UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended
September
30, 2008
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the
transition period from _______ to _________
Commission
File No. 000-12561
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
95-3819300
|
(State
or other jurisdiction of incorporation)
|
|
I.R.S.
Employer Identification Number
|
Building
3
No.
28 Feng Tai North Road,
Beijing
China 1000071
(Address
of principal executive offices)
(011)
86-10-63850516
(Registrant's
telephone number, including area code)
Deli
Solar (USA), Inc.
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
x
Yes
o
No
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
the definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
o
|
|
Accelerated filer
|
o
|
|
|
|
|
|
Non-accelerated filer
|
o
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
x
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
x
No
The
number of shares of the issuer’s common stock, $.001 per share, outstanding at
November 14, 2008 was 15,799,450.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
|
|
PART
I Financial Information
|
|
|
|
|
|
|
|
|
|
Item
1. Unaudited Financial Statements
.
|
|
|
F-1
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 and December
31, 2007
|
|
|
F-2
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the three and nine months
ended
September 30, 2008 and 2007
|
|
|
F-3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September
30, 2008 and 2007
|
|
|
F-4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity for the nine months ended
September 30, 2008
|
|
|
F-5
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
F-6
|
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
|
|
|
2
|
|
|
|
|
|
|
Item
4T. Controls and Procedures.
|
|
|
14
|
|
|
|
|
|
|
PART
II Other Information
|
|
|
15
|
|
|
|
|
|
|
Item
6. Exhibits.
|
|
|
15
|
|
|
|
|
|
|
Signatures
|
|
|
16
|
|
|
|
|
|
|
Exhibits/Certifications
|
|
|
|
|
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-Q/A is being filed to amend our quarterly report
on
Form 10-Q for the fiscal quarter ended September 30, 2008, as filed with
the
Securities and Exchange Commission (the “Commission”) on November 14, 2008 (the
“Original Report”), to
l
|
amend Note 4 to Condensed Consolidated
financial statements with regard to pro forma financial
information
|
l
|
amend Item 4T, "Controls
and
Procedures."
|
In
addition, we are filing updated certifications pursuant to the Sarbanes-Oxley
Act of 2002 as Exhibits 31.1, 31.2, and 32.1.
Item
1.
Financial
Statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Page
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 and December
31,
2007
|
|
|
F-2
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations And Comprehensive Loss for
the three
and nine months ended September 30, 2008 and 2007
|
|
|
F-3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September,
2008 and 2007
|
|
|
F-4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity for the nine
months ended September, 2008
|
|
|
F-6
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
F-6 - F-20
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
Currency
expressed in United States Dollars (“US$”), except for number of
shares
|
|
September
30, 2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,647,387
|
|
$
|
5,466,637
|
|
Accounts
receivable, net
|
|
|
8,971,587
|
|
|
7,453,009
|
|
Inventories
|
|
|
6,746,185
|
|
|
3,875,658
|
|
Other
receivables and prepayments
|
|
|
6,353,350
|
|
|
1,637,948
|
|
Total
current assets
|
|
|
26,718,510
|
|
|
18,433,252
|
|
|
|
|
|
|
|
|
|
Plant
and equipment, net
|
|
|
12,903,938
|
|
|
8,819,216
|
|
Goodwill
|
|
|
4,705,591
|
|
|
1,789,324
|
|
Intangible
assets, net
|
|
|
2,450,084
|
|
|
1,597,921
|
|
Customer
relationships, net
|
|
|
1,045,000
|
|
|
-
|
|
Intellectual
property - unpatented technology, net
|
|
|
893,000
|
|
|
-
|
|
TOTAL
ASSETS
|
|
$
|
48,716,122
|
|
$
|
30,639,713
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
1,875,042
|
|
$
|
2,111,028
|
|
Income
tax payables
|
|
|
1,538,863
|
|
|
1,108,433
|
|
Other
payables and accrued liabilities
|
|
|
8,021,159
|
|
|
8,552,452
|
|
Total
current liabilities
|
|
|
11,435,064
|
|
|
11,771,913
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
875,640
|
|
|
-
|
|
Minority
interests
|
|
|
1,960,344
|
|
|
935,825
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001, 25,000,000 shares authorized,
573,566
(unaudited) and 1,774,194 shares issued and outstanding,
respectively
|
|
$
|
574
|
|
$
|
1,774
|
|
Common
stock, $0.001 par value, 66,666,667 shares authorized, 13,599,450
(unaudited) and 6,205,690 shares issued and outstanding,
respectively
|
|
|
13,599
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
22,303,913
|
|
|
9,260,607
|
|
Accumulated
other comprehensive income
|
|
|
1,472,805
|
|
|
1,134,270
|
|
Retained
earnings
|
|
|
10,654,183
|
|
|
7,529,119
|
|
Total
stockholders’ equity
|
|
|
34,445,074
|
|
|
17,931,975
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
48,716,122
|
|
$
|
30,639,713
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Currency
expressed in United States Dollars (“US$”), except for number of
shares
(Unaudited)
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenue,
net
|
|
$
|
21,916,642
|
|
$
|
12,629,636
|
|
$
|
48,846,916
|
|
$
|
25,043,660
|
|
Cost
of revenue
|
|
|
17,050,868
|
|
|
10,078,609
|
|
|
37,069,100
|
|
|
19,817,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,865,774
|
|
|
2,551,027
|
|
|
11,777,816
|
|
|
5,226,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
183,216
|
|
$
|
82,731
|
|
$
|
464,599
|
|
$
|
153,697
|
|
Selling
and distribution
|
|
|
1,440,357
|
|
|
583,166
|
|
|
3,060,961
|
|
|
864,698
|
|
General
and administrative
|
|
|
719,601
|
|
|
532,137
|
|
|
1,602,809
|
|
|
987,093
|
|
Advertising
|
|
|
191,615
|
|
|
458,652
|
|
|
640,645
|
|
|
1,118,745
|
|
Salaries
and benefit
|
|
|
242,813
|
|
|
111,656
|
|
|
667,964
|
|
|
260,649
|
|
Total
operating expenses
|
|
|
2,777,602
|
|
|
1,768,342
|
|
|
6,436,978
|
|
|
3,384,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
210,275
|
|
|
-
|
|
|
277,106
|
|
|
-
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
expense
|
|
|
(42,662
|
)
|
|
-
|
|
|
(86,291
|
)
|
|
-
|
|
Interest
expense
|
|
|
(79,379
|
)
|
|
(31,845
|
)
|
|
(223,075
|
)
|
|
(30,207
|
)
|
Total
other (expense) income
|
|
|
88,234
|
|
|
(31,845
|
)
|
|
(32,259
|
)
|
|
(30,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,176,406
|
|
|
750,840
|
|
|
5,308,578
|
|
|
1,810,918
|
|
Income
tax expenses
|
|
|
467,336
|
|
|
189,770
|
|
|
1,254,614
|
|
|
327,747
|
|
Minority
interest
|
|
|
69,869
|
|
|
61,996
|
|
|
928,900
|
|
|
61,996
|
|
NET
INCOME
|
|
$
|
1,639,201
|
|
$
|
499,074
|
|
$
|
3,125,064
|
|
$
|
1,421,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation
of income available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
1,639,201
|
|
|
499,074
|
|
|
3,125,064
|
|
|
1,421,175
|
|
Preferred
stock beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(975,807
|
)
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
1,639,201
|
|
$
|
499,074
|
|
$
|
3,125,064
|
|
$
|
445,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
0.27
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - diluted
|
|
$
|
0.11
|
|
$
|
0.06
|
|
$
|
0.23
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
13,586,827
|
|
|
6,205,290
|
|
|
11,651,656
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,173,016
|
|
|
8,310,856
|
|
|
13,800,196
|
|
|
7,039,341
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Currency
expressed in United States Dollars (“US$”)
(Unaudited)
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(2,995,268
|
)
|
$
|
324,013
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(3,350,477
|
)
|
|
(740,779
|
)
|
Payment
for other intangible assets
|
|
|
(852,163
|
)
|
|
|
|
Acquisition
of subsidiary
|
|
|
(3,916,212
|
)
|
|
(2,162,133
|
)
|
Prepaid
land lease
|
|
|
-
|
|
|
25,110
|
|
Net
cash used in investing activities
|
|
|
(8,118,852
|
)
|
|
(2,877,802
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from private placement sale of stock
|
|
|
9,995,156
|
|
|
-
|
|
Proceeds
from warrants exercised
|
|
|
107,500
|
|
|
-
|
|
Prepayment
on short term notes payable
|
|
|
-
|
|
|
(6,712
|
)
|
Related
party payable
|
|
|
-
|
|
|
(92,686
|
)
|
Proceeds
from issuance of preferred stock
|
|
|
-
|
|
|
2,581,000
|
|
Net
cash provided by financing activities
|
|
|
10,102,656
|
|
|
2,481,602
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
192,214
|
|
|
171,543
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(819,250
|
)
|
|
99,356
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,466,637
|
|
|
3,212,065
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
4,647,387
|
|
$
|
3,311,421
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
441,015
|
|
$
|
137,976
|
|
Cash
paid for interest expenses
|
|
$
|
-
|
|
$
|
46,287
|
|
NONCASH
INVESTING AND FINANCING TRANSACTIONS:
|
|
|
|
|
|
|
|
Issuance
of common stock for acquisitions of SZPSP
|
|
$
|
2,839,458
|
|
$
|
-
|
|
Issuance
of warrants for the acquisitions of SZPSP
|
|
$
|
92,193
|
|
$
|
-
|
|
Preferred
share converted
|
|
$
|
1,201
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 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
|
|
Par
|
|
No. of
|
|
Par
|
|
paid-in
|
|
comprehensive
|
|
Retained
|
|
stockholders’
|
|
|
|
shares
|
|
value
|
|
shares
|
|
value
|
|
capital
|
|
income
|
|
earnings
|
|
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
and warrants issued for the acquisition of subsidiary at fair
value
|
|
|
-
|
|
|
-
|
|
|
1,419,729
|
|
|
1,420
|
|
|
2,930,231
|
|
|
-
|
|
|
-
|
|
|
2,931,651
|
|
Shares
issued for services
|
|
|
|
|
|
|
|
|
7,304
|
|
|
7
|
|
|
15,185
|
|
|
|
|
|
|
|
|
15,192
|
|
Warrant
exercised
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
75
|
|
|
107,425
|
|
|
-
|
|
|
-
|
|
|
107,500
|
|
Preferred
share converted
|
|
|
(1,200,628
|
)
|
|
(1,201
|
)
|
|
1,200,628
|
|
|
1,201
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,125,064
|
|
|
3,125,064
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
338,535
|
|
|
-
|
|
|
338,535
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,463,599
|
|
Balance
as of September 30, 2008
|
|
|
573,566
|
|
$
|
574
|
|
|
13,599,450
|
|
$
|
13,599
|
|
$
|
22,303,913
|
|
$
|
1,472,805
|
|
$
|
10,654,183
|
|
$
|
34,445,073
|
|
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)
NOTE
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 for the three and nine months ended
September 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 nine months ended September 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.
NOTE
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”).
NOTE
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 will 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
will
not have a material impact on the consolidated financial position or results
of
operations.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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.
Also
in
May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60" ("SFAS No.
163"). SFAS No. 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS No. 163 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, the Company
is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on
the
Company's financial position, results of operations or cash flows.
In
May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that,
upon conversion, may be settled by the issuer fully or partially in cash. FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest cost is recognized
in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years after December 15, 2008, and must be applied on a retrospective
basis. Early adoption is not permitted. 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
June
2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on the earnings per share
calculation.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or
an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF
07-5
provides that an entity should use a two-step approach to evaluate whether
an
equity-linked financial instrument (or embedded feature) is indexed to its
own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted.
The
Company is assessing the potential impact of this EITF 07-5 on the financial
condition and results of operations.
NOTE
4 - BUSINESS ACQUISITION
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 Supplementary 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
percent (50%) of the principal amount of the loan is required to be paid prior
to March 31, 2009 and the remaining balance of fifty percent (50%) is required
to be paid prior to March 31, 2010. The three shareholders of SZPSP have not
loaned the cash proceeds back to SZPSP as of September 30, 2008.
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
$1,674,789), SZPSP will pay the difference between the revenue and the targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the extent
necessary for the remaining balance.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
accounting date of the acquisition was April 1, 2008 and was accounted for
under
the purchase method. SZPSP results of operations for the six months ended
September 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:
|
|
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
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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. 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 nine months ended
September 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
|
|
·
Break
down of Revenue - IPRD versus products
|
|
|
90
|
%
|
|
80
|
%
|
|
75
|
%
|
|
70
|
%
|
|
65
|
%
|
|
|
|
10
|
%
|
|
20
|
%
|
|
25
|
%
|
|
30
|
%
|
|
35
|
%
|
|
|
|
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.
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
$310,000 of expenditures had no future value and accordingly should be written
off immediately.
The
property, plant and equipment acquired consists of plant machinery and
equipment, motor vehicles and leasehold improvements with estimated depreciable
lives of 5 years and residual value is 10% of the cost of
assets.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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 nine
months
ended
|
|
|
|
September
30, 2008
|
|
Pro
forma revenues
|
|
$
|
49,240,836
|
|
Pro
forma net income
|
|
$
|
3,121,870
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.21
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
Basic
|
|
|
13,076,836
|
|
Diluted
|
|
|
15,255,376
|
|
NOTE
5 - BALANCE SHEET COMPONENTS
Inventories
consisted of the following:
|
|
September
30, 2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,168,344
|
|
$
|
656,605
|
|
Consumables
|
|
|
73,685
|
|
|
5,359
|
|
Work-in-process
|
|
|
2,507,975
|
|
|
2,464,441
|
|
Finished
goods
|
|
|
2,996,181
|
|
|
749,253
|
|
Inventories
|
|
$
|
6,746,185
|
|
$
|
3,875,658
|
|
Other
receivables and prepayments consisted of the following:
|
|
September
30, 2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
|
|
|
|
|
|
Advance
to suppliers
|
|
$
|
2,528,515
|
|
$
|
493,421
|
|
Prepaid
expenses
|
|
|
235,026
|
|
|
249,598
|
|
Deposits
|
|
|
2,306,868
|
|
|
894,268
|
|
Other
receivables
|
|
|
1,282,941
|
|
|
661
|
|
Other
receivables and prepayments
|
|
$
|
6,353,350
|
|
$
|
1,637,948
|
|
NOTE
6 - STOCKHOLDERS’ EQUITY
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 $9,995,156 as net proceeds from this
financing.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
During
the nine months ended September 30, 2008, the Company issued 1,200,628 shares
of
common stock as part of the conversion of Series A Preferred Stock.
During
the nine months ended September 30, 2008, certain investors exercised their
warrants to purchase an aggregate of 75,000 shares of common stock totaling
$107,500.
During
the nine months ended September 30, 2008, the Company granted 7,304 shares
of
common stock to a former Board member in exchange for services. The shares
were
valued at $2.08 per share or an aggregate total of $15,192.
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 September 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.
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 to be determined based on the shortfall by which the Company failed
to
achieve the 2007 earnings target. 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 remaining escrow shares to be determined based on the shortfall by 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 900,000 escrow shares remained in escrow 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 nine
months ended September 30, 2008 as the escrow shares were to be returned to
the
Company since the investors did not provide at least $4,000,000 in additional
equity financing within 90 days after the effectiveness of the first
registration statement.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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 a formula should the placement
agent 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 to the same extent
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:
Risk
fee interest rate (%)
|
|
|
5
|
%
|
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 nine months ended September 30, 2008.
A
summary
of the status of the Company’s outstanding common stock warrants as of September
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
|
|
|
3.51
years
|
|
$
|
354,839
|
|
Granted
|
|
|
611,123
|
|
|
2.79
|
|
|
4.75
years
|
|
|
633,888
|
|
Exercised
|
|
|
(75,000
|
)
|
|
-
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding
and Exercisable at September 30, 2008
|
|
|
6,091,682
|
|
$
|
2.76
|
|
|
4.18
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.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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 on which
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 in respect of 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 registrable securities will be tolled until such time as the
Company is able to effect the registration of those securities in accordance
with any SEC restrictions.
On
February 29, 2008, the Company completed a private placement of 4,691,499 shares
of the common stock at a price per share of $2.40 for 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 with respect to all investors through August 28,
2008 at the monthly rate of 1%. Accordingly, as of August 28, 2008 the Company
had incurred $225,192 in liquidated damages for failing to have the registration
statement declared effective by July 28, 2007. The liquidated damages are
continuing to accrue at the rate of 1% per month with respect to the 3,249,833
shares included in the registration statement held by affiliates. Accordingly,
as of September 28, 2008 the Company owes an additional $77,996 in liquidated
damages with respect to the shares held by the affiliates. Accordiingly as
of
September 28, 2008 owes a total of $303,188 in liquidated damages.
NOTE
7 - 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 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 nine months ended
September 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 September 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 $54,440 on the expected future tax benefits from the net operating
loss carryforwards as the management believes it is more likely than not that
these assets will not be realized in the future.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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%.
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 nine months ended September 30,
2008 and 2007 were 15% and 18% respectively. The Company’s effective income tax
rate of 18% for the nine months ended September 30, 2007 was due to an exemption
from enterprise income tax provided by the PRC taxing authority during that
period, as discussed above.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE
8 - SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a)
Business information
During
the three and nine months ended September 30, 2008, 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 and nine months ended September 30, 2007, 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
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
11,317,236
|
|
$
|
8,813,298
|
|
$
|
24,143,764
|
|
$
|
21,227,321
|
|
Heat
Pipe related products
|
|
|
6,032,199
|
|
|
3,816,338
|
|
|
17,349,529
|
|
|
3,816,339
|
|
Energy-saving
projects
|
|
|
4,567,206
|
|
|
-
|
|
|
7,353,623
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,916,642
|
|
$
|
12,629,636
|
|
$
|
48,846,916
|
|
$
|
25,043,660
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
2,281,451
|
|
$
|
1,780,175
|
|
$
|
4,901,773
|
|
$
|
4,429,629
|
|
Heat
Pipe related products
|
|
|
1,915,611
|
|
|
770,852
|
|
|
5,697,303
|
|
|
796,378
|
|
Energy-saving
projects
|
|
|
668,711
|
|
|
-
|
|
|
1,178,741
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,865,774
|
|
$
|
2,551,027
|
|
$
|
11,777,817
|
|
$
|
5,226,007
|
|
|
|
September,
30, 2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
Total
assets:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
22,241,219
|
|
$
|
18,690,225
|
|
Heat
Pipe related products
|
|
|
19,497,406
|
|
|
9,029,994
|
|
Energy-saving
projects
|
|
|
5,981,232
|
|
|
-
|
|
Other
segment
|
|
|
996,265
|
|
|
2,919,494
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,716,122
|
|
$
|
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
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Other
segment in total assets refers to solar lighting products and sales of spare
parts/components. The amount of other assets is 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.
(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 area.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
21,894,686
|
|
$
|
12,629,636
|
|
$
|
48,804,635
|
|
$
|
25,043,660
|
|
Others
|
|
|
21,956
|
|
|
-
|
|
|
42,281
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,916,642
|
|
$
|
12,629,636
|
|
$
|
48,846,916
|
|
$
|
25,043,660
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
4,859,187
|
|
$
|
2,551,027
|
|
$
|
11,759,636
|
|
$
|
5,226,007
|
|
Others
|
|
|
6,587
|
|
|
-
|
|
|
18,181
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,865,774
|
|
$
|
2,551,027
|
|
$
|
11,777,817
|
|
$
|
5,226,007
|
|
|
|
September
30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
(Note
1)
|
|
Total
assets:
|
|
|
|
|
|
|
|
PRC
|
|
$
|
46,767,477
|
|
$
|
29,107,727
|
|
Others
|
|
|
1,948,645
|
|
|
1,531,986
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,716,122
|
|
$
|
30,639,713
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE
9 - CONTINGENCY
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 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.
NOTE
10 - NET INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net income
per
share for the three and nine months ended September 30, 2008 and
2007:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,639,201
|
|
$
|
499,074
|
|
$
|
3,125,064
|
|
$
|
1,421,175
|
|
Less:
Preferred stock beneficial conversion
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(975,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stock holders in computing basic
and
diluted net income per share
|
|
$
|
1,639,201
|
|
$
|
499,074
|
|
$
|
3,125,064
|
|
$
|
445,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
13,586,827
|
|
|
6,205,290
|
|
|
11,651,656
|
|
|
6,205,290
|
|
-
Weighted average preferred stock outstanding
|
|
|
586,189
|
|
|
1,774,194
|
|
|
1,126,801
|
|
|
696,535
|
|
-
Weighted average contingent shares outstanding
|
|
|
1,000,000
|
|
|
0
|
|
|
795,620
|
|
|
0
|
|
-
Weighted average warrant shares outstanding
|
|
|
-
|
|
|
331,372
|
|
|
226,119
|
|
|
137,516
|
|
Weighted
average ordinary shares outstanding-diluted
|
|
|
15,173,016
|
|
|
8,310,856
|
|
|
13,800,196
|
|
|
7,039,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
0.27
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
$
|
0.11
|
|
$
|
0.06
|
|
$
|
0.23
|
|
$
|
0.06
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
For
the
three and nine months ended September 30, 2007, warrants exercisable to
3,674,913 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 less than the exercise price of the warrants, thereby making the
warrants antidilutive under the treasury method.
For
the
three months ended September 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 less than
the
exercise price of the warrants, thereby making the warrants antidilutive
under
the treasury method.
For
the
nine months ended September 30, 2008, warrants exercisable to 4,392,488 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 less than
the
exercise price of the warrants, thereby making the warrants antidilutive
under
the treasury method.
NOTE
11 - SUBSEQUENT EVENT
On
October 27, 2008, Beijing Deli Solar Technology Development Co., Ltd., our
wholly-owned subsidiary (“
Deli
Solar (Beijing
)”),
entered into an Equity Interest Purchase Agreement to acquire approximately
29.97% of the outstanding equity interest of Tianjin Huaneng, a majority-owned
subsidiary of the Company, from the 29 minority shareholders of Tianjin Huaneng.
Cash
Purchase Price
:
Under
the Agreement, Deli Solar (Beijing) agreed to purchase 29.97% of the current
equity interest of Tianjin Huaneng from the Tianjin Huaneng Shareholders
for RMB
10.68 million ($1,557,578 US Dollars) payable in cash within seven days of
the
execution of the Agreement.
Warrants
Purchase Price
.
In
addition to the cash purchase price, the Company also agreed to issue to
the
Tianjin Huaneng Shareholders or their designated beneficiaries a total of
1,000,000 five year warrants to purchase the Company’s common stock at an
exercise of $1.10 per share.
Moreover,
the Company decided to increase its equity interest in Tianjin Huaneng
Corporation by contributing an additional RMB 15,740,000 ($2,295,531 US
Dollars), which increased the registered capital of Tianjin Huaneng from
RMB
5.94 million to RMB 21.68 million following the consummation of the
Agreement.
Item
2. 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.
|
·
|
the
solar heater/boiler related products are mainly sold by Deli Solar
(Bazhou)
|
|
·
|
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 no 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 products include flat plate solar collectors, solar water heater
systems, central solar water heater system and solar energy photovoltaic
technology.
Approximately
51.6% of our sales revenues for the three month period ended September 30,
2008
were derived from sales of our solar water heaters and boiler related products,
approximately 27.5% derived from sales of heat pipe related products and
20.8%
derived from sales of energy-saving projects.
Approximately
99.9% of our sales revenues for the nine month period ended September 30,
2008
were derived from sales made to PRC based customers. Approximately 0.1% 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 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
percent
(50%) of the principal amount of this loan is required to be repaid within
one
year of entry into 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)
representing the agreed-upon value of SZPSP’s intangible assets. The purchase
price for these intangible assets is required to be paid in 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).
Acquisition
of interest from Tianjin Huaneng minority
shareholders
On
October 27, 2008, Beijing Deli Solar Technology Development Co., Ltd.,
our
wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an Equity
Interest Purchase Agreement to acquire approximately 29.97% of the outstanding
equity interest of Tianjin Huaneng Group Energy Equipment Co., Ltd., a
majority-owned subsidiary of the Company (“Tianjin Huaneng”), from the minority
shareholders of Tianjin Huaneng.
Cash
Purchase Price
:
Under
the Agreement, Deli Solar (Beijing) agreed to pay to the Tianjin Huaneng
shareholders RMB 10.68 million ($1,557,578 US Dollars) payable in cash
within
seven days of the execution of the agreement.
Warrants
Purchase Price
.
In
addition to the cash purchase price, the Company also agreed to issue to
the
Tianjin Huaneng shareholders a total of 1,000,000 five year warrants to
purchase
the Company’s common stock at an exercise price of $1.10 per
share.
In
addition, the Company decided to increase its equity interest in Tianjin
Huaneng
by contributing an additional RMB 15,740,000 ($2,295,531 US Dollars), which
increased the registered capital of Tianjin Huaneng from RMB 5.94 million
to RMB
21.68 million.
On
July
1, 2007, Deli Solar (Beijing) had previously purchased 51% of the equity
in
Tianjin Huaneng for a purchase price of approximately $1,689,741. As a
result of
the consummation of the Agreement and the additional capital contribution,
the
Company owns approximately 91.82% of the equity interest in Tianjin
Huaneng.
RESULTS
OF OPERATIONS
The
sales and operating income amounts related to the acquisition of SZPSP are
separately stated under Energy Saving Projects 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.
Three
Months Ended September 30, 2008 Compared to Three Months Ended September
30,
2007
Sales
Revenues
An
analysis of the Company’s revenues and gross profits for each segment is as
follows:
|
|
Three months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
11,317,236.
|
|
$
|
8,813,298
|
|
Heat-pipe
related products
|
|
$
|
6,032,199
|
|
$
|
3,816,338
|
|
Energy-saving
projects
|
|
$
|
4,567,206
|
|
$
|
0
|
|
|
|
$
|
21,916,641
|
|
$
|
12,629,636
|
|
Overall:
Sales
revenues for the three months ended September 30, 2008 were $21,916,641.86
as
compared to $12,629,636.00 for the same period last year, an increase of
$9,287,005.86 or 73.53% compared to the same period in 2007. The overall
increase in sales is primarily attributed to the acquisition of SZPSP.
Solar
Heater/Boiler Related Products
:
Sales
revenues for these products for the three months ended September 30, 2008
were
$11,317,236.34 as compared to $8,813,298.00 for the same period last year,
an
increase of $2,503,938.34 or 28.41%. 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. We expect an increase in sales of
solar
heaters and boiler related products due to higher sales volume resulting
from
increased market demand in the boiler related product segment with the upcoming
winter season. The average selling price decreased as a result of increased
competition. We expect price competition to continue for the remainder of
2008.
Heat
Pipe Related Products:
Sales
revenues for the three months ended September 30, 2008 were $6,032,199.14
compared to $3,816,338.00 for the same period last year, an increase of
$2,215,861 or 58%. The sales of heat pipe related products are attributed
to the
acquisition of Tianjin Huaneng completed in July 1, 2007. The increase in
sales
of heat pipe related products was a result of higher sales volume resulting
from
sales promotion in this segment. We expect an increase in sales of heat pipe
related products due to higher sales volume resulting from increased market
demand in the boiler related product segment when winter is coming. The average
selling price decreased as a result of increased competition. We expect the
price competition to continue for the rest of 2008.
Energy
saving projects:
Sales
revenues for the three months ended September 30, 2008 were $4,567,206.38
compared to none 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
September 30,
|
|
Gross
Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
2,281,451.28
|
|
$
|
1,780,175.00
|
|
Heat-pipe
related products
|
|
|
1,915,611.27
|
|
|
770,852.00
|
|
Energy-saving
projects
|
|
|
668,711.33
|
|
|
0
|
|
|
|
$
|
4,865,773.88
|
|
$
|
2,551,027.00
|
|
Overall
:
Gross
profit for the three months ended September 30, 2008 was $4,865,774, an increase
of $2,314,747 or approximately 90.74%, compared to $2,551,027 for the three
months ended September 30, 2007. Our gross margin (gross profit as a percentage
of sales) in the third quarter of 2008 was approximately 22% 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.
Solar
Heater/Boiler Related Products
:
Gross
profit was $2,281,451 an increase of $501,276 or 28% compared to the same
period
in the prior year. The increase in overall gross profit was caused mainly
by
increased revenue due to increased sales volume. Gross margin for the three
month period ended September 30, 2008 was unchanged at approximately 20%
compared to approximately 20% in the same period last year. However, sales
prices decreased slightly. We expect the 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 slightly for the rest of 2008.
Heat
Pipe Related Products:
Gross
profit for the three months ended September 30, 2008 was $1,915,611.27
compared to $770,852 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. Gross margin (gross profit as a percentage
of
sales) on these products in the third quarter of 2008 was approximately 32
%
compared to 20% for the second quarter.
Energy
saving projects:
Gross
profit for the three months ended September 30, 2008 was $668,711 compared
to
none 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 third quarter
of 2008 was approximately 15%.
Operating
Expenses
Operating
expenses for the three months ended September 30, 2008 were $2,777,602, as
compared to $1,768,342 for the same period in 2007, an increase of $1,009,260
or
57.1%. The overall increase in operating expenses was primarily due to the
acquisition of SZPSP as well as increased sales and marketing expenses detailed
below.
Depreciation
and amortization expense increased to $183,216 from $82,731 for the same
period
last year. The increase was mainly due to an increased depreciation and
amortization expense of $19,446 as a result of the acquisition of SZPSP as
well
as increased depreciation expense of $30,039 as a result of new equipment
used.
Selling
and distribution expense increased to $1,440,357 or 147%, from $583,166 for
the
same period last year. The increase was mainly due to increased expenses
incurred in the development of sales network and promotion programs. Selling
expenses consisted of sales promotion expense ($354,467.00), traveling and
transportation expenses ($508,662), agency administration expenses ($
388,713.94) and after sales service ($ 188,513.97).
General
and administrative expenses were $719,601 for the three months ended September
30, 2008 (or approximately 5.2% of sales) compared to $532,137 (or approximately
8.7% of sales) for the same period in 2007. The net increase of $187,464
was
mainly due to the acquisition of SZPSP.
Advertising
expenses for the three months ended September 30, 2008 were $191,615 as compared
to $458,652
for
the
same period in 2007, a decrease of $267,037 or approximately 58%. 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 $242,813 for the three months ended September 30,
2008
from $111,650
for
the
same period in 2007, an increase of $131,157 or 117%. The increase reflects
both
increased salaries and benefits and the number of management and employees
as a
result of the SZPSP acquisition.
Solar
Heater/Boiler Related Products
:
Operating
expenses for the three months ended September 30, 2008 were $1,544,002 compared
to $1,194,010 for the same period in 2007, a decrease of $349,992 or
approximately 29%. The decrease in operating expenses was primarily due to
decreased general and administrative expenses explained below.
General
and administrative expense decreased to $376,280, or 57%, 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 September 30, 2008 were $129,866, as
compared to $ 458,652 for the same period last year, a decrease of $328,787.51
or approximately 72%. The decrease in advertising expense was the result
of our
reduced advertising on TV and with more focus on print and internet advertising.
Depreciation
and amortization expense increased to $48,484 an increase of $12,328 or
37% from $36,156.34 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 $892,135, or approximately 290%, from
$228,679.57 for the same period last year. The increased expense was due
to the
development of new distribution networks and the improvement of existing
distribution networks as well as additional sales promotion expenses.
Heat
pipe related products
Operating
expenses for the three months ended September 30, 2008 were $831,227 compared
to
$574,332 for the same period in 2007. The increase in operating expenses
was
primarily due to the increase of selling expenses. Operating expenses included
selling expenses of $465,709, depreciation and amortization expenses of $64,286
and general and administrative expenses of $301,233.
Energy-saving
projects
Operating
expenses for the three months ended June 30, 2008 were $252,646 compared
to none
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 $82,513, depreciation and amortization expenses
$19,445, and general and administrative expenses $150,687.
Net
Income
Net
income was $1,639,201 for the three months ended September 30, 2008, compared
to
$499,074 in the same period last year, an increase of $1,140,127 or
approximately 228%. The increase was primarily due to organic growth of sales
and the increased sales attributable to our acquisitions of SZPSP.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Key
Items during nine months ended September 30 2008
Significant
financial items during the nine months ended September 30 2008
include:
|
·
|
|
Completed
acquisition of SZPSP.
|
|
·
|
|
Overall
net sales increased 95% to
$48,846,916.
|
|
·
|
|
Net
income increased by 120% to
$3,125,064
|
Sales
Revenues
An
analysis of the Company’s revenues for each segment follows:
|
|
Nine months ended
September 30,
|
|
Revenue
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
24,143,764.24
|
|
$
|
21,227,322.00
|
|
Heat-pipe
related products
|
|
$
|
17,349,528.95
|
|
$
|
3,816,338.00
|
|
Energy
saving projects
|
|
$
|
7,353,622.80
|
|
$
|
0
|
|
|
|
$
|
48,846,915.98
|
|
$
|
25,043,660.00
|
|
Overall:
Sales
revenues increased to $48,846,915.98 during the nine months ended September
30,
2008 as compared to $25,043,660.00 for the same period in 2007, an increase
of
$23,803,255.98 or 95%.
The
overall increase in sales is the result of (i) the acquisitions of SZPSP,
which
contributed $7,353,623 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 nine months ended September 30,
2008
increased to $24,143,764.24 from $21,227,322.00 for the same period in 2007,
an
increase of $2,916,442.24 or approximately 13.8%. Approximately $16 million
were
derived from sales of solar hot water heaters, a 13% increase from the same
period in 2007; approximately $8.14 million was derived from sales of coal-fired
boilers and space heating products, about a 14.9% 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 a onetime event, and it is not the result of an increase
in
sales prices of our products. It is 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 the 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 nine months ended September 30, 2008 were $17,349,528.95
compared to $3,816,338 for the same period last year, an increase of $13,533,191
or approximately 355%. The sales of heat pipe related products are attributed
to
the acquisition of Tianjin Huaneng completed in July 1, 2007.
Energy
saving projects
:
Sales
revenues during the nine months ended September 30 2008 were $7,353,622.80
compared to none 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
|
|
Nine months ended
September 30,
|
|
Gross
Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
4,901,772.66
|
|
$
|
4,429,629
|
|
Heat-pipe
related products
|
|
$
|
5,697,302.91
|
|
$
|
796,378
|
|
Energy-saving
projects
|
|
$
|
1,178,740.85
|
|
$
|
-
|
|
|
|
$
|
11,777,816.42
|
|
$
|
5,226,007.00
|
|
Overall
:
Gross
profit during the nine months ended September 30, 2008 was $11,777,816 compared
to $5,226,007 for the same period last year. The increase in gross profit
is the
result of our organic growth of gross profit $6,551,809 and the acquisition
of
SZPSP, which contributed $1,178,741 to our gross profit, accounting for 10%
of
our overall gross profit.
Gross
margin (gross profit as a percentage of sales) during the nine months ended
September 30, 2008 was approximately 24% compared to approximately 21% in
the
same period in 2007. The higher profit margin achieved during the nine months
ended September 30, 2008 is due to sales of Tianjin Huaneng’s products with
higher profit margins. 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 nine months ended September 30
2008.
Solar
Heater/Boiler Related Products
:
Gross
profit was approximately $4,901,772 during the nine months ended September
30,
2008, about a 11% increase compared to the same period of prior year of
approximately $4,429,629.
Gross
profit margin for this segment decreased slightly during the nine months
ended
September 30, 2008 to 20.3% compared to the approximately 20.9% in the
same
period in 2007. The increased competition led to the drop of the profit
margin
of the solar system. 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 can foresee the continuous decrease in the
profit
margin of the solar water heaters. 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 $5,697,303 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 $1,178,741 which was attributed
to the acquisition of SZPSP. Gross margin (gross profit as a percentage of
sales
of these products) was approximately 16%. 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.
Operating
Expenses
Operating
expenses increased to $6,436,978 during the nine months ended September 30,
2008
as compared to $3,384,882 for the same period in 2007. This represented an
increase of $3,052,096 or about 90%. The overall increase in operating expenses
was primarily due to the acquisition of SZPSP (whose operating expenses amounted
to $757,765) as well as increased selling and distribution expenses described
below.
Selling
and distribution expenses increased to $3,060,961 from $864,698 for the same
period in 2007, an increase of $2,196,262.61, or 254%. These selling and
distribution expenses consisted primarily of non cash sales promotion expenses
($588,122), traveling and transportation expenses ($1,016,441), and agency
administration expenses ($1,018,995) and after sales services ($437,402).
The
increase in selling and distribution expenses was primarily the result of
our
acquisition of SZPSP (whose selling and distribution expenses were
$102,740.)
General
and administrative expenses were $1,602,809 during the nine months ended
September 30, 2008 (or approximately 5.93% of sales) compared to $987,093
or
approximately 9.45% of sales) for the same period in 2007. The net increase
of
$615,716 was mainly due to the acquisition of SZPSP which had general and
administrative expenses of $586,133. This was offset by the decrease in general
and administrative expenses by Deli Solar (Bazhou) and Tianjin Huaneng of
approximately $56,394.
Advertising
expenses during the nine months ended September 30, 2008 were $640,645 as
compared to $ 1,118,745 for the same period in 2007, a decrease of $478,100
or
approximately 43%. 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 focused on print
and
internet advertising.
Salaries
and benefits increased from $260,649 for the same period in 2007 to $667,964
during the nine months ended September 30, 2008, an increase of $407,315
or 156%
from the same corresponding period last year. The increase reflects both
increased salaries and benefits level and increased employees as a result
of the
SZPSP acquisition.
Depreciation
and amortization expense during the nine months ended September 30, 2008
increased by $310,902 to $464,599.00 or 202% from $153,697 for the same period
in 2007. The increase was due to an increased depreciation and amortization
expense of $68,892 as a result of the acquisition of SZPSP as well as increased
depreciation expense of $191,010 as a result of new equipment used.
Income
from Operations
Income
from operations during the nine months ended September 30, 2008 was $5,340,838
an increase of $3,499,713 or 190% as compared to $1,841,125.00 for the same
period in 2007. The increased operating income was due to the increased sales
revenue and the acquisition of SZPSP and our commencement of the sale of
its
respective products. As a percentage of sales, operating income was
approximately 10.93% during the nine months ended September 30, 2008 as compared
to approximately 7.35% for the same period in 2007. The increase in operating
income as a percentage of sales was substantially due to the increase in
sales
and controlling selling expenses during the nine months ended September 30,
2008.
Net
Income
$3,125,064
during the nine months ended September 30, 2008, compared with $1,421,175
for
the same period in 2007, an increase of $1,703,889 or approximately 120%.
The
increase was primarily due to increase in sales volume of the existing products
and increased sales attributable to our acquisition of SZPSP.
Minority
Interests
to
$928,900 during the nine months ended September 30, 2008 primarily due to
share
of profits by minority interests from consolidation with Tianjin Huaneng.
After
giving effect to additional investment and purchase of shares from minority
shareholders as well as an additional contribution, we will own about 92%
of
equity interest in Tianjin Huaneng.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during the first nine 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 nine 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%
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
used in operating activities was $2,572,144 for the nine months ended September
30, 2008, and net cash provided by our operating activities was $324,013
for the
same period of 2007. The increase in net cash used by operations was mainly
due
to an increase in inventories ($2,870,527) and an increase in payments made
in
advance to suppliers ($4,715,402).
Net
cash
used in investing activities was $8,541,976 for the nine months ended September
30, 2008, compared with $2,877,802 for the same period of 2007. The increase
was
due to acquisition of SZPSP and purchase of common share interests from
Tianjin
Huaneng minnority shareholders, and 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 nine months
ended September 30, 2008, compared with $2,481,602 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 decreased to $4,647,387 at September 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 $8.3
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 nine months ended September 30, 2008, accounts receivable increased
to
$8,971,587 from $7,453,009 as of December 31, 2007, primarily due to
consolidation with SZPSP. SZPSP recorded $1,174,334 of accounts receivable.
The
majority of each of our company’s sales is 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
nine
months ended September 30 2008 were none.
Inventory
Inventories
as of September 30, 2008 increased to $6,746,185 from $3,875,658 as of December
31, 2007 principally because of consolidation with SZPSP, which recorded
$852,844 of inventories as of September 30, 2008. In addition, Tianjin
Huaneng increased its inventories from $3,016,025 to $4,182,844 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 September 30, 2008 increased to $6,353,350
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 September 30, 2008 decreased to $1,875,042 from $2,111,028
as of
December 31, 2007 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 September 30, 2008 decreased to
$8,021,059 from $8,552,452 as of December 31, 2007, primarily due to
consolidation with SZPSP. The decrease is mainly due to decrease in accrued
expenses, customer deposits, other payables, taxes payable and deferred
revenue.
Item
4T.
Controls and Procedures.
Management's
Evaluation on the Effectiveness Of Disclosure Controls And
Procedures
Our
chief
executive officer and chief financial officer have reviewed and continue
to
evaluate the effectiveness of our controls and procedures over financial
reporting and disclosure (as defined in the Securities Exchange Act of 1934
("Exchange Act") Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this quarterly report. The term "disclosure controls and procedures"
is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that
it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated
to
our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating our controls and procedures over
financial reporting and disclosure, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and our
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. An
evaluation was performed under the supervision and with the participation
of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls
and
procedures as of September 30, 2008. Based on that evaluation, our management,
including our chief executive officer and chief financial officer, has concluded
that our disclosure controls and procedures were effective as of September
30,
2008.
Changes
in Internal Control.
In
connection with the review by the Division of Corporation Finance of the
Securities and Exchange Commission of the Company’s audited financial statements
for the fiscal year ended December 31, 2007 as set forth in the Registration
Statement on Form S-1 (File No. 333-150233) and the Annual Report on Form
10-KSB
for the Fiscal Year Ended December 31, 2007, filed April 10, 2008 (File
No.
0-12561) management identified an error in the calculation of the diluted
net
income per share resulting in an understatement of the Company’s diluted net
income per share by ten cents per share. On November 6, 2008 the Company
filed
an amended Annual Report on Form 10KSB/A for the fiscal year ended
December 31, 2007 wherein the Company revised the diluted net income per
share amount and corresponding computation for the year ended December
31, 2007
to reflect the diluted net income per share amount as
adjusted.
The
management considered the impact of this error on the effectiveness of
the
Company’s internal control over financial reporting. In view of the material
weakness described below, management no longer believes that the Company's
internal controls over financial reporting were effective.
On
October 27, 2008 the Audit Committee received a letter from Cordovano and
Honeck
LLP, the Company’s independent registered public accounting firm, advising the
committee of the following material weakness:
“When
preparing its financial statements for the year ended December 31, 2007,
China
Solar & Clean Energy Solutions, Inc. erred in calculating diluted net income
per share. The Company misapplied the treasury stock and the “if converted”
methods under SFAS No. 128. Because of the error, the Company restated its
historical financial statements for 2007 to record an increase of ten cents
in
diluted net income per share.”
A
material weakness is a control deficiency, or a combination of control
deficiencies, that result in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements
will not
be prevented or detected. Management has identified the material weakness
which
consisted in the error in the calculation of diluted earnings per share
and
misapplication by the Company of the treasury stock and the “if converted”
methods under SFAS No. 128.
We
remediated the material weakness identified above by working with our
independent registered public accounting firm. We are working to refine
our
internal controls over financial reporting and are making progress in this
area.
PART
II - OTHER INFORMATION
Item
6. Exhibits.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of the Acting Chief Financial Officer pursuant to Rules 13a-14(a)
as
adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certifications
of the Chief Executive Officer and the Chief Financial Officer
pursuant to
18 U.S.C. Section 1350 as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934,
the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
China
Solar & Clean Energy Solutions, Inc.
|
|
|
(Registrant)
|
|
|
|
|
Date:
December 2, 2008
|
/s/
Deli Du
|
|
|
Deli
Du
|
|
|
Chief
Executive Officer and President (principal executive
officer)
|
|
|
|
Date:
December 2, 2008
|
/s/
Yihai Yang
|
|
|
Yihai
Yang
|
|
|
Acting
Chief Financial Officer
|
|
(principal
financial officer and accounting
officer)
|
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