell heat
pipe
related products.
Other
segments:
Sales
revenues for 2007 were $3,376,481. Other segments refer to solar lighting and
spare parts/components which account for less than 10% of the total
revenue.
Cost
of Revenue
Overall
:
In line
with the 73% increase in our overall sales, our costs of goods sold were
$28,772,078 for 2007, an increase of $11,929,084 or 71% from $16,842,994 for
2006.
Solar
Water Heaters and Boilers
:
Our
cost of revenue increased to $21,021,407, or 79% of sales, an increase of
$4,178,413 or 25% from $16,842,994 for 2006.
Although
sales revenues increased by 24% for 2007 over 2006 costs of revenues increased
by 79% due mainly to the cost of raw materials. Management believes this trend
will continue. The Company is endeavoring to minimize its product costs by
reducing our manufacturing overhead and reducing waste to keep its product
prices competitive.
Heat
Pipe Related Products:
Our cost
of revenue was $5,181,491 or 74% of sales compared to nil for the prior
year.
Other
Segments:
Cost of
revenues for 2007 were $2,569,180 or 76% of sales. Other segments refer to
solar
lighting and spare parts/components which are less than 10% of the total cost
of
revenue.
Gross
Profit
|
|
Fiscal Year Ended
December 31
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
0
|
|
Other
segments
|
|
|
807,301
|
|
|
0
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
Overall
:
Gross
profit for 2007 was $8,300,268, compared to $4,625,319 for 2006. The increase
in
gross profit resulted primarily from the increase in sales revenue from the
sales of additional solar water heaters and boilers discussed below. We also
commenced selling Tianjin Huaneng’s products.
Gross
margin (gross profit as a percentage of sales) in 2007 was approximately 22.4%
compared to approximately 21.5% in 2006. The profit margin in 2007 increased
slightly over 2006 due to the acquisition of Tianjin Huaneng whose products
have
higher profit margins than our other products. The profit margins on our solar
heaters have been falling because of market pressure to keep our prices
competitive. We are facing severe price competition in the traditional solar
water heater market. We expect price competition to continue through the end
of
2008. As a result, we expect our gross profit margin for our solar water heaters
to continue to decrease. However, we anticipate that Tianjin Huaneng’s energy
saving boilers and environmental protection equipment will generate better
gross
profit margins to offset the decline in our profit margins for solar water
heaters and residential boilers. The gross margin on the sale of the Tianjin
Huaneng’s products was 26% in 2007.
Solar
Heater/Boiler Related Products
:
Gross
profit from this segment was approximately $5,672,443 in 2007, about a 22.6%
increase compared to the prior year of approximately $4,625,319. The increase
in
gross profit is due to the increase in sales volume of products. In 2007, we
sold approximately 147,500 solar water heaters and 108,800 boiler heaters
compared to 133,000 solar water heaters and 99,000 boiler heaters in
2006.
However,
gross profit margin for this segment decreased slightly in 2007 to 21.2%
compared to the approximately 21.5% in 2006. The profit margins on our solar
heaters have been falling because of increased competition causing us to lower
our prices. We are facing severe price competition in the traditional solar
water heater market. We expect price competition to continue through the end
of
2008. As a result we expect gross profit margin for our solar water heaters
to
continue decrease. Accordingly to deal with this trend management intends to
invest more in R & D to develop a new high tech product and focus on
flat-plate solar panels for commercial and industrial customers instead of
traditional evacuated tube solar water heaters for residential
customers.
Heat
Pipe Related Products:
Gross
profit on the sale of heat pipe related products was $1,820,524 which was
attributed to the acquisition of Tianjin Huaneng. Gross margin (gross profit
as
a percentage of sales of these products) was approximately 26%. We anticipate
that Tianjin Huaneng’s energy saving boilers and environmental protection
equipment will generate better gross profit margins to offset the decline in
our
profit margins for solar water heaters and residential boilers.
Other
Segments:
Gross
profit for other segments for 2007 was $807,301. Other segments refer to solar
lighting and spare parts/components which are less than 10% of the total gross
profit.
Segment
assets
Assets
in
solar heater were $18,690,225, about a 47% increase as compared to 2006 of
approximately 12,716,185. The increase is in line with increase in sales
generated from solar heater.
Assets
in
heat pipe were $9,029,994 compared with nil balance in 2006; the increase was
mainly due to acquisition of Tianjin Huaneng.
Assets
in
other segments of $2,919,494 refer to solar lighting products and sales of
spare
parts/ components which are less than 10% of the total assets.
Operating
Expenses
Operating
expenses increased to $5,114,634 for 2007 as compared to $3,414,707 for 2006.
This represented an increase of $1,699,927 or about 50%. The overall increase
in
operating expenses was primarily due to the acquisition of Tianjin Huaneng
(whose operating expenses amounted to $1,721,729) as well as increased selling
and distribution expenses described below (which amounted to $827,839) and
increased advertising expenses which amounted to $1,415,493.
Selling
and distribution expenses increased to $827,839 from $459,746 for 2006 (or
2.2%
of sales) an increase of $368,093, or 80%. These selling and distribution
expenses consisted primarily of non cash sales promotion expenses ($127,365),
outbound distribution expenses ($177,413), traveling and transportation expenses
($166,319), agency administration expenses ($268,653) and after sales services
($88,089). The increase in selling and distribution expenses was primarily
the
result of our acquisition of Tianjin Huaneng (whose selling and distribution
expenses were $125,912.)
General
and administrative expenses were $4,003,973 for 2007 (or approximately 11%
of
sales) compared to $2,800,015 (or approximately 13% of sales) for 2006. The
net
increase of $1,203,958 was mainly due to the acquisition of Tianjin Huaneng
which had general and administrative expenses of $1,486,751. This was offset
by
the decrease in general and administrative expenses by Deli Solar (Bazhou)
of
approximately $0.3 million. Deli Solar (Bazhou) and Deli Solar (Beijing)’s
expenses were approximately $1,852,430 and the Company at the U.S. level
incurred a total of $664,792 which included legal fees of approximately
$340,197. General and administrative expenses include advertising expenses
and
salaries and benefits.
|
o
|
Advertising
expenses (which is a component of our general and administrative
expenses
line item) for 2007 were $1,415,493 as compared to $1,106,488 for
2006, an
increase of $309,005 or approximately 28%. The increase in advertising
expense was a result of our acquisition of Tianjin Huaneng (whose
advertising expenses were $30,687) as well as our continued spending
on
advertising to increase our product awareness, branding and sales
of our
solar water heaters and boilers). We believe that through advertising
and
marketing, we will able to face our competition and generate greater
market share for our products.
|
|
o
|
Salaries
and benefits (which is also a component of our general and administrative
expenses line item) increased from $279,069 for 2006 to $454,012
for 2007,
an increase of $174,943 or 63% from the same corresponding period
last
year. The increase reflects the addition of 550 employees as a result
if
the Tianjin Huaneng acquisition. Per employee, salaries and benefits
decreased from $1,188 for 2006 to $890 for 2007, a decrease of $298
or 25%
from the same corresponding period last
year.
|
Depreciation
and amortization expense for 2007 increased by $127,876 to $282,822 or 83%
from
$154,946 for 2006. The increase was due to an increased depreciation and
amortization expense of $109,066 as a result of the acquisition of Tianjin
Huaneng as well as increased depreciation expense of $18,810 as a result of
new
equipment used.
Income
from Operations
Income
from operations for 2007 was $3,185,634 , an increase of $1,975,022 or 163%
as
compared to $1,210,612 for 2006. The increased operating income was due to
the
increased sales revenue and the acquisition of Tianjin Huaneng and our
commencement of the sale of their products. As a percentage of sales, operating
income was 8.59% in 2007 as compared to 5.64% for 2006. The increase in
operating income as a percentage of sales was substantially due to the increase
in sales and controlling selling expenses in 2007.
Net
Income
Net
income was $2,525,141 for 2007, compared with $1,239,501 for 2006, an increase
of $1,285,640 or approximately 104%. The increase was primarily due to increase
in sales volume of the exiting products and increased sales attributable to
our
acquisition of Tianjin Huaneng.
Minority
Interests
Minority
interests of $199,744 arise as of December 31, 2007 primarily due to share
of
profits by minority interests from consolidation with Tianjin
Huaneng.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during 2007 or 2006. Therefore, no provision for U.S. federal income taxes
or
tax benefits on the undistributed earnings and/or losses has been
made.
Normally
a PRC company is subject to enterprise income tax at the rate of 33%, value
added tax at the rate of 17% for most of the goods sold, and business tax on
services at a rate ranging from 3% to 5% annually. However, pursuant to the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are entitled
to an exemption from the PRC enterprise income tax for two years commencing
from
its first profitable year, after loss carry-forwards from the previous five
years have been recovered. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss for 2007. Consequently, it did not incur income tax. Tianjin
Huaneng is domestically owned and subject to the Corporate Income Tax governed
by the Income Tax Law of the People’s Republic of China, at a statutory rate of
33%, which is comprised of a 30% national income tax and 3% local income
tax.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
used in operating activities was $3,237,938 for the six months ended June 30,
2008, and net cash provided by our operating activities was $294,938 for the
same period of 2007. The increase in net cash used by operations was mainly
due
to an increase in inventories ($2,380,781) and an increase in payments made
in
advance to suppliers ($4,227,372).
Net
cash
used in investing activities was $5,949,774 for the six months ended June 30,
2008, compared with $373,030 for the same period of 2007. The increase was
due
to the purchase of new facilities and assembly lines in connection with the
SZPSP acquisition.
Net
cash
provided by financing activities was $10,102,656 for the six months ended June
30, 2008, compared with $2,501,080 for the same period of 2007. The increase
was
due to the purchase of 4,691,499 shares of common stock by the investors in
our
February 2008 private placement and the exercise of 75,000
warrants.
We
believe that current cash will be sufficient to meet anticipated working capital
and capital expenditures for at least the next twelve months. However, we need
to require additional cash for further development of business, including any
investments or acquisitions we may decide to pursue. However, we cannot assure
you that such funding will be available.
Cash
Cash
and
cash equivalents increased to $6,689,173 at June 30, 2008 from $5,466,637 at
December 31, 2007, primarily as a result of the receipt of net proceeds of
$9,995,156 from our private placement of our common stock. We used $3.2
million on increasing our working capital and $5.9 million on increasing
manufacturing facilities. We intend to use our available funds to increase
our
working capital and to make additional acquisitions. We believe that our
available funds will provide us with sufficient capital for the next twelve
months. However, if we make further acquisitions or establish additional
production facilities, we may require additional capital for the acquisition
or
for the operation of the combined companies. We cannot assure you that such
funding will be available.
Accounts
Receivable
During
the six months ended June 30, 2008, accounts receivable increased to $9,262,801
from $7,453,009 as of January 1, 2008, primarily due to consolidation with
SZPSP. SZPSP recorded $1,174,334 of accounts receivable. The majority of our
each company’s sales are on credit terms in accordance with terms specified in
the contracts governing the relevant transactions. We evaluate the need for
an
allowance for doubtful accounts based on specifically identified amounts that
we
believe to be uncollectible. If actual collections experience changes, revisions
to the allowance may be required. Based upon the aforementioned criteria, the
allowances for doubtful accounts during the first six months of 2008 were
nil.
Inventory
Inventories
as of June 30, 2008 increased to $6,256,439 from $3,875,658 as of December
31,
2007 principally because of consolidation with SZPSP, which recorded $1,153,785
of inventories as of June 30, 2008. In addition, Tianjin Huaneng
increased its inventories from $3,016,025 to $7,151,837 due to increased
purchases of raw materials for the next production season. The inventory
mainly consists of finished goods waiting for transportation or
installation.
Other
Receivables and Prepayments
Other
receivables and prepayments as of June 30, 2008 increased to $5,865,320 from
$1,637,948 as of December 31, 2007. Other receivables and prepayments mainly
consist of prepaid expenses and deposits.
Accounts
Payable
Accounts
payable as of June 30, 2008 increased to $1,831,368 from $2,111,028 as of
December 31, 2008 primarily due to the payments made to creditors under the
term
of credit agreements.
Other
Payables and Accrued Liabilities
Other
payables and accrued liabilities as of June 30, 2008 increased to $10,158,585
from $8,552,452 as of December 31, 2008, primarily due to consolidation with
SZPSP. The increase is mainly contributed from increase in accrued expenses,
customer deposits, other payable, and taxes payable and deferred
revenue.
BUSINESS
Business
Overview
We
are
engaged in the solar and renewable energy business in the People's Republic
of
China (“PRC”).
Our
business is conducted through our wholly-owned PRC based operating subsidiaries,
Deli Solar (Bazhou), Deli Solar (Beijing) and our recently acquired subsidiaries
Tianjin Huaneng and SZPSP.
Deli
Solar (Bazhou), founded in 1997, designs, manufactures and sells renewable
energy systems to produce hot water and for space heating in the PRC. Deli
Solar
(Bazhou)’s principal products are solar hot water heaters and multifunctional
space heating products, including coal-fired boilers for residential use. Deli
Solar (Bazhou) also sells component parts for its systems, and provides
after-sales maintenance and repair services.
Most
end
users of Deli Solar (Bazhou)’s products use them to heat water for their homes,
with a concentration in rural areas where electricity is in short supply. Deli
Solar (Bazhou)’s coal-fired boilers, furnaces and heating stoves are also used
as primary household space heaters during cold weather and as cooking
stoves.
Deli
Solar (Beijing), established during the second quarter of 2006, is
principally engaged in the installation of large solar water heaters in
construction projects in major cities in the PRC, including
Beijing.
Tianjin
Huaneng, acquired in July 2007, manufactures and installs waste heat recovery
systems primarily for use in manufacturing facilities whose manufacturing
processes require the generation of large amounts of heat, such as steel and
chemical plants. The waste heat can be used to generate hot water at the
manufacturing facilities Tianjin Huaneng’s products include heating pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. Products and systems manufactured and sold by Tianjin
Huaneng during the period from July 1, 2007 (the date of acquisition) through
December 31, 2007 represented 19% of our sales revenues for the fiscal year
ended December 31, 2007. Tianjin Huaneng’s products are sold in more than 28
provinces in the PRC as well as Singapore and Taiwan.
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the resale
of energy-saving heating products such as heat pipes, heat exchangers, pressure
water boilers, solar energy water heaters and radiators. Currently, SZPSP
is also operating a distribution facility in Shenzhen, PRC. This acquisition
has
added to the assortment of solar water products which we have available for
sale.
Approximately
48% of our sales revenues for the six month period ended June 30, 2008 were
derived from sales of our solar water heaters and boiler related products,
approximately 42% derived from sales of heat pipe related products and 10%
derived from sales of energy saving products.
For
the
fiscal year ended December 31, 2007, approximately 47% of our sales revenues
were derived from sales of our solar water heaters, approximately
34% derived from sales of our coal-fired boilers, space heating and other
products and approximately 19% derived from sales of heat pipe related
products.
For
the
six month period ended June 30, 2008 almost all of our sales revenues were
derived from sales made to PRC based customers..
Products
Solar
Hot Water Heaters
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters. Our solar water heaters are
primarily used to generate hot water for residential use. Among evacuated
tubular solar water heaters, regular evacuated tubular solar water heaters
using
all-glass vacuum collectors are our best selling product, comprising
approximately 80% of our total solar water heater revenues for the six month
period ended June 30, 2008 and 85% of our total solar water heater revenues
for
2007. This type of solar water heater can generate hot water even in cold
weather and therefore can be used throughout the year. Further, these water
heaters are relatively easy and inexpensive to produce compared to other solar
hot water heaters using other types of vacuum collectors. Because our primary
market is in rural areas of the PRC, our regular evacuated tubular solar water
heaters annually account for most of our sales.
Boilers
We
also
manufacture boilers, furnaces, stove heating, and space heating products. Most
of our boilers and space heating products are coal-fired, small scale units
for
residential space heating and cooking.
Approximately
48% of our sales revenues for the six month period ended June 30, 2008 and
72%
of our total sales revenues in 2007 were derived from sales of our solar water
heaters and boiler related products.
Heat
Pipe Related Products
We
also
manufacture waste heat recovery systems, heating products such as heating pipes,
heat exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators.
Sales
of
these products and systems comprised approximately 42% of our total sales
revenues for the six month period ended June 30, 2008 and approximately 19%
of
our total sales revenues in 2007 (from July 1, 2007 the date of acquisition).
Energy
Saving Products
SZPSP
is
principally engaged in the manufacture of solar hot water systems for commercial
use. Its customers include factories, hospitals, schools and hotels. SZPSP’s
solar energy saving projects compounding flat plate solar collectors, heat
exchangers , installation services and after sales services.
.
Sales
of
these products and systems comprised approximately 10% of our total sales
revenues for the six month period ended June 30, 2008 and approximately 0%
of
our total sales revenues in 2007.
Recent
Developments
February
2008 Private Placement
On
February 29, 2008 we raised gross proceeds of approximately $11,300,000 in
a
private placement providing for the sale of 4,691,499 shares of common stock
at
a price of $2.40 per share.
In
connection with the transaction we agreed to issue to Roth Capital Partners
LLC
as placement agent, warrants to purchase 469,150 shares of common stock
exercisable for a period of five years at an exercise price equal to $2.88
per
share and we paid them a transaction fee of 7% of the gross proceeds of the
transaction or approximately $790,000. On February 25, 2008, the closing
price of the common stock as quoted on the OTCBB was $2.69.
For
more
information relating to the terms of this private placement, reference is made
to “Selling Stockholders - Background.”
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
January 9, 2008 Deli Solar (Beijing) entered into an equity purchase agreement
and a complementary agreement with Shenzhen PengSangPu Solar Industrial Products
Corporation (“SZPSP”) and its shareholders to acquire 100% of the outstanding
equity interests of SZPSP from its three shareholders. The closing occurred
on
March 31, 2008.
SZPSP
was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $365,916) which was contributed by its three
shareholders. On July 13, 2006, the registered capital increased to $1,767,443
(RMB 12,800,000).
SZPSP
specializes in the manufacture of solar hot water systems for commercial use.
Its customers include factories, hospitals, schools and hotels. SZPSP’s solar
energy products include flat plate solar collectors, solar water heater systems
and central solar water heater systems. It acquired ISO9001: 2000 international
quality system accreditation in 2004. Currently, SZPSP is also operating a
distribution facility in Shenzhen, PRC. SZPSP had sales revenues of $2,786,416
for the six month period ended June 30, 2008 and sales revenues of $3,215,282
for 2007.
The
purchase price consisted of $4,087,832 (RMB 28,800,000) in cash, 1,419,729
shares of our common stock, and five year warrants to purchase 141,973 shares
of
common stock at an exercise price of $2.50 per share (subject to adjustment
for
stock splits and stock dividends). The cash portion was based on the net asset
value of SZPSP. The three shareholders agreed to loan the cash purchase price
back to the Deli Solar (Beijing) interest free to be used as working capital.
Fifty (50%) of the principal amount of this loan is required to be repaid within
one year of the closing and the remaining balance is required to be repaid
within two years. In addition to the cash purchase price, we paid RMB 20
million for SZPSP’s trademarks and other intangible assets which was paid in
1,419,729 shares of our common stock. We agreed that if on the first anniversary
of the closing our common stock price is lower than the share price ($2), we
will pay the difference.
SZPSP
warranted that if (i) for the year ended December 31, 2008 its sales
revenues are less than RMB 99 million (approximately $13,670,068) or its
after-tax net profits are less than RMB 9.43 million (approximately $1,302,108);
or (ii) for the year ended December 31, 2009, sales revenues are less than
RMB
143.9 million (approximately $19,868,336) or its after-tax net profits are
less
than RMB 12.13 million (approximately $1,674,789), SZPSP will pay the difference
between the revenue and the targeted revenue of the year specified by reducing
the amount payable on the shareholders’ loan. If the shareholders’ loan is not
sufficient to pay the difference, the common shares held by SZPSP will be
returned to us to the extent necessary for the remaining
balance.
The
management of SZPSP have entered into employment contracts with us for a term
of
three years to remain in their current managing positions of SZPSP.
Acquisition
of Tianjin Huaneng
On
May
18, 2007, Deli Solar (Beijing) entered into an agreement with Tianjin Municipal
Ji County State-owned Assets Administration Commission (the “SAAC”) to purchase
51% of the equity interests in Tianjin Huaneng Group Energy Equipment Co.,
Ltd.
(“Tianjin Huaneng”) for a purchase price of RMB24,100,000 (approximately
$3,149,147). The transaction closed on July 1, 2007 and we paid approximately
$1,575,600 in July 2007. By supplemental agreement between the parties dated
August 8, 2007, the purchase price was reduced to approximately $1,689,741.
However in addition to the purchase price we paid a finder’s fee to Tianjin
Wangshitong Corporate Consulting Co, Ltd , an unrelated party, of approximately
$769,418. At the closing Deli Solar (Beijing) assumed 51% of the liabilities
of
Tianjin Huaneng. In addition, we contributed RMB20,000,000 (approximately
$2,613,400) as working capital to the acquired company. Deli Solar (Beijing)
also agreed to employ the 550 current Tianjin Huaneng employees pursuant to
new
three year employment contracts.
Tianjin
Huaneng had sales revenues of approximately $11 million for 2006 and sales
revenues of approximately $3.7 million for six month period ended June 30,
2007.
For the six month period beginning July 1, 2007 and ending December 31, 2007,
Tianjin Huaneng had sales of $9,592,056 which represented 26% of our total
sales
revenues for 2007.
Tianjin
Huaneng, incorporated in 1987, is a state-owned enterprise with 51% of its
equity formerly-owned by SAAC and 49% owned by the employees.
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
Tianjin
is a city in the PRC which is approximately 50 miles from Beijing and has a
population of approximately 10.24 million (as of December 31, 2004), and is
one
of only four municipal cities directly governed by the central government in
China.
June
2007 Private Placement
On
June
13, 2007 we raised $2,750,000 in a private placement providing for the sale
to
the investors for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of
(i)
|
1,774,194
shares of Series A Preferred Stock (with each share convertible into
one
(1) share of common stock, subject to
adjustment)
|
(ii)
|
five
year class A warrants to purchase 1,774,194 shares of common stock
at an
exercise price $1.90 per share (subject to adjustment),
and
|
(iii)
|
five
year class B warrants to purchase an additional 1,774,194 shares
of common
stock at an exercise price of $2.40 per share (subject to
adjustment).
|
On
September 25, 2008, the closing price of the common stock as quoted on the
OTCBB
was $1.30.
As
of
September 25, 2008, 1,200,628 of the Series A Preferred Stock have been
converted and sold in the public market and 40,000 of the class A warrants
have
been exercised and sold.
Change
of Name
Effective
October 29, 2007, we changed our name from Deli Solar (USA), Inc. to China
Solar
& Clean Energy Solutions, Inc. We believe that the new name better reflects
the direction of the business. The name change was completed by means of a
short
form merger under the Nevada law under which Du Solar, Inc., our wholly
owned subsidiary, merged into us. We survived as the surviving corporation
and
we effected the name change in connection with that merger. No shareholder
approval was required for the short form merger and the related name change.
The
name change became effective with the OTCBB at the opening of trading on
November 5, 2007 under the new stock symbol “CSOL.OB.” Our new CUSIP number is
16943E 105.
Appointment
of Joe Levinson and Yihai Yang as Directors
Effective
July 25, 2008, Messrs Joseph J. Levinson and Yihai Yang were appointed as
directors of the Board of the Company (the “Board”). Mr. Levinson is qualified
as an "independent director" as defined by the rules of the Nasdaq Stock Market
and as a result of his appointment we have a majority of independent directors.
At the same time, Mr. Levinson was also appointed as Chairman of the Audit
Committee and Mr. Deli Du, the Chief Executive Officer of the Company, was
appointed as Chairman of the Compensation Committee.
Resignation
of Kevin Randolph as a Director
Effective
July 25, 2008, Mr. Randolph resigned as a director to pursue other
interests. His resignation was not the result of any disagreement with us
on any matter relating to our operations, policies or practices.
Resignation
of Mr. Jianmin Li as Chief Financial Officer and as a
Director
Effective
November 1, 2007, Mr. Jianmin Li resigned as our Chief Financial Officer to
pursue other interests. Mr. Li's resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices. Following his resignation as the Chief Financial Officer, Mr.
Li continued to serve as a director until March 31, 2008 when he resigned as
a
director. Mr. Li's resignation as director was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices.
Appointment
of Gary Lam as Chief Financial Officer and Subsequent Resignation as Chief
Financial Officer
Effective
November 1, 2007, Mr. Gary Lam was appointed to serve as our Chief Financial
Officer. Effective March 14, 2008, Mr. Lam resigned as our Chief Financial
Officer to pursue other interests. Mr. Lam’s resignation was not the
result of any disagreement with us on any matter relating to our operations,
policies or practices.
Appointment
of Yihai Yang as Acting Chief Financial Officer
Effective
March 14, 2008, Mr. Yihai Yang was appointed to serve as our Acting Chief
Financial Officer.
Corporate
History
China
Solar & Clean Energy Solutions, Inc. was formerly known as Deli Solar (USA),
Inc., which was formerly known as Meditech Pharmaceuticals, Inc.
(“Meditech”).
Meditech
was incorporated in Nevada on March 21, 1983.
Organization
of Holding Company and Acquisition of Deli Solar
(Bazhou)
In
2004,
Deli Solar (BVI), was organized as a limited liability company under the
International Business Companies Act of the British Virgin Islands by Mr. Deli
Du of Bazhou City, Hebei Province, PRC and others (with Mr. Du owning 80% )
as a
holding company for Deli Solar (Bazhou).
On
August
1, 2004, Deli Solar (BVI) purchased all the capital stock of Deli Solar (Bazhou)
from Messrs. Deli Du, his brother Xiaosan Du and Xiao'er Du, for RMB 6,800,000
(approximately $879,920). As a result of that transaction, Deli Solar (Bazhou)
became a wholly foreign-owned enterprise ("WFOE") under PRC law, by virtue
of
its status as a wholly-owned subsidiary of a foreign company, Deli Solar
(BVI).
Reverse
Merger and Financing
On
March
31, 2005, Meditech entered into a stock contribution agreement with the
shareholders of Deli Solar (BVI) under which Meditech acquired all of the issued
and outstanding shares of capital stock of Deli Solar (BVI) in exchange for
the
issuance to the shareholders of Deli Solar (BVI) of 4,067,964 shares of
Meditech’s common stock.
Also
on
March 31, 2005 in connection with the stock contribution, we received net
proceeds of $5,748,015 from the sale of 1,642,990 shares of common stock
and warrants to a number of accredited investors in a private placement. (The
number and the price of the shares as described in this and the prior paragraph
have been adjusted to give effect to the one-for-six reverse stock split of
the
common stock, which became effective on August 15, 2005.)
As
a
result of foregoing transactions, the former shareholders (including Mr. Du)
of
Deli Solar (BVI) became holders of a majority of the common stock of Meditech
and Deli Solar (BVI) became a wholly-owned subsidiary of Meditech. Following
(i)
Mr. Du's purchase of the 56,259 shares from a third party for $500,000, (ii)
the
issuance to him of 3,254,371 shares in exchange for his 80% of the outstanding
shares of Deli Solar (BVI) and (iii) the simultaneous issuance by the Company
of
an additional 1,642,290 shares to accredited investors in the private placement,
Mr. Du then owned,
of
record, 57% of the issued and outstanding common stock of the Company. On
February 25, 2008 the Company issued approximately 4.7 million shares of its
common stock in a private placement for gross proceeds of approximately $11.3
million. As a result of this issuance, Mr. Du ceased to own a majority of the
outstanding shares of common stock.
On
August
15, 2005, Meditech changed its name from Meditech to Deli Solar (USA), Inc.
and
completed a one for six reverse stock split of the common stock.
On
August
29, 2005 Meditech completed a spin-off of its drug development business to
East
West Distributors, Inc., its wholly owned subsidiary.
During
the quarter ended June 30, 2006, Deli Solar (USA) set up a new wholly-owned
subsidiary, Deli Solar (Beijing) to further develop our business in Beijing.
Deli Solar (USA) contributed $1 million into Deli Solar (Beijing) as registered
capital.
Corporate
Structure
The
following diagram sets forth our current corporate structure:
Neither
China Solar nor Deli Solar (BVI) has any operations or currently intends to
have any operations in the future other than acting as a holding company and
management company for Deli Solar (Bazhou) and Deli Solar (Beijing) and raising
capital for their operations.
As
of
August 18, 2008 we had approximately 1,103 full time employees and 67 part
time
employees. Deli Solar (Bazhou) requires each employee to enter
into a one-year standard employment agreement. Tianjin employees have three
year
agreements. The standard employment agreement contains a confidentiality
clause
and a covenant-not-to-compete clause, under which an employee must keep
confidential all manufacturing technology including drawings and other
technology materials, sales and financial information, and trade secrets
obtained through his or her employment with us. Breach of this confidentiality
clause will result in termination of employment. Further, each employee may
not
compete against us for a certain period of time following the termination
of
employment with us. We purchase group workers' compensation policy on behalf
of
our employees, and the premium is deducted from each employee's
paycheck.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516. Our factory
facilities are located outside of the city of Bazhou in the Hebei Province
of
the PRC in Shenzhen and in Tianjin.
Products
We
manufacture solar water heaters and boilers, heat pipe products and energy
saving products.
Solar
Hot Water Heater Products
Our
solar
water heaters are primarily used to generate hot water for residential
use.
Approximately
28% of our total revenues for the six month period ended June 30, 2008 were
derived from sales of our solar hot water heaters compared to 47% of our total
revenues for 2007 and 60% of our total revenues for 2006.
We
manufacture two types of solar hot water heaters: evacuated tubular solar water
heaters and flat plate solar water heaters.
Among
evacuated tubular solar water heaters, regular evacuated tubular solar water
heaters using all-glass vacuum collectors are our best selling product,
comprising approximately 80% of our total solar water heater revenues for the
six month period ended June 30, 2008 and approximately 85% of our total solar
water heater revenues for 2007. This type of solar water heater can generate
hot
water even in cold weather and therefore, can be used throughout the year.
Further, they are relatively easy and inexpensive to produce compared to other
solar hot water heaters using other types of vacuum collectors. Because our
primary market is in rural areas of the PRC, our regular evacuated tubular
solar
water heaters account for most of our sales of solar water heaters.
Solar
hot
water heaters use sunlight to heat either water or a heat-transfer fluid in
collectors. The solar collector is mounted on or near a house facing south.
As
sunlight passes through the collector's glazing, it strikes an absorbing
material. This material converts sunlight into heat, and the glazing prevents
the heat from escaping. The two most common types of solar collectors used
in
solar water heaters in the PRC market are evacuated tube collectors and glazed
flat plates.
Solar-heated
water is stored in an insulated tank until use. Hot water is drawn off the
tank
when tap water is used, and cold make-up water enters at the bottom of the
tank.
Solar water heaters tend to have a slightly larger hot water storage capacity
than conventional water heaters. This is because solar heat is available only
during the day and sufficient hot water must be collected to meet evening and
morning requirements.
We
produce and sell solar hot water heaters using both evacuated tube collectors
and glazed flat plate. Evacuated tubular solar water heaters are our principal
solar products. There are two major types of evacuated tubular solar water
heaters: standard evacuated tubular solar water heaters and evacuated heat
pipe
solar water heaters.
The
following table sets forth our product types and the approximate percentage
of
the sales of each type for 2007:
Types
|
|
Approx. % of
water heater
revenues
|
|
Sub-types
|
|
Approx. % of
total solar product
revenue
|
|
|
|
|
|
|
|
|
|
Evacuated
Tubular Solar Water Heaters
|
|
|
90
|
%
|
|
Regular
Evacuated Tubular Solar Water Heaters
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evacuated
Heat Pipe Solar Water Heaters
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Flat
Plate Solar Water Heaters
|
|
|
10
|
%
|
|
|
|
|
N/A
|
|
Evacuated
Tubular Solar Water Heaters
This
line
of products represents about 5% of our sales revenues from solar water heaters
in 2007. They can generate hot water all year round for homes, whether or not
they are located in a cold climate. There are two types of vacuum tube water
heaters currently available: (i) the regular evacuated tubular solar water
heaters; and (ii) evacuated heat-pipe solar water heaters. Our regular evacuated
tubular solar water heaters use all-glass vacuum tubes, and our evacuated heat
pipe solar water heaters use heat pipe vacuum tubes. The primary use of our
evacuated tubular solar water heaters is to generate hot water for household
use. However, solar thermal energy can also be employed in industrial processes,
timber treatment, agricultural processes, cooling and space
heating.
All
glass:
Our
regular evacuated products use all-glass evacuated tubular collectors. These
collectors consist of rows of parallel transparent glass tubes, which are double
layered and made of borosilicate glass. Each tube contains an absorber and
is
covered with a selective coating. Sunlight enters the tube, strikes the
absorber, and heats the water flowing through the absorber. The space between
the glass tubes and the absorber is "evacuated," or is a "vacuum". This vacuum
helps the collectors achieve extremely high temperatures (170-350 degrees F).
Because all-glass evacuated tubular collectors are relatively easy and cheap
to
make as compared to heat pipe vacuum tubes, our regular evacuated tubular solar
water heaters are our best selling solar hot water heater and comprise
approximately 85% of our solar water heaters sales.
Heat
Pipe:
Our
evacuated heat pipe solar water heaters comprise approximately 5% of our solar
hot water heaters sales. These solar water heaters use heat pipe vacuum tubes
to
convert solar energy into thermal energy. A heat pipe vacuum tube is a
hermetically sealed evacuated tube containing a mesh or sintered powder wick
and
a working fluid in both the liquid and vapor phase. When one end of the tube
is
heated the liquid turns to vapor absorbing the latent heat of vaporization.
The
hot vapor flows to the colder end of the tube where it condenses and gives
off
heat. The use of the latent heat of the fluid enables heat to be transferred
at
500 to 1000 times the rate compared with a solid metal rod and at temperature
differences between the ends of the pipe as low as 2 °C (i.e. 3.6°F difference).
The heat-pipe vacuum tube is a combined pipe and vacuum technology. This product
line features fast heating, minimum thermal loss, high temperature resistance,
anti-freeze and good pressure resistance. Evacuated heat pipe solar water
heaters, if pressurized, can produce high pressure hot water which provides
a
solution where uneven temperature is a problem. Our pressurized evacuated heat
pipe solar water haters can be customized according to actual needs of our
customers. Moreover, heat pipe vacuum tubes are more difficult to manufacture
and have higher production costs than all-glass vacuum tubes. Given our targeted
residential household market, we only sell a limited amount of evacuated heat
pipe solar water heaters.
Flat
Plate Solar Water Heaters
Our
sales
of this product comprise approximately 10% of our total solar hot water heater
sales for 2007.
This
type
of solar water heater consists of a flat-plate solar collector and a hot water
tank with natural circulation (thermosyphon). The collector is constructed
from
either a copper-aluminum mix, all copper, or anti-corrosive aluminum. The
collector is a rectangular box with a transparent cover and a back side
insulation layer. Small tubes run through the box and carry fluid-either water
or other fluid, such as an antifreeze solution. The tubes attach to the
collector.
As heat
builds up in the collector, it heats the fluid passing through the tubes. The
hot water or liquid goes to a storage tank. Flat plate solar water heaters
made
by foreign manufacturers typically can provide a household with 70-100 liters
of
hot water (at 40-60°C) per day all year round. However, the anti-freeze
technology for the flat plate has not fully developed in the PRC. Our flat
plate
solar hot water heaters, and to our knowledge, other flat plate solar hot water
heaters that are currently available in China, can be used only during the
spring, summer and fall seasons.
Integrated
Solar Heating Packages
A
number
of our products are being used in complete building integrated solar heating
packages, which integrate our solar hot water and space heating systems directly
into the construction of new multi-family dwellings, commercial office buildings
and industrial developments. In August 2005 we entered into a construction
agreement with Beijing Municipal Mengtougou District Yingtaogou Village
Committee to install our solar hot water and space heating systems in 83
detached houses by March 30, 2007. As of December 31, 2006 we completed the
installation of our solar hot water and space heating systems in 16 of such
houses. The project continues to be suspended due to a payment default.
Boilers
and Space Heating Products
We
also
manufacture boilers, furnaces, stove heating, and space heating products,
comprising approximately 20% of our total sales revenues for the six month
period ended June 30 2008 and 27% of our total sales revenues in 2007.
Most
of
our boilers and space heating products are coal-fired, small scale units for
residential space heating and cooking.
We
manufacture more than 80 types of boilers, furnaces, space heating and stove
cooking products. Separated by functions and use, our boilers, furnaces and
stove heating products can be divided into three types: 1) combined cooking
and
space heating, comprising approximately 60% of our sales of boilers and space
heating products, 2) combined shower and space heating, comprising approximately
10% of our sales of boiler and space heating products, and 3) multifunctional
shower, cooking and space heating, comprising approximately 30% of our sales
of
boilers and space heating products.
We
have
also developed two environmentally friendly boilers: smokeless coal-fired
boilers and bio-materials furnaces. The former does not produce smoke and the
latter utilizes waste materials such as dry hay to generate heat. The
development of these products has been completed and we have sent samples of
these products to our distributors. As of the date of this report we have not
made significant sales of these environmentally friendly new
products.
Energy
Saving Products
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the
energy-saving projects comprising, heat exchangers, solar water heaters,
installation services and after sales services.
New
Product Pipeline
We
have
the following products in the product planning and developing
stage:
Photovoltaic
powered water heaters
. We are
in the process of improving the physical performance of photovoltaic powered
water heaters. Photovoltaic technology (PV) is a technology that converts solar
energy into electricity. Photovoltaic modules or panels are made of
semiconductors that allow sunlight to be converted directly into electricity.
These modules can provide customers with a safe, reliable, maintenance-free
and
environmentally friendly source of power for a very long time. This system
consists of a photovoltaic array connected to several resistive heating elements
within a water storage tank. The PV array produces electrical power during
periods of solar irradiation and this power is immediately dissipated in the
resistive elements.
We
believe that the following factors make photovoltaic powered water heaters
an
attractive addition to our existing product line:
ooo
|
severe
electricity shortages for the PRC's grid-connected
residents,
|
ooo
|
the
complete absence of grid electricity for millions of others and the
poor
prospect of improvement via incremental central station capacity
and grid
development in the near future,
|
ooo
|
the
abundance of solar energy resource in the PRC and an active rural
banking
system.
|
Our
sales
of photovoltaic powered water heaters have not been significant thus
far.
Densely
Covered Regular Tubular Heaters
.
We have
developed a new solar water heater which is designed with densely covered
evacuated tubes to improve heating efficiency with only a small cost increase.
As an updated regular evacuated tubular heater, this product installs more
tubes
in one square meter than normal products do. For instance, it has ten tubes
on
one collector while others only have eight. We began marketing this product
in
June 2007 and we had sales of RMB 7million for the six month period ended June,
30 2008.
Raw
Materials and Principal Suppliers
The
primary raw materials for manufacturing our products are stainless steel plate,
vacuum tubes, iron and regular steel plate. These raw materials are generally
available on the market and Deli Solar (Bazhou) has not experienced any raw
material shortage in the past. Because of the general availability of these
raw
materials, it has not been our standard practice to enter into long-term
contracts or arrangements with most of our raw materials suppliers. We believe
that this gives us the flexibility to select the most suitable suppliers based
on product quality and price terms provided by suppliers each year. We generally
have at least three suppliers that are pre-approved for each raw material
supply. However, this arrangement does not provide any guarantee that necessary
raw materials will continue to be available at prices or delivery terms
acceptable to us.
During
the past three years, we have purchased stainless steel plate primarily from
Lingyi Co. in Shangdong Province. Our three principal suppliers of vacuum tubes
have been Shangdong Taian Co., Beijing Linuo Co. and Beijing Tianpu Co. Our
principal supplier of steel and iron plate has been the local market in Bazhou
City, where Deli Solar (Bazhou) is located, which has approximately 100 steel
suppliers. We do not rely on any particular suppliers to procure other raw
materials.
Heat
Pipe Related Products
Tianjin
Huaneng manufactures and installs waste heat recovery systems primarily for
customers in the steel and chemical industries. Tianjin Huaneng’s products
include heat pipe and heat pipe related products such as heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves and
radiators. The waste heat can be used to generate hot water or steam for
residential, commercial and industrial uses.
Energy-saving
projects
SZPSP,
which we acquired effective March 31, 2008, is principally engaged in the
energy-saving projects comprising heat exchangers, solar water heaters,
installation services and after sales services.
Manufacturing
Process, Cost, and Capacity
Deli
Solar (Bazhou) assembles and manufactures most of its products in its own
production facility in Bazhou. Tianjin Huaneng assembles and manufactures most
of its products in its own production facility in Tianjin. SZPSP assembles
and
manufactures most of its products in its own production facility in Shenzhen.
Our senior manufacturing personnel include a number of professional engineers
and senior technology consultants. We primarily use manual labor for our product
because of availability of cheap labor in the Bazhou area. However, Deli Solar
(Bazhou) is in the process of automating some of its production processes.
In
February 2006, Deli Solar (Bazhou) purchased an automated production line for
the manufacture of water tanks. That production line has been assembled, tested
and validated and has been in use since the beginning of May 2008.
As
of
August 18, 2008, we employed approximately 1,103 full time employees and
67 part
time employees. We added 550 employees as a result of the Tianjin acquisition
and 185 employees as a result of the SZPSP acquisition. During manufacturing
peak season for solar hot water heaters, which normally are the second and
third
calendar quarters of the year, we have at least approximately 300 workers
working 3 shifts and 7 days per week. Because of the strategic location of
our
manufacturing facilities, we are able to take advantage of low labor cost
in the
Bazhou, Tianjin and Shenzhen areas, which we estimate to be approximately
40%
lower than that in the Beijing or Shanghai areas. We have not experienced
a
great deal of worker turnover because there are relatively few manufacturing
employment positions in the Bazhou and Tianjin areas and believe that we
have
achieved a high level of employee loyalty. Set forth below is certain
information regarding our current manufacturing capacity:
Current
Manufacturing Capacity
|
|
Daily
Production
(Approximate
Units )
|
|
Annual
Production
(Approximate
Units)
|
|
|
|
|
|
|
|
Solar Hot Water
Heaters
|
|
|
500
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
Boilers
and Space Heating Products
|
|
|
120
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
Heat
Pipe Related Products
|
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
Energy
Saving Products
|
|
|
200sm
|
|
|
60,000sm
|
|
*
The
heat pipe related products are non-standard products so they cannot be measured
by unit.
Quality
Control
Our
manufacturing processes follow strict guidelines and standard operating
procedures that we believe are compliant with ISO 14000. Our solar water heater
products and boilers are routinely tested as are individual aspects of our
production. Deli Solar (Bazhou) is in the process of applying for ISO 14000
certification and anticipates that the certification will be issued by the
end
of 2008.
SZPSP
has been issued
ISO9001:
2000 certification.
Because
of our stringent quality control system, most of our products are certified
by
governmental quality control testing centers, such as the Institute of China
Product Quality Association, Hebei Province New Energy Products and Projects
Quality Control and Testing Center, and Beijing Technology Supervisory Bureau.
We also received awards from Hebei Province Consumers Organization and Hebei
Province Administration of Industry and Commerce, as well as endorsement from
the China Rural Areas Energy Industry Association. The following table sets
forth the brands of our products that are certified by Beijing Technology
Supervisory Bureau to have met the National Industry Standard NY-T 343-1998,
which is the testing standard for solar hot water heaters' thermal
power:
Brands
|
|
Products
|
|
Model
Numbers
|
|
|
|
|
|
|
|
Deli Solar Brand
|
|
|
Solar Water Heaters
|
|
|
DLYG-12/75
|
|
|
|
|
|
|
|
|
|
Ailiyang
Brand
|
|
|
Solar
Water Heaters
|
|
|
ALY-12/75
|
|
|
|
|
|
|
|
|
|
Dudeli
Brand
|
|
|
Solar
Water Heaters
|
|
|
DDL-12/75
|
|
|
|
|
|
|
|
|
|
Deyu
Brand
|
|
|
Solar
Water Heaters
|
|
|
DY-12/75
|
|
Original
Equipment Manufacturer (OEM) Arrangement
Sales
of
our solar water heater and boiler products peak in the second and third calendar
quarters of the year for solar hot water heaters and the third and fourth
calendar quarters of the year for boilers and space heating products. During
the
peak season when our production capacity falls short of the market demand,
we
assemble and manufacture products through OEM arrangements. Under a typical
OEM
arrangement, we authorize an OEM to manufacture products under our brand names
and/or trademarks. We achieve quality control over products manufactured under
such OEM arrangement by sending our technicians on site to supervise the
production and test the products. During fiscal year 2007, we contracted with
two OEMs, Shandong Xin Xing Solar Power Heater Co., Ltd. and Lian Yun Gang
Solar
Power Heating Co Ltd.
Manufacturing
through OEM arrangements comprises approximately 30% to 40% of our total sales
during the peak season. For 2007, the two OEM generated an aggregate of 40%
of
our annual revenues. The OEM manufacturers typically receive approximately
1% of
the gross sales from the products they manufacture for us. Most of the OEM
manufacturers we select are located near areas where products are demanded,
thereby minimizing transportation costs.
Demand
for Our Products
Solar
Water Heaters and Boilers:
The
majority of the demand for our solar water heaters and space heaters is from
residential households in the PRC, particularly in rural areas. Presently,
we
sell our solar water heaters and space heaters primarily in the rural areas
of
the north-east part of the PRC including Hebei, Beijing, Tianjin, Heilongjiang,
and Liaoning, where there is prolonged sunny and dry weather.
We
believe the rural residential market has additional growth potential because
it
is an emerging market and until recently we encountered relatively little
competition. Competition has recently intensified resulting in lower sales
volume and lower prices for our solar water heaters for the three month period
ended March 31, 2008. Historically, the PRC's rural households have used
primitive means of generating hot water and space heating by using biomass,
local agricultural wastes, and/or kerosene. As the PRC's rural population has
been earning incremental discretionary income in recent years, modern hot water
and space heating systems have become increasingly affordable and a priority
for
discretionary spending.
Heat
Pipe Related Products
The
demand for our heat pipe related products comes from industrial customers in
the
PRC, Taiwan and Singapore, particularly in steel and chemical
industries.
We
believe the market for our heat pipe related products has great potential to
grow as the PRC central government is developing energy saving initiatives
and
regional governments and officials are required to implement energy-saving
programs to implement these initiatives. As a result we believe the demand
for
our heat pipe related products will increase.
Seasonality
of Business
Our
sales
fluctuate, reflecting seasonal variations in solar energy supply during the
four
seasons. We have higher sales of solar hot water products in the spring because
solar hot water heaters perform the best during the summer when solar energy
is
abundant. High sales volumes for coal boilers occur in the fall because
customers purchase our space heating products for the winter. Sales volumes
for
our products tend to be lower between January and March.
For
heat
pipe related products, because the demands for hot water and for steam are
higher in the winter and spring, sales for heat pipe products is higher in
the
fall and the winter as customers need to purchase our products and to install
before or during the winter. Sales of our heat pipe products tend to be lower
between January and March.
The
PRC Solar Hot Water and Space Heating Market
The
PRC's Economic Growth, Energy Shortage and Renewable Energy
Policy
The
rapid
economic growth of the PRC in recent years has fueled a massive demand for
coal,
oil and gas, which has caused a depletion in the country’s coal and oil reserves
and a resulting shortage in supply, as well as serious environmental problems.
Recognizing that accelerating the country's transition to efficient and
renewable energy would ease this depletion and the environmental concerns,
the
National People's Congress, the PRC's parliament, passed the China Renewable
Energy Promotion Act, which became effective on January 1, 2006. The Act aims
to
promote the use of renewable energy as an alternative source of energy to the
more polluting fuels. Renewable energy currently accounts for a negligible
percentage of the country’s total energy supply. The Act, however, does not
provide for any incentive schemes for purchasers.
Urban
and Rural Market Segmentation for Hot Water and Space Heating Systems in
China
Recently
the market for hot water and space heating systems in the PRC has shown
substantial growth. According to a research conducted by the China Hardware
Products Association and the China Information Center in 2002, only 71.5% of
urban households had modern hot water systems. We do not know the number of
rural households that currently have hot water systems but believe that it
significantly less due to the fact that modern hot water and heating
systems have still not become available to and are not affordable in many
households in the country. Only recently have some of these households started
to earn the disposable income required to purchase the hot water and space
heating systems.
In
the
rural areas of the PRC the infrastructure is insufficient to facilitate delivery
of conventional energy solutions that are available in more developed countries.
The infrastructure to deliver natural gas or propane, two of the most common
energy sources used in the United States, for example, are not well developed
in
the PRC, even in larger cities. As to electrical energy, while it has become
more available in the urban areas of the PRC, it remains much less available
in
rural areas. Large portions of the PRC's rural areas are not electrified or
connected to the electric grid and approximately 60% of rural communities that
are grid-connected experience serious shortages of electricity. According to
the
National Renewable Energy Laboratories Eleven rural counties with a population
of approximately 70 million have no electricity at all. In addition, the cost
of
electricity is high in many rural areas, making it impractical for hot water
and
space heating purposes.
We
believe that in most provinces of the PRC, solar-generated hot water for rural
home use is the most available and economical solution. Compared with
electricity, natural gas or propane, we believe that solar hot water is more
available, less expensive and more suitable to rural household needs as shown
in
the following table.
Cost
Economics of Solar Hot Water Heaters
(in
$USD)
|
|
Solar
|
|
Gas
|
|
Electric
|
|
|
|
|
|
|
|
|
|
Initial
Equipment Cost
|
|
|
241
|
|
|
120
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
Life (Years)
|
|
|
15
|
|
|
6
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
Cost (15 years)
|
|
|
241
|
|
|
300
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Additional Energy Cost
|
|
|
0
|
|
|
98
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Cost (15 years)
|
|
|
241
|
|
|
1,770
|
|
|
1,431
|
|
Projected
Growth of Solar Hot Water Industry
The
PRC
solar hot water industry is an emerging, but fast growing industry. It has
experienced an annual growth rate of approximately 30% since 1999 as measured
by
the square meters of systems installed. The Solar Energy Usage Commission of
the
PRC Rural Energy Industry Association and the PRC Renewable Energy Industries
Association project such growth to continue at an annual average rate of 27.36%
until 2015 as shown in the following table:
Aggregate
Solar Hot Water Industry Sales
|
|
Annual
Sales
|
|
|
|
|
|
1999 A
|
|
|
5.0
million m
(2
|
)
|
|
|
|
|
|
2000 A
|
|
|
6.0
million m
(2
|
)
|
|
|
|
|
|
2001 A
|
|
|
8.0
million m
(2
|
)
|
|
|
|
|
|
2002 A
|
|
|
10.0
million m
(2
|
)
|
|
|
|
|
|
2003 A
|
|
|
12.0
million m
(2
|
)
|
|
|
|
|
|
2004 F
|
|
|
16.2
million m
(2
|
)
|
|
|
|
|
|
2015 F
|
|
|
232.0
million m
(2
|
)
|
A = actual. F
= forecast.
Source
: China
Solar Hot Water Industries Development and Research Report (2001-2003), jointly
published by the solar energy association and commission described
above.
Because
of the rapid growth in solar hot water industry, solar hot water heaters have
become one of the three major hot water sources along with gas-fired heaters
and
electric heaters for PRC households and the PRC has become the world's largest
producer and consumer of solar hot water heaters.
Market
for our Heat Pipe Related Products
We
sell
heat pipe related products to manufacturing customers especially steel and
chemical customers for their waste heat recovery. The waste heat recovery system
can produce hot water or steam for residential and industrial uses. Customers
benefit not only from sales of hot water, steam or electricity generated by
the
power of steam, but also from government energy-saving program subsidies.
Recently, the PRC central government has issued a number of energy saving
initiates which require compliance by regional governments. Management believes
that as a result of these governmental initiatives the demand for our heat
pipe
related products over the next few years will increase.
Boiler
and Space Heating Industry
The
PRC
space heating industry is not new, but the modern systems that we sell are
new
for our customers. While many rural PRC households have considered hot water
a
luxury, heat generating facilities for cooking and space heating purposes in
one
form or another are considered basic necessities. These heat generating
facilities are generally extremely primitive and inefficient, and usually
consist of hearths and biomass stoves, which are dirty, unsafe and difficult
to
handle with respect to fuel. As many rural households have started to earn
disposable income in recent years, many of them can afford to modernize their
cooking and space heating facilities by using coal-fired boilers, which have
become one of the principal means for such modernization among the PRC rural
households.
Our
Product Warranty
We
provide a three-year standard warranty to our end users for all of the products
we manufacture. Under this standard warranty program, we provide free repair
and
exchange of component parts in the first year following the purchase, and we
charge labor costs for repair and maintenance but provide free exchange of
component parts in the second and third years following the purchase.
Thereafter, end users are required to pay for any repair and maintenance
services, as well as exchange of component parts. Most of our warranty services
are performed by our independent sales agents and distributors in return for
a
1%-2% discount of the purchase price they pay for our products. No discount
is
provided to independent sales agents and distributors unless and until warranty
services are provided to the Company. The Company has not experienced any
material returns and therefore has not provided any discount to independent
sales agents and distributors for warranty services.
Our
Growth Strategy:
Acquisition
Strategy
As
part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
increase our market coverage or enhance our technical capabilities, or otherwise
offer growth opportunities.
In
July
2007 we acquired a 51% interest in Tianjin Huaneng and in March 2008 we acquired
a 100% interest in SZSP.
From
time
to time we consider investing in new businesses and we expect to make
investments in, and to acquire businesses, products, or technologies in the
future.
Our
Organic Growth Strategies
We
are
seeking to grow and expand our business through the following
strategies:
o
|
focus
on rural market segment.
|
o
|
extensive
and targeted advertising.
|
o
|
a larger
distribution and agency network.
|
o
|
after-sales
services network.
|
Our
focus on rural market segment for our solar water heaters and
boilers
We
market
our products in both the urban and the rural markets in the PRC. While most
solar hot water manufacturers focus on the urban market, we have always focused
on the rural market because the size of the rural market in the PRC is about
eight times larger than that of the urban market. Further, our rural customers
regard purchasing a hot water heater as a long term investment in a durable
good, more so than urban customers.
We
have
years of experience in operating marketing and sales organizations in rural
areas. Our marketing and sales team works with our agents to educate our end
users and inform them of the utility, functionality and comparative cost
advantages of our products as compared to electricity and gas water heaters.
We
have also received a great deal of feedback from rural customers and have
designed our products and marketing to meet their needs and
concerns.
Our
Advertising
Based
on
various advertising effectiveness studies in the PRC, we believe that large
scale advertising on TV and other mass media can have a significant impact
on
rural residential purchase decisions. Accordingly, we spent $152,221, or 1.8%
of
sales, on advertising in the three month period ended March 31, 2008 compared
to
$141,474 million, or 4.7% of sales in the three month period ended March 31,
2007. We spent approximately $1,415,493, or 3.8% of sales, on advertising in
2007 compared to $1.1 million, or 5.2% of sales in 2006.
Our
Multi-Brand Strategy
In
order
to position our products in different tiers of markets, we have utilized a
multi-brand approach. Our solar hot water brands include: "Ailiyang", "DeYu"
and
"Deli Solar", among which, Ailiyang is not a registered trademark; our space
heating brands include "De Yu" and "Du Deli". Each of these brands targets
a
different type of customer. We classify the brand names of the solar hot heaters
into three types: Premium, Standard, and Economy, and space heating products
into two types: Premium and Standard. Below are some of our products and related
brand names and classifications:
Solar
Hot Water Heater Series
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Deli
Solar
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
|
|
|
AiliYang
|
|
Economy
|
Space
Heating Series
Our
Brand Name
|
|
Our
Classification of Products
|
|
|
|
Du
Deli
|
|
Premium
|
|
|
|
DeYu
|
|
Standard
|
We
intend
to achieve the following objectives through the Multi-Brand
Strategy:
ooo
|
to
target different products in different tiers of the same geographical
market.
|
ooo
|
to
eliminate agency dominance in a regional market by granting non-exclusive
agencies to more than one distributor in a
region.
|
ooo
|
to
create competition among agents by assigning only one specific brand
of
our products to one distributor in a sales region so that each different
distributor will be responsible for selling a brand different from
other
distributors in the same geographical region. We periodically evaluate
the
performance of distributors in the same region, and then provide
suggestions to help them perform better. In addition, we also encourage
them to increase sales of our premium
products.
|
ooo
|
to
increase the market share of our
products.
|
Our
brand
logos are the following:
Our
distribution and agency network
We
use a
network of wholesalers, dealers and retailers to distribute our products. After
we manufacture and assemble our products, we sell them to our wholesalers,
generally located in major cities or provincial hubs, who then sell our products
on to a network of smaller distributors, or dealers, in outlying areas.
Sometimes when the dealers are closer to our warehouse, we also sell directly
to
dealers to simplify the payment process and reduce transportation costs. Because
these dealers are usually developed by the wholesalers, each direct sale to
a
dealer will be recorded on the account of the wholesaler who developed the
business relationship with such dealer. Our end users purchase their products
from either wholesalers or dealers, who also handle the installation and
warranty service of the systems for the end users.
We
also
have a Marketing Department, which as of August 18, 2008 consisted of
approximately 113 marketing and sales personnel, who collect feedback from
our
customers and other market information for our management and our product
development team.
Distribution
Channels for Solar Water Heater Systems
The
PRC
is a vast country geographically and the market for our solar water heaters
covers many regions. To penetrate the market effectively, especially the
less-developed rural areas, we have established a vast distribution and sales
network that as of
August
18
, 2008 included approximately 607 distributors and wholesalers and
approximately2,066 local appliance retailers covering 28 provinces in China,
with a focus on the northern PRC area, north-eastern PRC area, Beijing
metropolitan area, and Tianjin metropolitan area. The northern PRC area includes
Hebei Province, Henan Province, Shangdong Province, Shanxi Province, and
An'hui
Province. The north-eastern PRC area includes Liaoning Province and Heilongjiang
Province.
In 2007
sales of solar water heaters to these areas consist of approximately 70%
of our
total sales revenues. We believe that our comprehensive distribution and
sales
network enables us to efficiently service the rural communities without having
to rely on any particular agent or distributor for our sales. In the past
five
years, no single agent or distributor has generated more than 5% of our total
annual sales.
W
e
are
able to attract a large number of distributors, sales agents, and retailers
for
the following reasons:
|
o
|
We
produce both solar hot water heaters and boilers, while the majority
of
manufacturers in the PRC normally produce only one type of product.
Sales
of solar hot water heaters and boilers are both affected by seasonality.
As described elsewhere in this report, solar hot water heaters
are in high
demand in the spring and boilers are in high demand in the fall.
Therefore, the combined production of solar hot water heaters and
boilers
allows us to provide our distributors, wholesalers and retailers
with
products for sale throughout the
year.
|
|
o
|
We
carefully select our distributors and provide support to them.
Our
contracts with our wholesalers and distributors normally have a
three- to
five-year term. While most of our agency and distributor contracts
are
non-exclusive, we are seeking to establish exclusive distribution
relationships with some strong distributors. We require new sales
agents
to deposit a significant amount of cash as a down payment towards
the
purchase of our systems. We consider the following factors in our
selection of a new distributor or
wholesaler:
|
|
o
|
Local
solar energy status and market
potential
|
|
o
|
Sales
and market potential in the covered
area
|
|
o
|
Presence
of alternatives, such as gas or
electricity
|
|
o
|
Credibility
of the candidate
|
For
each
candidate we select, we enter into an agency contract with it, under which
we
provide warranty cards, product testing certificates, product brochures, and
other promotional materials. In addition, we help them design store logos and
show rooms, provide them with uniforms, and assist them to make marketing
plans.
Our
After-Sales Services Network
We
are in
the process of implementing an after-sales services network in parallel with
our
national sales and distribution network. Our after-sales services are primarily
performed by our sales agents and distributors. We have begun to provide
technical training to our 300 distributors in order to provide after-sales
services to our end users. The local distributors are very enthusiastic about
having the ability to provide after-sales services to the end users, which
also
provides the distributors with a new source of revenue. One additional benefit
to us provided by the after-sales services network is the ability to receive
product feedback from our end users on a constant basis. We can use this
information to continuously adjust our production plans, product designs,
inventory control and marketing and sales strategies.
COMPETITION
The
solar
hot water market in the PRC is highly fragmented. According to statistics from
the Chinese Energy Research Association, there are currently over 3,500 solar
hot water heater manufacturers producing products under more than 3,000 brands.
The top 51 companies have, on average, over 10 million RMB in sales
(approximately $1.2 million), with the top ten companies together controlling
17% of the domestic market.
We
believe our success lies in our quality control, brand recognition strategy,
comprehensive distribution network and advertising.
Recently
competition in the solar water heater marker has intensified causing us to
lower
our sales prices to remain competitive.
RESEARCH
AND DEVELOPMENT ACTIVITIES
Our
research and development ("R&D") expenses have historically been
approximately 1% to 2% of our annual sales revenues. Most of these expenses
were
spent in designing and manufacturing new products. In 2005, our R&D expenses
consisted of approximately 0.5% of our annual sales revenues, which we used
to
improve the functions and appearance of our current products instead of
developing new products. In 2006, we spent approximately $51,741 in R&D on
the development of pressurized evacuated heat pipe solar water heaters. In
2007,
we spent approximately $1.8 million in R&D on biomass fuel system program,
multi-source energy program. We also conduct other R&D activities based on
our customers' specific request for certain new functions or improvements on
our
existing products. The R&D expenses associated with such R&D activities
are generally borne by the requesting customers.
Currently,
we have a R&D team of three full time members and part time research
assistants. Our senior engineer members include: Luo Yunjun, who also serves
as
the chairman of Beijing Solar Industry Association, and Hao Fangzhou, who also
serves as the chairman of the Chinese Economic Boiler Association.
In
February 2006, we executed a non binding Cooperation Memorandum (the “Memo”)
with the Key Laboratory of Heat Transmission and Energy Saving Education of
Beijing University of Industry (“BUI”) in February 2006 for cooperation on
research and development of renewable energy technologies. The Memo sets forth
a
general cooperation framework between the two parties: we make available funding
for certain renewable energy research and development projects undertaken by
BUI. Further details of each party’ rights and obligations will be on a project
by project basis with specific agreements. To date we have not incurred any
expenses under this arrangement.
INTELLECTUAL
PROPERTY
Trademarks
Deli
Solar (Bazhou) is the holder of the following trademarks registered with the
Trademark Offices of the PRC National Industrial and Commerce Administrative
Bureau (the “PRC Trademark Offices”):
Trademark
|
|
Authorized Scope
|
|
Valid Term
|
|
Certificate Number
|
|
|
|
|
|
|
|
Deli
Solar
|
|
Boiler
(Space Heating Utility);
|
|
03/14/2003
|
|
to
1978396
|
|
|
Solar
Hot Water Utility;
|
|
03/13/2013
|
|
|
|
|
Solar
Stove and Solar Energy
|
|
|
|
|
|
|
Collection
Heater
|
|
|
|
|
|
|
|
|
|
|
|
Du
Deli
|
|
The
same as the above
|
|
01/28/2003
|
|
to
1978532
|
|
|
|
|
01/27/2013
|
|
|
|
|
|
|
|
|
|
De
Yu
|
|
Solar
Energy Collection Heat
|
|
07/28/1998
|
|
to
1195609
|
|
|
and
Boiler (Not machine accessory)
|
|
07/27/2008
|
|
|
|
|
|
|
|
|
|
Aili
Solar (to replace our brand "Ailiyang")
|
|
Approved,
pending the trademark certificate
delivery
|
A
registered trademark is protected for a term of ten years, renewable for another
term of ten years under the trademark law of the PRC, so long as an application
for renewal is submitted to the PRC Trademark Offices within six
months
prior to the expiration of the initial term.
Patents.
SZPSP
has
obtained the following patents in the PRC for its unique solar energy selective
absorbing coat and manufacturing technology:
Authorized Scope
|
|
Valid Term
|
|
Certificate Number
|
|
|
|
|
|
Cold water
recovery system in solar heating
|
|
2015
|
|
ZL200620016815X
|
Recycle
Heating Product in different temperature system
|
|
n/a
|
|
Application
submitted 7/4/06
|
Domain
names.
We
own
and operate a website under the internet domain name
http://www.cn-sce.com
.
Traffic to our other internet domain names www.AiLiYang.com are directed to
that
website. SZPSP owns and operates a website under the internet domain name
http://www.szpsp.com
.
Government
Regulation
We
are
not subject to any requirements for governmental permits or approvals or any
self regulatory professional associations for the manufacture and sale of solar
hot water heaters. We are required to obtain a production approval from the
Quality and Technology Supervisory and Control Bureau at the provincial level
for the manufacture and sale of boilers and space heating products. Deli Solar
(Bazhou) obtained the approval to manufacture, install and repair small and
regular size pressure boilers and space heating products from Hebei Provincial
Quality and Technology Supervisory and Control Bureau on August 28, 2002
effective for five years. We are currently in the process of renewing the
certificate. Other than the foregoing, Deli Solar (Bazhou) is not subject to
any
other significant government regulation of its business or production, or any
other government permits or approval requirements, except for the laws and
regulations of general applicability for corporations formed under the laws
of
the PRC.
Compliance
with Environmental Laws
To
our
knowledge, neither the production nor the sale of our products constitute
activities or generate materials, in a material manner, which causes our
operation to be subject to the PRC environmental laws.
Executive
Offices
Our
executive office is located at Building 3, No. 28 Feng Tai North Road, Beijing,
China, 100071 and our telephone number is +86-10-63850516.
Deli
Solar (Bazhou)’s factory facilities are located outside of the city of Bazhou in
the Hebei Province of the PRC. Deli Solar (Bazhou) utilizes one factory in
Bazhou with a total of over 10,000 square meters of production, warehouse,
and
office space and space for use as a distribution center and approximately 2,000
square meters of office space and exhibition center in Beijing
Tianjin
Huaneng’s factory facilities are located outside of the Tianjin municipalities
of the PRC. Tianjin Huaneng utilizes one factory in Tianjin with over
51,000 square meters of production, warehouse, and office space and space for
use as a distribution center.
SZPSP’s
factory facilities are located outside of the city of Shenzhen in the Guangdong
Province of the PRC. SZPSP utilizes two factories in Shenzhen with a total
of over 2,000 square meters of production, warehouse, and office space and
space
for use as a distribution center
Employees
As
of
August 18, 2008 we had approximately 1,103 full time employees and 67 part
time
employees Deli Solar (Bazhou) requires each employee to enter into a one-year
standard employment agreement. Tianjin employees have three year agreements.
The
standard employment agreement contains a confidentiality clause and a
covenant-not-to-compete clause, under which an employee must keep confidential
all manufacturing technology including drawings and other technology materials,
sales and financial information, and trade secrets obtained through his or
her
employment with us. Breach of this confidentiality clause will result in
termination of employment. Further, each employee may not compete against
us for
a certain period of time following the termination of employment with us.
We
purchase group workers' compensation policy on behalf of our employees, and
the
premium is deducted from each employee's paycheck.
Risk
of Loss and Product Liability Insurance
Delivery
of our products can be arranged by our sales agents and distributors, or by
us.
In the latter case, we deliver our products primarily through trucks,
supplemented with trains and cargo ships. Our standard agency contract generally
requires our sales agents to pay for the transportation cost. Although the
agency contract has not specifically provided for the issue of risk of loss,
our
customary practice is that sales agents bear the risk of loss in shipping and
purchase shipping insurance at their expense.
We
currently do not carry any product liability or other similar insurance, nor
do
we have property insurance covering our plants, manufacturing equipment and
office buildings. While product liability lawsuits in the PRC are rare and
Deli
Solar (Bazhou) has never experienced significant failures of its products,
we
cannot assure you that Deli Solar (Bazhou) would not face liability in the
event
of any failure of any of its products. We are currently negotiating with
insurers to purchase property insurance to cover our manufacturing plants,
equipment and office buildings and we anticipate that an insurance policy will
be issued in the next few months.
PROPERTY
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the government grants landholders a "land use right." The
following are the details regarding our land use rights with regard to the
two
pieces of land that we use in our business. The land use rights owned by Deli
Du, our Chief Executive Officer, President and Director, were transferred to
us
in October 2005 for a price of RMB20,000 (approximately $2,588). The application
for the change of the land use right certificate for this piece of land was
submitted to Bazhou City National Land Resources Bureau on January 16, 2006.
Once the application is approved, the registered holder for this land will
be
Deli Solar (Bazhou). As of July 16, 2008, the application has not yet been
approved and the registered holder is still Mr. Du. Deli Solar (Bazhou)’s
factory facilities are located outside of the city of Bazhou in the Hebei
Province of the PRC. Deli Solar (Bazhou) utilizes one factory in Bazhou
with a total of over 10,000 square meters of production, warehouse, and office
space and space for use as a distribution center and an approximately 2,000
square meters of office space and exhibition center in Beijing
On
March
17, 2006, Deli Solar (Bazhou) entered into an agreement with the local
government to acquire land use rights of a land of 61,530 square meters at
the
price of approximately $919,858. This piece of land is close to the present
Bazhou factory and is used to enlarge the present manufacturing base at Bazhou
City. The land use right has been approved by the local government after payment
of approximately $919,858. An official certificate evidencing the land lease
has
not yet been delivered from the government to the Company.
Registered
Holder
|
|
Location & Deed
Number
|
|
Usage and
Nature
|
|
Square meters
|
|
Construction/building on
the land
|
|
Term of use
right
|
|
Transfer price
|
Deli Solar (Bazhou)
|
|
Bazhou, Ningnan Village;
#98060026
|
|
Industrial
Transferred Land
|
|
10,244.05
Sq. M
|
|
Plant,
warehouses, accessories room, convention center
|
|
50
years (from March 25, 1998 to March 25, 2048
|
|
RMB
615,000
(approximately
$79,581) was paid to the Langfang Municipal Land Administration Bureau,
plus annual land use fee of RMB 5122 (approximately $
662.79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr.
Deli Du
|
|
Eighty
kilometers from
Bazhou
Jingbao Road North; #20010700405
|
|
Office
space for Deli Solar (Bazhou) Granted Land
|
|
816
Sq. M
|
|
Office
building, accessories room
|
|
50
years (from June 11, 2001 to June 3, 2051
|
|
RMB
20,000 (approximately $ 2,588) was paid to the Langfang Municipal
Land
Administration Bureau
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Solar (Bazhou) -
|
|
Close
to Bazhou Jingbao Road
|
|
Factory
|
|
61,530
Sq. M
|
|
Factory
facilities
|
|
Pending
the Land Use Right Certificate
|
|
approximately
$919,858 was paid to Bazhou local government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Huaneng
Group
Energy Equipment
Co.
Ltd.
|
|
No.
119 Yuyang South Road
Ji
County, Tianjin
|
|
Factory
|
|
51,000
Sq. M
|
|
|
|
50
years from September 2004 to September 2054
|
|
Approximately
528,000 was paid to Ji county
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
72,590.05 Sq. M
|
|
|
|
|
|
|
We
lease
19,140 square meters of land (“Leased Land”) from Bazhou County Credit Union
Lianshe Branch ("Credit Union") for an office building pursuant to a 20 year
renewal lease at an annual rent of RMB 120,000 (approximately $15,528) which
commenced on May 1, 2003. The lease is automatically renewable for another
20
year term subject to terms to be negotiated at the expiration of the first
20-year term. We are retaining a majority of the building's usable space for
our
business and seeking to sublease the rest to parties with business related
to
ours such as our sales agents, distributors, accessory parts dealers, and
after-sales service agents. We also constructed a business center on the Leased
Land. The business center is to be used for show rooms, retail stores, and
a
distribution center for solar related products and space heating
products.
We
lease
our Beijing office facility of approximately 2,000 square meters at No. 28,
Fengtai Bei Road, Fengtai District from Beijing Dajiangxia Technology and Trade
Co., Ltd. pursuant to a renewable lease commencing October 1, 2005 to August
8,
2011 for an annual rent of RMB370,000 (approximately $47,878) for the first
year
and RMB400,000 (approximately $ 51,760) for the second year, and the following
years pending a possible increase. We paid annual rent of RMB 400,000 in
2007.
Legal
Proceedings
Neither
we nor any of our subsidiaries is a party to any pending legal
proceedings.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of the voting securities by (i) any person or group with more than
5%
of the Company's securities, (ii) each director, (iii) each executive officer
and (iv) all executive officers and directors as a group, as of September
25,
2008.
Named and Address of Beneficial Owner
|
|
Amount
and Nature
of
Beneficial
Ownership
|
|
Percent
(%)of
Class (1)
|
|
5%
Owners
|
|
|
|
|
|
David
Gelbaum and Monica Chavez as trustees of
The
Quercus Trust,
2309
Santiago Drive
Newport
Beach, CA 92660 (2)
|
|
|
1,949,283
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
Ardsley
Partners (3)
|
|
|
1,666,500
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
Yihai
Yang,
Acting
Chief Financial Officer
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
Deli
Du,
President,
CEO and director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
2,837,282
|
|
|
18.2
|
%
|
Zhaolin
Ding, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Jianmin
Li, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Zhenhang
Jia, director
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
|
|
Joe
Levinson
No.
28, Fengtai Bei Road
Fengtai
District, Beijing, PRC 100071
|
|
|
0
|
|
|
*
|
|
Less
that
1%.
|
(1)
|
As
of September 25, 2008 we had 15,599,450 outstanding shares of common
stock. In determining the percent of common stock owned by a stockholder
on September 25, 2008, (a) the numerator is the number of shares
of common
stock beneficially owned by such stockholder, including shares
the
beneficial ownership of which may be acquired, within 60 days upon
the
conversion of convertible securities or the exercise of warrants
held by
such stockholder, and (b) the denominator is the sum of (i) 15,599,450
the
number of shares outstanding on September 25, 2008 and (ii) the
total
number of shares underlying the convertible securities and warrants,
which
such stockholders has the right to acquire within 60 days following
September 25, 2008.
|
|
(2)
|
These
shares are held by affiliates of Ardsley as set forth
below:
|
Name
|
|
Number of
Shares
|
|
Ardsley Partners
Fund II, L.P.
|
|
|
702,500
|
|
Ardsley
Offshore Fund, Ltd.
|
|
|
491,500
|
|
Ardsley
Partners Institutional Fund, L.P.
|
|
|
455,000
|
|
Marion
Lynton
|
|
|
17,500
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
Our
executive officers and directors as of the date of this prospectus are as
follows:
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
Deli
Du
|
|
President,
CEO and a director
|
|
43
|
Yihai
Yang
|
|
Acting
Chief Financial Officer and a director
|
|
43
|
Zhaolin
Ding
|
|
Director
|
|
40
|
Zhenhang
Jia
|
|
Director
|
|
61
|
Joseph
Levinson
|
|
Director
|
|
32
|
Our
board
of directors currently consists of five members. We also have an audit committee
and a compensation committee. Mssrs. Zhenghang Jia, Zhaolin Ding and Joseph
Levinson serve on the audit committee. Mssrs. Zhenghang Jia, Zhaolin Ding
and
Deli Du serve on the compensation committee. The directors serve until our
next
annual meeting or until their successors are duly elected and qualified.
The
officers serve at the pleasure of the Board.
We
have a
majority of “independent directors,” as three of our directors, namely Mssrs.
Ding, Jia and Levinson are “independent directors” under the Rules of
NASDAQ, Marketplace Rule 4200(a)(15).
Under
the
terms securities purchase agreement entered into on June 13, 2007 with the
investors in that financing, we were required, prior to July 13, 2007, to
increase the size of our Board to five or seven and cause the appointment of
a
majority of the Board of Directors to be “independent directors,” as defined by
the rules of the Nasdaq Stock Market. Prior to November 1, 2007 our Board
consisted of four members two of whom were “independent.” Under the terms of the
securities purchase agreement we are required to pay those investors
liquidated damages equal to one percent (1%) per month of the purchase price
of
the then outstanding shares of Series A Preferred Stock, in cash or in Series
A
Preferred Stock at the option of the investors, based on the number of days
that such obligation is not met beyond certain grace periods.
Accordingly, we were delinquent by 110 days in meeting this obligation and
we are required to pay the investors a total of $99,000 as of that date.
The Company is currently negotiating with the investors for a reduction in
the
amount due. Effective March 31, 2008 Mr. Jianmin Li resigned from our board
of
directors as a result of which our board again consists of four members.
However, notwithstanding such resignation we still have a majority of
independent directors.
In
addition, under the terms of the securities purchase agreement, we were
required, prior to August 12, 2007 to appoint (i) an audit committee comprised
solely of at least three independent directors and a (ii) compensation committee
comprised of at least three directors, a majority of whom are independent
directors. Our audit and compensation currently each currently consists of
two
members both of whom are independent, namely Mssrs. Zhaolin Ding and Zhenghang
Jia. Accordingly, we are currently delinquent in this obligation. However,
under
the terms of the securities purchase agreement no liquidated damages are
required to be paid for this breach during any period for which liquidated
damages are payable for failing to have an independent board. Accordingly,
damages began to accrue for breach of this provision on November 1, 2007. As
of
June 30, 2008 we were delinquent by 242 days in meeting this obligation and
we
are required to pay investors liquidated damages for this breach. The Company
is
currently negotiating with the investors for a reduction in the amount due.
Deli
Du,
age 43, was appointed as President, CEO and as a director on March 31, 2005.
Mr.
Du founded Deli Solar (Bazhou) in 1997 and has been its controlling equity
holder, chairman and chief executive officer during the past five (5) years.
Since June 2004 he has also been a director and manager of Deli Solar (BVI).
He
is a standing member of the China Solar Energy Utilization Association, the
China Efficiency Boiler Association and the Beijing New Energy and Renewable
Energy Union.
Yihai
Yang, age 43, was appointed as our Acting Chief Financial Officer effective
March 14, 2008 and as a director effective July 25 2008. From September 2006
until February 2007 Mr. Yang, served as Financial Controller of China
Diagnostics Medical Corporation, a company engaged in the business of
pharmaceutical research and development. From April 2005 to August 2006, Mr.
Yang served as the Chief Financial Officer of Beijing Tanglewood Tour
Development, Ltd., a company engaged in the business of real estate investment
and development. From July 2002 to March 2005, Mr. Yang studied in the UK and
obtained his Masters Degree in Finance and Accounting from London South Bank
University. From March 2000 to July 2002 Mr. Yang worked for CE Accountancy
Ltd.
as a project manager. In 1990 Mr. Yang graduated from Shenyang Industrial
University with a BA in Financial Accounting.
Zhaolin
Ding, age 40, was appointed as a director on August 3, 2007. Mr. Ding is
currently the director of Everbright International Executive Management
Education Center, an adjunct professor of the Executive Program, School of
Continuing Education, Tsinghua University and a visiting professor of executive
program of Peking University and Renmin University of China. Mr. Ding has
been
working as professor of the School of Continuing Education, Tsinghua University
for the last five years. He is an officially appointed news commentator of
China
National Radio. He also worked as research associate in the Center for
International Communication Studies of Tsinghua University. He holds an MBA
degree from Harvard University, a Master’s degree in International Journalism
from China School of Journalism, a bachelor degree of Law in International
Affairs from the University of International Relations.
Zhenhang
Jia, age 61, was appointed as our director on August 3, 2007. He has been a
director on Beijing Mechanic Engineering and Reusable Energies and Vice
Secretary-in-Chief of China Rural Energy Association Energy Saving Space Heating
Professional Society from April 1994. He also has been vice chairman, vice
secretary-in-chief of Beijing Municipal New Energy and director in Beijing
Mechanics and Engineering Committee, Energy Resourses and Engineering Branch
from 1995. Mr. Jia has been lecturing in his field of profession in colleges
and
universities for over ten years and has published two professional books such
as
Enterprise Energy Saving Technology and 70 papers.
Mr.
Joseph J. Levinson, age 32, has served as Chief Executive Officer of Levinson
Services Partnership, a U.S. consulting company, since March 2006. Mr. Levinson
also serves as a director and Chairman of the audit committee of China Aoxing
Pharmaceutical (CAXG), a publicly trade Florida corporation engaged in the
research, development, manufacture, and marketing of various narcotics and
pain
management pharmaceutical products in generic and formulations in China. Mr.
Levinson also serves as a director of China 3C (CHCG), a retailer and
distributor of consumer and business products in China. From September 2006
through February 2007, he worked as the Chief Financial Officer of PacificNet,
a
NASDAQ listed company and a is a provider of gaming and mobile game technology
worldwide with a focus on emerging markets in Asia, Latin America and Europe
.
From January 2006 to May 2007, Mr. Levinson worked for Global Pharmatech (GBLP)
as Chief Financial Officer and a director. From October 2001 to December 2005,
Mr. Levinson was a partner at Halo Equity Consulting Partnership, a Hong Kong
private company. From December 2004 to January 2006, he worked at BOL Media,
a
PRC media company, as the Chief Financial Officer. Mr. Levinson is a certified
public accountant. In December 1994, he graduated from State of University
of
New York at Buffalo with a B.S. Degree in Accounting and Finance.
The
following are the officers and directors of Deli Solar (Bazhou) as of the date
of this report:
Name
|
|
Positions
|
|
Age
|
|
|
|
|
|
Deli
Du
|
|
Chairman
and Director
|
|
43
|
Yunjin
Luo
|
|
Director
|
|
72
|
Hao
Dong
|
|
CEO
|
|
33
|
Xueling
Wu
|
|
Controller
|
|
27
|
Yunjun
Luo was appointed a director in June 2005. He holds a Bachelor's degree in
Pyrology from the Southeast University (Bazhou) with further studies and
research within the PRC at The Academy of Social Sciences (structural
mechanics), the Commission of Science, Technology and Industry for National
Defense (space satellites) and the Beijing Solar Energy Research Institute
(solar heaters). For over five (5) years he has been associated with the Beijing
New Energy and Renewable Energy Association, serving as a director and associate
professor. He also serves as a director and chief consultant for
Ailiyang.
Hao
Dong
was appointed as CEO of Deli Solar (Bazhou) in January 2005. He has been working
for Deli Solar (Bazhou) since 1997, holding positions in the technology
department (from 1997 to 1999), manufacturing department (from 1999 to 2004)
and
sales department. Mr. Dong graduated from Bazhou Municipal Technical College
in
1995 and worked as technical staff for Bazhou Municipal Hua Xin Construction
Co., Ltd. before joining Deli Solar (Bazhou). Mr. Dong is an assistant engineer
on mechanics, a certification recognized by Bazhou Municipal Government
Technology Department.
Xueling
Wu was appointed as controller of Deli Solar (Bazhou) in January 2005. Prior
to
that, Ms. Wu had worked for Deli Solar (Bazhou) since 2001 as a staff
accountant, inventory controller and sales person. She graduated from Hebei
Provincial Fisheries College and is a PRC Certified Accountant.
There
are
no family relationships among our directors or executive officers. We currently
do not have directors and officers insurance.
EXECUTIVE
COMPENSATION
The
following table reflects the compensation paid to our principal executive
officer during each of our fiscal years ending December 31, 2007, 2006 and
2005.
None of our other executive officers was paid a salary and bonus of more than
$100,000 in 2007 and so none are included in this table.
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Deli Du (1)
|
|
|
2007
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
2006
|
|
|
80,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
60,000
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,000
|
|
(1)
Commencing March 31, 2005, Mr. Du receives an annual salary of
$80,000.
Outstanding
Equity Awards at 2007 Fiscal Year End
There
were no option exercises or options outstanding in 2007.
Employment
Agreements
We
have
no employment agreements with any of our executive officers. We plan to enter
into an employment agreement with Mr. Yang shortly but no such agreement has
yet
been executed. In the absence of written employment agreements, the PRC labor
laws provide the terms of employment such as the term of employment, the
provision of labor-related insurance, termination for cause, termination on
30
days’ notice and termination without notice and the labor-related
benefits.
Compensation
Discussion and Analysis
Overview
of Compensation Program and Philosophy
The
Company’s compensation committee currently has three members namely Mr. Deli Du,
Zhenhang Jia and Zhaolin Ding.
The
Compensation Committee’s goal in determining compensation levels is to
adequately reward the efforts and achievements of executive officers for the
management of the Company. The Company currently has no pension plan, stock
option plan, non-equity incentive plan or deferred compensation arrangement.
The
Company has not used a compensation consultant in any capacity but believes
that
it's executive compensation package is comparable to similar businesses in
the
location of its operations.
None
of
the executive officers currently has an employment agreement with the
Company.
Director
Compensation
Our
standard arrangement with our directors provides that we pay each director
annual compensation of $20,000 for serving as a director. There are no currently
no other elements of compensation paid to our directors but we plan to adopt
in
the near future an incentive compensation plan.
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2007:
Name of Director
|
|
Fees
Earned
or
Paid in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhaolin
Ding
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deli
Du
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Randolph(1)
|
|
|
1,250
|
|
|
4,285
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhenhang
Jia
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jianmin
Li
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,400
|
|
|
(1)
|
Effective
November 1, 2007, Mr. Kevin Randolph was appointed as a director.
He
resigned effective July 25, 2008.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Since
January 1, 2007 we have not engaged in any transactions with any related persons
which would require disclosure under Item 404 of Regulation
S-K.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
The
following is a summary description of our capital stock and certain provisions
of our Restated Articles of Incorporation and By-laws, as amended, and of
certain applicable provisions of Nevada law.
General
We
are
authorized to issue 66,666,667 shares of common stock, par value $.001 per
share
and 25,000,000 shares of preferred stock, par value $.001 per share, of which
3,500,000 shares have been designated as Series A Preferred Stock. As of
September 25, 2008 there were 15,599,450 shares of common stock issued and
outstanding and 573,566 shares of Series A Preferred Stock issued and
outstanding. The following is a summary of the material terms of the common
stock.
Common
Stock
Voting:
The
holders of common stock are entitled to one vote per share on all matters to
be
voted on by the stockholders and are not entitled to cumulate their votes in
the
election of directors.
Dividends
:
Holders
of common stock are entitled to any dividends that may be declared from time
to
time by the Board of Directors in its discretion out of funds legally available
therefore subject to the prior rights, if any, of holders of any outstanding
shares of preferred stock and any contractual restrictions against the payment
of dividends on common stock.
The
payment of dividends is contingent on the ability of our PRC based operating
subsidiaries Deli Solar (Bazhou), Deli Solar (Beijing), Tianjin Huaneng and
SZSP
to obtain approval to send monies out of the PRC. The PRC's national currency,
the Yuan, is not a freely convertible currency. The PRC government imposes
controls on the convertibility of Renminbi into foreign currencies and, in
certain cases, the remittance of currency out of the PRC. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends.
In
addition, under the terms of the certificate of designation which was filed
in
the office of Secretary of State for the State of Nevada on June 12, 2007 in
connection with the issuance of the Series A Preferred Stock, we are restricted
in paying dividends on our common stock.
Liquidation:
In the
event of our liquidation or dissolution, holders of common stock are entitled
to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred
stock.
No
Preemptive Rights
.
Holders of common stock have no preemptive or other subscription rights and
no
right to convert their common stock into any other
securities.
Preferred
Stock
The
Board
of Directors is authorized under our Restated Articles of Incorporation to
issue
‘blank check” preferred stock by resolution and by filing a certificate of
designations under Nevada law, to fix the designation, powers, preferences
and
rights of the shares of each such series and the qualifications, limitations
or
restrictions thereof without any further vote or action by the stockholders.
Any
shares of preferred stock so issued are likely to have priority over the common
stock with respect to dividend or liquidation rights.
Anti-takeover
provisions
As
discussed above, our Board of Directors can issue shares of "blank check"
preferred stock, with any rights or preferences, including the right to approve
or not approve an acquisition or other change in control. The issuance of such
"blank check" preferred stock could be used to discourage a transaction
involving an actual or potential change in control of us or our management,
including a transaction in which our stockholders might otherwise receive a
premium for their shares over then current prices.
The
Placement Agent Warrants
The
placement agent warrants granted to Roth Capital in connection with the February
29, 2008 private placement entitle the holder to purchase up to an aggregate
of
469,150 shares of common stock at an exercise price of $2.88 per share, subject
to adjustment. The warrants expire on February 28, 2013. The holders
may make a cashless exercise but not until February 28, 2009 and then only
if the shares underlying the warrants have not been registered. The exercise
price and number of shares to be issued on exercise are subject to customary
adjustments in the event of the payment of stock dividends and stock splits
and
fundamental transactions. Roth Capital subsequently assigned 106,250 of the
warrants to vFinance and its affiliates.
LEGAL
MATTERS
Our
counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New
York,
New York 10022, is passing upon the validity of the issuance of the common
stock
that we are offering under this prospectus.
EXPERTS
Cordovano
and Honeck LLP, Independent Registered Public Accountants, located in Englewood,
Colorado, have audited our financial statements included in this Registration
Statement to the extent and for the periods set forth in their report. We have
relied on such reports given upon the authority of such firm as experts in
accounting and auditing.
Zhong
Yi
(Hong Kong) C.P.A. Company Limited located in Hong Kong, PRC, have audited
the
financial statements of Tianjin Huaneng and Shenzhen Pengsangpu included in
this
Registration Statement to the extent and for the periods set forth in their
report. We have relied on such reports given upon the authority of such firm
as
experts in accounting and auditing.
Child,
Van Wagoner & Bradshaw, PLLC, independent certified public accountants,
located at 5296 S. Commerce Drive, Suite 300, Salt Lake City, Utah, have audited
our financial statements included in this registration statement to the extent,
and for the periods set forth in their reports. We have relied upon such
reports, given upon the authority of such firm as experts in accounting and
auditing.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
"expert" or "counsel" as defined by Item 509 of Regulation S-K promulgated
under
the Securities Act, whose services were used in the preparation of this Form
S-1, was hired on a contingent basis or will receive a direct or indirect
interest in us or our parents or subsidiaries, nor was any of them a promoter,
underwriter, voting trustee, director, officer or employee of the
Company.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
bylaws provide that we will indemnify our directors and officers from all
liabilities incurred by them in connection with any action, suit or proceeding
in which they are involved by reason of their acting as our directors and
officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other
than
the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
On
January 24, 2008, our Board of Directors approved the termination of Child,
Van
Wagoner & Bradshaw, PLLC (“CVWB”) as our independent certified public
accounting firm.
Concurrently
with this action, our Board of Directors appointed Cordovano and Honeck, LLP
(“C&H”) as our new independent certified public accounting firm. C&H is
located at 88 Inverness Circle East, Building M Englewood, Colorado, USA.
C&H’s affiliated firm Zhong Yi (Hong Kong) C.P.A. Company Limited (“Zhong
Yi”), has been auditing the financial statements of Tianjin Huaneng Group Energy
Equipment Co., Ltd (“Tianjin Huaneng”), which we acquired effective July 1,
2007. Accordingly, management elected to continue this existing relationship
with C&H and Zhong Yi and engage C&H as the Company’s independent
auditors.
Our
consolidated financial statements for the years ended December 31, 2006 and
2005
were audited by CVWB. CVWB’s reports on our financial statements for two most
recent fiscal years did not contain an adverse opinion, a disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the years ended December 31, 2006 and 2005 and through January 24, 2008 there
were no disagreements with CVWB on any matter of accounting principles or
practices, financial statement disclosure, auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of CVWB, would have caused
it
to make reference to the subject matter of the disagreement in connection with
its report.
The
Company provided CVWB with a copy of a Current Report on Form 8-K prior to
its
filing with the SEC on January 30 2008 and requested them to furnish a letter
addressed to the SEC stating whether it agrees with the statements made above.
That letter of CVWB’s letter to the SEC, dated January 30, 2008 was filed as
Exhibit 16.1 to the 8-K.
During
the period the Company engaged CVWB, neither the Company nor anyone on the
Company's behalf consulted with C&H regarding either (i) the application of
accounting principles to a specified transaction, either contemplated or
proposed, or the type of audit opinion that might be rendered on the Company's
financial statements or (ii) any matter that was either the subject of a
disagreement or a reportable event. The Company has authorized CVWB to respond
fully to all inquiries of C&H.
FINANCIAL
STATEMENTS
Reference
is made to “Index to Financial Statements” for a list of the financial
statements being filed as a part of this prospectus.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the U.S. Securities and Exchange Commission, 100 F. Street,
N.E., Washington, D.C. 20549, a registration statement on Form S-1 under the
Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
The
registration statement and other information may be read and copied at the
SEC's
Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room
by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site
(HTTP://WWW.SEC.GOV.) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that
file
electronically with the SEC such as us.
You
may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access
them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval
services.
INDEX
TO FINANCIAL STATEMENTS
1.
Unaudited Condensed, Consolidated Financial Statements of China Solar
& Clean Energy Solutions, Inc. as of June 30, 2008 and December 31,
2007 and for the six months ended June 30, 2008 and
2007
|
|
|
|
i.
|
Condensed,
Consolidated Balance Sheets as of June 30, 2008 and December 31,
2007
|
F-1
|
|
|
|
ii.
|
Condensed,
Consolidated Statements of Income for the six months ended June 30,
2008
and 2007
|
F-2
|
|
|
|
iii.
|
Condensed,
Consolidated Statements of Cash Flows for the six months ended June
30,
2008 and 2007
|
F-3
|
|
|
|
iv.
|
Condensed,
Consolidated Statement of Changes in Stockholders’ Equity and
Comprehensive Income for the six months ended June 30,
2008
|
F-4
|
|
|
|
v.
|
Notes
to Condensed, Consolidated Financial Statements
|
F-5
|
|
|
|
2.
Audited Consolidated Financial Statements of China Solar & Clean
Energy Solutions, Inc. as of December 31, 2007 and 2006 and for the
years
ended December 31, 2007 and 2006
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-19
|
|
|
|
ii
|
Report
of Independent Registered Public Accounting Firm
|
F-20
|
|
|
|
iii.
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-21
|
|
|
|
iv.
|
Consolidated
Statements of Income for the years ended December 31, 2007 and
2006
|
F-22
|
|
|
|
v.
|
Consolidated
Statements of Cash Flows for the years Ended December 31, 2007 and
2006
|
F-23
|
|
|
|
vi.
|
Consolidated
Statement of Changes in Shareholders' Equity and Comprehensive Income
from
January 1, 2005 through December 31, 2007
|
F-24
|
|
|
|
vii.
|
Notes
to Consolidated Financial Statements
|
F-25
|
|
|
|
3.
Unaudited Condensed Financial Statements of Tianjin Huaneng Group
Energy
Equipment Co., Ltd as of June 30, 2007 and December 31, 2006 and
for the
six months ended June 30, 2007 and 2006
|
|
|
|
|
i.
|
Condensed
Balance Sheets as of June 30, 2007 and December 31, 2006
|
F-46
|
|
|
|
ii
|
Condensed
Statements of Operations and Comprehensive Income for the six months
ended
June 30, 2007 and 2006
|
F-47
|
|
|
|
iii.
|
Condensed
Statements of Cash Flows for the six months ended June 30, 2007 and
2006
|
F-48
|
|
|
|
iv.
|
Condensed
Statement of Owners Equity for the six months ended June 30, 2007
and
2006
|
F-49
|
|
|
|
v.
|
Notes
to Condensed Financial Statements
|
F-50
|
|
|
|
4.
Audited Financial Statements of Tianjin Huaneng Group Energy Equipment
Co., Ltd as of December 31, 2006 and 2005 and for the years ended
December
31, 2006 and 2005
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-63
|
|
|
|
ii.
|
Balance
Sheets as of December 31, 2006 and 2005
|
F-64
|
|
|
|
iii.
|
Statements
of Operations and Comprehensive Income for the years ended December
31,
2006 and 2005
|
F-65
|
|
|
|
iv.
|
Statements
of Cash Flows for the years ended December 31, 2006 and
2005
|
F-66
|
|
|
|
v.
|
Statements
of Owners’ Equity for the years ended December 31, 2006 and
2005
|
F-67
|
vi.
|
Notes
to Financial Statements
|
F-68
|
|
|
5.
Unaudited Condensed Financial Statements of Shenzhen Pengsangpu Solar
Industrial Products Corporation as of March 31, 2008 and December
31, 2007
and for the three months ended March 31, 2008 and 2007
|
|
|
|
|
i.
|
Condensed,
Consolidated Balance Sheets as of March 31, 2008 and December 31,
2007
|
F-81
|
|
|
|
ii.
|
Condensed,
Consolidated Statements of Operations for the three months ended
March 31,
2008 and 2007
|
F-82
|
|
|
|
iii.
|
Condensed, Consolidated
Statements of Cash Flows for the three months ended March 31, 2008
and
2007
|
F-83
|
|
|
|
iv.
|
Condensed, Consolidated
Statement of Owners’ Equity for the three months ended March 31,
2008
|
F-84
|
|
|
|
v.
|
Notes
to Condensed, Consolidated Financial Statements
|
F-85
|
|
|
|
6.
Audited Financial Statements of Shenzhen Pengsangpu Solar Industrial
Products Corporation as of December 31, 2007 and 2006 and for the
years
ended December 31, 2007 and 2006
|
|
|
|
|
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-93
|
|
|
|
ii.
|
Balance
Sheets as of December 31, 2007 and 2006
|
F-94
|
|
|
|
iii.
|
Statements
of Operations and Comprehensive Income (Loss) for the years ended
December
31, 2007 and 2006
|
F-95
|
|
|
|
iv.
|
Statements
of Cash Flows for the years ended December 31, 2007 and
2006
|
F-96
|
|
|
|
v.
|
Statements
of Changes in Owners’ Equity for the years ended December 31, 2007 and
2006
|
F-97
|
|
|
|
vi.
|
Notes
to Financial Statements
|
F-98
|
|
|
|
7.
Unaudited Pro forma Financial Information
|
|
|
|
i.
|
Condensed,
Combined Pro Forma Statement of Income for the three months ended
March
31, 2008
|
F-116
|
|
|
|
ii.
|
Condensed,
Combined Pro Forma Statement of Income for the year ended December
31,
2007
|
F-118
|
|
|
|
iii.
|
Condensed,
Combined Pro Forma Balance Sheet as of March 31, 2008
|
F-119
|
|
|
|
iv.
|
Notes
to Condensed, Combined Pro Forma Balance Sheet
|
F-119
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,689,173
|
|
$
|
5,466,637
|
|
Accounts
receivable, net
|
|
|
9,262,801
|
|
|
7,453,009
|
|
Inventories
|
|
|
6,256,439
|
|
|
3,875,658
|
|
Other
receivables and prepayments
|
|
|
5,865,320
|
|
|
1,637,948
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
28,073,733
|
|
|
18,433,252
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
12,191,828
|
|
|
8,819,216
|
|
Goodwill
|
|
|
4,705,591
|
|
|
1,789,324
|
|
Intangible
assets, net
|
|
|
1,673,660
|
|
|
1,597,921
|
|
Customer
relationships, net
|
|
|
1,072,500
|
|
|
-
|
|
Intellectual
property – unpatented technology, net
|
|
|
916,500
|
|
|
-
|
|
TOTAL
ASSETS
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
1,831,368
|
|
$
|
2,111,028
|
|
|
|
|
|
|
|
|
|
Income
tax payables
|
|
|
1,538,863
|
|
|
1,108,433
|
|
|
|
|
|
|
|
|
|
Other
payables and accrued liabilities
|
|
|
10,158,585
|
|
|
8,552,452
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
13,528,816
|
|
|
11,771,913
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
265,664
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1,879,303
|
|
|
935,825
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001; 25,000,000 shares authorized,
638,082
(unaudited) and 1,774,194 shares issued and outstanding,
respectively
|
|
|
638
|
|
|
1,774
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 13,527,630
(unaudited) and 6,205,690 shares issued and outstanding,
respectively
|
|
|
13,527
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
22,288,728
|
|
|
9,260,607
|
|
Accumulated
other comprehensive income
|
|
|
1,642,153
|
|
|
1,134,270
|
|
Retained
earnings
|
|
|
9,014,983
|
|
|
7,529,119
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
32,960,029
|
|
|
17,931,975
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
14,173,216
|
|
|
7,490,129
|
|
|
20,018,232
|
|
|
9,739,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,456,982
|
|
|
1,928,031
|
|
|
6,912,042
|
|
|
2,674,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
132,216
|
|
|
35,630
|
|
|
281,383
|
|
|
70,966
|
|
Selling
and distribution
|
|
|
1,118,041
|
|
|
237,502
|
|
|
1,620,604
|
|
|
281,532
|
|
General
and administrative
|
|
|
1,155,736
|
|
|
870,084
|
|
|
1,757,389
|
|
|
1,264,041
|
|
Total
operating expenses
|
|
|
2,405,993
|
|
|
1,143,216
|
|
|
3,659,376
|
|
|
1,616,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,050,989
|
|
|
784,815
|
|
|
3,252,666
|
|
|
1,058,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
25,741
|
|
|
-
|
|
|
66,831
|
|
|
-
|
|
Interest
income
|
|
|
1,638
|
|
|
78
|
|
|
1,638
|
|
|
1,735
|
|
Other
expense
|
|
|
(45,266
|
)
|
|
-
|
|
|
(45,266
|
)
|
|
-
|
|
Interest
expense
|
|
|
(109,858
|
)
|
|
(97
|
)
|
|
(143,696
|
)
|
|
(97
|
)
|
Total
other (expense) income
|
|
|
(127,745
|
)
|
|
(19
|
)
|
|
(120,493
|
)
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,923,244
|
|
|
784,796
|
|
|
3,132,173
|
|
|
1,060,078
|
|
Income
tax expenses
|
|
|
441,015
|
|
|
137,976
|
|
|
787,278
|
|
|
137,976
|
|
Minority
interest
|
|
|
386,016
|
|
|
-
|
|
|
859,031
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation
of
income
available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
Preferred
stock beneficial conversion
|
|
|
-
|
|
|
(975,807
|
)
|
|
-
|
|
|
(975,807
|
)
|
NET
INCOME AVAILABLE TO COMMON STOCK HOLDERS
|
|
$
|
1,096,213
|
|
$
|
(328,987
|
)
|
$
|
1,485,864
|
|
$
|
(53,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – basic
|
|
$
|
0.08
|
|
$
|
(0.05
|
)
|
$
|
0.14
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.07
|
|
$
|
(0.05
|
)
|
$
|
0.11
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
–
basic
|
|
|
13,075,468
|
|
|
6,205,290
|
|
|
10,612,185
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
–
diluted
|
|
|
15,584,542
|
|
|
6,205,290
|
|
|
13,006,396
|
|
|
6,205,290
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(3,237,938
|
)
|
$
|
294,938
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of SZPSP, net of cash acquired
|
|
|
(3,916,212
|
)
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
|
(2,033,562
|
)
|
|
(374,030
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,949,774
|
)
|
|
(373,030
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from private placement sale of stock
|
|
|
9,995,156
|
|
|
-
|
|
Proceeds
from warrants exercised
|
|
|
107,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
10,102,656
|
|
|
2,501,080
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
307,592
|
|
|
77,450
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
1,222,536
|
|
|
2,499,438
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,466,637
|
|
|
3,212,065
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF PERIOD
|
|
$
|
6,689,173
|
|
$
|
5,711,503
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
199,025
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
143,696
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING TRANSACTIONS:
|
|
|
|
|
|
|
|
Issuance
of common stock for acquisition of SZPSP
|
|
$
|
2,839,458
|
|
$
|
-
|
|
Issuance
of warrants for the acquisition of SZPSP
|
|
$
|
92,193
|
|
$
|
-
|
|
Preferred
share converted
|
|
$
|
1,136
|
|
$
|
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE
INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Preferred stock
|
|
Common stock
|
|
Additional
|
|
Accumulated
other
|
|
|
|
Total
|
|
|
|
No. of
shares
|
|
Par value
|
|
No. of
shares
|
|
Par value
|
|
paid-in
capital
|
|
comprehensive
income
|
|
Retained
earnings
|
|
stockholders’
equity
|
|
Balance as of
December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
Shares
issued for private placement, net of offering costs of $1,264,451
in cash
and $541,695 in warrants.
|
|
|
-
|
|
|
-
|
|
|
4,691,499
|
|
|
4,691
|
|
|
9,990,465
|
|
|
-
|
|
|
-
|
|
|
9,995,156
|
|
Shares
issued for the acquisition of subsidiary at fair value
|
|
|
-
|
|
|
-
|
|
|
1,419,729
|
|
|
1,420
|
|
|
2,930,231
|
|
|
-
|
|
|
-
|
|
|
2,931,651
|
|
Warrant
exercised
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
75
|
|
|
107,425
|
|
|
-
|
|
|
-
|
|
|
107,500
|
|
Preferred
share converted
|
|
|
(1,136,112
|
)
|
|
(1,136
|
)
|
|
1,136,112
|
|
|
1,136
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,485,864
|
|
|
1,485,864
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
507,883
|
|
|
-
|
|
|
507,883
|
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,993,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2008
|
|
|
638,082
|
|
$
|
638
|
|
|
13,527,630
|
|
$
|
13,527
|
|
$
|
22,288,728
|
|
$
|
1,642,153
|
|
$
|
9,014,983
|
|
$
|
32,960,029
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
accompanying condensed consolidated balance sheet as of December 31, 2007 has
been derived from audited financial statements and the accompanying unaudited
condensed consolidated financial statements for the three and six months ended
June 30, 2008 and 2007 have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for
interim financial information and the interim reporting requirements of
Regulation S-X. They do not include all of the information and footnotes for
complete consolidated financial statements as required by GAAP. In management’s
opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in the Company’s annual report on Form 10-K for the
year ended December 31, 2007
The
results of operations for the three and six months ended June 30, 2008 and
2007
are not necessarily indicative of the results to be expected for the entire
fiscal year ended December 31, 2008 or for any future period.
There
is
no provision for dividends for the quarter to which this quarterly report
relates .
2.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech’s drug development business to the shareholders of Meditech
of record on February 17, 2005, through a pro rata distribution in the form
of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao’er Du, and Xiaosan Du for RMB 6,800,000. As a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign owned
enterprise (“WFOE”) under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.
Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the PRC.
In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (“US”).
The
result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
In
January 2007, Deli Solar (Bazhou) via Mr. Deli Du, set up a branch sales offices
in the city of Lian Yun Gang and the City of Bazhou to cope with the increasing
sales demand in that region. This branch office exists in the form of a
sole-proprietorship set up in the name of Mr. Deli Du but is beneficially owned
by Deli Solar (Bazhou), so is regarded as a variable interest entity (“VIE”) by
the Company.
On
July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers.
On
April
1, 2008, Beijing Deli Solar Technology Development Co., Ltd (“Deli Solar
(Beijing)”) acquired 100% of Shenzhen Pengsangpu Solar Industrial Products
Corporation (“SZPSP”), which is engaged in the re-sale of energy-saving related
heating products such as heat pipes, heat exchangers, pressure water boilers,
solar energy heaters and raditors.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng and SZPSP are hereinafter referred to as (“the
Company”).
3.
|
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a “Smaller Reporting Company”
is a company with a public float of less than $75,000,000 (measured at end
of
Q2). Companies that meet this definition are able to elect “scaled disclosure
standards” on an item-by-item or “a-la-carte” basis. With this change, the SEC
has streamlined and simplified reporting for many companies, and has not added
any significant disclosure requirements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, the provisions
of
which are required to be applied prospectively. The Company believes that SFAS
159 should not have a material impact on the consolidated financial position
or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS No. 141R”). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in
a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until January 1, 2009. The Company expects
SFAS No. 141R will have an impact on accounting for business combinations once
adopted but the effect is dependent upon acquisitions at that time. The Company
is still assessing the impact of this pronouncement.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51, or SFAS No. 160”
(“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that SFAS 160
should not have a material impact on the consolidated financial position or
results of operations.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 “Accounting for Derivative Instruments and
Hedging Activities” and how derivative instruments and related hedged items
affect a company’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company’s future
financial position or results of operations.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) in the United States. This
statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The Company does not expect the adoption of SFAS No. 162 to
have a material effect on the financial condition or results of operations
of
the Company.
On
January 9, 2008, Beijing Deli Solar Technology Development Co., Ltd, the
Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an
Equity Purchase Agreement and Complementary Agreement to the Equity Purchase
Agreement to acquire 100% of the outstanding equity interest of Shenzhen
Pengsangpu Solar Industrial Products Corporation (“SZPSP”) from its
shareholders. On March 25, 2008, both parties signed a Supplmentary Agreement
to
the Equity Purchase Agreement and the Complementary Agreement to amend and
supplement the previous agreements and set forth the final terms of the total
purchase price and payment method of the acquisition.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its three shareholders. $4,087,832 (RMB 28.8 million) of the purchase
price was payable in cash. The three shareholders of SZPSP agreed to loan the
cash proceeds back to SZPSP interest free to be used for working capital. Fifty
(50%) of the principal amount of the loan is required to be paid prior to March
31, 2009 and the remaining 50% balance is required to be paid prior to March
31,
2010. The three shareholders of SZPSP have not loan the cash proceeds back
to
SZPSP as of June 30, 2008.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
addition to the cash portion of the purchase price, the parties agreed to an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of SZPSP’s intangible assets.
This
portion is required to be paid in the form of 1,419,729 shares of the Company’s
common stock (which was based on the average closing price of the common stock
for the 30 days immediately preceding the execution of the Complementary
Agreement (the “Share Price”)), provided that if on March 31, 2010 the common
stock price is lower than the Share Price, the Company will pay the difference.
Fifty percent (50%) of these shares will be transferable and unrestricted on
or
after March 31, 2009 and the remaining fifty percent (50%) will be transferable
on or after March 31, 2010. The shares are required to be transferred to SZPSP
within 180 days of the closing. In addition, as part of the purchase price,
the
shareholders of SZPSP will receive five years warrants to purchase a total
of
141,973 shares of common stock at an exercise price of $2.50 per share, subject
to future adjustment.
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue is less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit
of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it does
not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the extent
necessary for the remaining balance.
The
accounting date of the acquisition was April 1, 2008 and was accounted for
under
the purchase method. SZPSP results of operations for the three months ended
June
30, 2008 have been included in consolidated financial statements. The
acquisition of SZPSP will enable the Company to immediately begin leveraging
its
technology and engineering capabilities and expertise, and will significantly
expand China Solar’s customer base and present a commercial and industrial
market opportunity for solar water heaters in southern China.
The
estimated aggregate purchase price was $7,019,483. Below is a summary of the
total purchase price:
Cash
|
|
$
|
4,087,832
|
|
Fair
value of 1,419,729 common stock
|
|
|
2,839,458
|
|
Fair
value of 141,973 warrants
|
|
|
92,193
|
|
Total
purchase price
|
|
$
|
7,019,483
|
|
Our
purchase price allocation for the SZPSP acquisition was finalized on June 30,
2008. The following table represents the final purchase price allocation to
the
estimated fair value of the assets acquired and liabilities
assumed:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
As of April 1,
2008
|
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
|
|
87,316
|
|
Restricted
cash
|
|
|
84,304
|
|
Accounts
receivable, net
|
|
$
|
510,269
|
|
Inventories
|
|
|
325,429
|
|
Net
investment in sales-type leases
|
|
|
966,806
|
|
Prepayments
and other receivables
|
|
|
217,606
|
|
Property,
plant and equipment
|
|
|
1,275,287
|
|
Customer
relationships
|
|
|
1,100,000
|
|
Intellectual
property
|
|
|
1,250,000
|
|
Goodwill
|
|
|
3,055,769
|
|
Total
assets acquired
|
|
$
|
8,872,786
|
|
|
|
|
|
|
Short-team
bank loan
|
|
|
710,668
|
|
Accounts
payable
|
|
|
908,124
|
|
Deferred
revenue
|
|
|
23,217
|
|
Accrued
liabilities and other payables
|
|
|
211,294
|
|
Total
liabilities assumed
|
|
|
1,853,303
|
|
Net
assets acquired
|
|
$
|
7,019,483
|
|
The
$3,055,769 of goodwill was expected to be assigned to the solar heater/boiler
related products segment and a new segment of energy-saving projects segment.
The Company does not expect goodwill to be tax deductible in the PRC. Of the
$2,350,000 of acquired intangible assets, $310,000 was assigned to in-process
research and development which was written off during the six months ended
June 30, 2008, $940,000 was assigned to existing intellectual property, and
$1,100,000 was assigned to customer relationships. The acquired identifiable
intangibles assets have a weighted-average amortization period totaling
approximately 10 years and residual value totaling approximately
$0.
The
fair
value of the IPRD was derived using a discounted cash flow method.
Management analyzed expected future revenues from product sales and thereafter
based on the research and development being underway at the date of
acquisition. Technology feasibility was determined based on management
review of the product life spans and also the rate of change in the industry.
Based on the analysis management made assumptions as to the portion of product
revenue going forward which would be derived from products based on current
research and development. The significant assumptions with respect to the
percentage of revenues going forward from products based on IPRD are as outlined
in the following table:
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
·
Breakdown of Revenue – IPRD versus products
|
|
|
90
|
%
|
|
80
|
%
|
|
75
|
%
|
|
70
|
%
|
|
65
|
%
|
·
Existing products
|
|
|
10
|
%
|
|
20
|
%
|
|
25
|
%
|
|
30
|
%
|
|
35
|
%
|
·
IPRD
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Upon
further review, certain R&D underway was later determined to not warrant
completion and that future products based on the R&D were discontinued given
the demand in the market.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Our
internal technology specialists did a scientific and technological evaluation
of
the research expenditures of Shenzen Pengsangpu Solar Industrial Products
Corporation. Our evaluation was based on a number of factors, including,
1)
Commercial viability of products being researched and developed
2)
Anticipated level of patent protection
3)
Competitive environment for products being researched and developed
At
the
date of acquisition, the technology feasibility has not been established and
there is no alternative future use. Through this evaluation we determined that
$310,000 of expenditures had no future value and accordingly should be written
off immediately.
The
property, plant and equipment acquired consists of plant machinery and
equipment, motor vehicles and leasehold improvements with estimated depreciable
lives of 5 years and residual value is 10% of the cost of assets.
The
following unaudited pro forma financial information for the Company gives effect
to the 2008 acquisition as if they had occurred on January 1, 2008. These pro
forma results do not purport to be indicative of the results of operations
which
actually would have resulted had the acquisitions occurred on such date or
to
project the Company’s results of operations for any future period.
|
|
For the six months ended June 30,
2008
|
|
|
|
|
|
Pro
forma revenues
|
|
$
|
27,324,194
|
|
Pro
forma net income
|
|
|
1,482,670
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.11
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
Basic
|
|
$
|
11,314,249
|
|
Diluted
|
|
$
|
13,708,460
|
|
5.
|
BALANCE
SHEET COMPONENTS
|
Inventories
consisted of the following:
|
|
As of June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
Raw
materials
|
|
$
|
2,035,446
|
|
$
|
656,605
|
|
Consumables
|
|
|
-
|
|
|
5,359
|
|
Work-in-process
|
|
|
1,771,139
|
|
|
2,464,441
|
|
Finished
goods
|
|
|
2,449,854
|
|
|
749,253
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
6,256,439
|
|
$
|
3,875,658
|
|
Other
receivables and prepayments consisted of the following:
|
|
As of June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
Advance
to suppliers
|
|
$
|
1,170,384
|
|
$
|
493,421
|
|
Prepaid
expenses
|
|
|
956,648
|
|
|
249,598
|
|
Deposits
|
|
|
3,578,646
|
|
|
894,268
|
|
Other
receivables
|
|
|
159,642
|
|
|
661
|
|
|
|
|
|
|
|
|
|
Other
receivables and prepayments
|
|
$
|
5,865,320
|
|
$
|
1,637,948
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Issuance
of Common Stock
On
February 29, 2008, the Company completed a private placement of 4,691,499 shares
of common stock for an aggregate purchase price of approximately $11,300,000.
The Company received $9,995,156 as net proceeds from this
financing.
During
the six months ended June 30, 2008, the Company issued 1,136,112 shares of
common stock as part of the conversion of Series A Preferred Stock.
During
the six months ended June 30, 2008, certain investors exercised their warrants
to purchase an aggregate of 75,000 shares of common stock totaling
$107,500.
Common
Stocks Held in Escrow
In
connection with the private placement on February 29, 2008, the Company
deposited 2,000,000 shares of common stock (“Make Good Shares”) into escrow and
we are required to deliver (i) 1,000,000 of the Make Good Shares to the
investors on a pro rata basis for no additional consideration in the event
that
the Company’s after-tax net income for the fiscal year ending December 31, 2008
is less than $4.8 million; and (ii) 1,000,000 of the Make Good Shares to the
investors on a pro rata basis for no additional consideration in the event
that
the Company’s after-tax net income for the fiscal year ending December 31, 2009
is less than $8 million. As of June 30, 2008, the after-tax net income target
of
$4.8 million has not been met. In accordance with SFAS 128,
Earnings
Per Share
, the
1,000,000 shares contingently issuable in 2008 were included in the diluted
earnings per share calculation as the reporting period were treated as the
end
of the contingency period. The 1,000,000 shares contingently issuable in 2009
were not included in the diluted earnings per share calculation as the
contingency provision is for the fiscal year ending December 31,
2009.
In
connection with the private placement on June 13, 2007, the Company deposited
900,000 shares of Series A Convertible Preferred Stock into escrow as security
and will be issuable (i) if the Company’s consolidated pre-tax income for the
year ended December 31, 2007 was less than $3,000,000 (or pretax income per
share of $0.22 on a fully diluted basis), the Company was required to deliver
to
the investors (pro rata according to the relative size of their investment)
a
number of the escrow shares. The exact number of shares was to depend on the
extent to which the Company failed to achieve the 2007 earnings target and
(ii)
if the Company’s consolidated pre-tax income for the year ending December 31,
2008 is less than $5,500,000 (or pretax income per share of $0.40 on a fully
diluted basis) the investors were entitled to receive (pro rata according to
the
relative size of their investment) a number of the 900,000 shares of common
stock. The exact number was to depend on the extent to which the Company failed
to achieve 2008 earnings target. The agreement with the investors further
provided that the investors will not be entitled to any of the remaining escrow
shares and all remaining escrow shares shall be returned to the Company if
the
Company did not receive at least $4,000,000 from the investors, either through
the exercise of warrants, or additional equity financing, within 90 days after
the effectiveness of the first registration statement filed pursuant to a
certain registration rights agreement entered into with the investors
concurrently. The registration statement in question was declared effective
on
February 7, 2008 The earnings target for the year ended December 31, 007 was
met, thus the 900,000 remained issuable at the beginning of the year ending
December 31, 2008. However, the 900,000 shares held in escrow were not included
in the diluted earnings per share calculation for the six months ended June
30,
2007 as the escrow shares were to be returned to the Company since the investors
did not provide at least $4,000,000 in additional equity financing within 90
days after the effectiveness of the first registration statement.
Warrants
Issued to Placement Agent
The
Company issued a warrant (the "Warrant") to its placement agent in connection
with its private placement in February 2008. The Warrant authorizes the agent
to
purchase 469,150 shares of its common stock at a fixed price ($2.88 per share),
for a five-year period. The Warrant contains a cashless exercise provision
which
permits the placement agent, at its option, to exercise the Warrant without
tendering the exercise price, in exchange for a reduced number of shares. The
number of shares will be calculated according to an algebraic formula should
the
placement decide to opt to exercise the Warrant under the cashless provision.
If
the Company is sold during the exercise period (referred to as a "fundamental
transaction" in the Warrant), the placement agent has the right to exercise
its
Warrant and thus participate in the proceeds from the sale the same as any
other
shareholder. These warrants are immediately exerciseable. The fair value of
the
warrants was estimated at the date of grant using the Black-Scholes
option-pricing model. In calculating the fair value of the warrants, management
used the closing price of the common stock on February 29, 2008, of $2.71 per
share, plus the following assumptions:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
The
Company valued the warrants at US$1.155 per share, or $541,695 in aggregate,
in
accordance with SFAS 123R, which were recorded as offering costs which offset
additional paid-in capital in the accompanying consolidated financial statements
for the six months ended June 30, 2008.
A
summary
of the status of the Company’s outstanding common stock warrants as of June 30,
2008:
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December
31, 2007
|
|
|
5,555,559
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
Granted
|
|
|
611,123
|
|
|
2.79
|
|
|
5
years
|
|
|
633,888
|
|
Exercised
|
|
|
(75,000
|
)
|
|
-
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding
and Exercisable at June 30, 2008
|
|
|
6,091,682
|
|
|
2.76
|
|
|
4.38
years
|
|
|
988,727
|
|
Registration
Rights Agreement
In
connection with the private placement the Company entered into a registration
rights agreement with the investors on February 25, 2008 which requires us
to
file with the SEC a “resale” registration statement providing for the resale of
(i) all of the 4,691,499 shares of common stock sold to the investors, (ii)
the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the Securities
Act of 1933, as amended.
The
Company agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to register
for resale part of the registrable securities (other than the 2,000,000 make
good shares and the 469,150 shares underlying the placement agent warrants)
and
to cause that registration statement to be declared effective by July 28,
2008.
The
Company is required to file additional registration statements covering all
of
the remaining registrable securities (or such lesser number as the SEC deems
appropriate) if any registrable securities could not be registered in the
initial registration statement, by the 15th day following the date we are able
to effect the registration of such securities in accordance with any SEC
restrictions.
The
Company’s failure to meet this schedule and other timetables provided in the
registration rights agreement could result in the imposition of liquidated
damages. No liquidated damages will accrue on any registrable securities which
the SEC has requested (due to the application of Rule 415) the Company to remove
from the registration statement and the required effectiveness date for such
securities will be tolled until such time as the Company are able to effect
the
registration of those securities in accordance with any SEC
restrictions.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
On
February 29, 2008, the Company completed a private placement of 4,691,499 shares
of the common stock for price per share of $2.40 or an aggregate purchase price
of approximately $11,300,000. The Company received $9,995,156 as net proceeds
from this financing.
On
July
28, 2008, the Company incurred liquidated damages equal to $112,596 which
represents 1% of $11,259,587 (the aggregate of investment amount by the
investors) due to the fact that the Company failed to have the registration
statement declared effective on or prior to that date. The liquidated damages
continue to accrue per diem through August 28, 2008 at the monthly rate
of 1%.
Accordingly, the Company has incurred $225,192 in liquidated damages for
failing
to have the registration statement declared effective by July 28,
2007.
The
Company is registered in the United States of America and has operations in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes. The
Company generated substantially all of its net income from the operation of
its
subsidiary in the PRC and is subject to the PRC tax jurisdiction. The Company
has recorded an income tax provision for the three and six months ended June
30,
2008.
United
States of America
China
Solar was incorporated in the State of Nevada and is subject to the tax laws
of
United States of America. As of June 30, 2008, the operation in the United
States of America incurred $362,933 of net operating losses available for
federal tax purposes, which are available to offset future taxable income.
The
net operating loss carry forwards will expire through 2028, if unutilized.
The
Company has provided for a full valuation allowance against the deferred tax
assets of $362,933 on the expected future tax benefits from the net operating
loss carryforwards as the management believes it is more likely than not that
these assets will not be realized in the future.
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company’s subsidiaries operating in the PRC are Deli Solar (Bazhou), Deli Solar
(Beijing), Ailiyang, Tianjin Huaneng and SZPSP.
Of
these
subsidiaries Ailiyang, Tianjin Huaneng are domestically owned and subject to
the
Corporate Income Tax (“CIT”) governed by the Income Tax Law of the People’s
Republic of China, at a statutory rate of 25%.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a
two-year exemption from enterprise income tax (which expired at the end of
March
2007) and a reduced enterprise income tax rate of 15% for the following three
years.
On
July
25, 2006, SZPSP was classified as an Advanced Technology Enterprise in the
PRC.
The Company is exempted from CIT for the first two profit making years and
then
the CIT is reduced to 15% in the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The New CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. Tianjin Huaneng
is now is subject to CIT at a statutory rate of 25%. However, as foreign
invested enterprises, Deli Solar (Bazhou), Deli Solar (Beijing) and SZPSP can
continue to enjoy the lower CIT rate of 15% until their tax holiday
expires.
The
Company’s effective income tax rates for the six months ended June 30, 2008 and
2007 were 15% and 0% respectively. The Company’s effective income tax rate of 0%
for the six months ended June 30, 2007 was due to an exemption from enterprise
income tax provided by the PRC taxing authority during that period, as discussed
above. For this reason there is no income tax expense recorded on our statement
of income for the six months ended June 30, 2007.
8.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
(a)
Business information
During
the six months ended June 30, 2007, the Company had three reportable segments
namely (i) solar heater/boiler related products, (ii) heat pipe related products
and (iii) energy-saving projects, under the management of Deli Solar (Bazhou),
Tianjin Huaneng, and Shenzhne Pengsangpu, respectively.
During
the three months ended March 31, 2008, the Company had two reportable segment
namely (i) solar heater/boiler related products and (ii) heat pipe related
products.
An
analysis of the Company’s revenue and total assets are as follows:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
9,996,713
|
|
|
9,418,160
|
|
$
|
12,826,528
|
|
$
|
12,414,023
|
|
Heat
Pipe related products
|
|
|
5,847,069
|
|
|
-
|
|
|
11,317,330
|
|
|
-
|
|
Energy-saving
projects
|
|
|
2,786,416
|
|
|
-
|
|
|
2,786,416
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,630,198
|
|
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
2,045,428
|
|
$
|
1,928,031
|
|
$
|
2,620,321
|
|
$
|
2,674,979
|
|
Heat
Pipe related products
|
|
|
1,901,524
|
|
|
-
|
|
|
3,781,692
|
|
|
-
|
|
Energy-saving
projects
|
|
|
510,030
|
|
|
-
|
|
|
510,029
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Total
assets:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,277,522
|
|
$
|
18,690,225
|
|
Heat
Pipe related products
|
|
|
21,284,078
|
|
|
9,029,994
|
|
Energy-saving
projects
|
|
|
6,653,407
|
|
|
-
|
|
Other
segment
|
|
|
-
|
|
|
2,919,494
|
|
Corporate
assets *
|
|
|
2,418,805
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
Heat
Pipe related products
|
|
|
1,649,822
|
|
|
1,789,324
|
|
Energy-saving
projects
|
|
|
3,055,769
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,705,591
|
|
$
|
1,789,324
|
|
Other
segment in total revenue, gross profit, and assets refers to solar lighting
products and sales of spare parts/components. The amount of other segment
revenue, gross profit, and assets are less than 10% in each category and
disclosed as an “all other” category in accordance with paragraph 21 of SFAS
131. There was no elimination or reversal of transactions between reportable
segments.
*
The
types of items included in corporate assets are principally cash from the
proceeds of the February 2008 private placement.
(b)
Geographic information
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC. In respect of geographical segment reporting, sales are
based on the country in which the customer is located and total assets and
capital expenditure are based on the country where the assets are
located.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company’s operations are located in PRC, which is the main geographical area.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
18,620,035
|
|
$
|
9,418,160
|
|
$
|
25,940,868
|
|
$
|
12,414,023
|
|
Others
|
|
|
10,163
|
|
|
-
|
|
|
989,406
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
4,452,612
|
|
$
|
1,928,031
|
|
$
|
6,490,912
|
|
$
|
2,674,979
|
|
Others
|
|
|
4,370
|
|
|
-
|
|
|
421,130
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Total
assets:
|
|
|
|
|
|
PRC
|
|
$
|
46,401,756
|
|
$
|
29,107,727
|
|
Others
|
|
|
2,232,056
|
|
|
1,531,986
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
Under
an
engagement agreement dated January 16, 2008 between the Company and Roth Capital
Partners, LLC (“Roth”), Roth acted as a placement agent for the Company in
connection with during the private placement of approximately 4.7 million shares
of our common stock which was consummated in February 2008 (the “Offering”).
Under a certain agreement, dated as of March 21, 2007 by and among Trenwith
Securities, LLC (“Trenwith”) and the Company (the “Trenwith Agreement”),
Trenwith was granted certain rights, including the right to act as placement
agent in connection with a subsequent private placement of the Company’s
securities at fees which are mutually acceptable within a period of 24 months
after the closing of the June 2007 financing. Trenwith believes that it had
the
right to act as placement agent with respect to the Offering and has threatened
to bring proceedings against the Company for alleged violation of its rights
under the Trenwith Agreement. The Company disputes these claims and intends
to
vigorously defend any lawsuit which Trenwith may commence.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
following table sets forth the computation of basic and diluted net income
per
share for the three and six months ended June 30, 2008 and 2007:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
Less:
Preferred stock beneficial conversion
|
|
|
-
|
|
|
(975,807
|
)
|
|
-
|
|
|
(975,807
|
)
|
Net
income (loss) available to common stockholders in computing basic
net
income per share and diluted net income per share
|
|
$
|
1,096,213
|
|
$
|
(328,987
|
)
|
$
|
1,485,864
|
|
$
|
(53,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
13,075,468
|
|
|
6,205,290
|
|
|
10,612,185
|
|
|
6,205,290
|
|
-
Weighted average preferred stock outstanding
|
|
|
1,509,074
|
|
|
-
|
|
|
1,383,593
|
|
|
-
|
|
-
Weighted average contingent shares outstanding
|
|
|
1,000,000
|
|
|
-
|
|
|
692,308
|
|
|
-
|
|
-
Weighted average warrant shares outstanding
|
|
|
-
|
|
|
-
|
|
|
318,310
|
|
|
-
|
|
|
|
|
15,584,542
|
|
|
6,205,290
|
|
|
13,006,396
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
0.08
|
|
$
|
(0.05
|
)
|
$
|
0.14
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
0.07
|
|
$
|
(0.05
|
)
|
$
|
0.11
|
|
$
|
(0.01
|
)
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Basic
and
diluted earnings per share for the three and six months ended June 30, 2007
were
calculated in the same manner due to the loss from continuing operations
available to common stockholders. Potential common shares underlying warrants
of
389,277 and 194,639 for the three and six months ended June 30, 2007,
respectively, were excluded from the diluted earnings per share calculation,
as
they were antidilutive.
For
the
three months ended June 30, 2008, warrants exercisable to 6,166,682 shares
of
common stock were excluded from the diluted earnings per share calculation
as
the average market price of the common stock during the period was more than
the
exercise price of the warrants, thereby making the warrants antidilutive under
the treasury method.
For
the
six months ended June 30, 2008, warrants exercisable to 4,392,488 shares of
common stock were exclude from the diluted earnings per share calculation as
the
average market price of the common stock during the period was more than the
exercise price of the warrants, thereby making the warrants antidilutive under
the treasury method.
|
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA),
Inc.)
Beijing,
People’s Republic of China
We
have audited the consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) (the Company)
as of
December 31, 2006, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of
the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). 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.
The company is not required to have, nor were we engaged to perform,
an
audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting
as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the
effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of China
Solar & Clean Energy Solutions, Inc. (fka Deli Solar (USA), Inc.) as
of December 31, 2006, and the results of its operations and its cash
flows
for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
March
31, 2007
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and stockholders of
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
We
have
audited the accompanying consolidated balance sheet of China Solar & Clean
Energy Solutions, Inc. (the “Company”) as of December 31, 2007 and the related
consolidated statements of income, cash flows and changes in stockholders’
equity and comprehensive income for the year ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and the results of their operations and their cash flows for the year
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
/s/
Cordovano and Honeck LLP
Englewood,
Colorado USA
March
28,
2008, except for Note 2, acquisition, which is dated June 20, 2008
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
BALANCE
SHEETS
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
Accounts
receivable, net
|
|
|
7,453,009
|
|
|
870,446
|
|
Inventories
|
|
|
3,875,658
|
|
|
315,765
|
|
Other
receivables and prepayments
|
|
|
1,637,948
|
|
|
1,387,911
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
18,433,252
|
|
|
5,786,187
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,819,216
|
|
|
5,926,468
|
|
Goodwill
|
|
|
1,789,324
|
|
|
-
|
|
Intangible
assets, net
|
|
|
1,597,921
|
|
|
1,003,530
|
|
TOTAL
ASSETS
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
2,111,028
|
|
$
|
147,901
|
|
Income
tax payables
|
|
|
1,108,433
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,552,452
|
|
|
342,811
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
11,771,913
|
|
|
490,712
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001; 25,000,000 shares authorized,
1,774,194
and -0- shares issued and outstanding, respectively
|
|
|
1,774
|
|
|
-
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 6,205,290
and
6,205,290 shares issued and outstanding, respectively
|
|
|
6,205
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
9,260,607
|
|
|
5,705,574
|
|
Accumulated
other comprehensive income
|
|
|
1,134,270
|
|
|
533,909
|
|
Retained
earnings
|
|
|
7,529,119
|
|
|
5,979,785
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
17,931,975
|
|
|
12,225,473
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS
OF INCOME
(Currency
expressed in United States Dollars (“US$”))
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
16,842,994
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
4,625,319
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
154,946
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
459,746
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
2,800,015
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
3,414,707
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
1,210,612
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
45,606
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(16,717
|
)
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
154,576
|
|
|
28,889
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
-
|
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Computation
of
income
available to common stockholders:
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
Preferred
stock beneficial conversion
|
|
|
(975,807
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.25
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.23
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
10,783,026
|
|
|
6,957,876
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Currency
expressed in United States Dollars)
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
324,157
|
|
|
178,437
|
|
Provision
for allowance on accounts receivable
|
|
|
650,432
|
|
|
(77,267
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(7,232,995
|
)
|
|
(238,334
|
)
|
Inventories
|
|
|
(3,559,893
|
)
|
|
67,418
|
|
Other
receivables and prepayments
|
|
|
(250,037
|
)
|
|
(238,268
|
)
|
Accounts
payable, trade
|
|
|
1,963,127
|
|
|
58,526
|
|
Income
tax payable
|
|
|
1,108,433
|
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
8,232,169
|
|
|
262,885
|
|
Minority
interest
|
|
|
935,825
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
4,696,359
|
|
|
1,252,898
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of a subsidiary
|
|
|
(489,459
|
)
|
|
-
|
|
Deposits
made to acquire subsidiary
|
|
|
-
|
|
|
(256,278
|
)
|
Purchase
of intangible assets
|
|
|
(635,726
|
)
|
|
(932,732
|
)
|
Purchase
of property, plant and equipment
|
|
|
(4,294,741
|
)
|
|
(2,815,398
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,419,926
|
)
|
|
(4,004,408
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayment
of short-term borrowings
|
|
|
(180,694
|
)
|
|
(130,112
|
)
|
Capital
contribution received from shareholders
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of preferred stock (net of offering costs of $169,000
paid
in cash)
|
|
|
2,581,000
|
|
|
-
|
|
Related
receivable
|
|
|
-
|
|
|
82,639
|
|
Related
payables
|
|
|
(22,528
|
)
|
|
22,528
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
2,377,778
|
|
|
(24,945
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
600,361
|
|
|
359,352
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
2,254,572
|
|
|
(2,417,103
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,212,065
|
|
|
5,629,168
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF YEAR
|
|
$
|
5,466,637
|
|
$
|
3,212,065
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
939,798
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
95,446
|
|
$
|
16,717
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
Warrant
shares granted for offering costs
|
|
$
|
138,338
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
Preferred stock
|
|
Common stock
|
|
Additional
|
|
Accumulated
other
|
|
|
|
Total
|
|
|
|
No. of shares
|
|
Par
value
|
|
No. of shares
|
|
Par
value
|
|
paid-in
Capital
|
|
comprehensive
income
|
|
Retained
earnings
|
|
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
174,557
|
|
|
4,740,284
|
|
|
10,626,620
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,239,501
|
|
|
1,239,501
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359,352
|
|
|
-
|
|
|
359,352
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,598,853
|
|
Balance
as of December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
6,205,290
|
|
|
6,205
|
|
|
5,705,574
|
|
|
533,909
|
|
|
5,979,785
|
|
|
12,225,473
|
|
Shares
issued for private placement, net of offering costs of $169,000
in cash
and $138,338 in warrants.
|
|
|
1,774,194
|
|
|
1,774
|
|
|
|
|
|
|
|
|
2,579,226
|
|
|
|
|
|
|
|
|
2,581,000
|
|
Preferred
share dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,807
|
|
|
|
|
|
(975,807
|
)
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,525,141
|
|
|
2,525,141
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,361
|
|
|
|
|
|
600,361
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,125,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech's drug development business to the shareholders of Meditech
of record on February 17, 2005, through a pro rata distribution in the form
of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao'er Du, and Xiaosan Du for RMB 6,800,000. As a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign owned
enterprise ("WFOE") under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.
Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the PRC.
In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (“US”).
The
result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
During
2007, the Company set up a branch sales office in the cities of Lian Yun Gang
and the City of Bazhou to provide sales support in those cities as
sole-proprietorship of its chief executive officer and president, Mr. Deli
Du.
The sole proprietorships are considered variable interest entities because
they
(1) lack equity sufficient to finance their activities without additional
subordinated financial support and (2) the Company, and not Mr. Deli Du, absorbs
the losses or receives the gains.
Based
upon a review of the provisions of FIN 46R, the structure of the agreements
and activities of the entities described above, the Company determined that
it
is the primary beneficiary of the sole proprietorships at December 31, 2007.
If
the facts and circumstances change in the future, the Company could determine
that it is no longer the primary beneficiary, which would require China Solar
to
de-consolidate the sole-proprietorships. The Company's investment in the
sole-proprietorships was immaterial as of December 31, 2007.
On
July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers. The transaction
was
accounted for under the purchase method. See Note 2.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng are hereinafter referred to as (“the Company”).
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
consolidated financial statements include the financial statements of China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng and the VIE.
The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest Entities ” (“FIN
46R”). The sole-proprietorship business in the name of Mr. Deli Du is regarded
a
VIE of the Company and is consolidated in the Company’s financial statements.
The Company evaluates its relationship with other entities to identify whether
they are variable interest entities, as defined by Financial Accounting
Standards Board (FASB) Interpretation No. 46 (revised), "Consolidation of
Variable Interest Entities" (FIN 46R), and assesses whether it is the
primary beneficiary of such entities. If the determination is made that the
Company is the primary beneficiary, then that entity is included in the
Company's Consolidated Financial Statements in accordance with
FIN 46R.
All
significant intercompany balances and transactions within the Company have
been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the years reported. Actual results may differ
from these estimates.
¨
|
Cash
and cash equivalents
|
The
Company considers all highly liquid securities with original maturities of
three
months or less when acquired to be cash equivalents. At December 31, 2007 and
2006, the Company had $5,466,637 and $3,212,065, respectively, in cash
equivalents.
¨
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable consists of amounts due from customers. The Company extends unsecured
credit to its customers in the ordinary course of business but mitigates the
associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and determined
based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic
environment.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a first-in, first-out basis.
The
Company periodically reviews historical sales activity to determine excess,
slow
moving items and potentially obsolete items and also evaluates the impact of
any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of December 31, 2007, 2006 and 2005, the Company did not record
an
allowance for obsolete inventories, nor have there been any
write-offs.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
¨
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values. Property, plant and equipment are depreciated over
their estimated useful lives as follows:
|
|
Depreciable life
|
|
Residual value
|
|
Buildings
|
|
|
6-50 years
|
|
|
10
|
%
|
Plant
and machinery
|
|
|
10
years
|
|
|
10
|
%
|
Office
equipments
|
|
|
7
years
|
|
|
10
|
%
|
Motor
vehicles
|
|
|
7
years
|
|
|
10
|
%
|
Computer
equipment
|
|
|
3
years
|
|
|
10
|
%
|
¨
|
Construction-in-progress
|
All
facilities purchased for installation, self-made or subcontracted are accounted
for under construction-in-progress. Construction-in-progress is recorded at
acquisition cost, including cost of facilities, installation expenses and the
interest capitalized during the course of construction for the purpose of
financing the project. Upon completion and readiness for use of the project,
the
cost of construction-in-progress is to be transferred to fixed
assets.
¨
|
Goodwill
and intangible assets
|
Goodwill
and intangibles, including intellectual property, were generally acquired in
acquisitions in 2007. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS No. 142, requires goodwill to
be tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired. We perform this analysis during
the fourth quarter of each year. No impairment of goodwill has been identified
since the date of acquisition.
Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization. No impairment of intangibles has been identified since the date
of
acquisition. All lands in the PRC are owned by the PRC government. The
government in the PRC, according to the relevant PRC law, may sell the right
to
use the land for a specified period of time. Thus, all of the Company’s land
purchases in the PRC are considered to be leasehold land and are stated at
amortized cost. Amortization is provided over the term of the land use right
agreements on a straight-line basis, which is 50 years and they will expire
in
2048, 2051 and 2054.
¨
|
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets”
, a
long-lived assets and certain identifiable intangible assets held and used
by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated undiscounted net cash
flows expected to be generated by the assets. If such assets are considered
to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of December 31, 2007and 2006.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units of
accounting in the arrangement. Revenues under these bundled arrangements are
allocated considering the relative fair values of two separate deliverables:
(a)
product deliverable and (b) maintenance deliverable, included in the bundled
arrangement based on the estimated relative fair values of each element in
accordance with EITF 00-21, “Accounting for Multiple Element Revenue
Arrangements” and recognized when the applicable revenue recognition criteria
for each element are met. Revenue from product deliverables are recognized
upon
final acceptance, which is signed by the customer when installation is
completed. Revenue from maintenance support for the Company’s products are
deferred and recognized ratably over the term of the service period upon the
acceptance of the products, which is generally 12 months.
Revenue
from the provision of energy-saving projects are recognized when persuasive
evidence of an arrangement exists, transfer of title has occurred or services
have been rendered, the selling price is fixed or determinable and
collectibility is reasonably assured.
The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
Cost
of
revenue consists primarily of material costs, direct labor, inbound freight
charges, depreciation and manufacturing overheads, which are directly
attributable to the manufactured products and the provision of the energy-saving
projects. Additionally, costs of revenue includes purchasing, and receiving
costs, inspection costs, warehousing costs and costs associated with
distribution networks.
Selling
and distribution expenses consists primarily of non-cash sales promotions,
outbound distribution, traveling and transportation expenses, and agency
administration expenses. The nature of outbound distribution, traveling, and
transportation expenses includes outbound shipping and handling costs related
to
the sale of our products. It is our Company’s accounting policy to differentiate
outbound shipping costs from inbound shipping costs. Inbound shipping costs
are
capitalized in inventory and charged to costs of sales at the time revenue
is
recognized. O utbound shipping and handling costs recorded in selling and
distribution expense totaled $177,413 and $65,312, for the years ended December
31, 2007 and 2006, respectively. General and administrative expenses includes
advertising expenses and salaries and benefits.
Advertising
costs are expensed as incurred in accordance with the American Institute of
Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
.
Advertising expenses for the years ended December 31, 2007,and 2006 were
$1,415,493 and $1,106,488, respectively.
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operations as the related employee service is provided.
SFAS
No.
130,
“Reporting
Comprehensive Income”,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated other
comprehensive income, as presented in the accompanying statement of changes
in
owners’ equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
¨
Income
taxes
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
, which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided
for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statement of operations and comprehensive (loss) income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of,
or all
of the deferred tax assets will not be realized.
¨
Net
income per share
The
Company calculates net income per share in accordance with SFAS No. 128,
“Earnings
per Share.”
Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per
share
is computed similar to basic income per share except that the denominator
is
increased to include the number of additional common shares that would have
been
outstanding if the potential common stock equivalents had been issued and
if the
additional common shares were dilutive.
¨
Foreign
currency translation
The
reporting currency of the Company is United States dollar (“US$”). Transactions
denominated in currency other than US$ are translated into US$ at the average
rate for the period. Monetary assets and liabilities denominated in currency
other than US$ are translated into US$ at the rates of exchange ruling at
the
balance sheet date. The resulting exchange differences are recorded in other
expenses in the accompanying statements of operations.
The
financial records of the Company’s operating subsidiaries are maintained in
their local currency, the Renminbi (“RMB”), which is the functional currency.
Assets and liabilities are translated at the exchange rates at the balance
sheet
date, equity accounts are translated at historical exchange rates, and income
and expenses items are translated using the average rate for the period.
The
translation adjustments are recorded in accumulated other comprehensive income
in the statements of changes in stockholders’ equity and comprehensive
income.
¨
Stock
based compensation
Prior
to
January 1, 2006, we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Bulletin No. 25,
Accounting
for Stock Issued to Employees
, or APB
No. 25 and related interpretations. Compensation expense for stock options
was recognized ratably over the vesting period.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Effective
January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards,
Share-Based
Payment
, or
SFAS No. 123(R) using the modified prospective application method. Under
SFAS No. 123R, stock-based compensation expense is measured at the
grant date based on the value of the option or restricted stock and is
recognized as expense, less expected forfeitures, over the requisite service
period.
¨
Product
Warranty
The
Company provides a three-year standard warranty to all Deli Solar (Bazhou)
manufactured products. Repair and replacement of defective component parts
during the first year following purchase are covered under the standard warranty
program. In the second and third year, repair services are covered under
the
warranty program but customers pay for the purchase of the replacement parts.
Warranty services are performed by our independent sales agents and distributors
in return for a 1%-2% discount of the purchase price they pay for our products.
No discount is provided to independent sales agents and distributors unless
and
until warranty services are provided to the Company. The Company has not
experienced any material returns and therefore has not provided any discount
to
independent sales agents and distributors for warranty services.
Under
the
terms of the contracts for energy-saving projects, the Company provides a
product warranty on the equipment sold to its customers for a period of twelve
months upon the completion of installation at the Company’s
expense.
The
Company has not experienced any material returns where it was under obligation
to honor this standard warranty provision. As such, no reserve for product
warranty has been provided in the statements of operations for the years
ended
December 31, 2007 and 2006, respectively.
¨
Segment
reporting
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in two principal reportable segments:
Sales of solar heater or boiler related products and sales of heat pipe related
products.
¨
Fair
value of financial instruments
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
. The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that
the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, other receivables and prepayments, accounts payable,
other
payables and accrued liabilities. As of the balance sheet date, the estimated
fair values of financial instruments were not materially different from their
carrying values as presented due to short maturities of these
instruments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
¨
Registration
payment arrangements
The
Company accounts for registration payment arrangement in accordance with
FASB
Staff Position EITF 00-19-2,
Accounting
for
Registration
Payment
Arrangements
("FSP
EITF 00-19-2") which provides guidance on the accounting for registration
payment arrangements . FSP EITF 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement, whether issued as a separate agreement
or
included as a provision of a financial instrument or other agreement, should
be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies
. A
registration payment arrangement is defined in FSP EITF 00-19-2 as an
arrangement with both of the following characteristics: (1) the arrangement
specifies that the issuer will endeavor (a) to file a registration
statement for the resale of specified financial instruments and/or for the
resale of equity shares that are issuable upon exercise or conversion of
specified financial instruments and for that registration statement to be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and(2) the
arrangement requires the issuer to transfer consideration to the counterparty
if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained.
¨
Uncertain
tax positions
The
Company adopted Financial Accounting Standards Board Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes”
(“FIN
48”), on January 1, 2007. FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and foreign jurisdictions, principally the PRC. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years prior to
the
reverse merger on March 31, 2005. The Internal Revenue Service (IRS) has
not
commenced any examinations of the Company's U.S. income tax returns for the
year
2005, of which reverse merger taking place, through 2007.
The
Company did not have any adjustment to the opening balance of retained earnings
as of January 1, 2007 as a result of the implementation of FIN 48. As of
December 31, 2007, the Company did not have any significant liability for
unrecognized tax benefits. For the year ended December 31, 2007, the
Company did not have any interest accrued related to unrecognized tax benefits
in interest expense and penalties in operating expenses.
¨
Recently
issued accounting standards
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a "Smaller Reporting
Company" is a company with a public float less than $75,000,000 (measured
at end
of Q2). Companies that meet this definition are able to elect "scaled
disclosure standards" on an item-by-item or "a-la-carte" basis. With this
change, the SEC has streamlined and simplified reporting for many companies,
and
has not added any significant disclosure requirements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard
No.
159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities”
, or
SFAS 159. SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. It is expected to expand
the
use of fair value measurements which is consistent with the Financial Accounting
Standards Board’s long-term measurement objectives for accounting for financial
instruments. SFAS 159 is effective for our first fiscal year that begins
after
November 15, 2007, which is our fiscal year 2008 that begins in January 2008.
The Company is currently evaluating the impact of this statement to its
financial position and results of operations.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
‘’Business
Combinations’’
, or
SFAS No. 141R. SFAS No. 141R will change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be recorded and
disclosed following existing GAAP until January 1, 2009. We expect SFAS No.
141R
will have an impact on accounting for business combinations once adopted
but the
effect is dependent upon acquisitions at that time. We are still assessing
the
impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements—An Amendment of ARB No.
51’’
, or
SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation
of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact
on
our financial position or results of operations.
Acquisition
On
May
18, 2007, the Company’s wholly owned subsidiary, Beijing Deli Solar Technology
Development Co., Ltd. entered into a purchase agreement to acquire 51% equity
interest in Tianjin Huaneng, to expand market share, held by Tianjin Municipal
Ji County State-owned Assets Administration Commission for a total purchase
price of $3,149,147. By supplemental agreement dated August 8, 2007, the
purchase price was reduced to approximately $1,689,741. The Company also
incurred additional cost of $769,418 related to finder’s fee, which has been
included in the total cost of the acquisition of $2,459,159. The finder’s fee
was paid to Tianjin Wangshitong Corporate Consulting Co, Ltd., an unrelated
third party. As of December 31, 2007, the Company paid approximately $2,345,018
of the purchase price and the finder’s fee. The remaining balance as of the date
of this report was $114,141. In addition, the Company agreed to provide working
capital of approximately $2.6 million to Tianjin Huaneng. The accounting
date of
the acquisition was July 1, 2007 and was accounted for under the purchase
method. Tianjin Huaneng results of operations have been included in our
consolidated financial statements since the date of acquisition. Tianjin
Huaneng
is principally engaged in the design, development and manufacturing and
marketing of energy-saving related heating products such as heat pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. These products are distributed in the PRC and Southeast
Asia. Goodwill recorded as part of the purchase price allocation was $1,708,665.
Identifiable intangible assets acquired as part of the acquisition included
definite-lived intangibles such as land use rights which totaled $256,157,
with
a weighted average amortization period of approximately 50 years.
The
aggregate purchase price was $2,459,159, including $1,689,741 of cash and
costs
related to the acquisition of $769,418. Below is a summary of the total purchase
price:
Cash
|
|
$
|
1,689,741
|
|
Direct
acquisition costs
|
|
|
769,418
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
2,459,159
|
|
In
June
2008, the purchase price allocation was finalized which resulted to no
adjustment to the fair value of assets acquired and liabilities assumed.
The
following table represents the final purchase price allocation to the estimated
fair value of the assets acquired and liabilities assumed:
|
|
As of July 1,
2007
|
|
Cash
and cash equivalents
|
|
$
|
196,150
|
|
Accounts
receivable
|
|
|
2,362,792
|
|
Inventories
|
|
|
1,665,617
|
|
Prepayments
and other receivables
|
|
|
441,882
|
|
Property,
plant and equipment
|
|
|
589,985
|
|
Land
use rights
|
|
|
256,157
|
|
Goodwill
|
|
|
1,789,324
|
|
Total
assets acquired
|
|
$
|
7,301,907
|
|
Short-term
bank loan
|
|
$
|
588,899
|
|
Accounts
payable
|
|
|
573,479
|
|
Deferred
revenue
|
|
|
340,856
|
|
Advances
from customers
|
|
|
1,326,665
|
|
Value-added
tax payable
|
|
|
440,207
|
|
Income
taxes payable
|
|
|
458,705
|
|
Deferred
tax liabilities
|
|
|
16,059
|
|
Accrued
liabilities and other payables
|
|
|
716,188
|
|
Long-term
payables
|
|
|
381,690
|
|
Total
liabilities assumed
|
|
|
4,842,748
|
|
Net
assets acquired
|
|
$
|
2,459,159
|
|
The
$1,789,324 of goodwill was assigned to the heat solar and related products
segment. The company does not expect goodwill to be tax deductible in the
PRC.
The
following unaudited pro forma financial information for the Company gives
effect
to the 2007 acquisition as if they had occurred on January 1, 2006. These
pro forma results do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on such
date or
to project the Company’s results of operations for any future
period.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Pro
forma net sales
|
|
$
|
|
|
$
|
34,981,140
|
|
Pro
forma net income
|
|
|
|
|
|
1,445,425
|
|
|
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.16
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
6,205,290
|
|
Diluted
|
|
|
|
|
|
6,957,876
|
|
3.
ACCOUNTS
RECEIVABLE, NET
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
If
actual collections experience changes, revisions to the allowance may be
required.
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Accounts
receivable, cost
|
|
$
|
8,219,804
|
|
$
|
986,809
|
|
Less:
allowance for doubtful accounts
|
|
|
(766,795
|
)
|
|
(116,363
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
7,453,009
|
|
$
|
870,446
|
|
For
the
year ended December 31, 2006, the Company recorded the reversal of the allowance
for doubtful accounts of $77,267. For the year ended December 31, 2007, the
Company recorded allowance for doubtful accounts of $650,432.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
4.
INVENTORIES
Inventories
consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
656,605
|
|
$
|
150,748
|
|
Consumables
|
|
|
5,359
|
|
|
5,970
|
|
Work-in-process
|
|
|
2,464,441
|
|
|
-
|
|
Finished
goods
|
|
|
749,253
|
|
|
159,047
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3,875,658
|
|
$
|
315,765
|
|
5.
OTHER
RECEIVABLES AND PREPAYMENTS
Other
receivables and prepayments consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Advance
to suppliers
|
|
$
|
493,421
|
|
$
|
1,007,709
|
|
Prepaid
expenses
|
|
|
249,598
|
|
|
58,203
|
|
Deposits
|
|
|
894,268
|
|
|
256,278
|
|
Other
receivables
|
|
|
661
|
|
|
65,721
|
|
|
|
|
|
|
|
|
|
Other
receivables and prepayments
|
|
$
|
1,637,948
|
|
$
|
1,387,911
|
|
During
the year ended December 31, 2006, the Company received the amount of $82,639
being the settlement of related party receivables for an advance to one of
the
Company’s directors. Related party receivable as of December 31, 2007 and 2006
were in the amounts of $-0- and $-0- respectively.
6.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
5,573,982
|
|
$
|
3,528,180
|
|
Plant
and machinery
|
|
|
1,836,914
|
|
|
71,131
|
|
Office
equipments
|
|
|
1,004,118
|
|
|
65,749
|
|
Motor
vehicles
|
|
|
81,497
|
|
|
76,176
|
|
Computer
equipment
|
|
|
13,507
|
|
|
12,625
|
|
Construction
in progress
|
|
|
2,118,615
|
|
|
2,580,031
|
|
|
|
|
10,628,633
|
|
|
6,333,892
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,809,417
|
)
|
|
(407,424
|
)
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
8,819,216
|
|
$
|
5,926,468
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Depreciation
expenses for the years ended December 31, 2007and2006 were $282,822 and$162,695,
respectively.
7.
INTANGIBLE
ASSETS, NET
Intangible
assets consisted of the following:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
use rights, at cost
|
|
$
|
1,654,998
|
|
$
|
1,019,272
|
|
Less:
accumulated amortization
|
|
|
(57,077
|
)
|
|
(15,742
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
1,597,921
|
|
$
|
1,003,530
|
|
All
lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided
over
the term of the land use right agreement which is 50 years, on a straight-line
basis. Amortization expenses for the years ended December 31, 2007 and2006
were
$41,335 and $15,742, respectively.
8.
OTHER
PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Related
party payable
|
|
$
|
-
|
|
$
|
22,528
|
|
Accrued
expenses
|
|
|
608,315
|
|
|
22,080
|
|
Customer
deposits
|
|
|
2,281,909
|
|
|
262,269
|
|
Other
payables
|
|
|
3,508,066
|
|
|
35,934
|
|
Taxes
payables
|
|
|
1,359,140
|
|
|
-
|
|
Deferred
revenue
|
|
|
795,022
|
|
|
-
|
|
|
|
$
|
8,552,452
|
|
$
|
342,811
|
|
Related
party payable as of December 31, 2006 included expenses reimbursement payable
to
Mr. Deli Du, Chairman and Director, in the amount of $22,528. During the
year
ended December 31, 2007, the Company repaid Mr. Deli Du the amount of $22,528.
Related party payable to Mr. Deli Du as of December 31, 2007 was in the amount
of $-0-.
9.
STOCK
HOLDERS’ EQUITY
Authorized
Capital
The
Company’s authorized capital stock consists of 66,666,667 shares of $0.001 par
value per share common stock and 25,000,000 shares of $0.001 par value per
share
preferred stock
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Class
A Preferred stock
The
Company has designated 3,500,000 of its Preferred Shares as Class A Convertible
Preferred Shares. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, Class A Convertible Preferred
Shareholders shall be entitled to receive out of the assets of the Corporation,
an amount equal to $1.55 per share. Each share of Series A Preferred
Stock shall
be initially convertible into one (1) share of Common Stock subject to
adjustment for stock dividend and stock splits, sale or issuance of common
stock
at a price which is less than $1.55, at the option of the investors,
at any time
after the original issue date.
The
Class
A Convertible Preferred Shares contain a beneficial conversion feature in
favor
of the holder. The beneficial conversion feature was measured at its intrinsic
value at the date of issuance of the shares and is recognized immediately
as a
return to the preferred shareholders through a charge to retained earnings,
since the conversion feature is immediately exercisable by the holders. The
charge during the current year was $975,807. Although there is no impact
on net
income, the charge to retained earnings affects the computation of both basic
and diluted EPS for US GAAP in the same way that dividends on the preferred
shares do.
Sale
of Units
On
June
13, 2007, the Company entered into a Securities Purchase Agreement with Barron
Partners L.P., and two accredited investors in a private placement (“Private
Placement) providing for the sale of: (i) 1,774,194 shares of our Series
A
Convertible Preferred Stock; (ii) stock purchase warrants to purchase an
aggregate of 1,774,194 shares of common stock at a price of $1.90 per share;
and
(iii) stock purchase warrants to purchase an aggregate of 1,774,194 shares
of
common stock at a price of $2.40 per share. In connection with the Private
Placement, the Company deposited 900,000 shares of Series A Convertible
Preferred Stock into escrow as security in the event (i) the earnings target
for
2007 is not met and (ii) the earnings target for 2008 is not met. The 900,000
shares held in escrow were not included in the diluted earnings per share
calculation as the earnings target for 2007 was met and the fulfillment of
earnings target for 2008 has not been determined. Net proceeds of $2,581,000
were used to finance business acquisitions.
Registration
Rights
On
June
13, 2007, the Company also entered into a registration rights agreement for
the
common stock underlying the convertible preferred shares and all warrants
related to the Private Placement, under which it agreed to use its commercially
reasonable efforts to cause the initial registration statement to be declared
effective by the SEC at the earlier of (i) 150 days following the filing
date
with respect to the registration statement, (ii) 10 days following the receipt
of a “No Review” or similar letter from the SEC or (iii) the third business day
following the day the Company receives notice from the SEC that the SEC has
determined that the registration statement eligible to be declared effective
without further comments by the SEC. The Company is subject to monthly
liquidated damages of 17,742 shares of Series A Preferred Stock, up to a
maximum
of 266,129 shares of Series A Preferred Stock in aggregate, for failing to
register the shares timely. The Company is under the obligation to have the
Registration Statement effective on January 10, 2008. However, it was not
effective until 28 days later on February 7, 2008 being the effectiveness
date
of SB-2. 17,742 shares of preferred stock per month prorated per 28 days
means
16,559 shares of preferred stock will be issued to investors.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Warrants
for services
In
connection with the Private Placement on June 13, 2007, the Board of Directors
granted to consultants and agents warrants to purchase an aggregate of 181,452
shares of the Company’s common stock, of which 75,000 warrants are exercisable
at US$2.90 per share and 106,452 warrants are exercisable at US$2.71 per
share,
or on a cashless exercise basis. The warrants vested immediately and expire
on
June 13, 2012. The market price of the stock was US$2.10 per share on the
grant
date. The Company valued the 75,000 warrants at US$0.74 per share and the
106,452 warrants at US$0.78 per share, or $138,338 in aggregate in accordance
with SFAS 123R, which were recorded as offering cost in additional paid-in
capital in the accompanying consolidated financial statements for the year
ended
December 31, 2007.
The
fair
value of the warrants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
A
summary
of the status of the Company’s outstanding common stock warrants as of December
31, 2007 and 2006:
|
|
Number of
Shares
|
|
Weighted-
average Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2005
|
|
|
1,825,719
|
|
|
|
|
$
|
3.85
|
|
|
—
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
at December 31, 2006
|
|
|
1,825,719
|
|
|
|
|
|
3.85
|
|
|
2.25
years
|
|
|
—
|
|
Granted
|
|
|
3,729,840
|
|
|
|
|
|
2.18
|
|
|
4.50
years
|
|
|
354,839
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
and Exercisable at December 31, 2007
|
|
|
5,555,559
|
|
|
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
10.
INCOME
TAXES
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes.
The
Company generated substantially its net income from the operation of its
subsidiary in the PRC and subject to the PRC tax jurisdiction. The Company
has
recorded income tax provision for the years ended December 31, 2007 and
2006.
The
components of (loss) income before income taxes separating U.S., BVI and
PRC tax
jurisdictions are as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
|
|
Loss
subject to U.S.
|
|
$
|
(461,433
|
)
|
$
|
(693,745
|
)
|
Loss
subject to BVI
|
|
|
(184,056
|
)
|
|
(73,691
|
)
|
Income
subject to the PRC
|
|
|
3,985,699
|
|
|
2,006,937
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
United
States of America
China
Solar is registered in the State of Nevada and is subject to the tax laws
of United States of America.
As
of
December 31, 2007, the operation in the United States of America incurred
$461,433 of net operating losses available for federal tax purposes, which
are
available to offset future taxable income. The net operating loss carry forwards
will to expire through 2028, if unutilized. The Company has provided for
a full
valuation allowance against the deferred tax assets of $461,433 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiary operating in the PRC, Ailiyang and Tianjin Huaneng are
domestically owned and subject to the Corporate Income Tax governed by the
Income Tax Law of the People’s Republic of China, at a statutory rate of 33%,
which is comprised of a 30% national income tax and 3% local income
tax.
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to a
two-year exemption from enterprise income tax and a reduced enterprise income
tax rate of 15% for the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with effect from January 1, 2008. Deli Solar
(Bazhou) and Deli Solar (Beijing) are considered a foreign invested enterprise
and its ultimate applicable effective tax rate in 2008 and beyond will depend
on
many factors, including but not limited to whether certain of its legal entity
will be subject to a transitional policy under the Corporate Income Tax Law,
whether Deli Solar (Bazhou) and Deli Solar (Beijing) can continue to enjoy
the
unexpired tax holidays.
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for the
years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,340,210
|
|
$
|
1,239,501
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
15
|
%
|
|
|
|
1,102,269
|
|
|
185,925
|
|
Less:
items not subject to taxes
|
|
|
|
|
|
|
|
Effect
for tax holiday
|
|
|
(486,944
|
)
|
|
(185,925
|
)
|
Income
tax expenses
|
|
$
|
615,325
|
|
$
|
-
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
1,432,326
|
|
|
767,436
|
|
Less:
valuation allowance
|
|
|
(1,432,326
|
)
|
|
(767,436
|
)
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
11.
NET
INCOME PER SHARE
Basic
net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year less number of warrants issued during
the year in note 10.
The
following table sets forth the computation of basic and diluted net income
per
share for the years ended December 31, 2007and 2006:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,525,141
|
|
|
1,239,501
|
|
Less:
Preferred stock beneficial conversion
|
|
|
(975,807
|
)
|
|
-
|
|
Net
income available to common stockholders in computing basic net
income per
share
|
|
$
|
1,549,334
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Plus:
Preferred stock beneficial conversion
|
|
|
975,807
|
|
|
-
|
|
Net
income available to common stockholders in computing diluted net
income
per share
|
|
$
|
2,525,141
|
|
$
|
1,239,501
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
6,205,290
|
|
|
6,205,290
|
|
-
Weighted average preferred stock outstanding
|
|
|
887,097
|
|
|
-
|
|
-
Weighted average warrant shares outstanding
|
|
|
3,690,639
|
|
|
752,586
|
|
|
|
|
10,783,026
|
|
|
6,957,876
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.23
|
|
$
|
0.18
|
|
There
were no securities excluded from diluted earnings per share as none were
anti-dilutive.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
12.
SEGMENT
REPORTING, GEOGRAPHICAL INFORMATION
(a)
Business
information
The
Company has two reportable segments namely solar heater/boiler related products
and heat pipe related products for the three year ended December 31, 2007,
2006
and 2005. The solar heater/boiler related products are mainly under the
management of Deli Solar (Bazhou) while the heat pipe related products are
energy-savings projects under the management of Tianjin Huaneng.
An
analysis of the Company’s revenue and total assets are as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
26,693,850
|
|
$
|
21,468,313
|
|
Heat
Pipe related products
|
|
|
7,002,015
|
|
|
-
|
|
Other
segment
|
|
|
3,376,481
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
5,672,443
|
|
$
|
4,625,319
|
|
Heat
Pipe related products
|
|
|
1,820,524
|
|
|
-
|
|
Other
segment
|
|
|
807,301
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,690,225
|
|
$
|
12,716,185
|
|
Heat
Pipe related products
|
|
|
9,029,994
|
|
|
-
|
|
Other
segment
|
|
|
2,919,494
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
Heat
Pipe related products
|
|
|
1,789,324
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,789,324
|
|
$
|
-
|
|
Other
segment in total revenue, gross profit, and assets refers to solar lighting
products and sales of spare parts/components. The amount of other segment
revenue, gross profit, and assets are less than 10% in each category and
disclosed as an “all other” category in accordance with paragraph 21 of SFAS
131. There were no elimination or reversal of transactions between reportable
segments.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(b)
|
Geographic
information
|
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC. In respect of geographical segment reporting, sales
are based on the country in which the customer is located and total assets
and
capital expenditure are based on the country where the assets are
located.
The
Company’s operations are located in PRC, which is the main geographical areas.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
PRC
|
|
$
|
32,623,664
|
|
$
|
19,321,482
|
|
Others
|
|
|
4,448,682
|
|
|
2,146,831
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,072,346
|
|
$
|
21,468,313
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Gross
profit:
|
|
|
|
|
|
PRC
|
|
$
|
6,806,220
|
|
$
|
4,070,281
|
|
Others
|
|
|
1,494,048
|
|
|
555,038
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,300,268
|
|
$
|
4,625,319
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
PRC
|
|
$
|
29,107,727
|
|
$
|
11,445,134
|
|
Others
|
|
|
1,531,986
|
|
|
1,271,051
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,639,713
|
|
$
|
12,716,185
|
|
13.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company’s subsidiaries, Deli Solar (Bazhou),
Ailiyang, Deli Solar (Beijing) and Tianjin Huaneng are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $327,257 and $201,072 for the years ended December
31, 2007and 2006 respectively.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
14.
|
CONCENTRATION
OF
RISK
|
No
revenue from customers that individually represent greater than 10% of the
total
revenue for each of the years ended December 31, 2007and 2006.
The
following is a table summarizing the purchases from vendors that individually
represent greater than 10% of the total purchases for each of the years ended
December 31, 2007and 2006 and their outstanding balances as at year-end
date:
|
|
Year ended December 31, 2007
|
|
|
|
Purchases
|
|
Percentage of
total purchases
|
|
Accounts
payable, trade
|
|
Vendor A
|
|
$
|
5,475,372
|
|
|
50.4
|
%
|
$
|
667,718
|
|
|
|
Year ended December 31, 2006
|
|
Vendor
|
|
Purchases
|
|
Percentage of
total purchases
|
|
Accounts
payable, trade
|
|
Vendor A
|
|
$
|
3,800,242
|
|
|
49.0
|
%
|
$
|
379,215
|
|
Financial
instruments that are potentially subject to credit risk consist principally
of
cash and trade receivables. All cash held in financial institutions are not
insured and therefore subject to credit risk. The Company believes the
concentration of credit risk in its trade receivables is substantially mitigated
by its ongoing credit evaluation process and relatively short collection terms.
The Company does not generally require collateral from customers. The Company
evaluates the need for an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at floating rates expose the Company to cash flow and fair value
interest-rate risk. Company policy is to maintain approximately all of its
borrowings in floating rate instruments. At the year end, all of borrowings
were
at floating rates.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
15.
|
COMMITMENTS
AND CONTINGENCIES
|
(a)
|
Operating
lease commitment
|
The
Company leases land and buildings under non-cancelable operating lease
agreements. Based on the current rental lease agreements, the future minimum
rental payments required for the coming years are as follows:
Years ending December 31:
|
|
|
|
2008
|
|
$
|
20,015
|
|
2009
|
|
|
20,015
|
|
2010
|
|
|
20,015
|
|
2011
|
|
|
20,014
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
80,059
|
|
For
the
years ended December 31, 2007and 2006, rental expenses were $101,780 and
$77,246, respectively.
On
January 9, 2008 and March 25, 2008 Beijing Deli Solar Technology Development
Co., Ltd., the Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”),
entered into an Equity Purchase Agreement, a Complementary Agreement and a
Supplementary, with Shenzhen PengSangPu Solar Industrial Products Corporation
(“SZPSP”) and its shareholders to acquire 100% of the outstanding equity
interests of SZPSP from its three current shareholders. The closing will be
effective March 31, 2008.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its current three shareholders. Part of the consideration of
the transaction is RMB 28.8 million ($4,087,832) payable in cash. This purchase
price is based on an appraisal of SZPSP. The three shareholders of SZPSP agreed
to loan the cash proceeds back to SZPSP interest free to be used for working
capital. Fifty (50%) of the principal amount of the loan is required to be
paid
prior to March 31, 2009 and the remaining 50% balance is required to be paid
prior to March 31, 2010.
In
addition to the payment of the cash purchase price under the Complementary
Agreement the parties agreed to an appraisal value of RMB 20 million of SZPSP’s
intangible assets which was paid in 1,419,729 shares of common stock. Provided
that if on the first anniversary of the closing the common stock price is lower
than $2, the Company will pay the difference. Fifty percent (50%) of these
shares shall be transferable and unrestricted within one year after the Closing
and the remaining Fifty percent (50%) transferable within two years. The shares
shall be transferred to SZPSP within 180 days of the closing. In addition,
as part of the purchase price, the shareholders of SZPSP will receive five
years
warrants to purchase a total of 141,973 shares of common stock at an exercise
price of $2.5 per share subject to future adjustments such as stock splits
and
transactions similar in nature.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue is less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit
of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it does
not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the extent
necessary for the remaining balance.
The
current shareholders of SZPSP, being the management of SZPSP, will enter into
employment contracts with the Company for a term of three years to remain in
their current managing positions of SZPSP, subject to further amendments of
such
employment arrangement.
After
the
Closing, Deli Solar (Beijing) has the right to a majority of the board seats
of
SZPSP.
On
February 25, 2008 the Company raised gross proceeds of approximately $11,300,000
in a private placement providing for the sale of 4,691,499 shares of common
stock at a price of $2.40 per share.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
CONDENSED BALANCE
SHEETS
AS
OF JUNE 30, 2007 AND DECEMBER 31, 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
(unaudited)
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
384,607
|
|
$
|
282,148
|
|
Accounts
receivable, net
|
|
|
4,648,699
|
|
|
4,129,068
|
|
Inventories
|
|
|
3,265,915
|
|
|
3,136,141
|
|
Prepayments
and other receivables
|
|
|
881,590
|
|
|
569,416
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
9,180,811
|
|
|
8,116,773
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,156,835
|
|
|
1,151,521
|
|
Intangible
assets, net
|
|
|
502,269
|
|
|
507,556
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
10,839,915
|
|
$
|
9,775,850
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
1,154,703
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
1,124,468
|
|
|
614,355
|
|
Deferred
revenue
|
|
|
668,345
|
|
|
696,813
|
|
Advances
from customers
|
|
|
2,601,305
|
|
|
2,513,511
|
|
Value-added
tax payable
|
|
|
863,151
|
|
|
875,750
|
|
Income
taxes payable
|
|
|
899,421
|
|
|
835,860
|
|
Deferred
tax liabilities
|
|
|
31,489
|
|
|
79,038
|
|
Accrued
liabilities and other payables
|
|
|
1,404,290
|
|
|
1,148,560
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,747,172
|
|
|
7,918,590
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Long-term
payables
|
|
|
748,412
|
|
|
748,412
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,495,584
|
|
|
8,667,002
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
capital
|
|
|
720,786
|
|
|
720,786
|
|
Accumulated
other comprehensive income
|
|
|
123,098
|
|
|
66,449
|
|
Statutory
reserve
|
|
|
257,466
|
|
|
257,466
|
|
Retained
earnings
|
|
|
242,981
|
|
|
64,147
|
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,344,331
|
|
|
1,108,848
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
10,839,915
|
|
$
|
9,775,850
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
|
|
|
Product
|
|
$
|
5,944,303
|
|
$
|
3,597,777
|
|
Maintenance
|
|
|
705,566
|
|
|
480,226
|
|
|
|
|
6,649,869
|
|
|
4,078,003
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Product
|
|
|
5,129,097
|
|
|
3,083,888
|
|
Maintenance
|
|
|
42,334
|
|
|
28,814
|
|
|
|
|
5,171,431
|
|
|
3,112,702
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,478,438
|
|
|
965,301
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
654,140
|
|
|
364,787
|
|
Depreciation
and amortization
|
|
|
119,882
|
|
|
85,534
|
|
Research
and development
|
|
|
61,541
|
|
|
59,093
|
|
General
and administrative
|
|
|
309,549
|
|
|
245,831
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,145,112
|
|
|
755,245
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
333,326
|
|
|
210,056
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(86,692
|
)
|
|
(70,880
|
)
|
Interest
income
|
|
|
1,180
|
|
|
560
|
|
Other
income
|
|
|
16,990
|
|
|
9,977
|
|
Gain
on disposal of plant and equipment
|
|
|
2,066
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(66,456
|
)
|
|
(60,343
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
266,870
|
|
|
149,713
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(67,299
|
)
|
|
(53,090
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
199,571
|
|
$
|
96,623
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
56,649
|
|
|
6,375
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
256,220
|
|
$
|
102,998
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
199,571
|
|
$
|
96,623
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Gain
on disposal of plant and equipment
|
|
|
(2,066
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
119,882
|
|
|
85,534
|
|
Allowance
for doubtful accounts
|
|
|
103,419
|
|
|
-
|
|
Deferred
tax benefit
|
|
|
(47,549
|
)
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(623,050
|
)
|
|
(170,624
|
)
|
Inventories
|
|
|
(129,774
|
)
|
|
(1,308,034
|
)
|
Prepayments
and other receivables
|
|
|
(312,174
|
)
|
|
(80,958
|
)
|
Accounts
payable
|
|
|
510,113
|
|
|
(36,971
|
)
|
Deferred
revenue
|
|
|
(28,468
|
)
|
|
(75,700
|
)
|
Advances
from customers
|
|
|
87,794
|
|
|
1,249,042
|
|
Value-added
tax payable
|
|
|
(12,599
|
)
|
|
(99,207
|
)
|
Income
taxes payable
|
|
|
63,561
|
|
|
4,876
|
|
Accrued
liabilities and other payables
|
|
|
255,730
|
|
|
309,109
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
184,390
|
|
|
(26,310
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(123,582
|
)
|
|
(50,987
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
5,739
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(117,843
|
)
|
|
(50,987
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividends
paid to owners
|
|
|
(20,737
|
)
|
|
-
|
|
Repayment
of long-term payables
|
|
|
-
|
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(20,737
|
)
|
|
(25,411
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
56,649
|
|
|
6,375
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
102,459
|
|
|
(96,333
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
282,148
|
|
|
258,737
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
384,607
|
|
$
|
162,404
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
3,738
|
|
$
|
48,214
|
|
Cash
paid for interest expenses
|
|
$
|
86,692
|
|
$
|
70,880
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
CONDENSED
STATEMENT OF OWNERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Registered
capital
|
|
Accumulated
other
comprehensive
income
|
|
Statutory
reserve
|
|
Retained
earnings
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
$
|
720,786
|
|
$
|
66,449
|
|
$
|
257,466
|
|
$
|
64,147
|
|
$
|
1,108,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
56,649
|
|
|
-
|
|
|
-
|
|
|
56,649
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
199,571
|
|
|
199,571
|
|
Dividends
paid to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,737
|
)
|
|
(20,737
|
)
|
Balance
as of June 30, 2007
|
|
$
|
720,786
|
|
$
|
123,098
|
|
$
|
257,466
|
|
$
|
242,981
|
|
$
|
1,344,331
|
|
See
accompanying notes to condensed financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared in
accordance with both generally accepted accounting principles for interim
financial information, and the instructions to Form 10-QSB and Item 310(b)
of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited condensed financial statements
reflect all adjustments (consisting of normal recurring accruals) that are,
in
the opinion of management, considered necessary for a fair presentation of
the
results for the interim periods presented. Interim results are not necessarily
indicative of results for a full year.
The
condensed financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to our annual audited financial statements for the preceding fiscal
year. Accordingly, these condensed financial statements should be read in
conjunction with the financial statements for the year ended December 31,
2006.
2.
ORGANIZATION
AND BUSINESS BACKGROUND
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987
as a state-owned enterprise and then was restructured in July 2004 as a limited
liability company with 51% of its equity interest owned by Tianjin Municipal
Ji
County State-owned Assets Administration Commission (“SAAC”) and 49% of equity
interest owned by employees in the People’s Republic of China (“PRC”). Its
principal place of business is located in No.119 Yuyang South Road, Ji County,
Tianjin Municipality, the PRC. The registered capital of the Company is
US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The
Company is principally engaged in the design, development and manufacturing
and
marketing of energy-saving related heating products such as heat pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. These products are distributed in the PRC and Southeast
Asia.
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
ooo
Basis
of Presentation
These
accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
of
America.
ooo
Use of
Estimates
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the period reported. Actual results may differ
from these estimates.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
ooo
Revenue
Recognition
The
Company derives revenues from the provision of energy-saving projects. The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units of
accounting in the arrangement.
Revenues
under these bundled arrangements are allocated considering the relative fair
values of two separate deliverables: (a) product deliverable and (b) maintenance
deliverable, included in the bundled arrangement based on the estimated relative
fair values of each element in accordance with EITF 00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each element
are
met.
(a)
Product Revenue
Revenue
from these product deliverables are recognized upon final acceptance, which
is
signed by the customer when installation is completed.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and outbound
freight as a component of cost of revenues.
(b)
Maintenance Revenue
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the products,
which is generally 12 months. As of June 30, 2007 and 2006, the unrecognized
portion of revenue related to maintenance was $668,345 and $401,866 and were
included in the Deferred Revenue caption on the balance sheets.
(c)
Interest Income
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
ooo
Cost
of Revenue
Cost
of
revenue consists primarily of material costs, direct labor, shipping and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of products and the provision of the
energy-saving projects.
ooo
Cash
and Cash Equivalents
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
ooo
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company carries accounts receivable at their face amounts less an allowance
for doubtful accounts . On a regular basis, an allowance
for uncollectible receivables is established and determined based upon past
transaction history with customers, customer payment practices and economic
conditions. Actual collection experience may differ from the current estimate
of
net receivables. A change to the allowance for uncollectible amounts may be
required if a future event or other change in circumstances results in a change
in the estimate of the ultimate collectibility of a specific account. The
Company does not require collateral for the accounts receivable balances. For
the six months ended June 30, 2007 and 2006, the Company recorded an allowance
for doubtful accounts of $103,419 and $Nil, respectively.
ooo
Inventories
Inventories
consist primarily of finished goods, work in process and raw materials and
are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Allowance for slow-moving and obsolescence is
an
estimate amount based on an analysis of current business and economic risks,
the
duration of the inventories held and other specific identifiable risks that
may
indicate a potential loss. The allowance is reviewed regularly to ensure that
it
adequately provides for all reasonable expected losses. For the six months
ended
June 30, 2007 and 2006, the Company did not record any allowance for
obsolescence.
ooo
Property, Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable life
|
|
Residual value
|
|
|
|
|
|
|
|
|
|
Building
|
|
|
20
years
|
|
|
5
|
%
|
Plant
and machinery
|
|
|
10
years
|
|
|
5
|
%
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Office
equipment
|
|
|
10
years
|
|
|
5
|
%
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss on the
disposal of property, plant and equipment is the difference between the net
sales proceeds and the carrying amount of the relevant assets and is recognized
in the statements of operations.
o
o
o
Land
Use Right
All
lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreements on a straight-line basis, which is
50
years and they will expire in 2054.
Amortization
expense totaled $5,287 and $5,287 for the six months ended June 30, 2007 and
2006, respectively.
o
o
o
Valuation of Long-lived Assets
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the
Company reviews its long-lived assets, including property, plant and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. If the total of
the
expected undiscounted future net cash flows is less than the carrying amount
of
the asset, a loss is recognized for the difference between the fair value and
carrying amount of the asset. There has been no impairment as of June 30,
2007.
o
o
o
Comprehensive
Income
SFAS
No. 130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during the period from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign currency
translation. This comprehensive income is not included in the computation of
income tax expense or benefit.
o
o
o
Income
Taxes
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
, which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax assets
if
it is considered more likely than not that some portion of, or all of the
deferred tax assets will not be realized.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
o
o
o
Foreign
Currencies Translation
The
functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying
financial statements have been expressed in United States dollars, the reporting
currency of the Company. The balance sheet is translated into United States
dollars based on the rates of exchange ruling at the balance sheet date. The
statements of operations and comprehensive income are translated using a
weighted average rate for the period. Translation adjustments are reflected
as
cumulative translation adjustments in owners’ equity.
o
o
o
Retirement
Plan Costs
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the statements of operations and
comprehensive income as and when the related employee service is
provided.
o
o
o
Research
and Development Costs
Research
and development costs are expensed when incurred in the development of new
processes including significant improvements and refinements of existing
products. Such costs mainly relate to labor and material cost. The Company
incurred $61,541 and $59,093 for the six months ended June 30, 2007 and 2006
,
respectively.
o
o
o
Product
Warranty
Under
the
terms of the contracts, the Company provides a product warranty on the equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard warranty
provision. As such, no reserve for product warranty has been provided in the
statements of operations for the six months ended June 30, 2007 and
2006.
o
o
o
Related
Parties
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party
or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
o
o
o
Segment
Reporting
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in one principal reportable business
segment. All the customers are located in the PRC and the South East Asia
region.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
o
o
o
Fair
Value of Financial Instruments
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
. The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
trade accounts receivable, inventories, prepayments and other receivables,
short-term bank loan, trade accounts payable, deferred revenue, advances from
customers, value-added tax payable, income taxes payable, accrued liabilities
and other payable.
As
of the
balance sheet dates, the estimated fair values of financial instruments were
not
materially different from their carrying values as presented due to short
maturities of these instruments.
o
o
o
Recently
Issued Accounting Standards
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In
June
2006, the FASB issued Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in the Company’s financial statements in accordance with SFAS No. 109. FIN
48 prescribes a recognition threshold and measurement attributes for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company adopted FIN48 on
January 1, 2007. The adoption of FIN 48 did not have an effect on the
results of operations or financial condition. The Company did not have any
unrecognized tax benefits as of June 30, 2007.
On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities — Including an
Amendment of FASB Statement No. 115”
(“SFAS
159”). This standard permits an entity to measure financial instruments and
certain other items at estimated fair value. Most of the provisions of SFAS
No. 159 are elective; however, the amendment to FASB No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities,”
applies
to all entities that own trading and available-for-sale securities. The fair
value option created by SFAS 159 permits an entity to measure eligible items
at
fair value as of specified election dates. The fair value option (a) may
generally be applied instrument by instrument, (b) is irrevocable unless a
new election date occurs, and (c) must be applied to the entire instrument
and not to only a portion of the instrument. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity (i) makes that choice in the first 120 days
of that year, (ii) has not yet issued financial statements for any interim
period of such year, and (iii) elects to apply the provisions of FASB 157.
Management is currently evaluating the impact of SFAS 159, if any, on the
Company’s financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
4.
ACCOUNTS
RECEIVABLE, NET
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, the allowances for doubtful accounts
are
provided as $103,419 and $Nil for the six months ended June 30, 2007 and 2006,
respectively.
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
$
|
5,329,410
|
|
$
|
4,706,360
|
|
|
|
|
|
|
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(680,711
|
)
|
|
(577,292
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
4,648,699
|
|
$
|
4,129,068
|
|
5.
INVENTORIES
Inventories
consisted of the following:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
534,995
|
|
$
|
508,161
|
|
Work
in process
|
|
|
750,189
|
|
|
245,082
|
|
Finished
goods
|
|
|
1,980,731
|
|
|
2,382,898
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,265,915
|
|
$
|
3,136,141
|
|
As
of
June 30, 2007 and December 31, 2006, the Company recorded no allowance for
obsolete inventories and write-offs.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
6.
PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Advances
to employees
|
|
$
|
280,180
|
|
$
|
206,661
|
|
Deposits
paid to suppliers
|
|
|
601,410
|
|
|
345,024
|
|
Other
receivables
|
|
|
-
|
|
|
17,731
|
|
|
|
$
|
881,590
|
|
$
|
569,416
|
|
7.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
760,927
|
|
$
|
721,753
|
|
Plant
and machinery
|
|
|
1,161,492
|
|
|
1,157,166
|
|
Motor
vehicles
|
|
|
249,106
|
|
|
199,606
|
|
Office
equipment
|
|
|
104,074
|
|
|
109,806
|
|
|
|
|
2,275,599
|
|
|
2,188,331
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,118,764
|
)
|
|
(1,036,810
|
)
|
Net
book value
|
|
$
|
1,156,835
|
|
$
|
1,151,521
|
|
Depreciation
expense for the six months ended June 30, 2007 and 2006 were $114,595 and
$80,247, respectively.
As
of
June 30, 2007 and 2006, certain property, plant and machinery with the net
book
value of $915,135 and $1,071,835 respectively, were pledged as securities in
connection with outstanding loan facilities (see Note 9).
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
8.
INTANGIBLE
ASSETS, NET
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Land
use rights, cost
|
|
$
|
528,704
|
|
$
|
528,704
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(26,435
|
)
|
|
(21,148
|
)
|
Land
use rights, net
|
|
$
|
502,269
|
|
$
|
507,556
|
|
Amortization
expense for the six months ended June 30, 2007 and 2006 were $5,287 and $5,287,
respectively.
9.
SHORT-TERM
BANK LOAN
As
of
June 30, 2007, the Company has a short-term bank loan of $1,154,703 with the
Agricultural Bank of China, which is secured with interest rate at 5.84% per
annum payable quarterly, with principle due November 27, 2006. It is
collateralized by building and certain plant and machinery of the Company (see
Note 7).
10.
ACCRUED
LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Welfare
payable
|
|
$
|
688,250
|
|
$
|
523,566
|
|
Salary
payable
|
|
|
461,873
|
|
|
393,869
|
|
Accrued
expenses
|
|
|
173,318
|
|
|
131,832
|
|
Government
levy payable
|
|
|
80,849
|
|
|
99,293
|
|
|
|
$
|
1,404,290
|
|
$
|
1,148,560
|
|
11.
LONG-TERM
PAYABLES
Long-term
payables consisted of the following:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Payable
to employees
|
|
$
|
496,252
|
|
$
|
496,252
|
|
Payable
to government
|
|
|
194,560
|
|
|
194,560
|
|
Payable
to third parties
|
|
|
57,600
|
|
|
57,600
|
|
|
|
$
|
748,412
|
|
$
|
748,412
|
|
Payable
to employees represented unsecured advances with interest rate at 8.20% per
annum payable quarterly and no specific terms of repayment .
Payable
to government and third parties represented unsecured advances, interest-free
and no specific terms of repayment.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws,
the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
The
provision for income tax expense consisted of the following:
|
|
Six months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
114,848
|
|
$
|
53,090
|
|
Deferred
tax
|
|
|
(47,549
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
67,299
|
|
$
|
53,090
|
|
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes stated in the statements of operations for the six
months ended June 30, 2007 and 2006 is as follows:
|
|
Six months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
266,870
|
|
$
|
149,713
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
88,067
|
|
|
49,405
|
|
Add:
Items not subject to taxes
|
|
|
|
|
|
|
|
-
Provisions and accrued liabilities
|
|
|
7,071
|
|
|
3,685
|
|
-
Deferred revenue
|
|
|
(27,839
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
67,299
|
|
$
|
53,090
|
|
The
following table sets forth the significant components of the deferred tax
liabilities of the Company as of June 30, 2007 and December 31,
2006:
|
|
June 30, 2007
|
|
December 31, 2006
|
|
|
|
|
|
(audited)
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivables
|
|
$
|
31,489
|
|
$
|
79,038
|
|
Deferred
tax liabilities
|
|
$
|
31,489
|
|
$
|
79,038
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Prior
to
the restructuring in 2004, the Company was established as a state-owned
enterprise with a registered capital of $182,016 (approximately RMB1,500,000).
In July 2004, the Company was restructured to a limited liability company with
51% of its equity interest owned by SAAC and 49% of equity interest owned by
employees in the PRC . In accordance with the Company’s Articles of Association,
the registered capital of the Company was $720,786 (approximately
RMB5,940,000).
For
the
six months ended June 30, 2007, the Company declared and paid a dividend of
$20,737 to the owners.
The
Company operates in one single business segment that includes the design,
development, manufacture of products and provision of energy-saving projects.
The following table summarizes the Company’s net revenue generated from
different geographic locations:
|
|
Six months ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
-
Southeast Asia
|
|
$
|
209,391
|
|
$
|
31,062
|
|
-
The PRC
|
|
|
6,440,478
|
|
|
4,046,941
|
|
Total
revenue, net
|
|
$
|
6,649,869
|
|
$
|
4,078,003
|
|
All
of
the Company’s long-lived assets are located in the PRC.
15.
|
CONCENTRATION
OF RISK
|
The
customers who account for 10% or more of revenue are presented as
follows:
|
|
Six months ended June 30, 2007
|
|
Customer s
|
|
Revenue
|
|
Percentage of
revenue
|
|
Trade accounts
receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
991,445
|
|
|
15
|
%
|
$
|
444,296
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
For
the
six months ended June 30, 2006, there is no customer who accounts for 10% or
more of total revenues.
The
vendors who account for 10% or more of purchases are presented as
follows:
|
|
Six months ended June 30, 2007
|
|
Vendors
|
|
Purchases
|
|
Percentage of
purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
2,238,273
|
|
|
43
|
%
|
$
|
716,684
|
|
Vendor
B
|
|
|
811,000
|
|
|
16
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
3,049,273
|
|
|
59
|
%
|
$
|
716,684
|
|
|
|
Six months ended June 30, 2006
|
|
Vendors
|
|
Purchases
|
|
Percentage of
purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
1,882,836
|
|
|
60
|
%
|
$
|
237,984
|
|
Vendor
B
|
|
|
571,756
|
|
|
18
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,454,592
|
|
|
78
|
%
|
$
|
237,984
|
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers' financial condition, but does
not
require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from long-term borrowings. Borrowings issued
at variable rates expose the Company to cash flow interest-rate risk. Borrowings
issued at fixed rates expose the Company to fair value interest-rate risk.
Company policy is to maintain approximately all of its borrowings in floating
rate instruments. At the period end, all of borrowings were at floating
rates.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company rented offices under non-cancelable operating lease agreements. As
of
June 30, 2007, future minimum annual operating lease payments were as
follows:
Years
ending June 30:
|
|
|
|
2008
|
|
$
|
12,720
|
|
2009
|
|
|
6,360
|
|
Total
future minimum operating lease payments
|
|
$
|
19,080
|
|
For
the
six months ended June 30, 2007 and 2006, rent expense was $6,360 and $6,360,
respectively.
On
May
18, 2007, the Company and the shareholders of the Company entered into a
purchase agreement with Beijing Deli Solar Technology Development Co., Ltd.
(“Deli Solar (Beijing)”), a wholly-owned subsidiary of Deli Solar (USA), Inc., a
company organized under the laws of the State of Nevada and is a reporting
issuer in the United States and has its shares listed on the NASD
Over-the-Counter Bulletin Board under the symbol “DLSL”. Pursuant to the
purchase agreement, Deli Solar (Beijing) agreed to acquire 51% of equity
interest in the registered capital of the Company for a purchase price of
$3,149,147. The transaction was closed on July 1, 2007 and approximately
$1,575,600 was paid in July 2007. By supplemental agreement dated August 8,
2007, the purchase price was reduced to approximately $1,689,741.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Owners of
Tianjin
Huaneng Group Energy Equipment Co., Ltd.
We
have
audited the accompanying balance sheets of Tianjin Huaneng Group Energy
Equipment Co., Ltd. (“the Company”) as of December 31, 2006 and 2005 and the
related statements of operations and comprehensive income, cash flows and
owners’ equity for the years ended December 31, 2006 and 2005. The financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Tianjin Huaneng Group Energy
Equipment Co., Ltd. as of December 31, 2006 and 2005 and the results of
operations and cash flows for the years ended December 31, 2006 and 2005 and
in
conformity with accounting principles generally accepted in the United States
of
America.
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
|
|
|
|
Zhong
Yi (Hong Kong) C.P.A. Company Limited
|
|
Certified
Public Accountants
|
|
|
|
Hong
Kong, China
|
|
July
17, 2007
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
BALANCE
SHEETS
AS
OF DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
282,148
|
|
$
|
258,737
|
|
Accounts
receivable, net
|
|
|
4,129,068
|
|
|
2,113,888
|
|
Inventories
|
|
|
3,136,141
|
|
|
3,771,807
|
|
Prepayments
and other receivables
|
|
|
569,416
|
|
|
475,753
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,116,773
|
|
|
6,620,185
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,151,521
|
|
|
1,190,894
|
|
Intangible
assets, net
|
|
|
507,556
|
|
|
518,130
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
1,659,077
|
|
|
1,709,024
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
9,775,850
|
|
$
|
8,329,209
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
1,154,703
|
|
$
|
1,154,703
|
|
Accounts
payable, trade
|
|
|
614,355
|
|
|
564,418
|
|
Deferred
revenue
|
|
|
696,813
|
|
|
477,566
|
|
Advances
from customers
|
|
|
2,513,511
|
|
|
2,924,157
|
|
Value-added
tax payable
|
|
|
875,750
|
|
|
373,338
|
|
Income
taxes payable
|
|
|
835,860
|
|
|
642,817
|
|
Deferred
tax liabilities
|
|
|
79,038
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
1,148,560
|
|
|
853,103
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,918,590
|
|
|
6,990,102
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Long-term
payables
|
|
|
748,412
|
|
|
773,823
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,667,002
|
|
|
7,763,925
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
capital
|
|
|
720,786
|
|
|
720,786
|
|
Accumulated
other comprehensive income
|
|
|
66,449
|
|
|
16,872
|
|
Statutory
reserve
|
|
|
257,466
|
|
|
178,348
|
|
Retained
earnings (accumulated deficits)
|
|
|
64,147
|
|
|
(350,722
|
)
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,108,848
|
|
|
565,284
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
9,775,850
|
|
$
|
8,329,209
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
|
|
|
|
|
Product
|
|
$
|
13,026,841
|
|
$
|
8,984,244
|
|
Maintenance
|
|
|
485,986
|
|
|
368,176
|
|
|
|
|
13,512,827
|
|
|
9,352,420
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Product
|
|
|
10,346,178
|
|
|
7,293,042
|
|
Maintenance
|
|
|
27,809
|
|
|
23,896
|
|
|
|
|
10,373,987
|
|
|
7,316,938
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,138,840
|
|
|
2,035,482
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
992,474
|
|
|
743,219
|
|
Depreciation
and amortization
|
|
|
123,366
|
|
|
110,052
|
|
Research
and development
|
|
|
119,603
|
|
|
94,962
|
|
General
and administrative
|
|
|
845,632
|
|
|
674,019
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,081,075
|
|
|
1,622,252
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,057,765
|
|
|
413,230
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(152,742
|
)
|
|
(119,027
|
)
|
Interest
income
|
|
|
1,169
|
|
|
1,643
|
|
Other
income
|
|
|
34,011
|
|
|
62,450
|
|
Loss
on disposal of plant and equipment
|
|
|
-
|
|
|
(2,944
|
)
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
(117,562
|
)
|
|
(57,878
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
940,203
|
|
|
355,352
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
337,558
|
|
|
254,185
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
602,645
|
|
$
|
101,167
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
49,577
|
|
|
33,166
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
652,222
|
|
$
|
134,333
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 & 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
602,645
|
|
$
|
101,167
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
202,215
|
|
|
181,455
|
|
Allowance
for doubtful accounts
|
|
|
291,785
|
|
|
148,418
|
|
Loss
on disposal of plant and equipment
|
|
|
-
|
|
|
2,944
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,306,965
|
)
|
|
(756,552
|
)
|
Inventories
|
|
|
635,666
|
|
|
(550,936
|
)
|
Prepayments
and other receivables
|
|
|
(93,663
|
)
|
|
(113,623
|
)
|
Accounts
payable
|
|
|
49,937
|
|
|
152,797
|
|
Deferred
revenue
|
|
|
219,247
|
|
|
112,986
|
|
Advances
from customers
|
|
|
(410,646
|
)
|
|
194,051
|
|
Value-added
tax payable
|
|
|
502,412
|
|
|
241,339
|
|
Income
taxes payable
|
|
|
193,043
|
|
|
47,088
|
|
Deferred
tax liabilities
|
|
|
79,038
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
295,458
|
|
|
532,294
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
260,172
|
|
|
293,428
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(152,269
|
)
|
|
(194,453
|
)
|
Proceeds
from disposal of plant and equipment
|
|
|
-
|
|
|
5,556
|
|
Payment
in relation to intangible assets
|
|
|
-
|
|
|
(107,920
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(152,269
|
)
|
|
(296,817
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Dividend
paid to owners
|
|
|
(108,658
|
)
|
|
(56,709
|
)
|
Repayment
of long-term payables
|
|
|
(25,411
|
)
|
|
(47,502
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(
134,069
|
)
|
|
(
104,211
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
49,577
|
|
|
33,166
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
23,411
|
|
|
(74,434
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
258,737
|
|
|
333,171
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
282,148
|
|
$
|
258,737
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
84,562
|
|
$
|
207,097
|
|
Cash
paid for interest expenses
|
|
$
|
152,742
|
|
$
|
119,027
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT CO., LTD.
STATEMENTS
OF OWNERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
|
|
Registered
capital
|
|
Accumulated
other
comprehensive
(loss) income
|
|
Statutory
reserve
|
|
(Accumulated
deficits)/
retained
earnings
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2005
|
|
$
|
720,786
|
|
$
|
(16,294
|
)
|
$
|
103,838
|
|
$
|
(320,670
|
)
|
$
|
487,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
33,166
|
|
|
-
|
|
|
-
|
|
|
33,166
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,167
|
|
|
101,167
|
|
Dividend
to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(56,709
|
)
|
|
(56,709
|
)
|
Transfer
of retained earnings to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
74,510
|
|
|
(74,510
|
)
|
|
-
|
|
Balance
as of December 31, 2005
|
|
|
720,786
|
|
|
16,872
|
|
|
178,348
|
|
|
(350,722
|
)
|
|
565,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
49,577
|
|
|
-
|
|
|
-
|
|
|
49,577
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
602,645
|
|
|
602,645
|
|
Dividend
to owners
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(108,658
|
)
|
|
(108,658
|
)
|
Transfer
of retained earnings to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
79,118
|
|
|
(79,118
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
$
|
720,786
|
|
$
|
66,449
|
|
$
|
257,466
|
|
$
|
64,147
|
|
$
|
1,108,848
|
|
See
accompanying notes to financial statements.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
Tianjin
Huaneng Group Energy Equipment Co., Ltd. (“the Company”) was established in 1987
as a state-owned enterprise and then was restructured in July 2004 as a limited
liability company with 51% of its equity interest owned by Tianjin Municipal
Ji
County State-owned Assets Administration Commission (“SAAC”) and 49% of equity
interest owned by employees in the People’s Republic of China (“PRC”). Its
principal place of business is located in No.119 Yuyang South Road, Ji County,
Tianjin Municipality, the PRC. The registered capital of the Company is
US$720,786 (equivalent to Renminbi Yuan (“RMB”) 5,940,000).
The
Company is principally engaged in the design, development and manufacturing
and
marketing of energy-saving related heating products such as heat pipes, heat
exchangers, specialty heating pipes and tubes, high temperature hot blast
stoves, heating filters, normal pressure water boilers, solar energy water
heaters and radiators. These products are distributed in the PRC and Southeast
Asia.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the year reported. Actual results may differ
from these estimates.
The
Company derives revenues from the provision of energy-saving projects. The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products at the rate
of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases to the extent not refunded for export
sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
The
Company sells their products and services under a bundled sales arrangement,
which typically include equipment, installation, testing and maintenance
components. The components of equipment, installation and testing are
non-separable and considered as a single unit of deliverables, namely product
revenue. Hence, the product and maintenance are considered separate units of
accounting in the arrangement.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Revenues
under these bundled arrangements are allocated considering the relative fair
values of two separate deliverables: (a) product deliverable and (b) maintenance
deliverable, included in the bundled arrangement based on the estimated relative
fair values of each element in accordance with EITF 00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each element
are
met.
Revenue
from these product deliverables are recognized upon final acceptance, which
is
signed by the customer when installation is completed.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and outbound
freight as a component of cost of revenues.
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the products,
which is generally 12 months. As of December 31, 2006 and 2005, the
unrecognized portion of revenue related to maintenance was $696,813 and $477,566
and were included in the Deferred Revenue caption on the balance
sheets.
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
Cost
of
revenue consists primarily of material costs, direct labor, shipping and
handling fee, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of products and the provision of the
energy-saving projects.
o
|
Cash
and Cash Equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
o
|
Accounts
Receivable and Allowance for Doubtful
Accounts
|
The
Company carries accounts receivable at their face amounts less an allowance
for doubtful accounts. On a regular basis, an allowance for
uncollectible receivables is established and determined based upon past
transaction history with customers, customer payment practices and economic
conditions. Actual collection experience may differ from the current estimate
of
net receivables. A change to the allowance for uncollectible amounts may be
required if a future event or other change in circumstances results in a change
in the estimate of the ultimate collectibility of a specific account. The
Company does not require collateral for the accounts receivable balances. For
the years ended December 31, 2006 and 2005, the Company recorded an allowance
for doubtful accounts of $291,785 and $148,418, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Inventories
consist primarily of finished goods, work in process and raw materials and
are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Allowance for slow-moving and obsolescence is
an
estimate amount based on an analysis of current business and economic risks,
the
duration of the inventories held and other specific identifiable risks that
may
indicate a potential loss. The allowance is reviewed regularly to ensure that
it
adequately provides for all reasonable expected losses. For the years ended
December 31, 2006 and 2005, the Company did not record any allowance for
obsolescence.
o
|
Property,
Plant and Equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable
life
|
|
Residual value
|
|
|
|
|
|
|
|
Building
|
|
|
20
years
|
|
|
5
|
%
|
Plant
and machinery
|
|
|
10
years
|
|
|
5
|
%
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Office
equipment
|
|
|
10
years
|
|
|
5
|
%
|
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss on the
disposal of property, plant and equipment is the difference between the net
sales proceeds and the carrying amount of the relevant assets and is recognized
in the statements of operations.
All
lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreements on a straight-line basis, which is
50
years and they will expire in 2054.
Amortization
expense totaled $10,574 and $10,574 for the years ended December 31, 2006 and
2005, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
o
|
Valuation
of Long-lived Assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the
Company reviews its long-lived assets, including property, plant and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. If the total of
the
expected undiscounted future net cash flows is less than the carrying amount
of
the asset, a loss is recognized for the difference between the fair value and
carrying amount of the asset. There has been no impairment as of
December 31, 2006 or 2005.
SFAS
No. 130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during the year from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign currency
translation. This comprehensive income is not included in the computation of
income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
, which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax assets
if
it is considered more likely than not that some portion of, or all of the
deferred tax assets will not be realized.
o
|
Foreign
Currencies Translation
|
The
functional currency of the Company is Renminbi Yuan (“RMB”). The accompanying
financial statements have been expressed in United States dollars, the reporting
currency of the Company. The balance sheet is translated into United States
dollars based on the rates of exchange ruling at the balance sheet date. The
statements of operations and comprehensive income are translated using a
weighted average rate for the year. Translation adjustments are reflected as
cumulative translation adjustments in owners’ equity.
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the statements of operations and
comprehensive income as and when the related employee service is
provided.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
o
|
Research
and Development Costs
|
Research
and development costs are expensed when incurred in the development of new
processes including significant improvements and refinements of existing
products. Such costs mainly relate to labor and material cost. The Company
incurred $119,603 and $94,962 for the years ended December 31, 2006 and 20
05,
respectively.
The
Company expenses advertising costs as incurred in accordance with the American
Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
. The
Company incurred $32,904 and $47,379 advertising expenses for each of the years
ended December 31, 2006 and 2005, respectively.
Under
the
terms of the contracts, the Company provides a product warranty on the equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard warranty
provision. As such, no reserve for product warranty has been provided in the
statements of operations for the years ended December 31, 2006 and
2005.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party
or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on
a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in one principal reportable business
segment. All the customers are located in the PRC and the South East Asia
region.
o
|
Fair
Value of Financial Instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
. The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that the
Company could realize in a current market exchange.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
Company’s financial instruments primarily include cash and cash equivalents,
trade accounts receivable, inventories, prepayments and other receivables,
short-term bank loan, trade accounts payable, deferred revenue, advances from
customers, value-added tax payable, income taxes payable, accrued liabilities
and other payable.
As
of the
balance sheet date, the estimated fair values of financial instruments were
not
materially different from their carrying values as presented due to short
maturities of these instruments.
o
|
Recently
Issued Accounting Standards
|
In
September 2005, the FASB’s Emerging Issues Task Force (“EITF”) reached a final
consensus on Issue 04-13,
“Accounting
for Purchases and Sales of Inventory with the Same
Counterparty”
(“EITF
04-13”). EITF 04-13 requires that two or more legally separate exchange
transactions with the same counterparty be combined and considered a single
arrangement for purposes of applying APB Opinion No. 29,
“Accounting
for Nonmonetary Transactions”
, when
the transactions are entered into in contemplation of one another. EITF 04-13
is
effective for new arrangements entered into, or modifications or renewals of
existing arrangements, in interim or annual periods beginning after March 15,
2006. The Company does not expect that the adoption of this statement would
have
a material effect on the Company’s financial position or results of
operations.
In
February 2006, the FASB issued SFAS No. 155,
“Accounting
for Certain Hybrid Instruments-an amendment of FASB Statements 133 and
140”
, which
is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The statement improves financial reporting by eliminating the exemption from
applying SFAS No. 133 to interests in securitized financial assets so that
similar instruments are accounted for similarly regardless of the form of the
instruments. The Statement also improves financial reporting by allowing a
preparer to elect fair value measurement at acquisition, at issuance, or when
a
previously recognized have to bifurcated, if the holder elects to account for
the whole instrument-by-instrument basis, in cases in which a derivative would
otherwise have to bifurcated, if the holder elects to account for the whole
instrument on a fair value basis. The Company does not expect that the adoption
of this statement would have a material effect on the Company’s financial
position or results of operations.
In
July
2006, the FASB issued FIN 48,
“Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
109”
, which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognizes in its financial statements the impact
of a
tax position if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN
48
are effective for the Company on January 1, 2007, with the cumulative effect
of
the change in accounting principle, if any, recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its financial statements.
In
September 2006, the SEC released SAB No. 108,
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB
108”). SAB 108 provides interpretive guidance on the SEC’s views on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The provision of SAB
108
is effective for the Company in the current fiscal year ended December 31,
2006.
The Company is currently evaluating the impact of SAB 108 but does not believe
that the application of SAB 108 would have a material effect on its financial
position, cash flows nor results of operations.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
In
September 2006, the FASB issued SFAS No.157,
“Fair
Value Measurements”
(“SFAS
157”), which defines fair value, establishes guidelines for measuring fair value
and expands disclosures regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates inconsistencies
in
guidance found in various prior accounting pronouncements. SFAS 157 will be
effective for the Company starting January 1, 2008. Earlier adoption is
permitted, provided the Company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Company is currently
evaluating the impact of SFAS 157 on its financial position, cash flows and
results of operations.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities.”
SFAS
No. 159 permits entities to choose to measure, on an item-by-item basis,
specified financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are required to be reported in earnings at each reporting date. SFAS
No. 159 is effective for fiscal year beginning after November 15,
2007, the provisions of which are required to be applied prospectively. The
Company’s results of operations and financial condition will not be affected by
SFAS No. 159 since the Company does not plan to implement the fair value
option.
3.
|
ACCOUNTS
RECEIVABLE, NET
|
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, the allowances for doubtful accounts
are
provided as $291,785 and $148,418 for the years ended December 31, 2006 and
2005, respectively.
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Accounts
receivable, gross
|
|
$
|
4,706,360
|
|
$
|
2,399,395
|
|
|
|
|
|
|
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(577,292
|
)
|
|
(285,507
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
4,129,068
|
|
$
|
2,113,888
|
|
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
Inventories
consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
508,161
|
|
$
|
553,206
|
|
Work
in process
|
|
|
245,082
|
|
|
29,794
|
|
Finished
goods
|
|
|
2,382,898
|
|
|
3,188,807
|
|
|
|
|
3,136,141
|
|
|
3,771,807
|
|
|
|
|
|
|
|
|
|
Less:
allowance for obsolescence
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,136,141
|
|
$
|
3,771,807
|
|
5.
|
PREPAYMENTS
AND OTHER RECEIVABLES
|
A
summary
of prepayments and other receivables was:
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Advances
to employees
|
|
$
|
206,661
|
|
$
|
216,475
|
|
Deposits
to vendors
|
|
|
345,024
|
|
|
240,937
|
|
Other
receivables
|
|
|
17,731
|
|
|
18,341
|
|
|
|
|
|
|
|
|
|
|
|
$
|
569,416
|
|
$
|
475,753
|
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Building
|
|
$
|
721,753
|
|
$
|
690,887
|
|
Plant
and machinery
|
|
|
1,157,166
|
|
|
1,063,659
|
|
Motor
vehicles
|
|
|
199,606
|
|
|
192,997
|
|
Office
equipment
|
|
|
109,806
|
|
|
88,520
|
|
|
|
|
2,188,331
|
|
|
2,036,063
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(1,036,810
|
)
|
|
(845,169
|
)
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
1,151,521
|
|
$
|
1,190,894
|
|
Depreciation
expense for the years ended December 31, 2006 and 2005 were $191,641 and
$170,881, respectively.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2006 and 2005, certain property, plant and machinery with the
net
book value of $933,300 and $1,042,342, respectively, were pledged as securities
in connection with outstanding loan facilities (see Note 8).
7.
|
INTANGIBLE
ASSETS, NET
|
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land
use rights, cost
|
|
$
|
528,704
|
|
$
|
528,704
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(21,148
|
)
|
|
(10,574
|
)
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
507,556
|
|
$
|
518,130
|
|
Amortization
expense for the years ended December 31, 2006 and 2005 were $10,574 and $10,574,
respectively.
The
Company has a short-term bank loan of $1,154,703 with the Agricultural Bank
of
China, which is secured with interest rate at 5.841% per annum payable
quarterly, with principle due November 27, 2006. It is collateralized by
building and certain plant and machinery of the Company (see Note 6). In July
2007, the Company repaid the short-term bank loan to the bank.
Deferred
revenue represents the unrecognized portion of the entire fee from the bundled
arrangement allocated to maintenance service and recognized to revenue ratably
over the service period, usually 12 months (see Note 2).
10.
|
ADVANCES
FROM CUSTOMERS
|
Advances
from customers represent the advanced payments made by the customers upon the
signing of a purchase contract.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
11.
|
ACCRUED
LIABILITIES AND OTHER
PAYABLES
|
Accrued
liabilities and other payables consisted of the following:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Welfare
payable
|
|
$
|
523,566
|
|
$
|
278,389
|
|
Salary
payable
|
|
|
393,869
|
|
|
325,280
|
|
Government
levy payable
|
|
|
99,293
|
|
|
85,584
|
|
Accrued
expenses
|
|
|
131,832
|
|
|
163,850
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,148,560
|
|
$
|
853,103
|
|
Long-term
payables consisted of the following:
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Payable
to employees
|
|
$
|
496,252
|
|
$
|
579,263
|
|
Payable
to government
|
|
|
194,560
|
|
|
194,560
|
|
Payable
to third parties
|
|
|
57,600
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
748,412
|
|
$
|
773,823
|
|
Payable
to employees represented unsecured advances with interest rate at 8.2% per
annum
payable quarterly and repayable in the next twelve months.
Payable
to government and third parties represented unsecured advances, interest-free
and repayable in the next twelve months.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws,
the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax).
The
provision for income tax expense consisted of the following:
|
|
Years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
258,520
|
|
$
|
254,185
|
|
Deferred
tax
|
|
|
79,038
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
337,558
|
|
$
|
254,185
|
|
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes stated in the statements of operations for the years
ended December 31, 2006 and 2005 is as follows:
|
|
Years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
940,203
|
|
$
|
355,352
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
310,267
|
|
|
117,266
|
|
Add:
Items not subject to taxes
|
|
|
|
|
|
|
|
-
Deferred revenue
|
|
|
65,880
|
|
|
34,544
|
|
-
Provisions
|
|
|
(38,589
|
)
|
|
102,375
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
337,558
|
|
$
|
254,185
|
|
The
following table sets forth the significant components of the deferred tax
liabilities of the Company as of December 31, 2006 and 2005:
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
Accounts
receivables
|
|
$
|
75,378
|
|
$
|
-
|
|
Depreciation
|
|
|
3,660
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
$
|
79,038
|
|
$
|
-
|
|
Prior
to
the restructuring in 2004, the Company was established as a state-owned
enterprise with a registered capital of $182,016 (approximately RMB1,500,000).
In July 2004, the Company was restructured to a limited liability company with
51% of its equity interest owned by SAAC and 49% of equity interest owned by
employees in the PRC . In accordance with the Company’s Articles of Association,
the registered capital of the Company was $720,786 (approximately
RMB5,940,000).
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
15.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions provided
for such employee benefits were $266,446 and $209,788 for the years ended
December 31, 2006 and 2005, respectively.
Under
the
PRC Law, the Company is required to make appropriations to the statutory reserve
based on after-tax net earnings and determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriation to the statutory reserve should be at least 10% of the
after-tax net income until the reserve is equal to 50% of the registered
capital. The statutory reserve is established for the purpose of providing
employee facilities and other collective benefits to the employees and is
non-distributable other than in liquidation.
For
the
years ended December 31, 2006 and 2005, the Company contributed $79,118 and
$74,510 to statutory reserve, respectively.
The
Company operates in one single business segment that includes the design,
development, manufacture of products and provision of energy-saving projects.
The following table summarizes the Company’s net revenues generated from
different geographic locations:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
-
Southeast Asia
|
|
$
|
126,250
|
|
$
|
268,761
|
|
-
The PRC
|
|
|
13,386,577
|
|
|
9,083,659
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
$
|
13,512,827
|
|
$
|
9,352,420
|
|
All
of
the Company’s long-lived assets are located in the PRC.
18.
|
CONCENTRATION
AND RISK
|
For
the
years ended December 31, 2006 and 2005, there is no customer who accounts for
10% or more of total net revenues.
TIANJIN
HUANENG GROUP ENERGY EQUIPMENT
CO.,
LTD.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(Currency
expressed in United States Dollars (“US$”))
The
vendors who account for 10% or more of purchases are presented as
follows:
|
|
Year ended December 31, 2006
|
|
|
|
Purchases
|
|
Percentage of
purchases
|
|
Accounts
Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
3,400,500
|
|
|
58
|
%
|
$
|
354,560
|
|
Vendor
B
|
|
|
709,068
|
|
|
12
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
4,109,568
|
|
|
70
|
%
|
$
|
354,560
|
|
|
|
Year ended December 31, 2005
|
|
Vendors
|
|
Purchases
|
|
Percentage of
purchases
|
|
Accounts Payables
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
4,047,680
|
|
|
55
|
%
|
$
|
352,723
|
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. The Company performs
ongoing credit evaluations of its customers' financial condition, but does
not
require collateral to support such receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from long-term borrowings. Borrowings issued
at variable rates expose the Company to cash flow interest-rate risk. Borrowings
issued at fixed rates expose the Company to fair value interest-rate risk.
Company policy is to maintain approximately all of its borrowings in fixed
rate
instruments. At the year end, all of borrowings were at fixed
rates.
The
Company rented offices under non-cancelable operating lease agreements. As
of
December 31, 2006, future minimum annual operating lease payments were as
follows:
Year
ending December 31:
|
|
|
|
2007
|
|
$
|
12,720
|
|
2008
|
|
|
12,720
|
|
|
|
|
|
|
Total
future minimum operating lease payments
|
|
$
|
25,440
|
|
For
the
years ended December 31, 2006 and 2005, rent expense was $12,720 and $12,377,
respectively.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
BALANCE SHEETS
AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
87,316
|
|
$
|
122,501
|
|
Restricted
cash
|
|
|
84,304
|
|
|
80,941
|
|
Accounts
receivable, trade
|
|
|
510,269
|
|
|
423,137
|
|
Inventories
|
|
|
325,429
|
|
|
345,363
|
|
Net
investment in sales-type leases, current
|
|
|
143,317
|
|
|
137,599
|
|
Prepayments
and other receivables
|
|
|
217,606
|
|
|
91,180
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,368,241
|
|
|
1,200,721
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
|
823,489
|
|
|
757,662
|
|
Property,
plant and equipment, net
|
|
|
1,275,287
|
|
|
1,312,138
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
2,098,776
|
|
|
2,069,800
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,467,017
|
|
$
|
3,270,521
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
710,668
|
|
$
|
806,672
|
|
Accounts
payable, trade
|
|
|
908,124
|
|
|
795,958
|
|
Deferred
revenue
|
|
|
25,903
|
|
|
21,451
|
|
Accrued
liabilities and other payables
|
|
|
211,294
|
|
|
192,007
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,855,989
|
|
|
1,816,088
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,855,989
|
|
|
1,816,088
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
and paid-in capital
|
|
|
1,598,979
|
|
|
1,598,979
|
|
Distribution
to owners
|
|
|
(1,190,756
|
)
|
|
(1,190,756
|
)
|
Accumulated
other comprehensive income
|
|
|
276,506
|
|
|
167,717
|
|
Statutory
reserve
|
|
|
74,508
|
|
|
74,508
|
|
Retained
earnings
|
|
|
851,791
|
|
|
803,985
|
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,611,028
|
|
|
1,454,433
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
3,467,017
|
|
$
|
3,270,521
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenue,
net:
|
|
|
|
|
|
Product
sales
|
|
$
|
71,144
|
|
$
|
44,106
|
|
Project
revenue
|
|
|
322,776
|
|
|
15,879
|
|
Total
revenue, net
|
|
|
393,920
|
|
|
59,985
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
(exclusive of depreciation)
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
57,521
|
|
|
32,036
|
|
Cost
of projects
|
|
|
160,829
|
|
|
-
|
|
Total
cost of revenue
|
|
|
218,350
|
|
|
32,036
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
175,570
|
|
|
27,949
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
44,673
|
|
|
10,376
|
|
General
and administrative
|
|
|
39,681
|
|
|
28,429
|
|
Total
operating expenses
|
|
|
84,354
|
|
|
38,805
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
91,216
|
|
|
(10,856
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
8,572
|
|
Interest
expense
|
|
|
(43,087
|
)
|
|
(10,568
|
)
|
Total
other expenses
|
|
|
(43,087
|
)
|
|
(1,996
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
48,129
|
|
|
(12,852
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
323
|
|
|
319
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
47,806
|
|
$
|
(13,171
|
)
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
47,806
|
|
$
|
(13,171
|
)
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
44,673
|
|
|
10,376
|
|
Interest
income from sales-type leases
|
|
|
(34,026
|
)
|
|
(15,879
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(69,551
|
)
|
|
196,348
|
|
Inventories
|
|
|
(21,731
|
)
|
|
(403,996
|
)
|
Prepayments
and other receivables
|
|
|
(118,678
|
)
|
|
(408,622
|
)
|
Accounts
payable
|
|
|
115,121
|
|
|
247,828
|
|
Deferred
revenue
|
|
|
3,560
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
75,245
|
|
|
(28,105
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
42,419
|
|
|
(415,221
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from leases receivable
|
|
|
35,830
|
|
|
15,879
|
|
Net
cash provided by investing activities
|
|
|
35,830
|
|
|
15,879
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Drawdown
from short-term bank loans
|
|
|
-
|
|
|
699,938
|
|
Repayment
of short-term bank loans
|
|
|
(129,528
|
)
|
|
-
|
|
Contribution
from (distribution to) owners
|
|
|
-
|
|
|
(108,415
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(129,528
|
)
|
|
591,523
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
16,094
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(35,185
|
)
|
|
193,192
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
122,501
|
|
|
25,912
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
87,316
|
|
$
|
219,104
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
12,437
|
|
$
|
14,117
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
CONDENSED
STATEMENTS
OF CHANGE IN OWNERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Registered
and paid-in
capital
|
|
Distribution to
owners
|
|
Accumulated
other
comprehensive
income
|
|
Statutory
reserve
|
|
Retained
earnings
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2008
|
|
$
|
1,598,979
|
|
$
|
(1,190,756
|
)
|
$
|
167,717
|
|
$
|
74,508
|
|
$
|
803,985
|
|
$
|
1,454,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
108,789
|
|
|
-
|
|
|
-
|
|
|
108,789
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,806
|
|
|
47,806
|
|
Balance
as of March 31, 2008
|
|
$
|
1,598,979
|
|
$
|
(1,190,756
|
)
|
$
|
276,506
|
|
$
|
74,508
|
|
$
|
851,791
|
|
$
|
1,611,028
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
1.
BASIS
OF PRESENTATION
The
accompanying condensed consolidated balance sheet as of December 31, 2007 has
been derived from audited financial statements and the accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and the interim reporting
requirements of Regulation S-X. They do not include all of the information
and
footnotes for complete consolidated financial statements as required by GAAP.
In
management's opinion, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
These financial statements should be read in conjunction with the audited
financial statements and notes for the year ended December 31,
2007.
The
results of operations for the three months ended March 31, 2008 and 2007
presented are not necessarily indicative of the results to be expected for
the
year.
There
is
no provision for dividends for the quarter to which this quarterly report
relates .
2.
ORGANIZATION
AND BUSINESS BACKGROUND
Shenzhen
Pengsangpu Solar Industrial Products Corporation (“the Company”) was
incorporated as a limited liability company in the People’s Republic of China
(“PRC”) on September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $353,333) and contributed by three individuals namely,
Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde Chen
On
July
13, 2006, the registered capital was approved to increase to $1,706,666
(RMB12,800,000) by an injection of additional capital of $1,353,333
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shunda Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange Agreement
to transfer its interest of 0.23% in the Company to Mr Chen Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest in
the
Company to Mr Bin Luo, respectively.
On
January 9, 2008, the Company entered into an Equity Purchase Agreement and
a
Complementary Agreement (the “Agreements”) with Beijing Deli Solar Technology
Development Co., Ltd, a wholly-owned subsidiary of China Solar and Clean Energy
Solutions, Inc., a company organized under the laws of the State of Nevada
and
is a reporting issuer in the United States and has its shares listed on the
NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, China Solar and Clean Energy Solutions, Inc. agreed to purchase
100%
equity interest in the Company. The accounting date of the acquisition was
April
1, 2008 and was accounted for under the purchase method. SZPSP results of
operations have been not included in the three months ended March 31, 2008
consolidated financial statements. See note12.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
The
Company is principally engaged in the re-sale of energy-saving related heating
products such as heat pipes, heat exchangers, pressure water boilers, solar
energy water heaters and radiators. The Company currently operates a
distribution facility in Shenzhen City, the PRC.
All
the
customers are located in the PRC.
3.
RECENTLY ISSUED ACCOUNTING STANDARDS
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, the provisions
of
which are required to be applied prospectively. The Company believes that SFAS
159 should not have a material impact on the consolidated financial position
or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in
a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until January 1, 2009. The Company expects
SFAS No. 141R will have an impact on accounting for business combinations once
adopted but the effect is dependent upon acquisitions at that time. The Company
is still assessing the impact of this pronouncement.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51, or SFAS No. 160"
("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that SFAS 160
should not have a material impact on the consolidated financial position or
results of operations.
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
financial position or results of operations.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
4. PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
As of
|
|
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
Prepayments
|
|
$
|
195,833
|
|
$
|
54,936
|
|
Value
added tax receivable
|
|
|
21,773
|
|
|
20,904
|
|
Deposits
to vendors
|
|
|
-
|
|
|
8,347
|
|
Advance
to employees
|
|
|
-
|
|
|
6,993
|
|
|
|
|
|
|
|
|
|
|
|
$
|
217,606
|
|
$
|
91,180
|
|
5.
INVESTMENT
IN SALES-TYPE LEASES
Starting
from 2007, the Company engages in installing energy-saving facilities and
leasing the equipment facilities to customers under sales-type leasing
arrangement.
The
components of the lease receivable, net, are as follows:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
Gross
minimum lease receivables
|
|
$
|
2,039,570
|
|
$
|
2,112,360
|
|
Estimated
residual value of leased assets
|
|
|
36,574
|
|
|
36,574
|
|
Less:
unearned interest income
|
|
|
(1,109,338
|
)
|
|
(1,253,673
|
)
|
|
|
|
966,806
|
|
|
|
|
Net
investment in sales-type leases
|
|
|
|
|
|
895,261
|
|
Less:
current portion
|
|
|
(143,317
|
)
|
|
(137,599
|
)
|
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
$
|
823,489
|
|
$
|
757,662
|
|
As
of
March 31 , 2008, the future minimum rentals to be received on non-cancelable
sales-type leases are as follows:
Years
ending March 31,
|
|
|
|
2009
|
|
|
143,317
|
|
2010
|
|
|
143,317
|
|
2011
|
|
|
143,317
|
|
2012
|
|
|
143,317
|
|
2013
|
|
|
143,317
|
|
Thereafter
|
|
|
1,322,985
|
|
|
|
$
|
2,039,570
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
6.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
As
of
|
|
|
|
March 31,
2008
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
Plant
and machinery
|
|
$
|
1,310,877
|
|
$
|
1,310,877
|
|
Office
equipment
|
|
|
79,183
|
|
|
79,183
|
|
Motor
vehicles
|
|
|
145,184
|
|
|
145,184
|
|
Foreign
translation difference
|
|
|
69,946
|
|
|
65,775
|
|
|
|
|
1,605,190
|
|
|
1,601,019
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
315,260
|
|
|
270,587
|
|
Less:
foreign translation difference
|
|
|
14,643
|
|
|
18,294
|
|
Net
book value
|
|
$
|
1,275,287
|
|
$
|
1,312,138
|
|
Depreciation
expense for the three months ended March 31, 2008 and 2007 were $44,673
(unaudited) and $10,376 (unaudited), respectively.
7.
SHORT-TERM
BANK LOAN
As
of
March 31, 2008, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at 6.63%
per annum payable quarterly, with principle due July 19, 2008. It was pledged
by
the accounts receivable of the Company.
The
Company has a short-term bank loan of $144,684 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at 6.57%
per annum payable quarterly, with principle due June 29, 2008. It is personally
guaranteed by the owner, Mr Renzheng Qiu of the Company.
The
Company has a short-term bank loan of $511,294 (unaudited) with an independent
financial institution in the PRC, which is secured with interest rate at 6.75%
per annum payable quarterly, with principle due October 12, 2008. It is
personally guaranteed by the owner, Mr Chen Hanwen of the Company.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2007, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 with an independent financial
institution in the PRC, which is secured with interest rate at 6.63% per annum
payable quarterly, with principle due July 19, 2008. It was pledged by the
accounts receivable of the Company.
The
Company has a short-term bank loan of $205,086 with an independent financial
institution in the PRC, which is secured with interest rate at 6.57% per annum
payable quarterly, with principle due June 29, 2008. It is personally guaranteed
by the owner, Mr Renzheng Qiu of the Company.
The
Company has a short-term bank loan of $546,896 with an independent financial
institution in the PRC, which is secured with interest rate at 6.75% per annum
payable quarterly, with principle due October 12, 2008. It is personally
guaranteed by the owner, Mr Chen Hanwen of the Company.
8.
DISTRIBUTION
TO OWNERS
As
of
March 31, 2008, the distribution amount to owners, Mr Renzheng Qiu, Mr Chen
Hanwen and Mr Bin Luo totaled , $1,190,756.
9.
INCOME
TAXES
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws,
the
Company is generally subject to enterprise income tax (“EIT”) at a statutory
rate of 33% (30% national income tax plus 3% local income tax). Since the
Company is registered and operates in Shenzhen, the PRC and is recognized as
“Manufacturing Enterprise Located in Special Economic Zone”, it is entitled to
EIT at a preferential tax rate of 15%.
On
July
25, 2006, the Company was classified as an Advanced Technology Enterprise in
the
PRC. The Company is exempted from EIT for the first two profit making years
and
then the EIT is reduced to 15% in the following three years.
The
Company was exempted from EIT due to cumulative tax losses for the year ended
December 31, 2006.
As
of
December 31, 2006, the Company has approximately $142,169 of cumulative tax
losses which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Company as of December 31, 2006
consisted mainly of tax losses and for which a full valuation allowance has
been
provided, as the losses were fully utilized in 2007 without a tax reductive
benefit to the Company due to the exemption from EIT under the tax concession
policy for an Advanced Technology Enterprise.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law , among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. The Company
is
entitled to tax concession policy for an Advanced Technology Enterprise and
its
ultimate applicable effective tax rate in 2008 and beyond will depend on many
factors, including but not limited to whether certain of its legal entity will
be subject to a transitional policy under the Corporate Income Tax Law, whether
the Company can continue to enjoy the unexpired tax holidays.
The
Company’s effective income tax rates for the three months ended March 31, 2008
and 2007 were both 15%.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
10.
SEGMENT
INFORMATION - BUSINESS SEGMENTS
The
Company currently operates in two principal business segments: (i) sale of
components, (ii) provision of energy-saving projects. The Company had no
inter-segment sales for the period ended March 31, 2008 and 2007. The Company’s
reportable segments are strategic business units that offer different products
and services.
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the period ended March 31,
2008:
|
|
Sale of
products
|
|
Energy-saving
projects
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
71,144
|
|
$
|
322,776
|
|
$
|
393,920
|
|
Cost
of revenue
|
|
|
57,521
|
|
|
160,829
|
|
|
218,350
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
13,623
|
|
$
|
161,947
|
|
$
|
175,570
|
|
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended March 31,
2007:
|
|
Sale of
products
|
|
Energy-saving
projects
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
44,106
|
|
$
|
15,879
|
|
$
|
59,985
|
|
Cost
of revenue
|
|
|
32,036
|
|
|
-
|
|
|
32,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
12,070
|
|
$
|
15,879
|
|
$
|
27,949
|
|
For
the
period ended March 31, 2008 and year ended December 31, 2007, all assets and
operating facilities are located in the PRC.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
11.
CONCENTRATION
AND RISK
(a)
Major customers
No
revenue from customers that individually represent greater than 10% of the
total
revenue for each of the three months ended March 31, 2008 and 2007.
(b)
Major vendors
No
purchase from vendors that individually represent greater than 10% of the total
purchase for the each of the three months ended March 31, 2008 and
2007.
(c)
Credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable and sales-type leases.
The Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such
receivables.
(d)
Interest rate risk
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings in
fixed
rate instruments. At the year-end, all of borrowings were at fixed
rates.
(e) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against the US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivative
or
other financial instruments that expose to substantial market risk.
12.
SUBSEQUENT
EVENTS
On
January 9, 2008, the Company entered into an Equity Purchase Agreement and
Complementary Agreement to the Equity Purchase Agreement with Beijing Deli
Solar
Technology Development Co., Ltd (“Deli Solar (Beijing)”), a wholly-owned
subsidiary of China Solar and Clean Energy Solutions, Inc. (“China Solar”), a
company organized under the laws of the State of Nevada and is a reporting
issuer in the United States and has its shares listed on the NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, Deli Solar (Beijing) agreed to acquire 100% of the outstanding
equity interest of the Company from its shareholders. On March 25, 2008, both
parties signed a Supplmentary Agreement to the Equity Purchase Agreement and
the
Complementary Agreement to amend and supplement the previous agreements and
set
forth the final terms of the total purchase price and payment method of the
acquisition.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
the Company from its three shareholders. $4,087,832 (RMB 28.8 million) of
the purchase price was payable in cash. The three shareholders of the Company
agreed to loan the cash proceeds back to the Company interest free to be used
for working capital. Fifty (50%) of the principal amount of the loan is required
to be paid prior to March 31, 2009 and the remaining 50% balance is required
to
be paid prior to March 31, 2010.
In
addition to the cash portion of the purchase price, the parties agreed to an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of the Company’s intangible assets.
This
portion is required to be paid in the form of 1,419,729 shares of the common
stock of China Solar (which was based on the average closing price of the common
stock for the 30 days immediately preceding the execution of the Complementary
Agreement (the “Share Price”)), provided that if on March 31, 2010 the common
stock price is lower than the Share Price, China Solar will pay the difference.
Fifty percent (50%) of these shares will be transferable and unrestricted on
or
after March 31, 2009 and the remaining fifty percent (50%) will be transferable
on or after March 31, 2010. The shares are required to be transferred to the
Company within 180 days of the closing. In addition, as part of the
purchase price, the shareholders of the Company will receive five years warrants
to purchase a total of 141,973 shares of common stock at an exercise price
of
$2.50 per share, subject to future adjustment for stock splits and stock
dividend.
The
Company warranted in the Complementary Agreement that if (i) its sales revenue
is less than RMB 99 million (approximately $13,670,068) with an after-tax net
profit of less than RMB 9.43 million (approximately $1,302,108) for the
year ended December 31, 2008; or (ii) if in the year ended December 31,
2009, it does not reach the targeted sales revenue of RMB 143.9 million
(approximately $19,868,336) or the after-tax net profit of RMB 12.13 million
(approximately $1,674,789), the Company will pay the difference between the
revenue and the targeted revenue of the year specified by reducing the amount
payable on the shareholders’ loan. If the shareholders’ loan is not sufficient
to pay the difference, the common shares held by the Company will be returned
to
China Solar to the extent necessary for the remaining balance.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Owners of
Shenzhen
Pengsangpu Solar Industrial Products Corporation
We
have
audited the accompanying balance sheets of Shenzhen Pengsangpu Solar Industrial
Products Corporation (“the Company”) as of December 31, 2007 and 2006 and the
related statements of operations and comprehensive income (loss), cash flows
and
change in owners’ equity for the years ended December 31, 2007 and 2006. The
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits include consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Shenzhen Pengsangpu Solar
Industrial Products Corporation as of December 31, 2007 and 2006 and the results
of operations and cash flows for the years ended December 31, 2007 and 2006
and
in conformity with accounting principles generally accepted in the United States
of America.
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
|
|
Zhong
Yi
(Hong Kong) C.P.A. Company Limited
Certified
Public Accountants
Hong
Kong, China
May
14,
2008
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
BALANCE
SHEETS
AS
OF DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
122,501
|
|
$
|
25,912
|
|
Restricted
cash
|
|
|
80,941
|
|
|
-
|
|
Accounts
receivable, trade
|
|
|
423,137
|
|
|
64,678
|
|
Inventories
|
|
|
345,363
|
|
|
190,886
|
|
Net
investment in sales-type leases, current
|
|
|
137,599
|
|
|
-
|
|
Prepayments
and other receivables
|
|
|
91,180
|
|
|
433,323
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,200,721
|
|
|
714,799
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
|
757,662
|
|
|
101,565
|
|
Property,
plant and equipment, net
|
|
|
1,312,138
|
|
|
57,045
|
|
|
|
|
|
|
|
|
|
Total
non-current assets
|
|
|
2,069,800
|
|
|
158,610
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
3,270,521
|
|
$
|
873,409
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND OWNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$
|
806,672
|
|
$
|
384,000
|
|
Accounts
payable, trade
|
|
|
795,958
|
|
|
285,871
|
|
Deferred
revenue
|
|
|
21,451
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
192,007
|
|
|
19,245
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,816,088
|
|
|
689,116
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,816,088
|
|
|
689,116
|
|
|
|
|
|
|
|
|
|
Owners’
equity:
|
|
|
|
|
|
|
|
Registered
and paid-in capital
|
|
|
1,598,979
|
|
|
1,598,979
|
|
Distribution
to owners
|
|
|
(1,190,756
|
)
|
|
(1,291,913
|
)
|
Accumulated
other comprehensive income
|
|
|
167,717
|
|
|
31,891
|
|
Statutory
reserve
|
|
|
74,508
|
|
|
-
|
|
Retained
earnings (accumulated losses)
|
|
|
803,985
|
|
|
(154,664
|
)
|
|
|
|
|
|
|
|
|
Total
owners’ equity
|
|
|
1,454,433
|
|
|
184,293
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND OWNERS’ EQUITY
|
|
$
|
3,270,521
|
|
$
|
873,409
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue,
net:
|
|
|
|
|
|
Product
sales
|
|
$
|
136,714
|
|
$
|
304,222
|
|
Project
revenue
|
|
|
3,078,568
|
|
|
16,541
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
|
3,215,282
|
|
|
320,763
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
(exclusive of depreciation)
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
80,052
|
|
|
209,296
|
|
Cost
of projects
|
|
|
1,768,651
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue
|
|
|
1,848,703
|
|
|
209,296
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,366,579
|
|
|
111,467
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
132,457
|
|
|
35,269
|
|
General
and administrative
|
|
|
131,673
|
|
|
102,501
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
264,130
|
|
|
137,770
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,102,449
|
|
|
(26,303
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,982
|
|
|
-
|
|
Interest
expense
|
|
|
(73,274
|
)
|
|
(4,199
|
)
|
Total
other expenses
|
|
|
(69,292
|
)
|
|
(4,199
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
1,033,157
|
|
|
(30,502
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
135,826
|
|
|
27,971
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
1,168,983
|
|
$
|
(2,531
|
)
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 & 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
132,457
|
|
|
35,269
|
|
Interest
income from sales-type leases
|
|
|
(65,357
|
)
|
|
(16,541
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(342,382
|
)
|
|
44,078
|
|
Inventories
|
|
|
(136,805
|
)
|
|
(66,944
|
)
|
Prepayments
and other receivables
|
|
|
359,427
|
|
|
(392,002
|
)
|
Accounts
payable
|
|
|
474,435
|
|
|
176,813
|
|
Deferred
revenue
|
|
|
20,745
|
|
|
-
|
|
Accrued
liabilities and other payables
|
|
|
165,801
|
|
|
(19,104
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,641,478
|
|
|
(268,933
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Investment
in sales-type leases
|
|
|
(760,936
|
)
|
|
-
|
|
Proceeds
from leases receivable
|
|
|
65,448
|
|
|
15,869
|
|
Purchase
of property, plant and equipment
|
|
|
(1,342,427
|
)
|
|
(5,623
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(2,037,915
|
)
|
|
10,246
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(78,273
|
)
|
|
-
|
|
Drawdown
from short-term bank loans
|
|
|
1,057,746
|
|
|
377,596
|
|
Repayment
of short-term bank loans
|
|
|
(674,313
|
)
|
|
-
|
|
Contribution
from (distribution to) owners
|
|
|
182,975
|
|
|
(105,727
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
488,135
|
|
|
271,869
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
4,891
|
|
|
224
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
96,589
|
|
|
13,406
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
25,912
|
|
|
12,506
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
122,501
|
|
$
|
25,912
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
73,274
|
|
$
|
4,199
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
STATEMENTS
OF CHANGE IN OWNERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
|
Registered
and
paid-in
capital
|
|
Distribution to
owners
|
|
Accumulated
other
comprehensive
income
|
|
Statutory
reserve
|
|
(Accumulated
losses)
retained
earnings
|
|
Total
owner’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2006
|
|
$
|
321,446
|
|
$
|
(121,091
|
)
|
$
|
3,920
|
|
$
|
-
|
|
$
|
(124,162
|
)
|
$
|
80,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
27,971
|
|
|
-
|
|
|
-
|
|
|
27,971
|
|
Net
loss for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30,502
|
)
|
|
(30,502
|
)
|
Contribution
by owners
|
|
|
1,277,533
|
|
|
(1,170,822
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
106,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
$
|
1,598,979
|
|
$
|
(1,291,913
|
)
|
$
|
31,891
|
|
$
|
-
|
|
$
|
(154,664
|
)
|
$
|
184,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
from owners
|
|
|
-
|
|
|
101,157
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,157
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
135,826
|
|
|
-
|
|
|
-
|
|
|
135,826
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,033,157
|
|
|
1,033,157
|
|
Transfer
to statutory reserve
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
74,508
|
|
|
(74,508
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
$
|
1,598,979
|
|
$
|
(1,190,756
|
)
|
$
|
167,717
|
|
$
|
74,508
|
|
$
|
803,985
|
|
$
|
1,454,433
|
|
See
accompanying notes to financial statements.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
1.
ORGANIZATION
AND BUSINESS BACKGROUND
Shenzhen
Pengsangpu Solar Industrial Products Corporation (“the Company”) was
incorporated as a limited liability company in the People’s Republic of China
(“PRC”) on September 23, 1993. Its registered capital was Renminbi Yuan (“RMB”)
2,650,000 (equivalent to $321,446) and contributed by three individuals namely,
Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde Chen.
On
July
13, 2006, the registered capital was approved to increase to $1,598,979
(RMB12,800,000) by an injection of additional capital of $1,277,533
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shunda Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange Agreement
to transfer its interest of 0.23% in the Company to Mr Chen Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest in
the
Company to Mr Bin Luo, respectively.
The
Company is principally engaged in the re-sale of energy-saving related heating
products such as heat pipes, heat exchangers, pressure water boilers, solar
energy water heaters and radiators. The Company currently operates a
distribution facility in Shenzhen City, the PRC.
All
the
customers are located in the PRC.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the year reported. Actual results may differ
from these estimates.
The
Company engages in installing energy-saving facilities and leasing the equipment
facilities to customers and the Company will transfer all benefits, risks and
ownership of the leased property to the customers at the end of the lease term.
The Company’s investment cost in these projects is recorded as sales-type leases
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13,
“Accounting
for Leases”
and its
various amendments and interpretations. The sales and cost of goods sold is
recognized at the point of sales. The investment in sales-type lease consists
of
the sum of the total minimum lease payments receivable less unearned interest
income. Unearned interest income is amortized to income over the lease term
as
to produce a constant periodic rate of return on the net investment in the
lease. The gross investment on sales-type lease is recorded as net of unearned
interest income.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Sales-type
leases are generally placed in a non-accrual status (i.e., no revenue is
recognized) when payments are more than 90 days past due. Additionally,
management periodically reviews the credit worthiness of all sales-type lessees
with payments outstanding less than 90 days. Based upon management’s judgment,
sales-type lessees with balances less than 90 days delinquent may be placed
in a
non-accrual status. Leases placed on non-accrual status are only returned to
an
accrual status when the account has been brought current and management believes
recovery of the remaining unpaid lease payments is probable.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
(a)
Product sales
The
Company derives revenues from the sale of energy-saving products. The Company
recognizes its revenues net of value-added taxes (“VAT”). The Company is subject
to VAT which is levied on the majority of the products at the rate of 17% on
the
invoiced value of sales. Output VAT is borne by customers in addition to the
invoiced value of sales and input VAT is borne by the Company.
In
accordance with EITF 00-10,
“Accounting
for Shipping and Handling Fees and Costs,”
the
Company records shipping and handling costs incurred for inbound and outbound
freight as a component of cost of revenues.
(b)
Project revenue
(i)
Project revenue under multiple element arrangements
Starting
from 2007, the Company also sells their products and services under a bundled
sales arrangement namely energy-saving projects, which typically include design,
equipment, installation, testing and maintenance components. The components
of
design, equipment, installation and testing are non-separable and considered
as
a single unit of deliverables, namely product revenue. Hence, the product and
maintenance are considered separate units of accounting in the
arrangement.
Revenues
under these bundled arrangements are allocated considering the relative fair
values of two separate deliverables: (a) product deliverable and (b) maintenance
deliverable, included in the bundled arrangement based on the estimated relative
fair values of each element in accordance with EITF 00-21,
“Accounting
for Multiple Element Revenue Arrangements”
and
recognized when the applicable revenue recognition criteria for each element
are
met.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
(ii)
Maintenance service
Revenue
from maintenance support for the Company’s products are deferred and recognized
ratably over the term of the service period upon the acceptance of the products,
which is generally 24 to 42 months. As of December 31, 2007, the unrecognized
portion of revenue related to maintenance was $21,451 and was included in the
Deferred Revenue caption on the balance sheets.
(iii)
Project revenue under sales-type leases
In
accordance with SFAS No. 13,
“Accounting
for Leases”
, the
Company recognizes interest income over the lease term so as to produce a
constant rate of return on the net investment in the lease using effective
interest method.
Under
sales-type leases, the Company also recognizes a profit (or loss) at the
beginning of the lease term. Sales revenue should be recorded for the fair
value
of the leased asset, or, if lower, the present value of the minimum lease
payments, computed using the interest rate implicit in the lease. Cost of sales
should be recorded for the carrying amount of the leased asset, less the present
value of the unguaranteed residual value.
(c)
Interest income
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
Cost
of
revenue consists primarily of material costs, direct labor, shipping and
handling fee and manufacturing overheads, which are directly attributable to
the
manufacture of products and the provision of the energy-saving
projects.
o
|
Cash
and cash equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
The
Company maintains cash balances at an independent financial institution
specializing in corporate guarantees as a pledge to the short-term bank
loan.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
o
|
Accounts
receivable and
allowance
for
doubtful
accounts
|
The
Company carries accounts receivable at their face amounts less an
allowance
for
doubtful
accounts.
On a regular basis, an
allowance for uncollectible receivables is established and determined based
upon
past transaction history with customers, customer payment practices and economic
conditions. Actual collection experience may differ from the current estimate
of
net receivables. A change to the allowance for uncollectible amounts may be
required if a future event or other change in circumstances results in a change
in the estimate of the ultimate collectibility of a specific account. The
Company does not require collateral for the accounts receivable balances. As
of
December 31, 2007 and 2006, the Company has determined that no allowance for
doubtful accounts is required.
Inventories
consist primarily of finished goods, work in process and raw materials and
are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Allowance for slow-moving and obsolescence is
an
estimate amount based on an analysis of current business and economic risks,
the
duration of the inventories held and other specific identifiable risks that
may
indicate a potential loss. The allowance is reviewed regularly to ensure that
it
adequately provides for all reasonable expected losses. As of December 31,
2007
and 2006, the Company has determined that no allowance for obsolescence is
required.
o
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable
life
|
|
Residual value
|
|
|
|
|
|
|
|
Plant
and machinery
|
|
|
5
years
|
|
|
5
|
%
|
Office
equipment
|
|
|
5
years
|
|
|
5
|
%
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Expenditure
for maintenance and repairs is expensed as incurred. The gain or loss on the
disposal of property, plant and equipment is the difference between the net
sales proceeds and the carrying amount of the relevant assets and is recognized
in the statements of operations.
o
|
Valuation
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets,”
the
Company reviews its long-lived assets, including property, plant and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be fully recoverable. If the total of
the
expected undiscounted future net cash flows is less than the carrying amount
of
the asset, a loss is recognized for the difference between the fair value and
carrying amount of the asset. There has been no impairment as of December 31,
2007 or 2006.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
SFAS
No.
130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during the year from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of owners’
equity consists of changes in unrealized gains and losses on foreign currency
translation. This comprehensive income is not included in the computation of
income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
, which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statements of operations and comprehensive income in the period of enactment.
A
valuation allowance is provided to reduce the amount of deferred tax assets
if
it is considered more likely than not that some portion of, or all of the
deferred tax assets will not be realized.
The
Company also adopts the provisions of the Financial Accounting Standards
Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes” (“
FIN 48
”)
. FIN 48
prescribes a recognition threshold and measurement process for recording in
the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. The Company adopted FIN 48 and has determined that the adoption
did
not have an impact on the Company’s financial position, results of operations,
or cash flows.
o
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the statement of operations.
The
reporting currency of the Company is the United States dollar (“US$”). The
Company maintains its books and records in its local currency, Renminbi Yuan
(“RMB”), which is functional currency as being the primary currency of the
economic environment in which these entities operate.
In
general, assets and liabilities are translated into US$, in accordance with
SFAS
No. 52, “
Foreign
Currency Translation”
, using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the year. The gains and losses
resulting from translation of financial statements of foreign subsidiaries
are
recorded as a separate component of accumulated other comprehensive income
within the statement of changes in owners’ equity.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Translation
of amounts from RMB into US$ has been made at the following exchange rates
for
the respective year:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Year-end
RMB:US$ exchange rate
|
|
|
7.314
|
|
|
7.813
|
|
Average
rates RMB:US$ exchange rate
|
|
|
7.563
|
|
|
7.945
|
|
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the statements of operations and
comprehensive income as and when the related employee service is
provided.
The
Company expenses advertising costs as incurred in accordance with the American
Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7,
“Reporting
for Advertising Costs”
. The
Company incurred $12,422 and $0 advertising expenses for each of the years
ended
December 31, 2007 and 2006, respectively.
o
|
Research
and development costs
|
Research
and development costs are expensed as incurred and consist mainly of labor
cost
incurred in the development of new products, new applications, new features
or
enhancements for existing products or applications. The Company incurred $9,520
and $3,272 for the years ended December 31, 2007 and 2006 .
Under
the
terms of the contracts, the Company provides a product warranty on the equipment
to its customers for a period of twelve months upon the completion of
installation at the Company’s expense. The Company has not experienced any
material returns where it was under obligation to honor this standard warranty
provision. As such, no reserve for product warranty has been provided in the
statements of operations for the years ended December 31, 2007 and
2006.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party
or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
SFAS
No.
131
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on
a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
financial statements. The Company operates in two reportable business segments:
Sales of products and Energy-saving projects (including sales-type leases).
All
the customers are located in the PRC.
o
|
Fair
value of financial instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures
about Fair Value of Financial Instruments”
. The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
restricted cash, trade accounts receivable, inventories, investment in
sales-type leases, prepayments and other receivables, short-term bank loan,
trade accounts payable, deferred revenue, accrued liabilities and other
payable.
As
of the
balance sheet date, the estimated fair values of financial instruments were
not
materially different from their carrying values as presented due to short
maturities of these instruments.
o
|
Recently
issued accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In
February 2007, the FASB issued SFAS No. 159,
"The
Fair Value Option for Financial Assets and Financial
Liabilities"
("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure, on an
item-by-item basis, specified financial instruments and certain other items
at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are required to be reported in earnings at each reporting
date.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007,
the provisions of which are required to be applied prospectively. The Company
believes that SFAS 159 should not have a material impact on the financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business
Combinations" ("
SFAS No.
141R"
)
. SFAS
No. 141R will change the accounting for business combinations. Under SFAS No.
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value
with
limited exceptions. SFAS No. 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Accordingly, any business combinations the Company
engages in will be recorded and disclosed following existing GAAP until January
1, 2009. The Company expects SFAS No. 141R will have an impact on accounting
for
business combinations once adopted but the effect is dependent upon acquisitions
at that time. The Company is still assessing the impact of this
pronouncement.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements—An Amendment of ARB No. 51, or
SFAS No. 160"
("SFAS
No. 160"). SFAS No. 160 establishes new accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation of
a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company believes that SFAS No. 160 should not have a
material impact on the financial position or results of operations.
In
March
2008, the FASB issued SFAS No. 161 ("SFAS No. 161"),
"Disclosures
about Derivative Instruments and Hedging Activities"
. SFAS
161 requires companies with derivative instruments to disclose information
that
should enable financial-statement users to understand how and why a company
uses
derivative instruments, how derivative instruments and related hedged items
are
accounted for under SFAS No. 133
"Accounting
for Derivative Instruments and Hedging Activities"
and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The adoption of this statement is not expected to have a
material effect on the Company's future financial position or results of
operations.
3.
ACCOUNTS
RECEIVABLE, TRADE
The
majority of the Company’s sales are on credit terms and in accordance with terms
specified in the contracts governing the relevant transactions. The Company
evaluates the need of an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. If actual
collections experience changes, revisions to the allowance may be required.
Based upon the aforementioned criteria, no allowances for doubtful accounts
were
provided for the years ended December 31, 2007 and 2006.
4.
INVENTORIES
Inventories
consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
94,308
|
|
$
|
127,177
|
|
Finished
goods
|
|
|
141,663
|
|
|
33,837
|
|
|
|
|
|
|
|
|
|
|
|
$
|
345,363
|
|
$
|
190,886
|
|
For
the
years ended December 31, 2007 and 2006, the Company recorded no allowance for
obsolete inventories and write-offs.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
5.
PREPAYMENTS
AND OTHER RECEIVABLES
A
summary
of prepayments and other receivables was:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Prepayments
|
|
$
|
54,936
|
|
$
|
-
|
|
Value
added tax receivable
|
|
|
20,904
|
|
|
-
|
|
Deposits
to vendors
|
|
|
8,347
|
|
|
424,440
|
|
Advance
to employees
|
|
|
6,993
|
|
|
-
|
|
Other
receivables
|
|
|
-
|
|
|
8,883
|
|
|
|
$
|
91,180
|
|
$
|
433,323
|
|
6.
INVESTMENT
IN SALES-TYPE LEASES
The
Company engages in installing energy-saving facilities and leasing the equipment
facilities to customers under sales-type leasing arrangement.
As
of
December 31, 2007, the components of the lease receivable, net, are as
follows:
Gross
minimum lease receivables
|
|
$
|
2,112,360
|
|
Estimated
residual value of leased assets
|
|
|
36,574
|
|
Less:
unearned interest income
|
|
|
(1,253,673
|
)
|
|
|
|
|
|
Net
investment in sales-type leases
|
|
|
895,261
|
|
Less:
current portion
|
|
|
(137,599
|
)
|
|
|
|
|
|
Net
investment in sales-type leases, non-current
|
|
$
|
757,662
|
|
As
of
December 31 , 2007, the future minimum rentals to be received on non-cancelable
sales-type leases are as follows:
Years
ending December 31,
|
|
|
|
2008
|
|
|
137,599
|
|
2009
|
|
|
137,599
|
|
2010
|
|
|
137,599
|
|
2011
|
|
|
137,599
|
|
2012
|
|
|
137,599
|
|
Thereafter
|
|
|
1,424,365
|
|
|
|
$
|
2,112,360
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
7.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Plant
and machinery
|
|
$
|
1,310,877
|
|
$
|
-
|
|
Office
equipment
|
|
|
79,183
|
|
|
47,633
|
|
Motor
vehicles
|
|
|
145,184
|
|
|
145,184
|
|
Foreign
translation difference
|
|
|
65,775
|
|
|
6,445
|
|
|
|
|
1,601,019
|
|
|
199,262
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
270,587
|
|
|
138,130
|
|
Less:
foreign translation difference
|
|
|
18,294
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$
|
1,312,138
|
|
$
|
57,045
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 were $132,457 and
$35,269, respectively.
8.
SHORT-TERM
BANK LOAN
As
of
December 31, 2007, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $54,690 with an independent financial
institution in the PRC, which is secured with interest rate at 6.63% per annum
payable quarterly, with principle due July 19, 2008. It was pledged by the
accounts receivable of the Company.
The
Company has a short-term bank loan of $205,086 with an independent financial
institution in the PRC, which is secured with interest rate at 6.57% per annum
payable quarterly, with principle due June 29, 2008. It is personally guaranteed
by the owner, Mr Renzheng Qiu of the Company.
The
Company has a short-term bank loan of $546,896 with an independent financial
institution in the PRC, which is secured with interest rate at 6.75% per annum
payable quarterly, with principle due October 12, 2008. It is personally
guaranteed by the owner, Mr Chen Hanwen of the Company.
As
of
December 31, 2006, the short-term bank loan is as follows:
The
Company has a short-term bank loan of $384,000 with an independent financial
institution in the PRC, which is secured with interest rate at 7.3% per
annum payable quarterly, with principle due September 27, 2007. It is personally
guaranteed by the owner, Mr Chen Hanwen and Mr Renzheng Qiu of the
Company.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
9.
ACCRUED
LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Business tax payable
|
|
$
|
93,751
|
|
$
|
-
|
|
Customer
deposits
|
|
|
56,492
|
|
|
-
|
|
Welfare
payable
|
|
|
23,128
|
|
|
209
|
|
Salary
payable
|
|
|
13,132
|
|
|
16,941
|
|
Government
levy payable
|
|
|
4,212
|
|
|
2,095
|
|
Other
payable
|
|
|
1,292
|
|
|
-
|
|
|
|
$
|
192,007
|
|
$
|
19,245
|
|
10.
OWNERS’
EQUITY
In
accordance with the Company’s Articles of Association, the registered capital of
the Company was $321,446 (approximately RMB2,650,000) and contributed by three
individuals namely, Mr Renzheng Qiu, Mr Hanwen Chen and Mr Hongde Chen at its
inception.
On
July
13, 2006, the registered capital was approved to increase to $1,598,979
(RMB12,800,000) by an injection of additional capital of $1,277,533
(RMB10,150,000) by the existing owners and a new owner, Shenzhen Shundeng Solar
Energy Co., Ltd registered in the PRC.
On
April
18, 2007, Shenzhen Shunda Solar Energy Co. entered an Equity Exchange Agreement
to transfer its interest of 0.23% in the Company to Mr Chen Hanwen.
On
May
30, 2007, Mr Hongde Chen entered an Equity Exchange Agreement to transfer his
34.77% interest in the Company to Mr Chen Hanwen.
On
July
24, 2007, Mr Chen Hanwen entered an Equity Exchange Agreement to transfer his
3.33% interest in the Company to Mr Renzheng Qiu and his 28.33% interest in
the
Company to Mr Bin Luo, respectively.
As
of
December 31, 2007, the ultimate owners of the Company were Mr Renzheng Qiu,
Mr
Chen Hanwen and Mr Bin Luo.
11.
DISTRIBUTION
TO OWNERS
As
of
December 31, 2006, the distribution amount to owners, Mr Renzheng Qiu, Mr Chen
Hanwen and Mr Bin Luo totaled , $1,291,913.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
As
of
December 31, 2007, the distribution amount owners , Mr Renzheng Qiu, Mr Chen
Hanwen and Mr Bin Luo totaled , $1,190,756.
12.
INCOME
TAXES
The
Company is subject to taxes in the PRC. Pursuant to the PRC Income Tax Laws,
the
Company is generally subject to corporate income tax (“CIT”) at a statutory rate
of 33% (30% national income tax plus 3% local income tax). Since the Company
is
registered and operates in Shenzhen, the PRC and is recognized as “Manufacturing
Enterprise Located in Special Economic Zone”, it is entitled to CIT at a
preferential tax rate of 15%.
On
July
25, 2006, the Company was classified as an Advanced Technology Enterprise in
the
PRC. The Company is exempted from CIT for the first two profit making years
and
then the CIT is reduced to 15% in the following three years.
The
Company was exempted from CIT due to cumulative tax losses for the year ended
December 31, 2006.
As
of
December 31, 2006, the Company has approximately $142,169 of cumulative tax
losses which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Company as of December 31, 2006
consisted mainly of tax losses and for which a full valuation allowance has
been
provided, as the losses were fully utilized in 2007 without a tax reductive
benefit to the Company due to the exemption from CIT under the tax concession
policy for an Advanced Technology Enterprise.
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes stated in the statements of operations for the years
ended December 31, 2007 and 2006 is as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
1,033,157
|
|
$
|
(30,502
|
)
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
340,942
|
|
|
(10,066
|
)
|
Add:
Items not subject to tax purpose
|
|
|
|
|
|
|
|
-
Net operating losses carryforwards
|
|
|
(46,916
|
)
|
|
(1,809
|
)
|
-
Provisions and accrued liabilities
|
|
|
(31,221
|
)
|
|
11,875
|
|
-
Deferred revenue
|
|
|
6,846
|
|
|
-
|
|
-
Effect from tax holiday
|
|
|
(269,651
|
)
|
|
-
|
|
Income
tax expenses
|
|
$
|
-
|
|
$
|
-
|
|
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law , among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. The Company
is
entitled to tax concession policy for an Advanced Technology Enterprise and
its
ultimate applicable effective tax rate in 2008 and beyond will depend on many
factors, including but not limited to whether certain of its legal entity will
be subject to a transitional policy under the Corporate Income Tax Law, whether
the Company can continue to enjoy the unexpired tax holidays.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of December 31, 2007 and
2006:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
-
|
|
$
|
46,916
|
|
Less:
valuation allowance
|
|
|
-
|
|
|
(46,916
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
13.
RELATED
PARTY TRANSACTIONS
For
the
period from January 1, 2005 to July 31, 2007, Mr. Chen Hanwen and Mr. Renzheng
Qiu, the owners of the Company maintained the office premises and provided
office services without charge to the Company. The imputed rent expense at
its
current market fair value for the years ended December 31, 2007 and 2006 were
not significant.
On
February 2, 2007, Shenzhen Shunda Solar Energy Co., the former owner of the
Company sold the plant and machinery to the Company at the market fair value
of
$698,108, equivalent to RMB 5,280,000, at a cash consideration in a normal
course of business.
14.
CHINA
CONTRIBUTION PLAN
Under
the
PRC Law, full-time employees of the Company are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions provided
for such employee benefits were $24,625 and $9,555 for the years ended December
31, 2007 and 2006, respectively.
15.
STATUTORY
RESERVE
Under
the
PRC Law, the Company is required to make appropriations to the statutory reserve
based on after-tax net earnings and determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriation to the statutory reserve should be at least 10% of the
after-tax net income until the reserve is equal to 50% of the registered
capital. The statutory reserve is established for the purpose of providing
employee facilities and other collective benefits to the employees and is
non-distributable other than in liquidation.
For
the
years ended December 31, 2007 and 2006, appropriation of $74,508 and $0 were
made respectively.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
16.
SEGMENT
INFORMATION - BUSINESS SEGMENTS
The
Company currently operates in two principal business segments: (i) sale of
components, (ii) provision of energy-saving projects. The accounting policies
of
the segments are the same as those described in the summary of significant
accounting policies (see Note 2). The Company had no inter-segment sales for
the
years ended December 31, 2007 and 2006. The Company’s reportable segments are
strategic business units that offer different products and
services.
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended December 31,
2007:
|
|
Sale of
products
|
|
Energy-saving
projects
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
136,714
|
|
$
|
3,078,568
|
|
$
|
3,215,282
|
|
Cost of revenue
|
|
|
80,052
|
|
|
1,768,651
|
|
|
1,848,703
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
56,662
|
|
$
|
1,309,917
|
|
$
|
1,366,579
|
|
Summarized
financial information that is directly attributable to the Company’s reportable
segments is shown in the following table for the year ended December 31,
2006:
|
|
Sale of
products
|
|
Energy-saving
projects
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
304,222
|
|
$
|
16,541
|
|
$
|
320,763
|
|
Cost
of revenue
|
|
|
209,296
|
|
|
-
|
|
|
209,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
94,926
|
|
$
|
16,541
|
|
$
|
111,467
|
|
For
the
years ended December 31, 2007 and 2006, all assets and operating facilities
are
located in the PRC.
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
17.
CONCENTRATION
AND RISK
(a)
Major customers
The
customers who account for 10% or more of revenue are presented as
follows:
|
|
Year ended December 31,
2007
|
|
December 31,
2007
|
|
|
|
Revenue
|
|
Percentage of
revenue
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
$
|
737,385
|
|
|
23
|
%
|
$
|
-
|
|
Customer
B
|
|
|
288,276
|
|
|
9
|
%
|
|
136,724
|
|
Customer
C
|
|
|
264,838
|
|
|
8
|
%
|
|
-
|
|
Customer
D
|
|
|
264,086
|
|
|
8
|
%
|
|
14,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554,585
|
|
|
48
|
%
|
|
151,353
|
|
|
|
Year ended December 31,
2006
|
|
December 31,
2006
|
|
|
|
Revenue
|
|
Percentage of
revenue
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
|
Customer
E
|
|
$
|
69,226
|
|
|
22
|
%
|
$
|
-
|
|
Customer
F
|
|
|
50,346
|
|
|
16
|
%
|
|
-
|
|
Customer
G
|
|
|
44,053
|
|
|
14
|
%
|
|
-
|
|
Customer
H
|
|
|
41,493
|
|
|
13
|
%
|
|
-
|
|
Customer
I
|
|
|
37,760
|
|
|
11
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242,878
|
|
|
76
|
%
|
$
|
-
|
|
(b)
Major vendors
The
vendors who account for 10% or more of purchases are presented as
follows:
|
|
Year ended December 31,
2007
|
|
December 31,
2007
|
|
|
|
Purchases
|
|
Percentage
of
purchases
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
355,483
|
|
|
21
|
%
|
$
|
39,787
|
|
Vendor
B
|
|
|
177,741
|
|
|
11
|
%
|
|
-
|
|
Vendor
C
|
|
|
175,006
|
|
|
11
|
%
|
|
39,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
708,230
|
|
|
43
|
%
|
$
|
79,221
|
|
|
|
Year ended December 31,
2006
|
|
December 31,
2006
|
|
|
|
Purchases
|
|
Percentage of
purchases
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
51,955
|
|
|
18
|
%
|
$
|
18,276
|
|
Vendor C
|
|
|
92,972
|
|
|
31
|
%
|
|
35,410
|
|
Vendor
D
|
|
|
46,486
|
|
|
16
|
%
|
|
64,342
|
|
Vendor
E
|
|
|
42,384
|
|
|
14
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
233,797
|
|
|
79
|
%
|
$
|
118,028
|
|
SHENZHEN
PENGSANGPU SOLAR INDUSTRIAL PRODUCTS CORPORATION
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable and sales-type leases.
The Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such
receivables.
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings in
fixed
rate instruments. At the year-end, all of borrowings were at fixed
rates.
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against the US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivative
or
other financial instruments that expose to substantial market risk.
18.
SUBSEQUENT
EVENTS
On
January 9, 2008, the Company entered into an Equity Purchase Agreement and
a
Complementary Agreement (the “Agreements”) with Beijing Deli Solar Technology
Development Co., Ltd, a wholly-owned subsidiary of China Solar and Clean Energy
Solutions, Inc., a company organized under the laws of the State of Nevada
and
is a reporting issuer in the United States and has its shares listed on the
NASD
Over-the-Counter Bulletin Board under the symbol “CSOL”. Pursuant to the
Agreements, China Solar and Clean Energy Solutions, Inc. agreed to purchase
100%
equity interest in the Company for a cash consideration of RMB19 million
(equivalent to US$2,588,203) and also agreed to purchase the Company’s
trademarks and other intangible assets at an appraisal value of RMB20
million.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
Unaudited
Pro Forma Financial Information
PRO
FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
The
unaudited Pro Forma Condensed, Combined Statements of Operations for the six
months ended June 30, 2008 gives effect to the acquisition of Shenzhen
PengSangPu Solar Industrial Products Corporation (“Target”) by China Solar &
Clean Energy Solutions, Inc. (“Registrant”). The transaction was valued at fair
value. The unaudited Pro Forma Condensed, Combined Statements of Operations
was
taken from the respective financial statements of Target and Registrant for
the
six months ended June 30, 2008. The unaudited Pro Forma Condensed, Combined
Statements of Operations was prepared assuming that the acquisition described
above was consummated as of the beginning of the year presented.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are based
upon
historical financial statements of Target and Registrant. The pro forma
adjustments and the resulting unaudited Pro Forma Condensed, Combined Statements
of Operations have been prepared based upon available information and certain
assumptions and estimates deemed appropriate by the Registrant.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of the date indicated,
or
that may be achieved in the future. Furthermore, the unaudited Pro Forma
Condensed, Combined Statements of Operations do not reflect changes that may
occur as the result of post-combination activities and other
matters.
The
unaudited Pro Forma Condensed, Combined Statements of Operations and notes
thereto should be read in conjunction with the accompanying unaudited financial
statements of Target and Registrant.
PRO
FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
|
|
Registrant
(Historical) *
|
|
Target
(Historical)
|
|
Pro forma
adjustments
Increase
(Decrease)
|
|
Pro forma
combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
26,930,274
|
|
$
|
393,920
|
|
|
|
|
$
|
27,324,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
20,018,232
|
|
|
218,350
|
|
|
|
|
|
20,236,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,912,042
|
|
|
175,570
|
|
|
|
|
|
7,087,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
281,383
|
|
|
44,673
|
|
|
|
|
|
326,056
|
|
Selling
and distribution
|
|
|
1,620,604
|
|
|
-
|
|
|
|
|
|
1,620,604
|
|
General
and administrative
|
|
|
1,757,389
|
|
|
39,681
|
|
|
51,000
|
(A)
|
|
1,848,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,659,376
|
|
|
84,354
|
|
|
|
|
|
3,794,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,252,666
|
|
|
91,216
|
|
|
|
|
|
3,292,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
66,831
|
|
|
-
|
|
|
|
|
|
66,831
|
|
Interest
income
|
|
|
1,638
|
|
|
-
|
|
|
|
|
|
1,638
|
|
Other
expense
|
|
|
(45,266
|
)
|
|
-
|
|
|
|
|
|
(45,266
|
)
|
Interest
expense
|
|
|
(143,696
|
)
|
|
(43,087
|
)
|
|
|
|
|
(186,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
(120,493
|
)
|
|
(43,087
|
)
|
|
|
|
|
(163,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,132,173
|
|
|
48,129
|
|
|
|
|
|
3,129,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
787,278
|
|
|
323
|
|
|
|
|
|
787,601
|
|
Minority
interests
|
|
|
859,031
|
|
|
|
|
|
|
|
|
859,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,485,864
|
|
$
|
47,806
|
|
|
|
|
$
|
1,482,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.14
|
|
|
|
|
|
|
|
$
|
0.13
|
(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.11
|
|
|
|
|
|
|
|
$
|
0.11
|
(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
10,612,185
|
|
|
|
|
|
|
|
|
11,314,249
|
(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
13,006,396
|
|
|
|
|
|
|
|
|
13,708,460
|
(D)
|
*
It
includes the operating results of Target from the effective date of acquisition
from April 1, 2008.
PRO
FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR
THE
YEAR
ENDED DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
(UNAUDITED)
The
unaudited Pro Forma Condensed, Combined Statements of Operations for the year
ended December 31, 2007 gives effect to the acquisitions of Tianjin Huaneng
Group Energy Equipment Co. Ltd. (“Tianjin Huaneng”) and Shenzhen PengSangPu
Solar Industrial Products Corporation (“Shenzhen PengSangPu”) by China Solar
& Clean Energy Solutions, Inc. (“Registrant”). The transaction was valued at
fair value. The unaudited Pro Forma Condensed, Combined Statements of Operations
was taken from the respective financial statements of Tianjin Huaneng, Shenzhen
PengSangPu and Registrant for the year ended December 31, 2007. The unaudited
Pro Forma Condensed, Combined Statements of Operations was prepared assuming
that the acquisition described above was consummated as of the beginning of
the
year presented. The unaudited Pro Forma Condensed, Combined Statements of
Operations are based upon historical financial statements of Tianjin Huaneng,
Shenzhen PengSangPu and Registrant. The pro forma adjustments and the resulting
unaudited Pro Forma Condensed, Combined Statements of Operations have been
prepared based upon available information and certain assumptions and estimates
deemed appropriate by the Registrant.
The
unaudited Pro Forma Condensed, Combined Statements of Operations are not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of the date indicated,
or
that may be achieved in the future. Furthermore, the unaudited Pro Forma
Condensed, Combined Statements of Operations do not reflect changes that may
occur as the result of post-combination activities and other
matters.
The
unaudited Pro Forma Condensed, Combined Statements of Operations and notes
thereto should be read in conjunction with the accompanying audited financial
statements of Target and Registrant.
PRO
FORMA CONDENSED, COMBINED STATEMENTS OF INCOME
FOR
THE YEAR ENDED DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”))
(
UNAUDITED)
|
|
|
|
Tianjin
Huaneng
For the six
months
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
Ended June
|
|
Shenzhen
|
|
adjustments
|
|
|
|
|
|
Registrant
|
|
30, 2007
|
|
Pengsangpu
|
|
Increase
|
|
Pro forma
|
|
|
|
(Historical)
|
|
(Historical)
|
|
(Historical)
|
|
(Decrease)
|
|
combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
37,072,346
|
|
$
|
6,649,869
|
|
$
|
3,215,282
|
|
|
|
|
$
|
$46,937,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
28,772,078
|
|
|
5,171,431
|
|
|
1,848,703
|
|
|
|
|
|
35,792,212
|
|
Gross
profit
|
|
|
8,300,268
|
|
|
1,478,438
|
|
|
1,366,579
|
|
|
|
|
|
11,145,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
282,822
|
|
|
119,882
|
|
|
132,457
|
|
|
204,000
|
(A)
|
|
739,161
|
|
Selling
and distribution
|
|
|
827,839
|
|
|
654,140
|
|
|
-
|
|
|
|
|
|
1,481,979
|
|
General
and administrative
|
|
|
4,003,973
|
|
|
371,090
|
|
|
131,673
|
|
|
310,000
|
(A)
|
|
4,816,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
5,114,634
|
|
|
1,145,112
|
|
|
264,130
|
|
|
|
|
|
7,037,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,185,634
|
|
|
333,326
|
|
|
1,102,449
|
|
|
|
|
|
4,107,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
220,057
|
|
|
20,236
|
|
|
3,982
|
|
|
|
|
|
244,275
|
|
Interest
expense
|
|
|
(65,481
|
)
|
|
(86,692
|
)
|
|
(73,274
|
)
|
|
|
|
|
(225,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
154,576
|
|
|
(66,456
|
)
|
|
(69,292
|
)
|
|
|
|
|
18,828
|
|
Income
before income taxes
|
|
|
3,340,210
|
|
|
266,870
|
|
|
1,033,157
|
|
|
|
|
|
4,126,237
|
|
Income
tax expense
|
|
|
(615,325
|
)
|
|
(67,299
|
)
|
|
|
|
|
|
|
|
(682,624
|
)
|
Minority
interests
|
|
|
(199,744
|
)
|
|
-
|
|
|
-
|
|
|
(97,790
|
)(C)
|
|
(297,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,525,141
|
|
$
|
199,571
|
|
$
|
1,033,157
|
|
$
|
|
|
$
|
3,146,079
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,549,334
|
|
$
|
-
|
|
$
|
-
|
|
$
|
|
|
$
|
2,170,272
|
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share
|
|
$
|
0.25
|
|
|
|
|
$
|
$
|
|
$
|
|
|
$
|
0.18
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share
|
|
$
|
0.23
|
|
|
|
|
$
|
$
|
|
$
|
|
|
$
|
0.16
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
common shares
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
12,316,518
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
common shares
|
|
|
10,783,026
|
|
|
|
|
|
|
|
|
|
|
|
20,257,394
|
(B)
|
Notes
to Unaudited Pro Forma Combined Financial Statements
Note
A
The adjustment of $51,000 was additional amortization of intellectual property
and customer relationships arising from the acquisition of SZPSP for the
six
months ended June 30, 2008, which reflects amortization for the period
from
January to March 2008, as if the acquisition was completed on January 1,
2007.
The
adjustments of $204,000 and $310,000 were additional amortization of
intellectual property and customer relationships and write-down of in-process
research and development, respectively, arising from the acquisition of
SZPSP
for the year ended December 31, 2007, as if the acquisition was completed
on
January 1, 2007.
Of
the
$2,350,000 of acquired intangible assets, $310,000 was assigned to in-process
research and development which was written off during the six months ended
June 30, 2008, $940,000 was assigned to existing intellectual property, and
$1,100,000 was assigned to customer relationships. The acquired identifiable
intangibles assets have a weighted-average amortization period totaling
approximately 10 years and residual value totaling approximately $0. The
adjustment to amortize intellectual property and customer relationships were
$23,500 and $27,500, respectively for six months ended June 30, 2008 (from
the
effective date of acquisition at April 1, 2008).
The
property, plant and equipment acquired consists of plant machinery and
equipment, motor vehicles and leasehold improvements with estimated depreciable
lives of 5 years and residual value is 10% of the cost of assets.
Note
B
Income
per share as of December 31, 2007 was calculated as follows:
|
|
Historical
|
|
Pro
forma
|
|
|
|
|
|
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,525,141
|
|
|
3,146,079
|
|
Less:
Preferred stock dividends
|
|
|
(975,807
|
)
|
|
(975,807
|
)
|
Net
income available to common stockholders in computing basic net
income per
share
|
|
$
|
1,549,334
|
|
|
2,170,272
|
|
|
|
|
|
|
|
|
|
Plus:
Preferred stock beneficial conversion
|
|
|
975,807
|
|
|
975,807
|
|
Net
income available to common stockholders in computing diluted
net income
per share
|
|
$
|
2,525,141
|
|
|
3,146,079
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average ordinary shares outstanding – Basic
|
|
|
6,205,290
|
|
|
6,205,290
|
|
Weighted
average of ordinary shares issued for February 2008 private placement,
net
|
|
|
-
|
|
|
4,691,499
|
|
Weighted
average of ordinary shares issued for acquisition of Shenzhen
Pengsangpu,
net
|
|
|
-
|
|
|
1,419,729
|
|
Total
basic weighted average ordinariy shares outstanding
|
|
|
6,205,290
|
|
|
12,316,518
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of convertible preferred stock
|
|
|
887,097
|
|
|
1,774,194
|
|
Dilutive
effect of warrant shares
|
|
|
3,690,639
|
|
|
5,555,559
|
|
Dilutive
effect of warrant shares for February 2008 private
placement
|
|
|
-
|
|
|
469,150
|
|
Dilutive
effect of warrant shares for acquisition of Shenzhen
Pengsangpu
|
|
|
-
|
|
|
141,973
|
|
Weighted
average ordinary shares outstanding – Diluted
|
|
|
10,783,026
|
|
|
20,257,394
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.25
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.23
|
|
|
0.16
|
|
Note
C
The pro
forma adjustment gives effect to the acquisition of Tianjin Huaneng as if it
were consummated on January 1, 2007.
Net
income per Tianjin for the year of 2007
|
|
$
|
199,571
|
|
Multiply:
Minority interest portion
|
|
|
49
|
%
|
Total
minority interests
|
|
$
|
97,790
|
|
Note
D
Income
per share as of June 30, 2008 was calculated as follows:
|
|
Historical
|
|
Pro
forma
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income available to common stockholders in computing basic net income
per
share
|
|
$
|
1,485,864
|
|
|
1,482,670
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders in computing diluted net
income
per share
|
|
$
|
1,485,864
|
|
|
1,482,670
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average ordinary shares outstanding - Basic
|
|
|
9,894,520
|
|
|
9,894,520
|
|
Weighted
average of ordinary shares issued for acquisition of Shenzhen Pengsangpu,
net
|
|
|
717,665
|
|
|
1,419,729
|
|
Total
basic weighted average ordinary shares outstanding
|
|
|
10,612,185
|
|
|
11,314,249
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of convertible preferred stock
|
|
|
1,383,593
|
|
|
1,383,593
|
|
Dilutive
effect of warrant shares
|
|
|
318,310
|
|
|
318,310
|
|
Dilutive
effect of
contingent
shares
|
|
|
692,308
|
|
|
692,308
|
|
Weighted
average ordinary shares outstanding - Diluted
|
|
|
13,006,396
|
|
|
13,708,460
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.14
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.11
|
|
|
0.11
|
|
For
the
six months ended June 30, 2008, warrants exercisable to 4,392,488 shares of
common stock were excluded from the historical and pro forma diluted earnings
per share calculation as the average market price of the common stock during
the
period was more than the exercise price of the warrants, thereby making the
warrants antidilutive under the treasury method.
PART
II:
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
Although
we will not receive any of the proceeds from the sale of the shares being
registered in this registration statement, we have agreed to bear the costs
and
expenses of the registration of those shares. Our expenses in connection with
the issuance and distribution of the securities being registered, other than
the
underwriting discount, are as follows:
SEC
Registration Fee
|
|
$
|
392
|
|
Professional
Fees and Expenses*
|
|
$
|
75,000
|
|
Printing
and Engraving Expenses *
|
|
$
|
5,000
|
|
Transfer
Agent's Fees*
|
|
$
|
2,500
|
|
Miscellaneous
Expenses*
|
|
$
|
3,000
|
|
Total
|
|
$
|
85,892*
|
|
*
Estimates
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Pursuant
to Article VI, Sections 1 and 2 of our By-Laws, we may indemnify any person
who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or proceeding, whether civil, criminal, administrative
or
investigative (other than an action by or in the right of the Company) by reason
of the fact that such person is or was a director, officer, employee or agent
of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with such action or proceeding if such person acted
in
good faith and in a manner such person reasonably believed to be in the best
interests of the Company and, in the case of a criminal action or proceeding,
had no reasonable cause to believe the conduct of such person was
unlawful.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ending December 31, 2007:
On
June
13, 2007, we entered into a number of agreements with Barron Partners L.P.,
a
Delaware limited partnership, and two other investors (all accredited investors)
pursuant to a private placement transaction providing for the sale to the
investors for an aggregate purchase price of $2,750,000 (or $1.55 per share)
of
(i) 1,774,194 shares of Series A Preferred Stock (with each share of Series
A
Preferred Stock being convertible into one (1) share of common stock), subject
to adjustment; (ii) five year warrants to purchase 1,774,194 shares of common
stock at an exercise price $1.90 per share, subject to adjustment; and (iii)
five year warrants to purchase an additional 1,774,194 shares of common stock
at
an exercise price of $2.40 per share, subject to adjustment.
Additional
shares of Series A Preferred Stock (not to exceed 900,000) are required to
be
delivered to the investors in the event that we fail to achieve certain pre
tax
income targets for the fiscal years ended December 31, 2007 and 2008. The
private placement qualified as an exempt transaction under Section 4(2) of
the
Securities Act, as amended, and Rule 506 of Regulation D
thereunder.
In
connection with the placement we issued Trenwith Securities, LLC
warrants
to purchase 106,452 shares exercisable for a period of five years at an exercise
price of $1.17 ( subject to adjustment) and a transaction fee of $165,000.
In
connection with their appointment we had previously issued Trenwith five year
warrants to purchase 75,000 shares of common sock at an exercise price of $2.81,
subject to adjustment.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended December 31, 2006:
None.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended December 31, 2005:
On
March
31, 2005, pursuant to the Stock Contribution Agreement, the former shareholders
of Deli Solar (BVI) contributed all the shares of capital stock of Deli Solar
(BVI) in exchange for 4,067,968 shares of our common stock. The exchange
qualified as an exempt transaction under Section 4(2) and/or Regulation S under
the Securities Act of 1933, as amended.
On
March
31, 2005, pursuant to subscriptions executed by seventeen accredited investors,
the Company issued a total of 1,714,290 shares of common stock, accompanied
by
warrants to purchase 1,825,719 shares of common stock, in a private placement
qualifying as an exempt transaction under Section 4(2) of the Securities Act,
as
amended, and Rule 506 of Regulation D thereunder. The total purchase price
paid
for the common shares and warrants was $6,000,015. The exercise price of the
warrants was $3.85 per share. (The number and the price of shares described
in
these two paragraphs has been adjusted to give effect to the one-for-six reverse
stock split of all issued and outstanding shares of our common stock, which
became effective on August 15, 2005.).
The
offering to the seventeen accredited investors was accomplished through Kuhns
Brothers Securities Corporation, an NASD member and SEC registered broker
dealer, as placement agent. John Kuhns, the Chairman and 95% shareholder of
Kuhns Brother Securities Corporation, is a former Chairman of our
Board.
The
following sets forth recent sales by the Company of unregistered securities
during the fiscal year ended May 31, 2004 and the seven months ended December
31, 2004:
During
the fiscal year ended May 31, 2004 and the seven months ended December 31,
2004,
we issued 500,000 shares of our common stock as payment for a loan given to
Meditech. The loan of $30,000 was paid off through this stock
issuance.
During
the fiscal year ended May 31, 2004 and the seven months ended December 31,
2004,
we issued an aggregate of 1,633,333 shares of our common stock for cash of
$142,222. (The number and the price of shares described in these two paragraphs
has been adjusted to give effect to the one-for-six reverse stock split of
all
issued and outstanding shares of our common stock, which became effective on
August 15, 2005.).
No
underwriter was involved in any of the above issuances of securities. All of
the
above securities were issued in reliance upon the exemption set forth in Section
4(2) of the Securities Act on the basis that they were issued under
circumstances not involving a public offering.
Other
than the securities mentioned above, we have not issued or sold any securities
without registration for the past three years from the date of this registration
statement.
EXHIBITS
3.1
|
Certificate
of Incorporation. (1)
|
|
|
3.2-1
|
Bylaws.
(2)
|
|
|
3.2-2
|
Amendment
to Bylaws dated October 17, 2005 (3)
|
|
|
3.2-3
|
Articles
of Merger of Du Solar, Inc. into the Company (10)
|
|
|
4.1
|
Common
Stock Specimen (4)
|
|
|
4.2
|
Form
of Warrant. (1)
|
|
|
4.3
|
Certificate
of Designation as filed with the Secretary of State of Nevada on
June 12 ,
2007 (8)
|
|
|
4.4
|
Series
A Preferred Stock Specimen (8)
|
|
|
4.5
|
Form
of Class A Warrant (8)
|
|
|
4.6
|
Form
of Class B Warrant (8)
|
|
|
4.7
|
Form
of Placement Agent Warrant (12)
|
5.1
|
Legal
Opinion of Guzov Ofsink, LLC re legality of the common stock being
registered.
(14)
|
10.1
|
Stock
Contribution Agreement, dated March 28, 2005, entered into by and
between
the Company and Deli Du (5)
|
|
|
10.2
|
Stock
Purchase Agreement, dated March 30, 2005, by and among Deli Du, Halter
Capital Corporation, and the Company (5)
|
|
|
10.3
|
Form
of Unit Purchase Agreement (1)
|
|
|
10.4
|
Form
of Engagement Agreement (1)
|
|
|
10.5
|
Form
of Lock Up Agreement between the Company and the members of the Financial
Advisor Group (1)
|
|
|
10.6
|
Land
Purchase Agreement by and between Deli Solar (Bazhou) and Deli Du
(English
Translation) (4)
|
|
|
10.7
|
Stock
Purchase Agreement by and between Deli Solar (Bazhou) and Ailiyang
Shareholders (6).
|
|
|
10.8
|
Land
Use Rights Purchase Agreement by and between Deli Solar (Bazhou)
and the
Governance Commission of Beijiahe Village Chaheji County Bazhou City
dated
March 16, 2006 (English Translation) (7)
|
|
|
10.9
|
Securities
Purchase Agreement dated June 13, 2007 by and among the Company,
Barron
Partners LP and the other investors named therein (8)
|
|
|
10.10
|
Registration
Rights Agreement dated June 13, 2007 by and among the Company, Barron
Partners LP and the other investors named (8)
|
|
|
10.11
|
Stock
Escrow Agreement dated June 13, 2007 by and between the Company and
Tri-State Title & Escrow, LLC, as escrow agent
(8)
|
10.12
|
Closing
Escrow Agreement dated June 13, 2007 by and between the Company and
Barron
Partners, L.P., and the other investors named therein and Tri-State
Title
& Escrow, LLC, as escrow agent (8)
|
|
|
10.13
|
Investor
Relations Consulting Agreement dated July 23, 2007 between the Company
and
Hayden Communications International, Inc. (9)
|
|
|
10.14
|
Securities
Purchase Agreement dated as of February 25, 2008 by and among the
Company
and the investors named therein (10)
|
|
|
10.15
|
Registration
Rights Agreement dated as of February 25, 2008 by and among the Company
and the investors named therein (10)
|
|
|
10.16
|
Make
Good Escrow Agreement dated as of February 25, 2008 by and between
the
Company, the investors named therein, Roth Capital Partners, LLC
and
Tri-State Title & Escrow, LLC, as escrow agent,
(10)
|
|
|
10.17
|
Escrow
Agreement dated as of February 25, 2008 by and between the Company,
Roth
Capital Partners, LLC and Tri-State Title & Escrow, LLC, as escrow
agent (10)
|
|
|
21.1
|
List
of subsidiaries. (11)
|
|
|
23.1
|
Consent
of counsel to the use of the opinion annexed at Exhibit 5.1 (contained
in
the opinion annexed at Exhibit 5.1)
|
|
|
23.2
|
Consent
of accountants Cordovano and Honeck LLP for use of their
report
|
|
|
23.3
|
Consent
of accountants Zhong Yi (Hong Kong) C.P.A. Company Limited for use
of
their report.
|
|
|
23.4
|
Consent
of accountants Child, Van Wagoner & Bradshaw, PLLC for use of their
report
|
(1)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on November 2, 2005.
|
|
|
(2)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
with
the SEC in August 2003.
|
|
|
(3)
|
Incorporated
herein by reference to the Registration Statement on Form SB-2 filed
with
the SEC on March 26, 2001.
|
|
|
(4)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 1
on Form
SB-2 filed with the SEC on February 6, 2006.
|
(5)
|
Incorporated
herein by reference to Schedule 13D filed by the Company on April
18,
2005.
|
|
|
(6)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on November 28, 2005.
|
|
|
(7)
|
Incorporated
herein by reference to the Registration Statement Amendment No. 2
on Form
SB-2 filed with the SEC on May 22, 2006.
|
|
|
(8)
|
Incorporated
herein by reference to the Current Report on Form 8-K filed by the
Company
on June 19, 2007.
|
|
|
(9)
|
Incorporated
herein by reference to Amendment No. 2 to the Registration Statement
on
Form SB-2 filed with the SEC on January 1,
2008..
|
(10)
|
Incorporated
by reference to our Current Report on Form 8-K filed by the Company
with
the SEC on March 3, 2008.
|
|
|
(11)
|
Incorporated
herein by reference to the Annual Report on Form 10-KSB filed by
the
Company on April 10, 2008.
|
|
|
(12)
|
Incorporated
herein by reference to the Registration Statement on Form S-1 filed
by the
Company on April 14, 2008.
|
(13)
|
Incorporated
herein by reference to Amendment No. 1 the Registration Statement
on Form
S-1 filed by the Company on June 25,
2008.
|
(14)
|
Incorporated
herein by reference to Amendment No. 3 the Registration Statement
on Form
S-1 filed by the Company on August 27,
2008.
|
UNDERTAKINGS
The
undersigned Registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i.
To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
ii.
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement(or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement;
iii.
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act, each
such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
That,
for
the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
Each
prospectus filed by the Registrant pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the
registration statement or made in any such document immediately prior to such
date of first use.
Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer
will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the Registration Statement on Form
S-1
to be signed on its behalf by the undersigned thereunto duly authorized
in
Beijing, PRC, on September 30, 2008.
|
CHINA
SOLAR & CLEAN ENERGY
SOLUTIONS,
INC.
|
|
|
|
/s/
Deli Du
|
|
By:
Deli Du,
|
|
Chief
Executive Officer, President and Director
|
|
(principal
executive officer)
|
In
accordance with the requirements of the Securities Act of 1933, this Amendment
No.4 to the Registration Statement on Form S-1 was signed by the following
persons in the capacities and on the dates indicated.
Name
and Title
|
|
Date
|
|
|
|
/s/
Deli Du
|
|
September
30, 2008
|
Deli
Du,
|
|
|
Chief
Executive Officer, President and Director
|
|
|
(principal
executive officer)
|
|
|
|
|
|
/s/
Yihai Yang
|
|
September
30, 2008
|
Yihai
Yang
|
|
|
Acting
Chief Financial Officer and director
|
|
|
(principal
financial officer and accounting
officer)
|
|
|
|
|
|
/s/
Zhaolin Di
|
|
September
30, 2008
|
Zhaolin
Ding
|
|
|
Director
|
|
|
|
|
|
/s/
Zhenhang Jia
|
|
September
30, 2008
|
Zhenhang
Jia
|
|
|
Director
|
|
|
|
|
|
/s/
Joseph Levinson
|
|
September
30, 2008
|
Joseph
Levinson
|
|
|
Director
|
|
|
EXHIBIT
INDEX
23.2
|
Consent
of accountants Cordovano and Honeck LLP for use of their
report
|
|
|
23.3
|
Consent
of accountants Zhong Yi (Hong Kong) C.P.A. Company Limited for use
of
their report.
|
|
|
23.4
|
Consent
of accountants Child, Van Wagoner & Bradshaw, PLLC for use of their
report
|
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