UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended
June
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, $.001 per share, outstanding at
August 11, 2008 was 14,179,721.
TABLE
OF CONTENTS
|
Page
|
|
|
PART
I Financial Information
|
|
|
|
Item
1. Unaudited Financial Statements
.
|
3
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008 and December 31,
2007
|
3
|
|
|
Condensed
Consolidated Statements of Income for the three and six months ended
June
30, 2008 and 2007
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June
30,
2008 and 2007
|
5
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity for the six months ended
June 30, 2008
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
|
21
|
|
|
Item
4. Controls and Procedures.
|
35
|
|
|
PART
II Other Information
|
36
|
|
|
Item
6. Exhibits.
|
36
|
|
|
Signatures
|
37
|
|
|
Exhibits/Certifications
|
|
Item
1.
Financial
Statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,689,173
|
|
$
|
5,466,637
|
|
Accounts
receivable, net
|
|
|
9,262,801
|
|
|
7,453,009
|
|
Inventories
|
|
|
6,256,439
|
|
|
3,875,658
|
|
Other
receivables and prepayments
|
|
|
5,865,320
|
|
|
1,637,948
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
28,073,733
|
|
|
18,433,252
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
12,191,828
|
|
|
8,819,216
|
|
Goodwill
|
|
|
4,705,591
|
|
|
1,789,324
|
|
Intangible
assets, net
|
|
|
1,673,660
|
|
|
1,597,921
|
|
Customer
relationships, net
|
|
|
1,072,500
|
|
|
-
|
|
Intellectual
property – unpatented technology, net
|
|
|
916,500
|
|
|
-
|
|
TOTAL
ASSETS
|
|
|
48,633,812
|
|
|
30,639,713
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
1,831,368
|
|
$
|
2,111,028
|
|
|
|
|
|
|
|
|
|
Income
tax payables
|
|
|
1,538,863
|
|
|
1,108,433
|
|
|
|
|
|
|
|
|
|
Other
payables and accrued liabilities
|
|
|
10,158,585
|
|
|
8,552,452
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
13,528,816
|
|
|
11,771,913
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
265,664
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1,879,303
|
|
|
935,825
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Convertible
preferred stock: par value $0.001;
25,000,000
shares authorized, 638,082 (unaudited) and 1,774,194 shares issued
and
outstanding, respectively
|
|
|
638
|
|
|
1,774
|
|
Common
stock, $0.001 par value; 66,666,667 shares authorized; 13,527,630
(unaudited) and 6,205,690 shares issued and outstanding, respectively
|
|
|
13,527
|
|
|
6,205
|
|
Additional
paid-in capital
|
|
|
22,288,728
|
|
|
9,260,607
|
|
Accumulated
other comprehensive income
|
|
|
1,642,153
|
|
|
1,134,270
|
|
Retained
earnings
|
|
|
9,014,983
|
|
|
7,529,119
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
32,960,029
|
|
|
17,931,975
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
14,173,216
|
|
|
7,490,129
|
|
|
20,018,232
|
|
|
9,739,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,456,982
|
|
|
1,928,031
|
|
|
6,912,042
|
|
|
2,674,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
132,216
|
|
|
35,630
|
|
|
281,383
|
|
|
70,966
|
|
Selling
and distribution
|
|
|
1,118,041
|
|
|
237,502
|
|
|
1,620,604
|
|
|
281,532
|
|
General
and administrative
|
|
|
1,155,736
|
|
|
870,084
|
|
|
1,757,389
|
|
|
1,264,041
|
|
Total
operating expenses
|
|
|
2,405,993
|
|
|
1,143,216
|
|
|
3,659,376
|
|
|
1,616,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,050,989
|
|
|
784,815
|
|
|
3,252,666
|
|
|
1,058,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
25,741
|
|
|
-
|
|
|
66,831
|
|
|
-
|
|
Interest
income
|
|
|
1,638
|
|
|
78
|
|
|
1,638
|
|
|
1,735
|
|
Other
expense
|
|
|
(45,266
|
)
|
|
-
|
|
|
(45,266
|
)
|
|
-
|
|
Interest
expense
|
|
|
(109,858
|
)
|
|
(97
|
)
|
|
(143,696
|
)
|
|
(97
|
)
|
Total
other (expense) income
|
|
|
(127,745
|
)
|
|
(19
|
)
|
|
(120,493
|
)
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,923,244
|
|
|
784,796
|
|
|
3,132,173
|
|
|
1,060,078
|
|
Income
tax expenses
|
|
|
441,015
|
|
|
137,976
|
|
|
787,278
|
|
|
137,976
|
|
Minority
interest
|
|
|
386,016
|
|
|
-
|
|
|
859,031
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation
of
income available to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
Preferred
stock beneficial conversion
|
|
|
-
|
|
|
(975,807
|
)
|
|
-
|
|
|
(975,807
|
)
|
NET
INCOME AVAILABLE TO COMMON STOCK HOLDERS
|
|
$
|
1,096,213
|
|
$
|
(328,987
|
)
|
$
|
1,485,864
|
|
$
|
(53,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – basic
|
|
$
|
0.08
|
|
$
|
(0.05
|
)
|
$
|
0.14
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.07
|
|
$
|
(0.05
|
)
|
$
|
0.11
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
–
basic
|
|
|
13,075,468
|
|
|
6,205,290
|
|
|
10,612,185
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
–
diluted
|
|
|
15,584,542
|
|
|
6,205,290
|
|
|
13,006,396
|
|
|
6,205,290
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(3,237,938
|
)
|
$
|
294,938
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of SZPSP, net of cash acquired
|
|
|
(3,916,212
|
)
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
|
(2,033,562
|
)
|
|
(374,030
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,949,774
|
)
|
|
(373,030
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from private placement sale of stock
|
|
|
9,995,156
|
|
|
-
|
|
Proceeds
from warrants exercised
|
|
|
107,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
10,102,656
|
|
|
2,501,080
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
307,592
|
|
|
77,450
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
1,222,536
|
|
|
2,499,438
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,466,637
|
|
|
3,212,065
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS,
END
OF PERIOD
|
|
$
|
6,689,173
|
|
|
5,711,503
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
199,025
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
143,696
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING TRANSACTIONS:
|
|
|
|
|
|
|
|
Issuance
of common stock for acquisition of SZPSP
|
|
$
|
2,839,458
|
|
$
|
-
|
|
Issuance
of warrants for the acquisition of SZPSP
|
|
$
|
92,193
|
|
$
|
-
|
|
Preferred
share converted
|
|
$
|
1,136
|
|
$
|
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE
INCOME
FOR
THE SIX MONTHS ENDED JUNE 30, 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Preferred stock
|
|
Common stock
|
|
Additional
|
|
Accumulated
other
|
|
|
|
Total
|
|
|
|
No. of
shares
|
|
Par value
|
|
No. of
shares
|
|
Par value
|
|
paid-in
capital
|
|
comprehensive
income
|
|
Retained
earnings
|
|
stockholders’
equity
|
|
Balance as of
December 31, 2007
|
|
|
1,774,194
|
|
$
|
1,774
|
|
|
6,205,290
|
|
$
|
6,205
|
|
$
|
9,260,607
|
|
$
|
1,134,270
|
|
$
|
7,529,119
|
|
$
|
17,931,975
|
|
Shares
issued for private placement, net of offering costs of $1,264,451
in cash
and $541,695 in warrants.
|
|
|
-
|
|
|
-
|
|
|
4,691,499
|
|
|
4,691
|
|
|
9,990,465
|
|
|
-
|
|
|
-
|
|
|
9,995,156
|
|
Shares
issued for the acquisition of subsidiary at fair value
|
|
|
-
|
|
|
-
|
|
|
1,419,729
|
|
|
1,420
|
|
|
2,930,231
|
|
|
-
|
|
|
-
|
|
|
2,931,651
|
|
Warrant
exercised
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
75
|
|
|
107,425
|
|
|
-
|
|
|
-
|
|
|
107,500
|
|
Preferred
share converted
|
|
|
(1,136,112
|
)
|
|
(1,136
|
)
|
|
1,136,112
|
|
|
1,136
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,485,864
|
|
|
1,485,864
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
507,883
|
|
|
-
|
|
|
507,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2008
|
|
|
638,082
|
|
$
|
638
|
|
|
13,527,630
|
|
$
|
13,527
|
|
$
|
22,288,728
|
|
$
|
1,642,153
|
|
$
|
9,014,983
|
|
$
|
32,960,029
|
|
See
accompanying notes to condensed consolidated financial
statements
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
accompanying condensed consolidated balance sheet as of December 31, 2007
has
been derived from audited financial statements and the accompanying unaudited
condensed consolidated financial statements for the three and six months
ended
June 30, 2008 and 2007 have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for
interim financial information and the interim reporting requirements of
Regulation S-X. They do not include all of the information and footnotes
for
complete consolidated financial statements as required by GAAP. In management’s
opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. These
financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in the Company’s annual report on Form 10-K for the
year ended December 31, 2007
The
results of operations for the three and six months ended June 30, 2008
and 2007
are not necessarily indicative of the results to be expected for the entire
fiscal year ended December 31, 2008 or for any future period.
There
is
no provision for dividends for the quarter to which this quarterly report
relates .
2.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Solar & Clean Energy Solutions, Inc. (“China Solar”), formerly known as Deli
Solar (USA) Inc. was incorporated in the State of Nevada on March 21, 1983
as
Meditech Pharmaceuticals, Inc. (“Meditech”). In late 2004, the Board of
Directors of Meditech contemplated a strategic reorganization with Deli
Solar
Holding Ltd., a corporation organized in the British Virgin Islands (“Deli Solar
(BVI)”). In contemplation of the reorganization, the Board of Directors resolved
to spin off Meditech’s drug development business to the shareholders of Meditech
of record on February 17, 2005, through a pro rata distribution in the
form of a
stock dividend. The spin-off was completed on August 29, 2005. The acquisition
of Deli Solar (BVI) was accounted for as a recapitalization of Deli Solar
(BVI).
Deli
Solar (BVI) was formed in June 2004. On August 1, 2004, Deli Solar (BVI)
purchased Bazhou Deli Solar Energy Heating Co., Ltd. (“Deli Solar (Bazhou)”), a
corporation duly organized under the laws of the People’s Republic of China
(“PRC”) from Messrs. Deli Du, Xiao’er Du, and Xiaosan Du for RMB 6,800,000. As a
result of this transaction, Deli Solar (Bazhou) became a wholly-foreign
owned
enterprise (“WFOE”) under PRC law on March 30, 2005. This acquisition was
accounted for as a transfer of entities under common control.
Deli
Solar (Bazhou) was incorporated on August 19, 1997 under the laws of the
PRC. In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the
United
States (“US”).
The
result of the above transactions is that Deli Solar (BVI) is now our direct,
wholly-owned subsidiary and Deli Solar (Bazhou) remains a wholly-owned
subsidiary of Deli Solar (BVI).
On
November 21, 2005 Deli Solar (Bazhou) acquired Ailiyang Solar Energy Technology
Co., Ltd. (“Ailiyang”), an entity formerly controlled by the owners of Deli
Solar (Bazhou). The transaction was accounted for as a transfer of entities
under common control.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Beijing
Deli Solar Technology Development Co., Ltd. (“Deli Solar (Beijing)”) was founded
in 2006 and is principally engaged in solar power heater integrated construction
projects in major cities in the PRC.
In
January 2007, Deli Solar (Bazhou) via Mr. Deli Du, set up a branch sales
offices
in the city of Lian Yun Gang and the City of Bazhou to cope with the increasing
sales demand in that region. This branch office exists in the form of a
sole-proprietorship set up in the name of Mr. Deli Du but is beneficially
owned
by Deli Solar (Bazhou), so is regarded as a variable interest entity (“VIE”) by
the Company.
On
July
1, 2007, Deli Solar (Beijing) acquired 51% of Tianjin Hua Neng Energy Equipment
Company (“Tianjin Huaneng”), which manufactures energy saving boilers and
environmental protection equipment for industrial customers.
On
April
1, 2008, Beijing Deli Solar Technology Development Co., Ltd (“Deli Solar
(Beijing)”) acquired 100% of Shenzhen Pengsangpu Solar Industrial Products
Corporation (“SZPSP”), which is engaged in the re-sale of energy-saving related
heating products such as heat pipes, heat exchangers, pressure water boilers,
solar energy heaters and raditors.
China
Solar, Deli Solar (BVI), Deli Solar (Bazhou), Ailiyang, Deli Solar (Beijing),
Tianjin Huaneng and SZPSP are hereinafter referred to as (“the
Company”).
3.
|
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a “Smaller Reporting Company”
is a company with a public float of less than $75,000,000 (measured at
end of
Q2). Companies that meet this definition are able to elect “scaled disclosure
standards” on an item-by-item or “a-la-carte” basis. With this change, the SEC
has streamlined and simplified reporting for many companies, and has not
added
any significant disclosure requirements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized
gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159
is
effective for fiscal years beginning after November 15, 2007, the provisions
of
which are required to be applied prospectively. The Company believes that
SFAS
159 should not have a material impact on the consolidated financial position
or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS No. 141R”). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be
required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R
will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until January 1, 2009. The Company
expects
SFAS No. 141R will have an impact on accounting for business combinations
once
adopted but the effect is dependent upon acquisitions at that time. The
Company
is still assessing the impact of this pronouncement.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51, or SFAS No.
160”
(“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that SFAS
160
should not have a material impact on the consolidated financial position
or
results of operations.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 “Accounting for Derivative Instruments and
Hedging Activities” and how derivative instruments and related hedged items
affect a company’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company’s future
financial position or results of operations.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements in conformity with
generally accepted accounting principles (GAAP) in the United States. This
statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The Company does not expect the adoption of SFAS No. 162 to
have a material effect on the financial condition or results of operations
of
the Company.
On
January 9, 2008, Beijing Deli Solar Technology Development Co., Ltd, the
Company’s wholly-owned subsidiary (“Deli Solar (Beijing)”), entered into an
Equity Purchase Agreement and Complementary Agreement to the Equity Purchase
Agreement to acquire 100% of the outstanding equity interest of Shenzhen
Pengsangpu Solar Industrial Products Corporation (“SZPSP”) from its
shareholders. On March 25, 2008, both parties signed a Supplmentary Agreement
to
the Equity Purchase Agreement and the Complementary Agreement to amend
and
supplement the previous agreements and set forth the final terms of the
total
purchase price and payment method of the acquisition.
Under
the
agreements, Deli Solar (Beijing) agreed to purchase the 100% equity interest
of
SZPSP from its three shareholders. $4,087,832 (RMB 28.8 million) of the
purchase
price was payable in cash. The three shareholders of SZPSP agreed to loan
the
cash proceeds back to SZPSP interest free to be used for working capital.
Fifty
(50%) of the principal amount of the loan is required to be paid prior
to March
31, 2009 and the remaining 50% balance is required to be paid prior to
March 31,
2010.
The
three
shareholders of SZPSP have not loan the cash proceeds back to SZPSP as
of June
30, 2008.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
addition to the cash portion of the purchase price, the parties agreed
to an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of SZPSP’s intangible assets.
This
portion is required to be paid in the form of 1,419,729 shares of the Company’s
common stock (which was based on the average closing price of the common
stock
for the 30 days immediately preceding the execution of the Complementary
Agreement (the “Share Price”)), provided that if on March 31, 2010 the common
stock price is lower than the Share Price, the Company will pay the difference.
Fifty percent (50%) of these shares will be transferable and unrestricted
on or
after March 31, 2009 and the remaining fifty percent (50%) will be transferable
on or after March 31, 2010. The shares are required to be transferred to
SZPSP
within 180 days of the closing. In addition, as part of the purchase price,
the
shareholders of SZPSP will receive five years warrants to purchase a total
of
141,973 shares of common stock at an exercise price of $2.50 per share,
subject
to future adjustment.
SZPSP
warranted in the Complementary Agreement that if (i) its sales revenue
is less
than RMB 99 million (approximately $13,670,068) with an after-tax net profit
of
less than RMB 9.43 million (approximately $1,302,108) for the year ended
December 31, 2008; or (ii) if in the year ended December 31, 2009, it does
not
reach the targeted sales revenue of RMB 143.9 million (approximately
$19,868,336) or the after-tax net profit of RMB 12.13 million (approximately
$1,674,789), SZPSP will pay the difference between the revenue and the
targeted
revenue of the year specified by reducing the amount payable on the
shareholders’ loan. If the shareholders’ loan is not sufficient to pay the
difference, the common shares held by SZPSP will be returned to us to the
extent
necessary for the remaining balance.
The
accounting date of the acquisition was April 1, 2008 and was accounted
for under
the purchase method. SZPSP results of operations for the three months ended
June
30, 2008 have been included in consolidated financial statements. The
acquisition of SZPSP will enable the Company to immediately begin leveraging
its
technology and engineering capabilities and expertise, and will significantly
expand China Solar’s customer base and present a commercial and industrial
market opportunity for solar water heaters in southern China.
The
estimated aggregate purchase price was $7,019,483. Below is a summary of
the
total purchase price:
Cash
|
|
$
|
4,087,832
|
|
Fair
value of 1,419,729 common stock
|
|
|
2,839,458
|
|
Fair
value of 141,973 warrants
|
|
|
92,193
|
|
Total
purchase price
|
|
$
|
7,019,483
|
|
Our
purchase price allocation for the SZPSP acquisition was finalized on June
30,
2008. The following table represents the final purchase price allocation
to the
estimated fair value of the assets acquired and liabilities
assumed:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
As of April 1,
2008
|
|
|
|
(Unaudited)
|
|
Cash
and cash equivalents
|
|
|
87,316
|
|
Restricted
cash
|
|
|
84,304
|
|
Accounts
receivable, net
|
|
$
|
510,269
|
|
Inventories
|
|
|
325,429
|
|
Net
investment in sales-type leases
|
|
|
966,806
|
|
Prepayments
and other receivables
|
|
|
217,606
|
|
Property,
plant and equipment
|
|
|
1,275,287
|
|
Customer
relationships
|
|
|
1,100,000
|
|
Intellectual
property
|
|
|
1,250,000
|
|
Goodwill
|
|
|
3,055,769
|
|
Total
assets acquired
|
|
$
|
8,872,786
|
|
|
|
|
|
|
Short-team
bank loan
|
|
|
710,668
|
|
Accounts
payable
|
|
|
908,124
|
|
Deferred
revenue
|
|
|
23,217
|
|
Accrued
liabilities and other payables
|
|
|
211,294
|
|
Total
liabilities assumed
|
|
|
1,853,303
|
|
Net
assets acquired
|
|
$
|
7,019,483
|
|
The
$3,055,769 of goodwill was expected to be assigned to the solar heater/boiler
related products segment and a new segment of energy-saving projects segment.
The Company does not expect goodwill to be tax deductible in the PRC. Of
the
$2,350,000 of acquired intangible assets, $310,000 was assigned to in-process
research and development which was written off during the six months ended
June 30, 2008, $940,000 was assigned to existing intellectual property, and
$1,100,000 was assigned to customer relationships. The acquired identifiable
intangibles assets have a weighted-average amortization period totaling
approximately 10 years and residual value totaling approximately
$0.
The
fair
value of the IPRD was derived using a discounted cash flow method.
Management analyzed expected future revenues from product sales and thereafter
based on the research and development being underway at the date of
acquisition. Technology feasibility was determined based on management
review of the product life spans and also the rate of change in the industry.
Based on the analysis management made assumptions as to the portion of
product
revenue going forward which would be derived from products based on current
research and development. The significant assumptions with respect to the
percentage of revenues going forward from products based on IPRD are as
outlined
in the following table:
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
·
Breakdown
of Revenue – IPRD versus products
|
|
|
90
|
%
|
|
80
|
%
|
|
75
|
%
|
|
70
|
%
|
|
65
|
%
|
·
Existing
products
|
|
|
10
|
%
|
|
20
|
%
|
|
25
|
%
|
|
30
|
%
|
|
35
|
%
|
·
IPRD
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Upon
further review it was determined that certain R&D underway was later
determined to not warrant completion and that future products based on
the
R&D were discontinued given the demand in the market.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
property, plant and equipment acquired consists of plant machinery and
equipment, motor vehicles and leasehold improvements with estimated depreciable
lives ranging from 6 to 50 years and residual value is 10% of the cost
of
assets.
The
following unaudited pro forma financial information for the Company gives
effect
to the 2008 acquisition as if they had occurred on January 1, 2008. These
pro
forma results do not purport to be indicative of the results of operations
which
actually would have resulted had the acquisitions occurred on such date
or to
project the Company’s results of operations for any future period.
|
|
For the six months ended June 30,
2008
|
|
|
|
|
|
Pro
forma revenues
|
|
$
|
27,324,194
|
|
Pro
forma net income
|
|
|
1,533,670
|
|
|
|
|
|
|
Pro
forma earnings per common share — net income
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.08
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
Basic
|
|
$
|
11,314,249
|
|
Diluted
|
|
$
|
18,899,659
|
|
5.
|
BALANCE
SHEET COMPONENTS
|
Inventories
consisted of the following:
|
|
As of June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
Raw
materials
|
|
$
|
2,035,446
|
|
$
|
656,605
|
|
Consumables
|
|
|
-
|
|
|
5,359
|
|
Work-in-process
|
|
|
1,771,139
|
|
|
2,464,441
|
|
Finished
goods
|
|
|
2,449,854
|
|
|
749,253
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
6,256,439
|
|
$
|
3,875,658
|
|
Other
receivables and prepayments consisted of the following:
|
|
As of June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Note
1)
|
|
Advance
to suppliers
|
|
$
|
1,170,384
|
|
$
|
493,421
|
|
Prepaid
expenses
|
|
|
956,648
|
|
|
249,598
|
|
Deposits
|
|
|
3,578,646
|
|
|
894,268
|
|
Other
receivables
|
|
|
159,642
|
|
|
661
|
|
|
|
|
|
|
|
|
|
Other
receivables and prepayments
|
|
$
|
5,865,320
|
|
$
|
1,637,948
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Issuance
of Common Stock
On
February 29, 2008, the Company completed a private placement of 4,691,499
shares
of common stock for an aggregate purchase price of approximately $11,300,000.
The Company received $9,995,156 as net proceeds from this
financing.
In
connection with the private placement, the Company deposited 2,000,000
shares of
common stock (“Make Good Shares”) into escrow and we are required to deliver (i)
1,000,000 of the Make Good Shares to the investors on a pro rata basis
for no
additional consideration in the event that the Company’s after-tax net income
for the fiscal year ending December 31, 2008 is less than $4.8 million;
and (ii)
1,000,000 of the Make Good Shares to the investors on a pro rata basis
for no
additional consideration in the event that the Company’s after-tax net income
for the fiscal year ending December 31, 2009 is less than $8 million. As
of June
30, 2008, the after-tax net income target of $4.8 million has not been
met. In
accordance with SFAS 128,
Earnings
Per Share
,
the
1,000,000 shares contingently issuable in 2008 were included in the diluted
earnings per share calculation as the reporting period were treated as
the end
of the contingency period. The 1,000,000 shares contingently issuable in
2009
were not included in the diluted earnings per share calculation as the
contingency provision is for the fiscal year ending December 31,
2009.
During
the six months ended June 30, 2008, the Company issued 1,136,112 shares
of
common stock as part of the conversion of Series A Preferred Stock.
During
the six months ended June 30, 2008, certain investors exercised their warrants
to purchase an aggregate of 75,000 shares of common stock totaling
$107,500.
Warrants
Issued to Placement Agent
The
Company issued a warrant (the "Warrant") to its placement agent in connection
with its private placement in February 2008. The Warrant authorizes the
agent to
purchase 469,150 shares of its common stock at a fixed price ($2.88 per
share),
for a five-year period. The Warrant contains a cashless exercise provision
which
permits the placement agent, at its option, to exercise the Warrant without
tendering the exercise price, in exchange for a reduced number of shares.
The
number of shares will be calculated according to an algebraic formula should
the
placement decide to opt to exercise the Warrant under the cashless provision.
If
the Company is sold during the exercise period (referred to as a "fundamental
transaction" in the Warrant), the placement agent has the right to exercise
its
Warrant and thus participate in the proceeds from the sale the same as
any other
shareholder. These warrants are immediately exerciseable. The fair value
of the
warrants was estimated at the date of grant using the Black-Scholes
option-pricing model. In calculating the fair value of the warrants, management
used the closing price of the common stock on February 29, 2008, of $2.71
per
share, plus the following assumptions:
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Risk
free interest rate (%)
|
|
|
5.00
|
%
|
Dividend
yield (%)
|
|
|
0.00
|
%
|
Expected
life of warrant grants (years)
|
|
|
5
years
|
|
Expected
volatility of warrant grants (%)
|
|
|
43.79
|
%
|
The
Company valued the warrants at US$1.155 per share, or $541,695 in aggregate,
in
accordance with SFAS 123R, which were recorded as offering costs which
offset
additional paid-in capital in the accompanying consolidated financial statements
for the six months ended June 30, 2008.
A
summary
of the status of the Company’s outstanding common stock warrants as of June 30,
2008:
|
|
Number of
Shares
|
|
Weighted-
average
Exercise Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December
31, 2007
|
|
|
5,555,559
|
|
$
|
2.73
|
|
|
3.76
years
|
|
$
|
354,839
|
|
Granted
|
|
|
611,123
|
|
|
2.79
|
|
|
5
years
|
|
|
633,888
|
|
Exercised
|
|
|
(75,000
|
)
|
|
-
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding
and Exercisable at June 30, 2008
|
|
|
6,091,682
|
|
|
2.76
|
|
|
4.38
years
|
|
|
988,727
|
|
Registration
Rights Agreement
In
connection with the private placement the Company entered into a registration
rights agreement with the investors on February 25, 2008 which requires
us to
file with the SEC a “resale” registration statement providing for the resale of
(i) all of the 4,691,499 shares of common stock sold to the investors,
(ii) the
2,000,000 “make good shares” and (iii) the 469,150 shares underlying the
placement agent warrants (collectively, the “registrable securities”) for an
offering to be made on a continuous basis pursuant to Rule 415 of the Securities
Act of 1933, as amended.
The
Company agreed, among other things, to prepare and file an initial registration
statement within 45 days of the closing date (i.e. April 14, 2008) to register
for resale part of the registrable securities (other than the 2,000,000
make
good shares and the 469,150 shares underlying the placement agent warrants)
and
to cause that registration statement to be declared effective by July 28,
2008.
The
Company is required to file additional registration statements covering
all of
the remaining registrable securities (or such lesser number as the SEC
deems
appropriate) if any registrable securities could not be registered in the
initial registration statement, by the 15th day following the date we are
able
to effect the registration of such securities in accordance with any SEC
restrictions.
The
Company’s failure to meet this schedule and other timetables provided in the
registration rights agreement could result in the imposition of liquidated
damages. No liquidated damages will accrue on any registrable securities
which
the SEC has requested (due to the application of Rule 415) the Company
to remove
from the registration statement and the required effectiveness date for
such
securities will be tolled until such time as the Company are able to effect
the
registration of those securities in accordance with any SEC
restrictions.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
On
February 29, 2008, the Company completed a private placement of 4,691,499
shares
of the common stock for price per share of $2.40 or an aggregate purchase
price
of approximately $11,300,000. The Company received $9,995,156 as net proceeds
from this financing.
On
July
28, 2008, the Company incurred liquidated damages equal to $112,596 which
represents 1% of $11,259,587 (the aggregate of investment amount by the
investors) due to the fact that the Company failed to have the registration
statement declared effective on or prior to that date. The liquidated damages
continue to accrue per diem at the monthly rate of 1%. As of August 14,
2008,
the Company has incurred an additional $50,850 in liquidated damages.
Accordingly, as of August 14, 2008, the Company has incurred $163,446 in
liquidated damages for failing to have the registration statement declared
effective by July 28, 2007.
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin Island
(“BVI”) and the PRC. The operations in the United States of America and British
Virgin Island have incurred net operating losses for income tax purposes.
The
Company generated substantially all of its net income from the operation
of its
subsidiary in the PRC and is subject to the PRC tax jurisdiction. The Company
has recorded an income tax provision for the three and six months ended
June 30,
2008.
United
States of America
China
Solar was incorporated in the State of Nevada and is subject to the tax
laws of
United States of America. As of June 30, 2008, the operation in the United
States of America incurred $362,933 of net operating losses available for
federal tax purposes, which are available to offset future taxable income.
The
net operating loss carry forwards will expire through 2028, if unutilized.
The
Company has provided for a full valuation allowance against the deferred
tax
assets of $362,933 on the expected future tax benefits from the net operating
loss carryforwards as the management believes it is more likely than not
that
these assets will not be realized in the future.
British
Virgin Island
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company’s subsidiaries operating in the PRC are Deli Solar (Bazhou), Deli Solar
(Beijing), Ailiyang, Tianjin Huaneng and SZPSP.
Of
these
subsidiaries Ailiyang, Tianjin Huaneng are domestically owned and subject
to the
Corporate Income Tax (“CIT”) governed by the Income Tax Law of the People’s
Republic of China, at a statutory rate of 25%.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
March
2005, the Deli Solar (Bazhou) became a foreign investment enterprise. Hence,
effective from the year ended 2005, Deli Solar (Bazhou) is entitled to
a
two-year exemption from enterprise income tax (which expired at the end
of March
2007) and a reduced enterprise income tax rate of 15% for the following
three
years.
On
July
25, 2006, SZPSP was classified as an Advanced Technology Enterprise in
the PRC.
The Company is exempted from CIT for the first two profit making years
and then
the CIT is reduced to 15% in the following three years.
In
September 2006, the Deli Solar (Beijing) was founded as a foreign investment
enterprise. Hence, effective from the year ended 2006, Deli Solar (Beijing)
is
entitled to a two-year exemption from enterprise income tax and a reduced
enterprise income tax rate of 15% for the following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The New CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with effect from January 1, 2008. Tianjin
Huaneng
is now is subject to CIT at a statutory rate of 25%. However, as foreign
invested enterprises, Deli Solar (Bazhou), Deli Solar (Beijing) and SZPSP
can
continue to enjoy the lower CIT rate of 15% until their tax holiday
expires.
The
Company’s effective income tax rates for the six months ended June 30, 2008 and
2007 were 15% and 0% respectively. The Company’s effective income tax rate of 0%
for the six months ended June 30, 2007 was due to an exemption from enterprise
income tax provided by the PRC taxing authority during that period, as
discussed
above. For this reason there is no income tax expense recorded on our statement
of income for the six months ended June 30, 2007.
8.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
(a)
Business
information
During
the six months ended June 30, 2007, the Company had three reportable segments
namely (i) solar heater/boiler related products, (ii) heat pipe related
products
and (iii) energy-saving projects, under the management of Deli Solar (Bazhou),
Tianjin Huaneng, and Shenzhne Pengsangpu, respectively.
During
the three months ended March 31, 2008, the Company had two reportable segment
namely (i) solar heater/boiler related products and (ii) heat pipe related
products.
An
analysis of the Company’s revenue and total assets are as follows:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
9,996,713
|
|
|
9,418,160
|
|
$
|
12,826,528
|
|
$
|
12,414,023
|
|
Heat
Pipe related products
|
|
|
5,847,069
|
|
|
-
|
|
|
11,317,330
|
|
|
-
|
|
Energy-saving
projects
|
|
|
2,786,416
|
|
|
-
|
|
|
2,786,416
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,630,198
|
|
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
2,045,428
|
|
$
|
1,928,031
|
|
$
|
2,620,321
|
|
$
|
2,674,979
|
|
Heat
Pipe related products
|
|
|
1,901,524
|
|
|
-
|
|
|
3,781,692
|
|
|
-
|
|
Energy-saving
projects
|
|
|
510,030
|
|
|
-
|
|
|
510,029
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Total
assets:
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
18,277,522
|
|
$
|
18,690,225
|
|
Heat
Pipe related products
|
|
|
21,284,078
|
|
|
9,029,994
|
|
Energy-saving
projects
|
|
|
6,653,407
|
|
|
-
|
|
Other
segment
|
|
|
-
|
|
|
2,919,494
|
|
Corporate
assets *
|
|
|
2,418,805
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
|
|
|
|
|
|
|
|
Total
goodwill:
|
|
|
|
|
|
|
|
Solar
Heater/Boiler related products
|
|
$
|
-
|
|
$
|
-
|
|
Heat
Pipe related products
|
|
|
1,649,822
|
|
|
1,789,324
|
|
Energy-saving
projects
|
|
|
3,055,769
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,705,591
|
|
$
|
1,789,324
|
|
Other
segment in total revenue, gross profit, and assets refers to solar lighting
products and sales of spare parts/components. The amount of other segment
revenue, gross profit, and assets are less than 10% in each category and
disclosed as an “all other” category in accordance with paragraph 21 of SFAS
131. There was no elimination or reversal of transactions between reportable
segments.
*
The
types of items included in corporate assets are principally cash from the
proceeds of the February 2008 private placement.
(b)
Geographic
information
The
Company operates in the PRC and all of the company’s long lived assets are
located in the PRC. In respect of geographical segment reporting, sales
are
based on the country in which the customer is located and total assets
and
capital expenditure are based on the country where the assets are
located.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company’s operations are located in PRC, which is the main geographical area.
The Company’s sales and total assets by geographical market are analyzed as
follows:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
18,620,035
|
|
$
|
9,418,160
|
|
$
|
25,940,868
|
|
$
|
12,414,023
|
|
Others
|
|
|
10,163
|
|
|
-
|
|
|
989,406
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
4,452,612
|
|
$
|
1,928,031
|
|
$
|
6,490,912
|
|
$
|
2,674,979
|
|
Others
|
|
|
4,370
|
|
|
-
|
|
|
421,130
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Total
assets:
|
|
|
|
|
|
PRC
|
|
$
|
46,401,756
|
|
$
|
29,107,727
|
|
Others
|
|
|
2,232,056
|
|
|
1,531,986
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,633,812
|
|
$
|
30,639,713
|
|
Under
an
engagement agreement dated January 16, 2008 between the Company and Roth
Capital
Partners, LLC (“Roth”), Roth acted as a placement agent for the Company in
connection with during the private placement of approximately 4.7 million
shares
of our common stock which was consummated in February 2008 (the “Offering”).
Under a certain agreement, dated as of March 21, 2007 by and among Trenwith
Securities, LLC (“Trenwith”) and the Company (the “Trenwith Agreement”),
Trenwith was granted certain rights, including the right to act as placement
agent in connection with a subsequent private placement of the Company’s
securities at fees which are mutually acceptable within a period of 24
months
after the closing of the June 2007 financing. Trenwith believes that it
had the
right to act as placement agent with respect to the Offering and has threatened
to bring proceedings against the Company for alleged violation of its rights
under the Trenwith Agreement. The Company disputes these claims and intends
to
vigorously defend any lawsuit which Trenwith may commence.
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
following table sets forth the computation of basic and diluted net income
per
share for the three and six months ended June 30, 2008 and 2007:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Basic
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,096,213
|
|
$
|
646,820
|
|
$
|
1,485,864
|
|
$
|
922,102
|
|
Less:
Preferred stock beneficial conversion
|
|
|
-
|
|
|
(975,807
|
)
|
|
-
|
|
|
(975,807
|
)
|
Net
income
(loss) available to common stockholders in computing basic
net income per
share and diluted net income per share
|
|
$
|
1,096,213
|
|
$
|
(328,987
|
)
|
$
|
1,485,864
|
|
$
|
(53,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
- Weighted average ordinary shares outstanding
|
|
|
13,075,468
|
|
|
6,205,290
|
|
|
10,612,185
|
|
|
6,205,290
|
|
-
Weighted average preferred stock outstanding
|
|
|
1,509,074
|
|
|
-
|
|
|
1,383,593
|
|
|
-
|
|
-
Weighted average contingent shares outstanding
|
|
|
1,000,000
|
|
|
-
|
|
|
692,308
|
|
|
-
|
|
-
Weighted average warrant shares outstanding
|
|
|
-
|
|
|
-
|
|
|
318,310
|
|
|
-
|
|
|
|
|
15,584,542
|
|
|
6,205,290
|
|
|
13,006,396
|
|
|
6,205,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
0.08
|
|
$
|
(0.05
|
)
|
$
|
0.14
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
0.07
|
|
$
|
(0.05
|
)
|
$
|
0.11
|
|
$
|
(0.01
|
)
|
CHINA
SOLAR & CLEAN ENERGY SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Basic
and
diluted earnings per share for the three and six months ended June 30,
2007 were
calculated in the same manner due to the loss from continuing operations
available to common stockholders. Potential common shares underlying warrants
of
389,277 and 194,639 for the three and six months ended June 30, 2007,
respectively, were excluded from the diluted earnings per share calculation,
as
they were antidilutive.
For
the
three months ended June 30, 2008, warrants exercisable to 6,166,682 shares
of
common stock were excluded from the diluted earnings per share calculation
as
the average market price of the common stock during the period was more
than the
exercise price of the warrants, thereby making the warrants antidilutive
under
the treasury method.
For
the
six months ended June 30, 2008, warrants exercisable to 4,392,488 shares
of
common stock were exclude from the diluted earnings per share calculation
as the
average market price of the common stock during the period was more than
the
exercise price of the warrants, thereby making the warrants antidilutive
under
the treasury method.
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 nil revenue derived from Deli solar (Beijing).
Tianjin
Huaneng manufactures heating products such as heating pipes, heat exchangers,
specialty heating pipes and tubes, high temperature hot blast stoves, heating
filters, normal pressure water boilers, solar energy water heaters and
radiators.
SZPSP
is
principally engaged in
the
manufacture of solar hot water systems for commercial use. Its customers include
factories, hospitals, schools and hotels. SZPSP’s solar energy products include
flat plate solar collectors, solar water heater systems, central solar water
heater system and solar energy photovoltaic technology.
Approximately
54% of our sales revenues for the three month period ended June 30, 2008 were
derived from sales of our solar water heaters and boiler related products,
approximately 31% derived from sales of heat pipe related products and 15%
derived from sales of energy-saving projects.
Approximately
99.95% of our sales revenues for the six month period ended June 30, 2008 were
derived from sales made to PRC based customers. Approximately 0.05% of our
sales
revenues were derived from the international market, all of which were sales
of
heat pipe related products made by Tianjin Huaneng.
Recent
Developments
Additional
Capital
February
2008 Private Placement
On
February 25, 2008 we raised gross proceeds of approximately $11,300,000 in
a
private placement providing from the sale to investors of 4,691,499 shares
of
common stock at a price of $2.40 per share.
Acquisition
of Shenzhen PengSangPu Solar Industrial Products
Corporation
On
April
1, 2008 Deli Solar (Beijing) completed the acquisition of 100% of the
outstanding equity interests of SZPSP from its three shareholders. SZPSP was
incorporated as a limited liability company under the laws of the PRC on
September 23, 1993.
Cash
Purchase Price
:
$4,087,832 (RMB 28,800,000) of the purchase price was paid in cash. This cash
portion was based on an appraisal of SZPSP. The three shareholders agreed to
loan the cash portion back to SZPSP to be used as working capital. Fifty (50%)
of the principal amount of this loan is required to be repaid within one year
of
entry of the complementary agreement and the remaining balance is required
to be
paid off within two years.
Stock
Purchase Price
.
In
addition to the cash portion of the purchase price, the parties agreed to an
additional consideration of RMB 20 million (approximately $2,839,458) to
represent the agreed-upon value of SZPSP’s intangible assets. The purchase price
for these intangible assets is required to be paid 1,419,729 shares of our
common stock (based on the average closing price of the common stock for the
30
days immediately preceding the execution of the Complementary Agreement (the
“Share Price”), provided that if on March 31, 2009 (the first anniversary of the
closing) the common stock price is lower than the Share Price, the Company
will
pay the difference. Fifty percent (50%) of these shares are transferable and
unrestricted after March 31 2009 and the remaining fifty percent (50%)
transferable after March 31, 2010. The shares are required to be transferred
to
SZPSP within 180 days of the closing.
Warrants.
In
addition, as part of the purchase price the sellers were issued five year
warrants to purchase 141,973 shares of common stock at an exercise price of
$2.50 per share (subject to adjustment).
RESULTS
OF OPERATIONS
The
sales
and operating income amounts related to the acquisition of Tianjin Huaneng
Group
Energy Equipment Co., Ltd are separately stated under Heat Pipe Related Products
as this is now a separate product line of the company. We believe that
presenting the operating results of this product line separately from other
product lines results in greater clarity on the reasons for changes in operating
results. In reference to the non-GAAP measures, we revised the disclosure to
indicate that the results of the three product lines were separately shown
to
indicate the business reasons for the change in sales and operating results
for
the periods presented.
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
Sales
Revenues
An
analysis of the Company’s revenues and gross profits for each segment are as
follows:
|
|
Three months ended June 30,
|
|
Revenue
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
9,996,713
|
|
$
|
9,418,160
|
|
Heat-pipe
related products
|
|
$
|
5,847,069
|
|
$
|
|
|
Energy-saving
projects
|
|
$
|
2,786,416
|
|
$
|
|
|
|
|
$
|
18,630,198
|
|
$
|
9,418,160
|
|
Overall:
Sales
revenues for the three months ended June 30, 2008 were $18,630,198 as compared
to $9,418,160 for the same period last year, an increase of $9,212,038 or 98%
compared to the same period in 2007. The overall increase in sales is primarily
attributed to the acquisitions of Tianjin Huaneng and SZPSP. Our organic sales
growth for the second quarter of 2008 was 6%.
Solar
Heater/Boiler Related Products
: Sales
revenues for these products for the three months ended June 30, 2008 were
$9,996,713 as compared to $9,418,160 for the same period last year, a increase
of $578,553, or 6%. The increase in sales of solar heaters and boiler related
products was a result of higher sales volume resulting from sales promotion
in
the solar heater segment. The decrease in average selling price was the result
of increased competition. We had expected a decrease in sales of solar heaters
and boiler related products due to lower prices and lower sales volume resulting
from increased competition in the solar heater segment. We expect price
competition to continue for the remainder of 2008.
Heat
Pipe Related Products:
Sales
revenues for the three months ended June 30, 2008 were $5,847,069 compared
to
nil for the same period last year. The sales of heat pipe related products
are
attributed to the acquisition of Tianjin Huaneng completed in July 1, 2007
and
our commencement to sell heat pipe related products.
Energy
saving projects:
Sales
revenues for the three months ended June 30, 2008 were $2,786,416 compared
to
nil for the same period last year. The sales of energy saving projects are
attributed to the acquisition of SZPSP completed in April 1,
2008.
Gross
Profit
|
|
Three months ended June 30,
|
|
Gross
Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
2,045,428
|
|
$
|
1,928,031
|
|
Heat-pipe
related products
|
|
$
|
1,901,524
|
|
$
|
-
|
|
Energy-saving
projects
|
|
$
|
510,030
|
|
$
|
-
|
|
|
|
$
|
4,456,982
|
|
$
|
1,928,031
|
|
Overall
: Gross
profit for the three months ended June 30, 2008 was $4,456,982 an increase
of
$2,528,952 or approximately 131%, compared to $1,928,031 for the three months
ended June 30, 2007. Our gross margin (gross profit as a percentage of sales)
in
the second quarter of 2008 was approximately 24% compared to approximately
20%
in the same period last year. This is primarily due to the increase in the
volume of sales of higher margin products such as heat pipe related products
due
to the acquisition of Tianjin Huaneng. The 24% gross margin for three months
ended June 30, 2008 decreased from 30% for the prior quarter was mainly due
to
the changes in our sales structure, which means that the sales of heat-pipe
related products (which has higher gross margin) was 31%, down from 66% for
the
prior quarter.
Solar
Heater/Boiler Related Products
:
Gross
profit was $2,045,428 an increase of $117,397 or 6% compared to the same period
in the prior year. The increase in gross profit is caused by increased revenue
due to increased sales volume. However, sales prices decreased slightly. Gross
margin for the three month period ended June 30, 2008 was approximately 20%
compared to approximately 20% in the same period last year. We expect price
competition to continue for the rest of 2008 and as a result we expect gross
profit and gross margin on these products to decrease for the rest of
2008.
Heat
Pipe Related Products:
Gross
profit for the three months ended June 30, 2008 was $1,901,525 compared to
nil for the same period last year. Gross profit of heat pipe related
products is attributed to the acquisition of Tianjin Huaneng completed in
July 1, 2007 and our commencement of the sale of their products. Gross margin
(gross profit as a percentage of sales) on these products in the second quarter
of 2008 was approximately 33 % compared to 34% for the first quarter.
Energy
saving projects:
Gross
profit for the three months ended June 30, 2008 was $510,030 compared to nil
for
the same period last year. Gross profits of energy saving projects are
attributed to the acquisition of SZPSP completed in April 1, 2008. Gross margin
(gross profit as a percentage of sales) on these products in the second quarter
of 2008 was approximately 18 %.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2008 were $2,405,993 as compared
to
$1,143,216 for the same period in 2007, an increase of $1,262,777 or 110%.
The
overall increase in operating expenses was primarily due to the acquisitions
or
Tianjin Huaneng and SZPSP as well as increased sales and marketing expenses
detailed below.
Depreciation
and amortization expense increased to $132,216 or 271% from $35,630 for the
same
period last year. The increase was mainly due to an increased depreciation
and
amortization expense of $83,732 as a result of the acquisition of Tianjin
Huaneng and SZPSP as well as increased depreciation expense of $12,854 as a
result of new equipment used.
Selling
and distribution expense increased to $1,118,041 or 371%, from $237,502 for
the
same period last year. The increase was mainly due to increased expenses
incurred on the development of sales network and promotion programs. Selling
expenses consisted of sales promotion expense ($233,656), travelling and
transportation expenses ($364,501), agency administration expenses ($409,584)
and after sales service ($110,300).
General
and administrative expenses were $1,155,736 for the three months ended June
30,
2008 (or approximately 6.2% of sales) compared to $870,084 (or approximately
9.2% of sales) for the same period in 2007. The net increase of $285,652 was
mainly due to the acquisition of Tianjin Huaneng and SZPSP which together had
general and administrative expenses of $757,021.
General
and administrative expenses include the advertising expenses and salaries and
benefits described below.
Advertising
expenses for the three months ended June 30, 2008 were $176,750 as compared
to
$518,619 for the same period in 2007, a decrease of $341,869 or approximately
66%. The decrease in advertising expense was a result of lower TV advertising.
Management believes expensive advertising on TV is not the only effective method
to increase market share in the face of severe competition. This year, we have
focused more on print and internet advertising.
Salaries
and benefits increased to $239,140 for the three months ended June 30, 2008
from
$109,641 for the same period in 2007, an increase of $129,499 or 118%. The
increase reflects both increased salaries and benefits and the number of
management and employees as a result of the Tianjin Huanengand SZPSP
acquisitions.
Solar
Heater/Boiler Related Products
:
Operating
expenses for the three months ended June 30, 2008 were $924,140 compared to
$1,143,216 for the same period in 2007, a decrease of $219,076, or approximately
19%. The decrease in operating expenses was primarily due to decreased general
and administrative expenses explained below.
General
and administrative expense decreased to $274,791, or 68%, from $870,084 for
the
same period last year. General and administrative expenses mainly include
advertising expenses, salaries and benefits of management, business travel
expenses, office expenses and other general and administrative expenses.
Advertising
expenses for the three months ended June 30, 2008 were $108,936 as compared
to
$518,619 for the same period last year, a decrease of $409,683, or approximately
79%. The decrease in advertising expense was the result of our reduced
advertising on TV and with more focus on print and internet advertising.
Other
general and administrative expenses for the three months ended June 30, 2008
were $165,855 (including office expense ($57,410), salary and benefits
($67,420), business travel expense ($15,669) and miscellaneous payments
($25,356)), compared to $351,465 for the same period last year, a decrease
of
$185,610 or approximately 53%, resulting mainly from our increased focus on
controlling our expenses.
Depreciation
and amortization expense increased to $48,484, an increase of 12,854 or
36% from $35,630 for the same period last year. The additional expense
was incurred by Deli Solar (Bazhou) in connection with manufacturing property
which it began using at the end of 2007.
Selling
and distribution expense increased to $600,865, or approximately 153%, from
$237,502 for the same period last year. The increased expense was due to the
development of new and existing distribution networks as well as additional
sales promotion expenses.
Heat
pipe related products
:
Operating
expenses for the three months ended June 30, 2008 were $852,810 compared to
nil
for the same period in 2007. The increase in operating expenses was primarily
due to the acquisition of Tianjin Huaneng completed in July 1,
2007.
Operating
expenses included selling expenses ($496,949), depreciation and amortization
expenses ($64,286) and general and administrative expenses ($291,575).
Energy-saving
projects
:
Operating
expenses for the three months ended June 30, 2008 were $505,119 compared to
nil
for the same period in 2007. The increase in operating expenses was primarily
due to the acquisition of SZPSP completed in April 1, 2008.
Operating
expenses included selling expenses ($20,227), depreciation and amortization
expenses ($19,446) and general and administrative expenses
($465,446).
Income
from Operations
Income
from operations for the three months ended June 30, 2008 was $2,050,989 an
increase of $1,266,174 or approximately 161% as compared to $784,815 for the
three months ended June 30, 2007. The increased income was mainly due to the
increased sales revenue attributable to the acquisition of Tianjin Huaneng
and
SZPSP and our commencement of the sale of their respective
products.
Net
Income
Net
income was $1,096,213 for the three months ended June 30, 2008, compared with
$646,820 in the same period last year, an increase of $449,393 or approximately
69%. The increase was primarily due to the increased sales attributable to
our
acquisitions of Tianjin Huaneng and SZPSP.
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
Key
Items during first six months of 2008
Significant
financial items during the first six months of 2008 include:
|
o
|
|
Completed
acquisition of SZPSP.
|
|
|
|
Overall
net sales increased 117% to
$26,930,274.
|
|
|
|
Net
income increased by 61% to $1,485,864
|
|
|
|
|
|
o
|
|
Operating
income increased by 207%
|
Sales
Revenues
An
analysis of the Company’s revenues for each segment follows:
|
|
Six months ended June 30,
|
|
Revenue
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
12,826,528
|
|
$
|
12,414,023
|
|
Heat-pipe
related products
|
|
$
|
11,317,330
|
|
$
|
|
|
Energy
saving projects
|
|
$
|
2,786,416
|
|
$
|
|
|
|
|
$
|
26,930,274
|
|
$
|
12,414,023
|
|
Overall:
Sales
revenues increased to $26,930,274 during the first six months of 2008 as
compared to $12,414,023 for the same period in 2007, an increase of $14,516,251
or 117%.
The
overall increase in sales is the result of (i) the acquisitions of Tianjin
Huaneng and SZPSP, which companies together contributed $14,103,746 to our
sales
revenues and (ii) our investment in marketing, sales promotion of our solar
water heaters and the development of a more extensive sales distribution network
for our solar water heaters and our boiler related products discussed below.
Solar
Heater/Boiler Related Products
:
Sales
revenues of this product segment during the first six months of 2008 increased
to $12,826,528 from $12,414,023 for the same period in 2007, an increase of
$412,505 or approximately 3%. Approximately $8.16 million were derived from
sales of solar hot water heaters, a 3% increase from the same period in 2007;
approximately $4.66 million was derived from sales of coal-fired boilers and
space heating products, about a 3% increase as compared to the same period
in
2007.
The
increase in sales of solar heaters and boiler related products was a result
of
our investment in marketing and sales promotion and the development of a more
extensive sales distribution network for these products. The increase in sales
revenues was not associated with a one time event. The increase in sales is
not
the result of an increase in sales prices of our products but the result of
increased sales volume. On the contrary the sales prices for our solar heater
and boiler related products have been declining due to increased competition.
Going forward we believe that the continued organic growth of revenue of this
segment will be negatively impacted by increased competition in the solar heater
segment which is causing us to lower our prices. We expect price competition
to
continue for the next year and we expect sales revenues on this product segment
to increase slightly.
Heat
Pipe Related Products
:
Sales
revenues during the first six months of 2008 were $11,317,330 compared to nil
for the same period last year. The sales of heat pipe related products are
attributed to the acquisition of Tianjin Huaneng completed in July 1, 2007
and
our commencement to sell heat pipe related products.
Energy
saving projects
:
Sales
revenues during the first six months of 2008 were $2,786,416 compared to nil
for
the same period last year. The sales of energy-saving projects are attributed
to
the acquisition of SZPSP completed in April 1, 2008 and our commencement to
sell
these products.
Gross
Profit
|
|
Six months ended June 30,
|
|
Gross
Profit
|
|
2008
|
|
2007
|
|
Solar
water heaters/Boilers & Space heaters
|
|
$
|
2,620,321
|
|
$
|
2,674,979
|
|
Heat-pipe
related products
|
|
$
|
3,781,692
|
|
$
|
-
|
|
Energy-saving
projects
|
|
$
|
510,029
|
|
$
|
-
|
|
|
|
$
|
6,912,042
|
|
$
|
2,674,979
|
|
Overall
:
Gross
profit during the first six months of 2008 was $6,912,042 compared to $2,674,979
for the same period last year. The increase in gross profit is the result of
the
acquisitions of Tianjin Huaneng and SZPSP, two companies together contributed
$4,291,721 to our gross profit, accounting for 62% of our overall gross profit.
Gross
margin (gross profit as a percentage of sales) during the first six months
of
2008 was approximately 26% compared to approximately 22% in the same period
in
2007. The profit margin during the first six months of 2008 increased over
the
same period in 2007 due to the acquisition of Tianjin Huaneng whose products
have higher profit margins than our other products. The profit margins on our
solar heaters have been falling because of market pressure to keep our prices
competitive (down by 2% compared to the same period last year). We are facing
severe price competition in the traditional solar water heater market. We expect
price competition to continue through the end of 2008. As a result, we expect
our gross profit margin for our solar water heaters to continue to decrease.
However, we anticipate that Tianjin Huaneng’s energy saving boilers and
environmental protection equipment will generate better gross profit margins
to
offset the decline in our profit margins for solar water heaters and residential
boilers. The gross margin on the sale of the Tianjin Huaneng’s products was 33%
during the first six months of 2008.
Solar
Heater/Boiler Related Products
:
Gross
profit was approximately $2,620,321 during the first six months of 2008, about
a
2% decrease compared to the same period of prior year of approximately
$2,674,979.
The
decrease in gross profit is due to the decrease in sales price of products.
The
number of units sold actually increased. During the first six months of 2008,
we
sold approximately 63,134 solar water heaters and 50,113 boiler heaters compared
to 53,220 solar water heaters and 45,320 boiler heaters in the same period
in
2007.
Gross
profit margin for this segment decreased slightly during the first six months
of
2008 to 20.43% compared to the approximately 21.55% in the same period in 2007.
The profit margins on our solar heaters have been falling because of increased
competition causing us to lower our prices. We are facing severe price
competition in the traditional solar water heater market. We expect price
competition to continue through the end of 2008. As a result we expect gross
profit margin for our solar water heaters to continue decrease. Accordingly,
to
deal with this trend management intends to invest more in R & D to develop a
new high tech product and focus on flat-plate solar panels for commercial and
industrial customers instead of traditional evacuated tube solar water heaters
for residential customers. We are going to use the new high tech product
(flat-plate solar panels) on energy saving projects and the revenue in the
energy saving project segment is expected to be doubled in the next quarter
with
higher gross margin.
Heat
Pipe Related Products:
Gross
profit on the sale of heat pipe related products was $3,781,692 which was
attributed to the acquisition of Tianjin Huaneng. Gross margin (gross profit
as
a percentage of sales of these products) was approximately 33%. We anticipate
that Tianjin Huaneng’s energy saving boilers and environmental protection
equipment will generate better gross profit margins to offset the decline in
our
profit margins for solar water heaters and residential boilers.
Energy-saving
projects:
Gross
profit on the sale of energy-saving projects was $510,029 which was attributed
to the acquisition of SZPSP. Gross margin (gross profit as a percentage of
sales
of these products) was approximately 18%. However, we anticipate that SZPSP’s
energy saving projects will generate better gross profit margins for the rest
of
the year and the following years, as we expect to sign more contracts with
higher price and higher gross margin as a result of the excellent marketing
of
our products and brands.
Segment
assets
Assets
in
solar heater were $18,277,522, about a 9% increase as compared to the same
period in 2007 of approximately $18,690,225. The increase is in line with
increase in sales generated from solar heater.
Assets
in
heat pipe were $21,484,078 compared with $9,029,994 balance in the same period
in 2007, the increase was mainly due to acquisition of Tianjin
Huaneng.
Assets
in
energy-saving project segment were $6,653,407 compared with nil balance in
the
same period in 2007; the increase was mainly due to acquisition of
SZPSP.
Corporate
assets were $2,418,805, principally referring to cash from the proceeds of
the
February 2008 private placement.
Operating
Expenses
Operating
expenses increased to $3,659,376 during the first six months of 2008 as compared
to $1,616,539 for the same period in 2007. This represented an increase of
$2,042,837 or about 126%. The overall increase in operating expenses was
primarily due to the acquisition of Tianjin Huaneng and SZPSP (whose operating
expenses together amounted to $2,152,823) as well as increased selling and
distribution expenses described below.
Selling
and distribution expenses increased to $1,620,604 from $281,532 for the same
period in 2007 (or 6% of sales) an increase of $1,339,072, or 476%. These
selling and distribution expenses consisted primarily of non cash sales
promotion expenses ($233,656), traveling and transportation expenses ($507,779),
and agency administration expenses ($630,281) and after sales services
($248,888). The increase in selling and distribution expenses was primarily
the
result of our acquisition of Tianjin Huaneng and SZPSP (whose selling and
distribution expenses together were $875,255.)
General
and administrative expenses were $1,757,389 during the first six months of
2008
(or approximately 6.53% of sales) compared to $1,264,041 (or approximately
10%
of sales) for the same period in 2007. The net increase of $493,348 was mainly
due to the acquisition of Tianjin Huaneng and SZPSP which together had general
and administrative expenses of $1,054,770. This was offset by the decrease
in
general and administrative expenses by Deli Solar (Bazhou) of approximately
$546,422.
General
and administrative expenses include advertising expenses and salaries and
benefits.
Advertising
expenses during the first six months of 2008 were $349,030 as compared to
$660,093 for the same period in 2007, a decrease of $311,063 or approximately
47%. The decrease in advertising expense was a result of lower advertising
expenses incurred in TV advertising. Management believes expensive TV
advertising is not the only effective method to increase market share in the
face of severe competition. This year, we have been more focussed on print
and
internet advertising.
Salaries
and benefits increased from $109,641 for the same period in 2007 to $385,151
during the first six months of 2008, an increase of $275,510 or 251% from the
same corresponding period last year. The increase reflects both increased
salaries and benefits level and increased employees as a result of the Tianjin
Huaneng acquisition and SZPSP acquisition.
Depreciation
and amortization expense during the first six months of 2008 increased by
$210,417 to $281,383 or 297% from $70,966 for the same period in 2007. The
increase was due to an increased depreciation and amortization expense of
$192,798 as a result of the acquisition of Tianjin Huaneng and SZPSP as well
as
increased depreciation expense of $17,619 as a result of new equipment used.
Income
from Operations
Income
from operations during the first six months of 2008 was $3,252,666, an increase
of $2,194,226 or 207% as compared to $1,058,440 for the same period in 2007.
The
increased operating income was due to the increased sales revenue and the
acquisition of Tianjin Huaneng and SZSPS and our commencement of the sale of
their respective products. As a percentage of sales, operating income was
approximately 12% during the first six months of 2008 as compared to
approximately 8.5% for the same period in 2007. Our organic operating income
was
$1,237,693 or approximately 10% of sales. The increase in operating income
as a
percentage of sales was substantially due to the increase in sales and
controlling selling expenses during the six months ended June 30, 2008.
Net
Income
Net
income was $1,485,864 during the first six months of 2008, compared with
$922,102 for the same period in 2007, an increase of $563,762 or approximately
61%. The increase was primarily due to increase in sales volume of the exiting
products and increased sales attributable to our acquisition of Tianjin Huaneng.
Minority
Interests
Minority
interests increased $859,031 during the first six months of 2008 primarily
due
to share of profits by minority interests from consolidation with Tianjin
Huaneng.
Minority
interests shown on the balance sheet were $1,879,303 which refers to the equity
interest of minority shareholders in Tianjin Huaneng as of June 30,
2008.
Income
Taxes
We
did
not carry on any business or maintain any branch office in the United States
during the the first six months of 2008 or the same period in 2007. Therefore,
no provision for U.S. federal income taxes or tax benefits on the undistributed
earnings and/or losses has been made.
Currently,
Most PRC companies are subject to enterprise income tax at the rate of 25%,
value added tax at the rate of 17% for most of the goods sold, and business
tax
on services at a rate ranging from 3% to 5% annually. However, pursuant to
the
applicable laws and regulations in the PRC, Deli Solar (Bazhou), and Deli Solar
(Beijing) as wholly foreign owned enterprises (“WFOEs”) in the PRC, are entitled
to an exemption from the PRC enterprise income tax for two years commencing
from
its first profitable year, after loss carry-forwards from the previous five
years have been recovered. Since Deli Solar (Bazhou) was converted into a WFOE
in March 2005, it enjoyed a two-year tax-exempt treatment in the PRC which
ended
on March 31, 2007. Since then it has been subject to 50% of its enterprise
income tax from 2007 until 2010. Our direct subsidiary, Deli Solar (Beijing),
had a net loss during the first six months of 2008. Consequently, it did not
incur income tax. Tianjin Huaneng is domestically owned and subject to the
Corporate Income Tax governed by the Income Tax Law of the People’s Republic of
China, at a statutory rate of 25%
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
used in operating activities was $6,050,483 for the six months ended June 30,
2008, and net cash provided by our operating activities was $294,938 for the
same period of 2007. The increase in net cash used by operations was mainly
due
to an increase in inventories ($2,380,781) and an increase in payments made
in
advance to suppliers ($4,227,372).
Net
cash
used in investing activities was $3,137,229 for the six months ended June 30,
2008, compared with $373,030 for the same period of 2007. The increase was
due
to the purchase of new facilities and assembly lines in connection with the
SZPSP acquisition.
Net
cash
provided by financing activities was $10,102,656 for the six months ended June
30, 2008, compared with $2,501,080 for the same period of 2007. The increase
was
due to the purchase of 4,691,499 shares of common stock by the investors in
our
February 2008 private placement and the exercise of 75,000
warrants.
We
believe that current cash will be sufficient to meet anticipated working capital
and capital expenditures for at least the next twelve months. However, we need
to require additional cash for further development of business, including any
investments or acquisitions we may decide to pursue. However, we cannot assure
you that such funding will be available.
Cash
Cash
and
cash equivalents increased to $6,689,173 at June 30, 2008 from $5,466,637 at
December 31, 2007, primarily as a result of the receipt of net proceeds of
$9,995,156 from our private placement of our common stock. We used $3.2
million on increasing our working capital and $5.9 million on increasing
manufacturing facilities. We intend to use our available funds to increase
our
working capital and to make additional acquisitions. We believe that our
available funds will provide us with sufficient capital for the next twelve
months. However, if we make further acquisitions or establish additional
production facilities, we may require additional capital for the acquisition
or
for the operation of the combined companies. We cannot assure you that such
funding will be available.
Accounts
Receivable
During
the six months ended June 30, 2008, accounts receivable increased to $9,262,801
from $7,453,009 as of January 1, 2008, primarily due to consolidation with
SZPSP. SZPSP recorded $1,174,334 of accounts receivable. The majority of our
each company’s sales are on credit terms in accordance with terms specified in
the contracts governing the relevant transactions. We evaluate the need for
an
allowance for doubtful accounts based on specifically identified amounts that
we
believe to be uncollectible. If actual collections experience changes, revisions
to the allowance may be required. Based upon the aforementioned criteria, the
allowances for doubtful accounts during the first six months of 2008 were
nil.
Inventory
Inventories
as of June 30, 2008 increased to $6,256,439 from $3,875,658 as of December
31,
2007 principally because of consolidation with SZPSP, which recorded $1,153,785
of inventories as of June 30, 2008. In addition, Tianjin Huaneng
increased its inventories from $3,016,025 to $7,151,837 due to increased
purchases of raw materials for the next production season. The inventory
mainly consists of finished goods waiting for transportation or
installation.
Other
Receivables and Prepayments
Other
receivables and prepayments as of June 30, 2008 increased to $5,865,320 from
$1,637,948 as of December 31, 2007. Other receivables and prepayments mainly
consist of prepaid expenses and deposits.
Accounts
Payable
Accounts
payable as of June 30, 2008 increased to $1,831,368 from $2,111,028 as of
December 31, 2008 primarily due to the payments made to creditors under the
term
of credit agreements.
Other
Payables and Accrued Liabilities
Other
payables and accrued liabilities as of June 30, 2008 increased to $10,158,585
from $8,552,452 as of December 31, 2008, primarily due to consolidation with
SZPSP. The increase is mainly contributed from increase in accrued expenses,
customer deposits, other payable, and taxes payable and deferred
revenue.
Item
4.
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 June 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 June 30,
2008.
Changes
in Internal Control.
We
made
no changes to our internal control over financial reporting during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
6. Exhibits.
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31.1
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Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
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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.
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|
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(Registrant)
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|
|
|
|
Date:
August 14, 2008
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/s/
Deli
Du
|
|
|
Deli
Du
|
|
|
Chief
Executive Officer and President (principal executive
officer)
|
|
|
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Date:
August 14, 2008
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/s/
Yihai Yang
|
|
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Yihai
Yang
|
|
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Acting
Chief Financial Officer
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|
(principal
financial officer and accounting
officer)
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